Banking & Finance 2024 Comparisons

The increasing interest rates and difficult credit conditions are currently driving some of the more leveraged companies to seek alternatives (such as equity investments) or to attempt to restructure loans (eg, by way of deferrals, payment extensions or facility increases). Lenders are generally offering more conservative terms and raising their credit qualifications. Licensed and exempt credit providers are offering alternatives to traditional lenders, but currently their market share remains low. 

The ongoing conflict in Gaza and the exchange of fire with Iran and Hezbollah has impacted on the local lending market. Although local lenders are continuing to lend as usual, international lenders appear to be exercising greater caution in lending into Israel. To the extent that the conflict will escalate into a wider regional war, this will likely further affect the local lending market.

The impact of the Ukraine war on the local lending market has been minimal. As in other jurisdictions, Russian lenders have not been active in the local lending market since the breakout of the war.

The local high-yield market is undeveloped. Accordingly, it is difficult to state how it may have affected financing terms and structures in Israel. The market has seen some funded derivative transactions that are backed by securities as a means of providing financing.

The loan market in Israel has seen significant rapid growth in alternative credit providers in the last few years. This growth is attributable to institutional lenders, as well as to non-bank lenders that are acting under a lending licence. These lenders are very active in the retail market, offering mortgages, car loans and loans for general purposes.

A trend in the lending market in recent years is sales of loan portfolios, largely from the lending institutions to institutional investors such as pension and provident funds and long-term saving plans managed by Israeli insurance companies, as well as Israeli banks purchasing portfolios from non-bank lenders.

The authors are of the opinion that non-bank lending has not affected financing terms and structures in a meaningful way.

In the context of leveraged financing and the acquisition of Israeli targets, foreign borrowers appear to be leaning towards HoldCo structures familiar to them in other jurisdictions. This enables purchasers to obtain acquisition debt from foreign credit providers using a structure they recognise. Using derivatives as an alternative to secured financing has also been a recurring theme over the past few years.

Other trends seen in the market include sales of debt portfolios by Israeli banks, as well as by non-bank lenders. These sales are either direct true sale sales to a specific institutional entity, or a sale to a special purpose company, which issues notes to institutional investors or receives a loan from a local bank to finance the purchase of the portfolio. Repayments of the loans in the portfolio are then passed through to the note holders or financing entity.

A recently completed first-to-market public RMBS securitisation may be the harbinger of a new trend on the market, which may be expedited if the draft securitisation legislation (currently under discussion) is approved.

An additional structure used by banks to obtain capital relief is a CLN or a fully funded CDS backed by cash.

Environmental, social and governance (ESG) remains a developing topic in Israel. One of Israel’s largest banks recently entered into a large credit line agreement with the European Investment Bank to support “green” investments, and it is expected that ESG will continue to become more relevant in the medium-term.

In 2022, a state-guaranteed loan fund was launched for small and medium-sized businesses with an annual turnover of up to NIS100 million. This fund features a diverse range of credit providers, including seven banks and four non-bank lenders. Among the loan tracks available, the “Sustainable Energy Track” loan is specifically designed to fund projects that minimise environmental impact by optimising energy consumption or transitioning to cleaner energy sources. This track aims to accelerate Israel’s environmental goals in sustainable energy by supporting investments in energy efficiency for industry and buildings, the electrification of fossil fuel systems and the promotion of clean energy production processes.

Additionally, there has been a growing issuance of green bonds in Israel, indicating a developing market for sustainable finance. This trend correlates with a potential increase in ESG or sustainability-linked lending.

In July 2024, the Israeli Ministry of Environmental Protection published the Israeli Taxonomy for Classifying Sustainable Economic Activities, particularly focusing on the mitigation of greenhouse gas emissions. The Taxonomy provides a framework for classifying economic activities based on their environmental impact, closely mirroring the EU Taxonomy. While adherence to the Israeli Taxonomy remains voluntary, it has the potential to influence eligibility for green financing and drive the development of green loan products.

