For the first time in Israel: Bank Leumi issues covered bonds to foreign investors - at a significantly higher rating than the State of Israel and at a lower interest rate

Bank Leumi has made a groundbreaking move by becoming the first bank in Israel to issue covered bonds to foreign investors, reaching a total of EUR 750 million in funding. This innovative financial instrument has attracted record interest, with demand spiking at approximately EUR 4.6 billion. The bonds issued in a 5-year series come with a 0.68% margin, translating to an annual interest rate of 3.197%. Notably, these bonds received high ratings—AA- by Fitch and Aa3 by Moody's—significantly surpassing the ratings of the State of Israel’s recent bond issuances, which stand at Baa1 from Moody's and A from Fitch, while also being issued at a lower interest rate.

Directed by Bank Leumi’s Deputy CEO Omer Ziv, along with the Legal Division Head Nitzan Sandor, this issuance showcases the bank's continued ambition to grow and diversify its funding sources. It was underwritten by prominent global financial entities such as Barclays, JPMorgan, Goldman Sachs, and UBS, with plans for the bonds to be listed on the Tel Aviv Stock Exchange's institutional trading platform.

Covered bonds, which are secured by a pool of mortgage assets, are notably more favorable for both issuers and investors due to their generally lower funding costs compared to traditional corporate bonds. This issuance marks a significant achievement for Bank Leumi, opening doors to foreign markets, particularly with investors from Germany, France, and Switzerland. According to Bank Leumi's CEO Hanan Friedman, this event underscores the bank's reputation as a leading financial institution in Israel and signifies growing international interest in the Israeli banking sector.

Bank Leumi’s recent issuance of covered bonds to foreign investors represents a pivotal moment for Israel’s financial landscape. With approximately EUR 750 million raised and impressive demand of EUR 4.6 billion, this first-ever initiative in Israel highlights the bank’s strong market position and potential for growth. The bonds, rated between AA- and Aa3—considerably higher than the ratings of standard Israeli government bonds—underscore the bank’s robust financial health and attractiveness to international investors.

Investors should closely monitor Bank Leumi’s performance and consider the implications of this groundbreaking issuance. The bond’s asset backing from a diversified mortgage portfolio reduces risk while offering lower funding costs than traditional corporate bonds. The annual interest rate of 3.197%, which is 20 basis points lower than those of similarly rated government bonds, makes these covered bonds a compelling investment opportunity.

Moreover, with this issuance, Bank Leumi taps into a vast global covered bonds market, positioning itself to attract a new pool of institutional investors from Europe and beyond. Countries like Germany, France, and Switzerland, which have historically had limited exposure to Israeli financial instruments, now present an expanded horizon for investment diversification.

For market participants, this could indicate a shift in perception of Israeli banks, enhancing the overall appeal of the Israeli banking sector to foreign capital. Institutional investors generally favor covered bonds for their reliability and security; thus, Bank Leumi’s successful strategy to diversify funding channels may signal increased opportunities across the sector.

In conclusion, this innovative move should encourage investors to consider the potential for growth and stability from investing in Bank Leumi’s covered bonds, while also viewing broader implications for the Israeli financial market as it opens up to foreign investment.