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On January 21, 2015, the Capital Markets, Insurance and Savings Department at the Israeli Ministry of Finance issued a draft circular which imposes, among other things, certain obligations and restrictions on Israeli financial institutions when giving leveraged loans, including disclosure and reporting obligations and establishing particular internal requirements and underwriting procedures (“the Draft Circular”). The Draft Circular applies to those financial institutions that hold an Israeli insurance license or an Israeli license to manage provident funds. Its publication is a continuation of the process of regulating the participation of financial institutions in “tailor made” loans further to the draft regulation published with respect to the implementation of the recommendations of the Goldschmidt Committee. For the purposes of the Draft Circular, leveraged loans are defined as tailor made loans given for the purpose of acquiring control in a corporation, or credit that is granted against a charge over a controlling interest in a corporation, or credit given for the purpose of paying dividends (“Leveraged Loans”). In addition to applying to the actual giving of leveraged loans by Israeli financial institutions, the Draft Circular also covers financial institutions that purchase a leveraged loan that was previously given by a third party. Under the Draft Circular, at least once a year, the investment committee of the financial institution must determine, among other things, the financial institution’s investment policy in relation to giving Leveraged Loans (such as the type of borrower, the percentage the financing constitutes and the type of collateral) as well as the scope of its total exposure and the percentage of exposure in relation to such loans in respect of a single borrower or a group of borrowers. The investment committee is also required to set a limit in respect of the borrower’s leverage rate, above which the financial institution will not provide credit. In addition, the Draft Circular imposes robust reporting obligations on financial institutions. Such reporting obligations include providing the investment committee with details of the financial institution’s exposure vis-à-vis each borrower and overall, the likelihood of failure to repay the Leveraged Loan and the financial institution’s exposure vis-à-vis the type of collateral or vis-à-vis those transactions that are unsecured. In respect of syndicated transactions, the report must set out the consequences of any default which will result in the pari passu treatment of all lenders. The Draft Circular also includes provisions regarding disclosure requirements from borrowers who take out a Leveraged Loan which exceeds NIS 50 million. In such a case, the financial institution may only give such a loan in the event that the borrower discloses any debt that has been incurred by a person who holds or purchases a controlling interest in the borrower for the purpose of financing the acquisition of such controlling interest as well as any charge over such controlling interest. This disclosure should include, among other things, details of such debt or charge and any undertakings and covenants made by such borrower vis-à-vis its lenders. A financial institution is additionally under an obligation to establish underwriting procedures that reflect the risk appetite of its activities concerning Leveraged Loans. Among other things, it must assess the ability of a borrower to repay its debts within a reasonable period of time, a borrower’s expected cash flow, determine a strategy regarding syndicated transactions, and determine a valuation methodology and conditions that guarantee the ability to demand repayment of the loan in certain circumstances. Further, the Draft Circular provides that financial institutions must not rely on a guarantor unless the guarantee is in writing and after it has reviewed the guarantor’s financial statements, its conduct in connection with its previous investment management experience, any limitations in realizing the guarantee and the guarantor’s conduct regarding the distribution of dividends and capital contribution in corporations that it controls. The provisions set out in the Draft Circular are additional tools designed to define the regulatory supervision of Leveraged Loans granted by financial institutions, in the hope that these restrictions and obligations will reduce the risk of default, enable efficient credit allocation and increase the certainty in protecting the funds that are managed by financial institutions. By Amit Steinman and Michelle Liberman (S. Horowitz & Co. Tel Aviv)


Amit Steinman is a partner at the Israel based law firm S. Horowitz & Co. He advises on the full range of corporate and commercial transactions with a particular focus on mergers and acquisitions, joint ventures, equity investments, capital markets and acquisition financing. His clients include multinational corporations, financial institutions, private equity funds and start-up companies, spanning a wide range of sectors including technology, energy, infrastructure, telecoms, homeland security, financial services, media and clean-tech.

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