The Tel-Aviv Stock Exchange presents today for public comments a proposal for amendment of the rules of the Tel Bond Indices. While the proposed changes are within the jurisdiction of TASE's Board of Directors, TASE's management has decided that, considering the significance of the changes and their anticipated effect on the composition of the indices, it is prudent to obtain the public's comments prior to finalizing the proposal.
The Tel Bond Indices are designated as an investment asset consisting of diverse, low-risk corporate bonds. Even the high-yield indices within Tel Bond family, the Tel Bond Yields Index, consist solely of investment-rated series of corporate bonds[1].
The rules of the Tel Bond Indices include customary provisions for the inclusion of bonds. These require, inter alia, that the bond be granted an “investment rating"[2] by at least one rating company a series of bonds is deleted from the indices only if both rating companies reduce the rating of the series below “investment rating".
Recent incidents have demonstrated that the rating agencies are often too slow to respond to an impairment in the business position of a company whose bonds have been rated by them. Consequently, the price of bonds of a company that encounters business difficulties drops while the bond is still included in the index, which reduces the index yield and adversely affects the investors tracking such index, since under the existing rules the bond will only be deleted from the indices once both rating companies reduce their rating below “investment rating".
To demonstrate the adverse effect on investors of the inability to promptly delete the bonds from the indices, TASE mentions a case study of a Bond series that during the month of May 2020 reached a new low by the time their rating was finally reduced below “investment rating". Additionally, almost a month had elapsed between the reduction of the rating by Midroog and the subsequent reduction by Maalot that enabled the deletion of the bond series from the indices under the existing rules.
In order to improve the TASE's response time (as the administrator of the Tel Bond Indices) to impairment in the business position of a company whose bonds are included in the Tel Bond Indices, the following changes are proposed to the rules of the Indices:
1. The lower rating of a series will be the determining factor for deletion from the Indices - It is proposed that where a series of bonds is rated by two rating companies, the rating that is the lower of the two will be the determining factor for the inclusion or the deletion of the series in the Indices (the opposite of the current state of affairs, where the decision is based on the higher rating. That is, a series of bonds that has received an “investment rating" from one rating agency is not deleted from the Tel Bond Indices even if its rating by the other rating company is below “investment rating").
2. Introduction of a prerequisite of yield to redemption as a cause for deletion, preceding a rating reduction - It is proposed that a prerequisite be added that is based on the yield to redemption of a bond series, as the risk of interest and/or principal default is generally reflected in a high yield to redemption of the bonds. The proposed prerequisite aims to facilitate a just in time response to the Indices by TASE in the event of deterioration in the business position of a company, ahead of the reduction of its rating by either of the rating agency.
It is proposed that a bond series be deleted from the Tel Bond Indices when its yield to redemption exceeds the average yield to redemption of bonds with similar characteristics (in terms of interest and linkage types) by 3 standard deviations. The yield to redemption of all bonds that are included in the Tel Bond Indices will be calculated daily at the end of trading to determine whether there is cause for deletion from the Indices.
[1] The Tel Bond Yields indices have been customized for the local market and therefore, unlike the more common high-yield indices, do not comprise bonds rated below investment rating.
[2] Investment rating = a minimum rating of (Baa) by Midroog or (BBB-) by Maalot.
