Yishal is a company that holds about one-third of the shares of New Pharm. The company collapsed in the last few months of 2012 and from this period it has been in contact with the bondholders in order to come to a debt agreement. The Yishal Company also has a collateral deposit at Bank Leumi valued at 4.2 million NIS. In addition to this, the company holds approximately 50 percent of the shares of Kamin Real Estate. Kamin holds approximately fifty percent of a real estate company from Latvia, which is in possession of two assets, land in the city of Jūrmala and another asset under lien in Riga. Kamin has also placed its assets under lien to Menorah Mivtachim, in exchange for another loan, but it was unable to comply with the terms and conditions and the loan was declared repayable immediately.

The company had 7 million NIS in cash in its coffers, and 1.85 million NIS were added to this after the sale of the company to the businessman and entrepreneur Eitan Eldar.

The significance of the purchase of a shelf company

A shelf company by definition is a company that has offered shares in the company to the public in the past, but currently, it does not perform any commercial activity or has very little activity. In such situations, new buyers can invest their money in order to become the owner of the company, and in this way cause the value of the shares of the company to rise. In certain cases, the buyer can enjoy significant tax breaks.
By purchasing a shelf company, one can enter the market without an initial public offering, subject to high costs. In this manner, companies that want to recruit capital in the stock market at sums that are below the minimum for initial public offering, can buy a shelf company and inject their activity into them. Afterward, they can recruit capital on the stock market.

The businessman Eitan Eldar is a highly recognized figure in the financial markets. As a part of his activity in the finance market, Eitan Eldar performs brokerage deals for private and institutional investors through the “Arena Capital” company, which he owns.

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There are several factors that affect the risk level in investments. One of them is the level of trade in stocks in a portfolio. Eitan Eldar says that usually, high level of trade will lead to a higher risk level. Just because of the greatest risk, many investment portfolios include bonds (A way of reducing the level of risk) and high investment diversification, which further reduces the risk. Solid investments can have foreign currency certificates of deposit, government bonds, and more.

Investment in mutual funds, stocks, options and exchange traded notes are high-risk. So should dispel them right between Israeli shares, the shares of developing countries and developed countries.

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• Raising capital – If a company (or private businessman) purchase more than 50 percents of the shares belong to the shelf company, it becomes the controller over the cash reserve of the company. The purchasing party can sthenghten the value of its money and raise capital by offering bonds or allotting stocks.
• Purchasing private companies – Owning a shelf company, explains Eitan Eldar, is a basis for parties interested to purchase private companies and merge with them. This process can increase the value of securities for the investors.
• No need in regulation – People acquire and merge with shelf companies also because there is no need in regulation of minumal recruitment.

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• Becoming a public company – Private company that wants to become public can reduce the cost of public offering by purchasing a shelf company, merge with it and perform a reverse merger. The shelf company is almost empty of content and the purchasing company pours its content into it. Eitan Eldar adds that this is a way to increase the number of potentional investors.
• Savings in the offering process – This process of acquiring a shelf company and pouring into it the new content, saves money in the offering of securities in comparison to initial public offering. It is also a cheap way.

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What is an “asset”? Eitan Eldar explains that asset can be: businesses, reputation of a company, securities, etc. In Israel, this kind of tax is imposed also on real estates assets, and called “Mas Shevach”.

In Israel, there is a difference between the working population and the wealthy. While the first pay an income tax rate that can reach 48 percent, the latest who own capital pay tax at rate of 30 percent. The country claims that there isn’t any discrimination – because the wealthy pay double tax – one for the capital of the company and one for the dividends of the company. Together, these taxes reach up to 50 percents.

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The disadvantages of fixed interest

When we choose a fixed interest (attached or not attached to an index), it is interest that is significantly higher than any other interest at the time of the original loan issue. Worse than that, often we will have to pay high fees due to the difference in interest, if we choose to pay it off earlier than expected and take another loan instead of it with lower interest.

When is it still worthwhile to choose a fixed interest?

1. If you need peace of mind – with all the disadvantages of fixed interest, loans with fixed interest are still the most secure loans that exist and we don’t need to worry that we will wake up one day and learn that the monthly payment of the loan has jumped significantly. The annual average rise in the index (2% in the last two years) is not so high in comparison to the possible rise in the prime interest rate or the average interest rate in the market.

2. During times of high inflation – due to the fact that during times of high inflation the price index and the various interest rates in the market rise, it makes a great deal of sense to get a high-interest loan, with the knowledge that it is reasonable to assume that in a short period of time the interest on variable interest rate loans will rise as well to the same level. This is especially true for long term loans for which there is a cumulative effect of compound interest.