The Supervision of Financial Services (Regulated Financial Services) Law, 5766-2016 sets out a comprehensive regulatory framework for credit providers (among others), and requires that credit providers obtain a licence to lend in Israel (certain criteria has been published as to the territorial scope of the law and what would be deemed to be lending in Israel). This is subject to certain available exemptions, including for OECD-licensed banks and certain other OECD-regulated entities and their subsidiaries (which are regulated for anti-money laundering in their home country), as well as for large loans to business entities.

Subject to the above, banks may lend to Israeli companies on a cross-border basis.

Foreign lenders may provide loans if they or the loan transaction meet the requirements under one of the relevant exceptions (see 2.1 Providing Financing to a Company). To the extent licensing is required, currently only Israeli entities may obtain a licence to lend in Israel. Foreign banks may request a foreign bank licence without incorporating a local subsidiary, subject to certain requirements and criteria.

Generally, there are no restrictions or impediments to providing security or guarantees to foreign lenders or security agents, although receiving a security interest over shares in certain regulated companies or in companies subject to foreign holding restrictions may require a permit, and may not be possible when exceeding a certain percentage of the equity in the company.

Additionally, loans secured by intellectual property developed with funding from the Israel Innovation Authority (IIA) require foreign lenders or security agents to execute an undertaking towards the IIA, agreeing that enforcement of the security will be made in Israel and subject to the Law for Encouragement of Research and Development in Industry – 1984 (as amended).

Registration of mortgages in the Israel Land Registry in the name of foreign lenders or security agents may require translation of documents into Hebrew and the delivery of legal opinions – this can be a drawn-out process.

Israel does not currently have any currency controls in place with non-sanctioned jurisdictions.

A borrower may not use loan proceeds for any illegal or sanctioned activity. Otherwise, to the authors’ knowledge, there are no restrictions.

A trust is a recognised concept under Israeli law. No parallel debt structure is required under Israeli law.

Generally, loans can be freely assigned in Israel, unless a restriction is in place in the loan documents or by law (applicable mostly to loans secured by assets that are regulated or that require a permit). The assignee should be licensed to lend, or be exempt from the licensing requirement (see 2.1 Providing Financing to a Company). Upon assignment of the loan, any collateral provided (to the extent that it is transferrable) is also transferred as a matter of law, although registration in order to perfect the assignment may be required.

Debt buyback is permitted in Israel, unless contractually restricted pursuant to the underlying documentation. Where such debt is a listed bond, additional rules apply pursuant to relevant securities regulation.

There are no specific provisions in Israel catering for “certain funds”, beyond basic contractual principles. The concept is less developed in Israel than in other jurisdictions.

The most recent law that required changes to legal documentation was Israel’s Insolvency and Economic Rehabilitation Law – 2018 (the “Insolvency Law”) which came into effect on 15 September 2019. Certain changes were made to ensure that the updated suite of Israeli insolvency proceedings and procedures was reflected, as necessary. The authors further note that the Regulation of Provision of Payment Services and Payment Initiation, 2023 (regulating the activity of provisions of payment services) has recently entered into effect.

Under the Israel Interest Law – 1957, the maximum rate of interest that may be charged on index-linked loans lent in new Israeli shekel is 13% per annum, and the maximum rate of arrears interest is 17% per annum. Additional restrictions apply to the compounding of interest.

Under the Fair Credit Law (which applies to loans to individuals not exceeding approximately NIS1.2 million), the maximum rate of interest that may be charged on unindexed-linked loans is as follows:

• on unindexed new Israeli shekel loans, the Bank of Israel Rate + 15% per annum, and, if in arrears, the Bank of Israel rate + 18% per annum; and
• on foreign currency loans, the London Inter-Bank Offered Rate (LIBOR) + 15% per annum, and, if in arrears, LIBOR + 18% per annum.

Additionally, there is some case law on this topic, particularly as regards overly excessive interest rates; however, there are no strict rules other than as described above.

Companies that have listed equity or debt are required to report material financial contracts to the public. The Israeli Securities Authority has published rules pertaining to the information required to be reported in respect of significant credit agreements, both in immediate reports (upon entry into the contract, any material change thereto and in default scenarios) and in financial statements.

