Beynleumi Hanpakot: What Really Sits Inside the Subordinated-Note Layer
The main article already showed that Beynleumi Hanpakot's subordinated-note layer is not ordinary debt. This follow-up shows why: it sits behind senior debt and deposits, includes bank-level write-down triggers, and is carried at NIS 2.280 billion against undiscounted contractual cash flows of NIS 2.948 billion.
What Actually Sits Inside the Subordinated-Note Layer
The main article already established that this layer is not ordinary listed debt. It is part of the International Bank's capital structure through the issuing vehicle, so it has to be read through subordination terms, write-down mechanics, and the support structure, not through one balance-sheet line. This continuation isolates that point.
At the end of 2025 the layer consisted of three series, 25 through 27, rated ilAA- by S&P Maalot and Aa3.il(hyb) by Midroog. Together they stood at a fair value of NIS 2.280 billion, about 33.5% of total liabilities. Anyone reading that number like a standard bond balance misses the core issue. These are instruments classified as Tier 2 capital for the bank, with loss-absorption mechanics, limited call windows, and accounting views that do not match the contractual cash-flow profile.
The easiest point to miss sits in the gap between three ways of measuring the same layer. On year-end par balances, the three series stood at NIS 2.008 billion. At fair value through profit and loss, they are carried at NIS 2.280 billion. In the undiscounted contractual cash-flow ladder, the report already shows NIS 2.948 billion. That is not semantics. It is the difference between what the layer is booked at today and what contractually sits across the life of the instrument.
One more important point: unlike the commercial-paper layer, this is not a near-term cash wall. Only NIS 45.3 million sits within six months, there is no contractual cash flow at all in the 6 to 12 month bucket, and NIS 2.712 billion, about 92% of the undiscounted cash flow, sits beyond five years. So the near-term test is not a giant maturity cliff. It is how the bank and the company handle the first call windows and the price of this capital layer.
| Series | Fair value at 31.12.2025 | Single call window | Rate reset date if not called | Original anchor-rate reference disclosed in the report |
|---|---|---|---|---|
| 25 | NIS 357.1 million | June 23, 2026 to July 23, 2026 | June 23, 2026 | minus 0.579% |
| 26 | NIS 1,009.7 million | March 31, 2028 to April 30, 2028 | March 31, 2028 | minus 1.399% |
| 27 | NIS 913.3 million | March 13, 2029 to April 13, 2029 | March 13, 2029 | minus 0.138% |
Seniority: Support Does Not Erase Subordination
This is the core distinction between the hybrid layer and senior bonds or commercial paper. The bond and commercial-paper terms say that the obligations of the company and the bank rank equally with their other unsecured obligations, including public deposits, except for obligations explicitly defined as junior. The subordinated notes reverse that picture. Their obligations are contractually subordinated after all other obligations of the company and the bank to depositors and other ordinary creditors.
The report makes the point even sharper. There is no collateral, no guarantee, and no other arrangement that legally or economically improves the notes' seniority relative to depositors and other creditors. So anyone reading the subordinated notes as simply "bank debt with an extra comfort layer" is reading past the contract. This is not the same rung in the stack.
At the same time, the subordination should not be read too broadly. Within the regulatory-capital world, series 25 to 27 are not some undefined bottom layer. The report says they rank equally with earlier subordinated notes recognized as Tier 2 capital, and equally or senior to future instruments that may be recognized as Tier 2 capital, if any are issued. In other words, the subordination is against the senior world, not against every possible future instrument.
The support layer itself is strong, but it is important to define what it does and what it does not do. The agreements between the company and the bank, signed in 2007 and 2009, say that the bank bears all payments to holders of the bonds and subordinated notes whose proceeds are deposited with it, that issuance proceeds are deposited with the bank on identical terms and without commission, and that the bank also bears the company's ongoing expenses. In addition, the August 2009 indemnity letter commits the bank to indemnify the company for all of its liabilities from time to time.
