Due to the global economic crisis of 2008-2009, and continued lack of economic growth, governments around the world are coming under increased pressure to solve the problem by any means possible. The solution used by many countries, especially the United States, is to pump (print) more money into their economies in order to stimulate spending. Many leading economists are concerned that this will lead to hyper-inflation in the future. How can we, the private investor, protect ourselves from coming high inflation through investing in Israel?
Two financial vehicles that can help us are government and corporate bonds that are linked to the cost-of-living index. This type of bond provide a steady stream of income while interest payments and principal increase lock-step with inflation. The link to the cost-of-living index provides peace of mind, knowing that our buying power isn’t being eroded by inflation. Before each interest and principal payment is made to the bondholder, the payment is automatically adjusted to the Israel Consumer Price Index (CPI), the inflation gauge. Specifically, the government of Israel offers such a bond: the Galil Bond. The current yield to maturity on a 4-year Galil bond is 0.3% annually above inflation (effective yield is 0.3% + 3% inflation expectation = 3.3% per year), and on an 11-year Galil Bond is 1.8% above inflation (which translates to a 4.8% effective yield per year).
Another relatively safe inflation-hedge is buying indexed corporate bonds. Solid investment-grade indexed corporate bonds usually provide a better rate of return than indexed government bonds, with some more risk. Their payments are indexed exactly the same way as indexed government bonds. Here are some corporate bonds you can look into:
Suggested inflation-indexed corporate bonds
table last updated: January 17, 2011
| Corporation | Bond Series | Sector/Subsector | Annual Yield to Maturity (YTM) on Nov 24, 2010 | S&P Rating | Moody Rating | Maturity Date | Info | Bond# |
|---|---|---|---|---|---|---|---|---|
| Bezeq Israel Telecom | 5 | Communications and Media | 1.12% | AA+ | Aa1 | 06/01/16 | More info... | 2300069 |
| Israeli Electric Company | 22 | Commerce and Services | 1.5% | AA- | Aa2 | 02/20/15 | More info... | 6000020 |
| Leumi Finance | Yud (10) | Banking | 1.53% | AA | Aaa | 01/23/15 | More info... | 7410186 |
| Strauss Group | Bet | Food Industry | 1.67% | AA+ | Aa1 | 02/01/18 | More info... | 7460140 |
| Cellcom | Dalet | Communications and Media | 1.9% | AA | 07/01/17 | More info... | 1107333 | |
| Almogim | Aleph | Real Estate and Construction | 5.54% | 03/07/17 | More info... | 1120690 |
Current Yield to Maturity, the best measure of real rate of return, and even more bond details, can be viewed using the Google-translated Bank Leumi website (the translation to English is problematic).
Ratings
There are two internationally-recognized bond rating agencies that examine Israeli companies’ ability to repay their debts: Standard and Poor’s and Moody’s. Listed below is the meaning of each of their rankings. The S&P’s rank can add a fine tuning of + or -; Moody’s can add a fine tuning of 1,2 or 3 to better rank a bond within a specific category.