3. If you have taken a long term loan – the more time passes, the greater the chance that the difference between the interest rate at the time which you took the original loan and the current interest rate will increase. There are two sides to every coin, and just as the variable interest rate can decrease significantly, it can also increase and also greatly increase the monthly payment. For this reason, particularly for long term loans, it is worth considering receiving the majority of the loan at a fixed interest rate (regarding mortgages, the Bank of Israel requires this in any event).

In summary
Despite the fact that in many cases it appears that taking a fixed interest rate loan will cause us to pay more, a fixed interest also has a substantial number of advantages that are worthwhile to take into account before making a final decision that can influence our financial situation for many years to come.

Eitan Eldar is an independent entrepreneur who has amassed assets and controlled the holdings for a number of companies over the years. He has led to cooperation, large purchases and the public stock offering of many companies on the Tel Aviv Stock Exchange. This material is taken from a collection of lectures that Eitan Eldar has presented at the Interdisciplinary Center of Herzliya.

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Investment diversification – unsystematic risk diversification

Any investment in the capital market is affected by two major types of risk – systematic and unsystematic. Systematic risk is often unavoidable, as it is affected by both the overall economy and the financial market. On the other hand, unsystematic risk, caused by specific consequences to the investment, can certainly be prevented or reduced by diversification of investments. This diversification, says Eitan Eldar, provides diversity in the various investments so that a particular alteration in invested securities, will generally only have a moderate effect, if any, on the fluctuation of other securities.

Protection against fluctuations in the capital market

Investment diversification includes investments in various fields such as bonds, shares, ETFs, mutual funds, various options, and deposits, which are additionally spread out over various stock exchanges. Investment diversifications that are not significantly correlated reduce the volatility of the portfolio and provide investor protection from losses. Eitan Eldar explains, there is very little likelihood that an Israeli share that goes down will affect the bond from the Australian Government.

Increasing chances of profit with investment diversification

Beyond protection and reducing the level of risk that investment diversification provides, it also significantly increases the chance of profit. It works similarly to sweepstakes, where the prospect of earning increases with every additional competitor, as opposed to the chances of winning when betting on one horse. However, it is important to note that the chances to profit with a diversified portfolio are, in most cases, greater with long-term investments, and lesser with short-term investments such as day trading.

The art of investment diversification

It is important to note that building a portfolio and intelligently diversifying it is an art form that can be improved upon with time and experience. Behind this, explains Eitan Eldar, there are theories and many different strategies. Every person must learn and identify the right tools for their needs, investment assignments, way of life and nature.

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The pre-sale is essentially a solution that allows a developer to start a project with the aid of the bank, which can often reach millions of Shekels, through a “lending account.” Before the bank allows the release of funds for a developer, it requires them to provide private capital for a portion of the value of the construction.

The developer tries to sell the plots to the buyers, who are investing an amount that is 15-20 percent of the transactions at the signing, and get a mortgage or business loan in order to buy the real estate plots. In this way the developer shows the bank that they are selling units before the project even begins, thereby increasing the trust between the parties and can even encourage the bank to grant greater benefits.In order to grant a developer with a lending account for a real estate project, the bank is interested to see that the developer can sell the real estate plots in order to return the investment and that the project has potential. This is the reason why the bank requires them to sell a certain amount of units to buyers. This arrangement is known as “pre-sale.”

When is a project successful?

In the best scenario for a developer the real estate project is one for a financially secure population, which will attract other financially secure people and thereby secure the success of the project. The benefits that the developer earns from the bank allow the developer to offer discounts in certain cases to the buyers purchasing real estate plots in the project.

In truth the benefits are large in such situations, for the buyers as well, but it is important to remember that they don’t get to see the plots that they have begun to pay for. In a pre-sale the buyer purchases a plot (an apartment or office, for example) from the developer only on paper, and a great amount of time passes until the project is completed.

The pre-sale is often also used as a condition of the bank to begin to provide financial assistance to a project, in addition to private capital provided by the developer. In these cases the developer is required to a pre-sale of a certain percentage of the project at predetermined sale prices.

Eitan Eldar is involved in a variety of activities that include, among other things, real estate projects in Israel and abroad and financial services. In recent years, Eitan Eldar, has been a leader in investment banking deals. The information is part of lectures of Eitan Eldar in IDC Herzliya.

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