Israel Aerospace Industries' IPO faces a race against time over its closely guarded secrets
Regulators and the defense establishment are trying to reconcile IAI’s obligation to investors with the need to protect classified information. The outcome could determine whether the state-owned company proceeds toward an IPO or loses its status as a reporting corporation.
A new glitch in the Israel Aerospace Industries (IAI) IPO process could produce the opposite result from what the state intended: Instead of turning IAI into a public company whose shares are traded on the stock exchange within three months, the state could find itself presiding over the company's exit from the reporting regime altogether, Calcalist has learned.
Sources involved in the government-owned company's IPO process warned Calcalist that unless the state resolves the issue of confidentiality surrounding sensitive security information about IAI's activities, as well as the issue of the compensatory disclosure it would be required to provide investors, the Israel Securities Authority could have difficulty approving a new bond issuance by December 1. If that happens, IAI would be forced to repay the remaining NIS 154 million ($50 million) of its Series D bonds on that date and would no longer have publicly traded securities, potentially causing it to cease being a reporting corporation.
The issue is one of the main obstacles facing IAI's IPO. According to sources involved in the matter, "all relevant parties are currently trying to resolve the impasse and are racing against the clock."
In recent days, the Israel Securities Authority, the Ministry of Justice, the Government Companies Authority and the defense establishment have been discussing an arrangement that would balance the protection of the security secrets of one of Israel's most sensitive companies with its obligation to disclose material information to investors.
Other sources familiar with the matter said on Tuesday that it was clear that "interested parties are trying to stir the pot in a hand-wringing manner, against the backdrop of a series of advances that have occurred in recent months regarding the company's IPO. The interest in issuing IAI is first and foremost in the State of Israel."
The root of the problem lies in an arrangement that has accompanied IAI for almost two decades. In 2007, the company became a reporting corporation after issuing bonds to the public. It was subsequently granted an exemption from disclosing information whose publication could harm state security. The exemption covers significant portions of its production and development activities, which are classified and subject to strict oversight and restrictions on disclosure by the Director of Security for the Defense Establishment.
The exemption has allowed IAI to operate in the capital market through bonds while keeping much of its sensitive information confidential. Sources involved in the matter explained that the rationale behind the arrangement was largely economic: A bondholder's exposure to the company is different from that of a shareholder. A bondholder is primarily concerned with the company's ability to meet its obligations and service its debt, while shareholders are directly exposed to the company's performance, business, profitability, financial risks and market risks.
Over the years, IAI has operated as a reporting corporation under a practical arrangement with the Securities Authority based on the fact that the public holds only its bonds. But as preparations have accelerated for an IPO, the gap between the existing level of confidentiality and the disclosure obligations applicable to a publicly traded company has become a problem, putting IAI under a tight regulatory deadline.
Preparing IAI for an equity offering has therefore required regulators to revisit the confidentiality arrangement and determine which information could remain undisclosed to the public after the IPO, and what information the company would instead be required to provide to investors.
"The confidentiality mechanism does not distinguish between trading in bonds and trading in stocks," a senior source familiar with the details said. "In terms of disclosure obligations, it is not possible to set one standard for a company when it issues shares and continue over time with a different standard just because the public holds its bonds."
Calcalist has learned that the Israel Securities Authority is nearing completion of its work on the matter, alongside parallel steps being taken by the Ministry of Justice, primarily under Attorney General Gali Baharav-Miara. Those steps have not yet been completed.
As part of the discussions, an outline has been formulated that is intended to determine which information would remain confidential after the IPO and what "compensatory disclosure" IAI would be required to provide investors in place of information it could not disclose.
However, amid the ongoing discussions with the Attorney General's office and the lack of clarity regarding Baharav-Miara's position, the status of the outline that has been formulated remains uncertain.
"During the bond issuance stage, the Securities Authority is required to approve the confidentiality requested in the prospectus," the senior official said. "Then, when it comes to ongoing reports by a reporting corporation, confidentiality requires court approval, as part of a process in which the state, through the Attorney General, presents its position."
IAI has extended the maturity date of its Series D bonds several times in recent years, allowing it to maintain its status as a reporting corporation while preparations for its IPO were repeatedly pushed back. In October 2025, the final maturity date was postponed again, from December 1, 2025, to December 1, 2026.
IAI clarified in its reports that the extension was not due to a liquidity problem and was intended to preserve its legal status as a reporting corporation.
As a result, a relatively small bond balance compared with the scale of IAI's operations has effectively become its umbilical cord to the capital market. Now, regulators are warning that, beginning in three months, the company may no longer be able to rely on the same arrangement.