Interest payments, and payments deemed to be interest payments (eg, discounts upon conversion of a convertible loan security) paid by Israeli borrowers are subject to withholding tax at source, currently at a rate of 23% for corporate (opaque) lenders. A reduced withholding rate may be available under an applicable tax treaty; however, this requires receiving written confirmation from the Israel Tax Authority ahead of making such payment, subject to the lender meeting the relevant eligibility criteria under said treaty.

A recent amendment to the law, which was adopted with the goal of strengthening the Israeli high-tech industry, has (among other reliefs) introduced a tax exemption for interest paid by a high-tech company to a foreign financial institution, subject to meeting certain detailed conditions.

Interest payments may also be subject to value added tax (VAT), currently levied at a rate of 17%. Typically, the local borrower entity would be required to issue a self-invoice (a reverse-charge mechanism). Depending on the use of the borrowed funds, the VAT may be reclaimable.

There is currently no stamp tax or similar documentary tax payable in Israel in respect of credit transactions.

As noted previously (see 4.1 Withholding Tax), withholding of taxes occurs at source, which can be mitigated by gross-up provisions in the loan documents.

In addition, and depending on the nature and scope of the activities of the foreign lender and whether or not personnel present in Israel are involved in the origination of the loan, there could be permanent establishment issues relating to the foreign lender which would, in parallel, trigger tax reporting and other compliance issues.

Forms of Security Available in Israel

Israeli law recognises both fixed and floating charges.

Assets capable of being secured by way of fixed charge include:

• shares;
• patents;
• trade marks;
• real estate;
• equipment;
• machinery;
• receivables; and
• any other specific asset of the company.

Israeli law is unclear as regards creating a fixed charge over future collateral, although the prevailing market view appears to be that this is not possible.

A floating charge may also be created by an Israeli company over a specific asset or over all present and future assets of the company.

To the extent that an Israeli court deems that an asset purported to be charged by way of fixed security does not meet the necessary criteria for fixed security (eg, identifiability and lender control of the asset), the security may be classified as a floating charge instead.

Formalities and Perfection Requirements

Under Israeli law, the laws that govern the perfection of a security interest are the laws of the jurisdiction of incorporation of the pledgor (ie, the State of Israel) and the laws of the jurisdiction where the charged property is located or deemed located. Accordingly, in order to ensure the validity, binding effect and enforceability of a security interest against a third party or liquidator of an Israeli company, it is necessary to:

• file the security agreement at the Israeli Companies Registry within 21 days of execution of the security agreement, and an executed Hebrew language statutory form; and
• comply with all registration/perfection requirements of the jurisdiction where the charged property is located or deemed located (if different from Israel).

Similarly, in order to ensure the validity, binding effect and enforceability of a security interest against a third party or liquidator of an Israeli partnership or individual, it is necessary to:

• register the security interest at the Israeli Pledges Registry by way of an executed Hebrew language statutory form; and
• comply with all registration/perfection requirements of the jurisdiction where the charged property is located or deemed located (if different from Israel).

Failure to perfect a security interest would result in the security interest not being valid vis-à-vis other creditors or a receiver or insolvency official, and the creditor would therefore be unsecured.

Costs of perfection are minimal (less than USD100) and, in the authors’ experience, charges and pledges are registered at the relevant registry within two to five business days.

Certain assets such as patents and real estate have specific registries and should be registered in such registries in order to perfect the security interest therein.

It is possible for an Israeli company to charge future assets under a floating charge. As previously discussed, it is likely not possible to create a fixed charge over future assets.

Israeli partnerships and individuals are unable to create floating charges.

Israeli companies are permitted to create floating charges, which may cover a pool of assets.

There must be independent corporate benefit in providing any third-party guarantee or security interest to a lender. Typically, this is easier to identify in the case of downstream credit support.

In the context of upstream and cross-stream guarantees, the Israeli credit support provider must carefully consider whether adequate corporate benefit is present. It is arguable whether this may be managed with a fee payable to the Israeli security provider by the sister company or parent, or whether such a fee assists in any way.

If no corporate benefit is present, any guarantee given to a sister company, or to a company with common owners, falls within the (wide) definition of a distribution. For the distribution to not be unlawful, it must meet the relevant distribution tests (see 5.4 Restrictions on the Target). Generally, even if sufficient profits are available to pay under the guarantee, existing third-party creditors (ie, employees, tax authorities, trade creditors, etc) could still seek to prevent payment under the guarantee for reason of lack of corporate benefit.