But there is an important qualifier here as well. The indemnity expires if the company ceases to be an auxiliary corporation of the International Bank. So the support is structural and economic, not a cancellation of the contractual order of priority. That is the key distinction: holders benefit from a very strong support chain around the instrument, while still holding a junior instrument with loss-absorption terms.
| Support or obligation layer | What the report says in practice | What should not be inferred from it |
|---|---|---|
| Matching deposits at the bank | Issuance proceeds are deposited with the bank on identical terms and without commission | This does not make the holder senior to depositors or ordinary creditors |
| Bank indemnity to the company | The bank undertakes to indemnify the company for all of its liabilities, as long as it remains an auxiliary corporation | This is not presented as collateral or a guarantee that changes contractual ranking |
| Bank coverage of ongoing expenses | The bank bears the company's ongoing expenses, which totaled NIS 308 thousand in 2025 | This strengthens the wrapper, but it does not neutralize principal write-down if a capital trigger is hit |
Call Windows, Rate Reset, and Principal Write-Down
The first trigger the market may actually encounter is not a write-down. It is the first call window. Each of the three series has only one such window. Series 25 comes first, in June to July 2026. Series 26 arrives only in 2028, and series 27 in 2029. If the company does not exercise the call during that window, the coupon resets on the date specified for that series.
What matters here is that the reset is not one-directional. The report explicitly says that the annual coupon will increase or decrease, as the case may be, by the difference between the anchor rate on the reset date and the anchor rate published at the original issuance date. So the call window is not an automatic penalty mechanism that forces refinancing. It is a cost-of-capital decision point. If the yield environment and the bank's capital management do not justify calling the series, the coupon can move either way.
The harsher trigger sits elsewhere entirely. All three series include a loss-absorption mechanism if the International Bank's Tier 1 equity ratio falls below 5%, or if a non-viability event occurs at the bank, subject to the Supervisor of Banks. In those cases, a full or partial principal write-down is executed.
The report also sets out the potential reversal mechanism. If the bank's Tier 1 equity ratio rises above its required minimum, the company may, after a decision by the bank, notify a full or partial cancellation of the write-down for up to seven years from the date of the write-down, even if the final maturity has already passed. That again reinforces the same conclusion. This layer sits on the line between debt and regulatory capital. It trades on the exchange, but its economics belong to the bank's capital-management framework.
The Carrying Value Is Not the Cash-Flow Promise
This layer is a good lesson in accounting interpretation. On the balance sheet, the subordinated notes are measured at fair value through profit and loss and classified as Level 1 in the fair-value hierarchy, meaning quoted market prices for identical instruments. By contrast, the matching long-term deferred deposits at the bank are shown as Level 2, based on observable inputs that are not direct market prices. So even in a nearly mirrored structure, the two sides do not have to offset exactly at every reporting date.
That is exactly what the numbers show. The matching long-term deferred deposits stand at NIS 2.275 billion, the subordinated notes stand at NIS 2.280 billion, and the net gap between them is about NIS 5.0 million. That is small relative to the layer's size, but it is still a reminder that the wrapper is not a mechanical zero-spread formula. There is a market, there is a fair-value hierarchy, and there is a difference between a Level 2 asset and a Level 1 traded liability.
The larger, and more important, gap is between the carrying value and the undiscounted contractual cash-flow ladder. The balance sheet carries NIS 2.280 billion. The liquidity ladder shows NIS 2.948 billion. That NIS 667.4 million gap does not mean a matching asset is missing. It means the balance sheet gives a point-in-time fair-value measurement, while the liquidity note shows the full contractual cash flows over the life of the instrument. Anyone mixing those two numbers will misread the risk.
What This Means From Here
The practical reading for 2026 starts with series 25. Not because there is a huge cash wall there, but because this is the first window in which the bank and the company can show whether they prefer to call the instrument, leave it outstanding into the reset, or simply signal that the right price of hybrid capital has changed.
The main point for readers following Beynleumi Hanpakot is not whether the subordinated notes are "backed" in the everyday sense. They sit inside a very strong support wrapper of matching deposits, agreements with the bank, and an indemnity letter. But the contract still says clearly that this is a junior, unsecured layer with bank-level write-down triggers. So it has to be read like a regulatory capital instrument that trades in the market, not like a senior bond with a more elegant name.
That also explains why the balance-sheet carrying value is not enough on its own. NIS 2.280 billion is a correct number, but it is a point-in-time number. To understand what truly sits inside this layer, the reader has to connect ranking, write-down mechanics, call windows, the support structure, and the gap between fair value and contractual cash flow. Only then does the full picture become visible.
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