One source warned Calcalist that if the Securities Authority does not approve a new bond issuance, IAI could not only cease to be a reporting corporation and exit the reporting regime under which it has operated for almost two decades, but also see much of the infrastructure built over the past year in preparation for its IPO put at risk.
"A situation will be created that could dismantle a significant part of the infrastructure built over the past year in preparation for the company's IPO," the source said.
This is not the first time IAI has run into capital-market problems as a result of the state's conduct as its controlling shareholder.
Last year, the company faced a different crisis after Defense Minister Israel Katz and Minister responsible for government companies David Amsalem delayed the appointment of a chairman and directors amid prolonged political disputes. The thinning of IAI's board and the failure to maintain the required composition of the company's governing bodies put it, in the midst of a regional war and unusually heavy workloads, at risk of violating provisions applicable to it as a reporting corporation.
The situation raised concerns about the implications for IAI's bonds, including the possibility that its debt could become immediately repayable.
Even then, however, there was no underlying business or financial problem at IAI. The company's sales and profits in recent years have reached the highest levels in its history.
But the difficulty the state has had in meeting the requirements applicable to a company operating in the capital market has been a recurring problem. The Securities Authority clarified at the time that IAI's status as a government company did not exempt it from the corporate governance rules applicable to reporting corporations. The issue was ultimately resolved when the ministers appointed, at the last minute, two directors on their behalf, preventing the implementation of the authority's warnings to halt trading in IAI's bonds.
Calcalist has learned that the same principle now lies at the core of the authority's position on IAI's confidentiality crisis in the context of the planned share offering. From the authority's perspective, the state's desire to see IAI go public does not justify relaxing the standards that apply to other public companies.
Under this principle, government companies that choose to enter the capital market must comply with the same disclosure and corporate governance rules as other market participants, even when they are controlled by the state, even when they are defense companies with significant classified operations, and even when they have been operating in emergency mode for almost three years to support the IDF's wartime needs.
This approach, which could have significant implications for IAI in the coming months, could also complicate future IPO plans by other government-owned defense companies. The issue is particularly relevant given growing interest from Rafael and Tomer, the manufacturer of missile and rocket propulsion systems, in going public and raising capital to expand their operations and strengthen their ability to compete in international markets, where demand for weapons remains exceptionally strong.
Of the three government-owned defense companies, IAI is by far the most advanced in its preparations for an IPO, following a government decision in late 2020. Despite Rafael and Tomer's interest in going public, the government has yet to make a decision regarding either company. Any preparations for an IPO are therefore expected to take time and, if they move forward at all, are likely to begin only after the elections and the formation of a new government.
Rafael Chairman Yuval Steinitz has long urged government ministries to move quickly on a decision regarding the company's IPO. In recent weeks, he has said on several occasions that taking IAI public without a similar move for Rafael would weaken his company and put it at a disadvantage. He has also warned of a potential "brain drain" from Rafael to IAI, arguing that a publicly traded IAI would have greater flexibility to offer employees more competitive compensation.
Meanwhile, in recent weeks, the Securities Authority has been dealing with a similar corporate governance crisis at Israel Railways, following prolonged delays in appointing directors, a situation that echoes the saga that nearly brought IAI to a standstill last year.
Israel Railways has been left without the required number of external directors and without a director with accounting and financial expertise, making it difficult for the company to operate its statutory committees and approve its financial reports in accordance with the rules applicable to reporting corporations.
The Securities Authority has already warned that if the situation at Israel Railways continues, it could affect the approval of the company's financial statements, trading in its bonds and its ability to raise debt in the future.
From the authority's perspective, last year's crisis at IAI, the current situation at Israel Railways and the present confidentiality dispute at IAI are different events, but they are connected by the same principle: A government company that enters the capital market must operate according to the rules and regulations governing that market.
IAI Chairman Boaz Levy said in response to Calcalist: "The company, in coordination with the Ministry of Defense and the Government Companies Authority, is moving forward with the IPO, and in the coming months a major effort will be made to resolve all the issues required to obtain the necessary approvals. The Securities Authority is involved in the process, and we are currently at the final stage of its work in preparation for discussions on the issue with the Ministry of Justice.
"Regarding the bonds that allow IAI to operate as a reporting company, they have been extended in recent years. In light of the significant progress in the IPO process, I assume that, if necessary, they will be extended again this time."
The Israel Securities Authority said: "The Authority does not comment on matters concerning reporting companies. To the extent required, this will be reflected in the company's reports."
The Ministry of Justice declined to comment.