In the context of an acquisition, without an application to court for a capital reduction, the effect is that any security or financial assistance granted by the target (including upstream guarantee or security granted by an Israeli entity as part of an acquisition financing package for the purchase of its shares or the shares of its parent) must meet certain distribution criteria (and is treated as a distribution). These criteria are as follows.

Profits Test

Dividends may be distributed only out of the greater of:

• the balance of accumulated reserves; and
• reserves/profits accumulated over the two most recent fiscal years based on the company’s most recent financial statements (audited or reviewed).

For calculation purposes, the aggregate amount of all previous distributions is deducted (other than distributions which were already subtracted from the company’s retained earnings as reported in its financial statements). The date of the distribution may not exceed six months from the end of the period to which such financial statements relate.

Solvency Test

A distribution may only be effected when there is no reasonable suspicion that the distribution will result in the company being unable to meet its current or future obligations when due. This subjective determination as to whether or not the company satisfies the solvency test is made by the company’s board of directors.

Although the law is not entirely clear on this point, there is an argument that both above-mentioned tests should be met at the time of creation of the guarantee as well as at the time of any enforcement. Therefore, unless both tests are met, any support by the Israeli company or its subs for the acquisition (including the granting of collateral or upstream guarantees) may constitute a prohibited distribution.

To bypass this limitation, it is possible to apply to the court and ask for a capital reduction irrespective of the company not meeting either test or both tests; however, this can be a long process and is rarely used.

Another possible approach is merging a newly established Israeli acquisition vehicle into the target, thereby pushing the debt into the target. The rationale for using this structure is that the merger procedure has its own built-in protections for creditors of the target, and therefore there is no need to also meet the distribution tests. A number of transactions have been structured in this manner; however, there are no court cases that either support or reject this approach, and thus there is some uncertainty involved with it.

In the context of acquisition financing, it is common to see the credit support provided by an Israeli target being limited to its distributable reserves as available at the time.

Note that there is no issue with pledging the shares of the Israeli target in support of the acquisition financing, and this is almost always done.

Generally, the granting of guarantees or security may be restricted for a regulated entity, in accordance with any statutory restrictions or limitations included in any licence granted to it.

To the extent that an Israeli pledgor has received government funding (eg, from the IIA), statutes and conditions concerning such funding may also include restrictions on pledging.

Any underlying contractual restriction on pledging an asset may also be relevant.

In order to release a security interest in Israel, it is necessary to file a standard discharge in Hebrew to:

• the Companies’ Registry if the security interest is registered in the name of a company; or
• the Pledges Registry if the security interest is registered in the name of a partnership or individual.

Under Israeli law, in order to have priority against a third party or liquidator of an Israeli company or partnership, the security interest must first be registered at:

• the Israeli Companies Registry (for companies); or
• the Israeli Pledges Registry (for partnerships and individuals).

See 5.6 Release of Typical Forms of Security.

If duly registered, the priorities between creditors will generally be determined based on the “first in time” principle. If a registered floating charge also contains a negative pledge notation, this security interest will generally take priority over any subsequent security interest created over the same asset, including fixed security.

Generally, a creditor with a fixed-charge security interest will have priority over all other creditors for all outstanding obligations, except that from the date the court issues a commencement-of-proceedings order, default interest accruing on outstanding obligations will be subordinated to unsecured debt.

For floating charges created on or after September 2019, the Insolvency Law provides that a floating charge holder will be entitled only to 75% of the proceeds of realisation of the assets that were subject to the floating charge on the date of commencement of the insolvency proceedings after statutorily preferred payments (such as realisation expenses, unpaid employee salaries, severance pay and certain taxes). Any remaining debts owed to the floating charge holder after such payment will rank pari passu with the unsecured creditors.

In addition to the above, from the date the court issues a commencement-of-proceedings order, default interest accruing on outstanding obligations will be subordinated to unsecured debt.

Contractual subordination is common in Israel, and priority can be and regularly is contractually varied in a lender group or between two separate groups of lenders.

Contractual subordination provisions should also survive an Israeli insolvency. This is likely to be relevant at a level above the insolvent entity once the court-instructed distributions have been finalised post-insolvency.

