Israeli panel proposes new rules for managing debt-troubled firms

Wed Apr 30, 2014 12:13pm EDT

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* Proposes three-step process for settling with creditors

* Aimed at encouraging growth of debt capital markets

By Steven Scheer

JERUSALEM, April 30 (Reuters) - A panel of Israeli regulators has proposed new, more transparent rules for managing companies after they get into financial difficulties that would provide more protection and predictability for creditors.

The panel, led by Finance Ministry Director-General Yael Andorn, made the recommendations to encourage the growth of Israel's debt capital market following a number of high-profile debt settlements that angered the public and harmed investor confidence.

"We think that having specific rules and specific directives of what happens when a company gets to a debt (restructuring) brings much more certainty and makes this debt market a better one and a more efficient one," Andorn told reporters.

She noted that the recommendations are based on regulations in the United States and Britain.

"Regulation of debt arrangements ... is critical to strengthening the confidence of savers and depositors in the credit system," she said, adding that such a process would create more rational pricing of debt.

Half of all business credit currently comes from the bond market and other sources than banks, up from 23 percent in 2003.

Andorn's panel, which included securities, banking and capital markets regulators, recommended in an interim report a three-stage approach to debt restructuring.

In the optional first phase, companies that start having debt problems appoint a debt representative, who draws up an initial debt settlement proposal aiming to strengthen the firm.

In the second phase when the company is already in financial distress, the creditors appoint an observer to the board of directors to make sure the interests of the lenders are taken into account. The company is required to cut costs and stop dividend payments, ensuring it acts in the interests of its debtholders.

In the third phase, after a company fails to pay its debt for 45 days, the controlling shareholder loses the ability to manage it, and a special manager is appointed by a receiver. The company also has the option to go to court.

"The purpose of this stage is, first and foremost, to create complete certainty for the company and its debtholders," the report said.

"The certainty should increase the chances for dialogue between the company and its creditors that will lead to an optimal arrangement for the parties," it added.

Since 2008, 140 Israeli companies have entered into debt settlement arrangements for a value of 39 billion shekels ($11.3 billion), 10 of them in 2013.

Most recently, conglomerate Israel Corp lost control of shipping company Zim under an agreement with Zim's creditors.

Nochi Dankner, once one of Israel's most powerful businessmen, lost his debt-ridden conglomerate IDB Holding earlier this year.

($1 = 3.4674 shekels) (editing by Jane Baird)

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