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Critics say such business structures impede competition, keep prices high and stunt economic growth. By controlling financial assets, pyramids can give their businesses access to easy credit, creating risk across the financial system.
Israel is expected to pass a law this year constricting the power of pyramids. Holding companies will have to limit how many tiers of subsidiaries they have. Conglomerates will have to choose between owning major financial or non-financial concerns.
The law could hurt tycoons, said Richard Gussow, senior analyst at DS Securities: “They will have to restructure, sell companies, and since everyone knows they are going to sell, they might not get the full value for them,” Gussow said.
Big debtors account for an increasing portion of the corporate bond market. At the end of 2012, 91 percent of outstanding debt in Israel’s corporate bond market was issued by companies with more than 500 million shekels of debt, up from 75.5 percent in 2004, according to the central bank.
Israel’s Security Authority said that in 2012 about 28 corporations opened negotiations for debt rescheduling with bondholders and that this was “worrying”.
Israeli media say the total owed by Danker’s firms is 9 billion shekels ($2.5 billion).
IDB Development, one unit of IDB Holding, owes nearly 6 billion shekels. Earlier this month, an Israeli court rejected bondholders’ demands to hand them control of IDB Development as part of a debt settlement plan. The court appointed outside observers to monitor IDB’s conduct.
“This court has never seen such an extreme case in which financial institutions gave credit at such sums, with no collateral and without providing any explanation,” Judge Eitan Orenstein said.