A trustee will have discretion to negotiate and accept terms for DIP financing to fund the business and to support a going-concern sale where such financing is essential for the economic rehabilitation of the debtor (conditional upon obtaining court approval). The trustee may agree with the secured lenders on the terms for DIP financing that requires a sales process, though this outcome is not assured and depends on the trustee’s judgement under the circumstances and on the obtaining of court approval. 

A trustee may seek alternatives for DIP financing other than the existing secured lender. The legal standard for obtaining such DIP financing is that existing secured lenders should receive adequate protection or other means to secure their interests. There is limited guidance on the standards for adequate protection without the consent of the existing secured lender.

Generally, a lender may enforce its collateral upon the occurrence of any of the trigger events agreed in the relevant security document.

Outside insolvency proceedings, the lender may enforce its security through the Israeli courts (or the Israeli court execution office) with a sale conducted by a receiver, often through a public auction.

In the context of insolvency proceedings, the court may determine whether to direct the company or partnership into rehabilitation or liquidation proceedings.

An applicant for an order for commencement of proceedings is able to specify its preference for rehabilitation or liquidation; however, the court will ultimately decide which route to direct the company or partnership towards (ie, rehabilitation or insolvency), based principally on the economic condition of the company or partnership.

If the court proceeds to order the company or partnership into rehabilitation proceedings, the court has the right to order a moratorium on proceedings against the company or partnership for up to nine months (extendable by successive periods of up to three months each), which may restrict the enforcement of security. During this moratorium, the court may permit a holder of a fixed or floating charge to enforce or crystalise its security, if it is satisfied that:

• adequate protection of the secured creditor’s rights cannot be guaranteed (determined principally on economic grounds); or
• enforcement of the security interest would not jeopardise the creditor’s arrangement (principally determined based on an analysis of whether enforcement would affect the operation of material elements of the business).

If the court proceeds to order the company or partnership into liquidation proceedings, the moratorium on proceedings against the company or partnership will not apply to secured creditors.

Generally, a choice of foreign law as the governing law of the contract, the submission to a foreign jurisdiction and a waiver of immunity would be upheld in Israel, subject to:

• Israeli principles of public policy (including, without limitation, the principles applicable to government contracts);
• mandatory rules of Israeli law (including good faith); and
• the Israeli rules of civil procedure.

Generally, subject to any jurisdiction-specific agreement, any monetary judgment obtained in a foreign court will be enforceable in the courts of Israel without re-trial or re-examination of the merits of the case provided certain requirements are fulfilled in accordance with the Enforcement of Foreign Judgments Law, 1958 (the “Foreign Judgments Law”), the principal conditions of which are that:

• the judgment has been rendered by a foreign court, which under the laws of the foreign jurisdiction was competent to render the judgment;
• the foreign judgment is final and not subject to appeal, and an appeal is no longer possible (or that an appeal was rejected and no further appeal is possible);
• the obligation imposed by the foreign judgment is of a type enforceable under the rules of enforcement of judgments in Israel;
• the content of the foreign judgment does not contradict Israel’s public policy;
• the judgment is capable (as a legal matter) of being executed in the jurisdiction where the judgment was made;
• Israeli courts will only declare a judgment given in a particular country as enforceable in Israel if the courts of that country would likewise enforce a judgment given by an Israeli court;
• the judgment must not have been obtained by fraud, or in a manner contrary to principles of natural justice or international law; and
• a motion for the enforcement of a foreign judgment must be filed within five years from the date the foreign judgment was rendered, unless there is an agreement between Israel and the country in which the judgment was delivered stipulating an alternative period of time (or unless certain other special circumstances exist).

Regarding Foreign Arbitral Awards Generally

Any award of an arbitral tribunal made following an arbitration conducted in accordance with the requirements of standard arbitration provisions will be enforceable in the Israeli courts pursuant to Israeli arbitration law in accordance with, and subject to, the terms of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the “New York Convention”).

If any party were to commence legal proceedings in the Israeli courts in relation to any matter covered by the arbitration provisions, the Israeli courts would, pursuant to and subject to the exceptions and provisions of the Israeli Arbitration Law and of the New York Convention, stay such proceedings and require the dispute to be submitted to arbitration in accordance with the applicable arbitration provisions (an interim relief may be granted by Israeli courts).

