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 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.
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.