| Standard and Poor's (Ma'alot) Rating | Moody's (Midrug) Rating | Description | Investment Grade | Meaning |
|---|---|---|---|---|
| AAA | Aaa | Excellent | Investment Grade | The issuer has excellent ability to repay the payments for the liability compared to other Israeli issuers |
| AA+ AA AA- | Aa1 Aa2 Aa3 | Very high | Investment Grade | Ability to repay the payment obligation is much more than average compared to other Israeli issuers |
| A+ A A- | A1 A2 A3 | Medium - high | Investment Grade | Ability to repay the liability payments is beyond the average compared to other Israeli issuers |
| BBB+ BBB BBB- | Baa1 Baa2 Baa3 | Medium | Investment Grade | Ability to repay the payment obligation is average compared to other Israeli issuers |
| BB+ BB BB- | Ba1 Ba2 Ba3 | Problematic | Speculative Grade | Ability to repay the liability payments is below average compared to other Israeli issuers |
| B+ B B- | B1 B2 B3 | Low | Speculative Grade | Ability to repay the liability payments is far below average compared to other Israeli issuers |
| CCC+ CCC CCC- | Caa1 Caa2 Caa3 | Much lower | Speculative Grade | The bond has characteristics that may cause default of interest payments and/or principal |
| CC | Ca | Very much lower | Speculative Grade | Failure to meet interest payments and/or principal repayment seems very reasonable |
| C | C | Very low | Speculative Grade | The bond issuer is insolvent or stopped interest payment and/or principal |
| DDD DD D | Very low | Speculative Grade | The issuer has defaulted on payments |
More details on the companies above
| Corporation | Company Market Capitalization (in Israeli Shekels) | Company on index | Description |
|---|---|---|---|
| Bezeq Israel Telecom | 3.2 Billion | Tel Aviv Large Cap 25 | The company, Bezeq Israel Telecommunication Corp. Ltd., is the national landline phone carrier. The company and its subsidiaries are engaged in four main areas: - Stationary inland communication: telephone services, Internet access services and data transmission services. - Radio - Mobile: Radio services - mobile phone cells, marketing, terminal equipment, installation, operation and maintenance of equipment and systems in wireless. - International communications, Internet services and network termination point services - Multi-channel TV: digital TV broadcast services via satellite; multi-channel supply value-added services to subscribers. In April, 2010 Bezeq completed a deal that bought B Communications (formerly Smile 012) |
| Israeli Electric Company | 8.1 Billion | Tel Aviv Bond 20 | The company is engaged in supplying electricity to consumers from electricity production and delivery to end-points to each of the electricity consumers. The activities of the company is comprised of three areas: - Electricity production includes all activities involved in producing electricity at the company's production sites. - Electricity transmission, which includes the transmission of electricity from production through high voltage transmission lines on high tension switching stations and sub stations and switching stations, using voltage transmission lines using high-voltage transformers. - The distribution of electricity, including the transfer of electricity substations to consumers through high-voltage lines and low voltage lines, supply and sale of electricity to consumers. |
| Leumi Finance | 2.6 Billion | Tel Aviv Bond 20 | Bank Leumi provides a variety of banking and financial services, and owns Migdal Insurance and Israel Corporation. Leumi Finance is engaged in raising resources for Bank Leumi in Israel, through public offerings and private placements of bonds and subordinated notes, which the Leumi Bank is responsible for them, for use at their discretion and responsibility. Leumi Finance is wholly owned by Bank Leumi, which holds all the shares directly and through its subsidiaries. |
| Strauss Group | 967 Million | Tel Aviv Large Cap 25 | The company, Strauss Group Ltd., and the companies it controls are a group of industrial and commercial companies, which operate in Israel and outside Israel (Central and Eastern Europe, Brazil and the United States) in developing, manufacturing, marketing and sale of a variety of branded food and beverage products. Strauss Group collaborates with a number of trans-national corporations - the French conglomerate Danone, the American firm "PepsiCo" and Italian company "Lavache”. In 2004 Strauss Dairies and Strauss Salads merged into Strauss Group. Strauss Group has other activities including: development, production, marketing, sales and distribution of honey, olive oil and jams under the brand "Yad Mordechai", manufacturing and selling chocolate products in Max Brenner, and operation of “Chocolate Bars "in Israel and abroad under the brand “Max Brenner”. |
| Cellcom | 2 Billion | Tel Aviv Large Cap 25 | Cellcom Israel (by itself and through subsidiaries) providing cellular mobile communications systems (mobile communications) in Israel. The company offers its customers basic phone services, ancillary services such as voicemail, call waiting caller ID and value-added services and entertainment information services. Cellcom also engages in the sale of terminal equipment and providing equipment warranty services. Cellcom is a dual listed company: its shares are traded both on the NYSE and TASE. |
| Almogim | 52 Million | CPI-Linked Bonds | The company, Almogim (Coral) Holdings Ltd., is engaged itself and through its related subsidiaries in two main areas: - Youth residential complexes (B-Young): initiation, construction, sale, rental, management, operation and sale of ancillary services (maintenance, insurance, sale of electricity, etc.): residential complex for the young. - Construction entrepreneurship: initiation, development, construction, marketing and sale of residential projects as well as initiation, construction and operation of real estate zoned for residential purposes. |