The arbitration provisions would need to be reviewed on a case-by-case basis.

To the extent that the Israeli entity is regulated or the secured asset has been government-funded, please see earlier in 5. Guaranties and Security and 6. Enforcement. However, to the authors’ knowledge, no other matters would affect a foreign lender’s ability to enforce its rights under a loan or security agreement.

See 6.1 Enforcement of Collateral by Secured Lenders regarding rehabilitation and liquidation proceedings.

The general principle that applies to the allocation of assets (or the proceeds of the sale of assets) of an insolvent company or partnership is that all creditors should be treated equally (and thus receive a pro rata return with respect to their debts). However, this principle is overridden by a series of statutory provisions such that, in general, the priority of creditors may be summarised as follows:

• holders of a statutory first charge (largely in respect of certain unpaid taxes);
• creditors secured by a fixed charge (other than for amounts representing post-insolvency default interest that are subordinated to unsecured debt); 
• costs of insolvency proceedings;
• creditors who enjoy statutory preference (such as for certain unpaid taxes);
• creditors secured by a floating charge (other than for amounts representing post-insolvency default interest that are subordinated to unsecured debt) (subject to as discussed in ‎5.1 Assets and Forms of Security); and
• unsecured creditors.

An insolvency process may take as little as a few months or up to any number of years. There is no uniform answer, and the following factors are all relevant:

• the complexity of the insolvency proceedings;
• the volume of objections submitted (if any);
• the number of petitions filed; and
• the type of proceedings.

A temporary measure of postponement of proceedings was introduced as a result of the COVID-19 pandemic, with the effect of rehabilitation (see 6.1 Enforcement of Collateral by Secured Lenders regarding rehabilitation proceedings), though allowing a company to continue and manage its affairs without the appointment of an insolvency official (a recent proposal to include this permanently in the Insolvency Law was introduced). Additional available procedures include court-approved debt arrangements, allowing a company to reorganise its debt with all creditors.

If the borrower, security provider or guarantor were to become insolvent, the main risk areas for lenders centre around the ability to enforce contractual rights and security. Once insolvency proceedings commence, the insolvency process is managed by a court-appointed trustee and is supervised by the court. This may entail stay of proceedings and limitations on the ability to enforce security.

The most active sectors in recent years have been:

• energy (particularly renewable energy and storage);
• light rail;
• desalination; and
• military infrastructure.

Public-private partnership (PPP) structures in Israel are similar to those in other jurisdictions, although State/private sector risk allocation is perhaps more favourable to the State.

There is no general PPP legislation in Israel – rather, specific sectors have specific legislation governing projects in that sector (eg, the Electricity Sector Law and rules issued by the sector regulator govern the electricity sector).

Most PPP projects are conducted within the scope of a concession agreement issued by the State as part of a mandatory tender process, and this tender law plays a significant role in the selection of the private sector entity. However, in the electricity sector, in some cases a licence and/or quote regime is in effect, with general rules being applicable rather than a project-specific concession agreement.

Typically, the concession agreement issued by the State will be governed by Israeli law; in certain cases, disputes will be resolved by Israeli arbitration, though Israeli court jurisdiction is more common.

Given the need for back-to-back assumption of responsibility, EPC and O&M contracts will also typically be governed by Israeli law. Offtake/PPA agreements will also usually be governed by Israeli law. However, major equipment supply contracts (such as for turbines and light rail vehicles) have sometimes been governed by other laws.

On the finance side, it is more acceptable for agreements with non-Israeli lenders to be governed by English or New York law. 

Usually, tender documents for major PPP projects impose restrictions requiring that the owners be incorporated in countries that maintain diplomatic relations with the State of Israel. In certain cases, ownership of a PPP project by a non-Israeli entity may require the ad hoc approval of a committee run by the Prime Minister’s officer, which addresses concerns similar to those addressed by the CFIUS regime in the USA.

Although PPP projects do not usually involve ownership of real property rights (but rather a long-term right of use), non-Israeli ownership of real estate in Israel is subject to an approval process.

Provided that the lenders meet the criteria for lenders set out in the tender documents/concession agreement (again, usually regarding incorporation in a country with which Israel has diplomatic relations), there are generally no specific issues with receiving and enforcing security interests (although it is common to use a local entity as a security agent, especially where an Israeli bank is a co-arranger).

In most large-scale PPP projects, the concession agreement will require the concessionaire to incorporate as an Israeli limited company (though in some cases, it may allow for a limited partnership). In the electricity sector where the licence/quota regime applies rather than a concession agreement, the most common structure is to use a limited partnership (for tax reasons).

There are no specific laws regarding structuring of project companies as opposed to other types of companies (although the accounting treatment of PPP projects may be different).

For the most part, project finance is arranged by one or more local or international banks who organise a syndicate of mainly Israeli lenders (usually made up of institutional entities – pension/provident funds, insurance companies, etc). Rules that govern these entities (referred to as the “Goldschmidt” rules) require them to ensure that certain conditions be included in the finance documents, including:

• minimum holding by the arranger of 10% of the debt;
• full disclosure by the arranger of any actual or potential conflicts of interest;
• disclosure by the arranger of the types of fees it receives; and
• receipt of all information received by the arranger as part of its work.

ECA financing has been used in a number of cases where key equipment is manufactured in the relevant jurisdictions (mainly turbines and light rail vehicles), though it is still not common.

Project bonds, private equity financings and similar structures are not common sources of senior debt in Israel (though Israeli infrastructure funds have provided mezzanine financing or equity in a number of projects).

Other than renewable energy sources, Israel’s main natural resource is natural gas. Exploration, extraction, transmission, distribution and sale of natural gas is highly regulated:

• upstream is regulated by the Petroleum Commissioner, under the Petroleum Law 1952 and associated regulations and rules; and
• midstream and downstream is regulated under the Gas Sector Law and associated regulations and rules.

Under the relevant legislation, each natural gas lease has local supply obligations determined by the regulator (although a certain amount of trade in these obligations is possible). Exportation of gas (within the export quota) is also subject to approvals regarding the identity of the counterparty.

Generally speaking, Israel’s electricity grid is an “island” and is not connected to its neighbours; therefore, the exportation of electricity is not possible.

In Israel, the key regulatory bodies overseeing finance and investment policies are:

• the Capital Market, Insurance and Savings Authority (CMISA); and
• the Supervisor of Banks at the Bank of Israel.

While there are no specific regulations regarding financial projects, there are several policies and regulations for financing and investment related to ESG, including as follows.

ESG Disclosure Requirements

Currently, Israel does not have mandatory ESG disclosure laws. As a result, the degree of ESG disclosures varies between institutions, with some taking a more proactive approach than others. The CMISA mandates that financial institutions disclose their incorporation of ESG factors in their investment policies. Additionally, several institutional investors utilise ESG questionnaires and rely on external ratings for responsible investments. Investors and asset managers enjoy flexibility in their approach to considering ESG factors.

While not legally binding, the Israeli taxonomy mentioned in 1.6 ESG/Sustainability-Linked Lending can be a valuable tool for project finance. It provides investors with a framework for assessing a company’s environmental impact and guide investment decisions accordingly. Additionally, financial institutions can leverage the taxonomy to report on the proportion of their on- and off-balance sheet exposures aligned with taxonomy-defined activities, as well as the percentage of fee income derived from such activities.

Environmental Risk Management

Israeli banking institutions are obligated to identify and manage environmental risks in their lending, financing and investment activities. They must establish and implement “environmental risk-management programmes”, often involving the assessment of ESG reports or ratings, which can be provided by the issuer or external service providers.

In June 2023, the Bank of Israel issued a directive on the principles for effective management of climate-related financial risks. The new directive includes 12 principles (adopted from the Basel Framework) that banking institutions operating in Israel are required to comply with by June 2026.

It should be noted that common practice is also to review material environmental permits (if needed) for the activity that is relevant to the financing – for example:

• air emission permit under the Clean Air Law;
• toxins permit under the Hazardous Substances Law; and
• business licence under the Business Licensing Law.

In addition, tests of soil and water pollution are often considered in the financing of a project.