Wednesday, 15 April 2020

Bahrain Middle East Bank - Successful AGM, No EGM = Future Remains Bleak

At the Third AGM, a Quorum Can Be Rather Small

BMB “successfully” held its FY 2019 AGM on 9 April after two previous unsuccessful tries. Minutes here.

But just barely.

Only one shareholder holding one share was in attendance.

That’s 0.00000025% of outstanding shares according to the AGM Minutes.

As per Bahrain’s Commercial Companies Law, there is no required minimum quorum for a third meeting.

All AGM agenda items were approved.

The EGM – which is needed to address the critical issue of continuity of BMB – failed for lack of a quorum. 

See below for the main focus of the AGM:  a discussion of the implications of failure to hold an EGM on BMB's ability to legally continue as a "going concern".

As noted in an earlier post, because AN Investments was excluded from voting in the EGM, if their shares are excluded from the total number of BMB shares, only 4.81% of shares would constitute a quorum for the EGM.

As also noted in that post, that would require AlFawares (ALF) to be present to vote its shares because in the event that AN Investments' shares are excluded a minimum of 4.81% of total outstanding BMB shares would have to be present and all other shareholders own only 4.51% of BMB. 

ALF was not in attendance for the EGM.

It’s unclear what the reason is for their failure to participate.

Earlier the Board noted that certain members of senior management and the Vice Chairman were under investigation for an alleged fraud. None of these individuals were directly associated with ALF.

Also, ALF’s two directors on the Board resigned "just before" the CBB ordered that the Board resign.

I have interpreted the timing of these events as an early warning from the CBB to the ALF directors to exit before being forced to resign.

In which case ALF should have nothing to fear from attending the EGM unless it fears (a) other legal exposure of some sort, (b) being forced to participate with new equity, or (c) the "sting" of unpleasant comments from other shareholders.

Re the first point, it would seem that the CBB’s actions—if my assessment is correct—indicate that ALF’s hands are “clean”, though see the potentially troubling reference to the difficult situation with “majority shareholders” below.

What might be the "sticking point" is ALF's own obligation to the Bank for the Installment Sale Receivable (ISR) loan which BMB has provisioned in full.

Re the second point, I don’t think Bahraini law gives the CBB or another Bahraini authority the power to compel a shareholder to invest additional equity. Participation in rights issues is voluntary and rights entitlements may be waived and in some cases traded.

And if the good sheikhs at ALF are sensitive to criticism, they can always give a party with thicker skin their proxy. The proxy holder can turn away questions regarding new capital or any other matter, including the ISR, with a simple “I don’t know”.

Given ALF’s own financial “difficulties”, their absence seems strange as restoring value to BMB increases the assets they need to meet their own obligations.

Given that the CBB appears to have given ALF's directors advance warning so they could keep their "thoubs" clean, it seems downright ungrateful of ALF not to cooperate.

Beyond that, Kuwaiti investors often use OPM to fund their investments as a tried and true method of limiting their downside risk.

If the investment goes bad, they hand the "keys" to the investment to the lender with a smile.

One might therefore expect there could well be a lender holding the BMB shares as collateral. 

An institution one would hope would be motivated to see the value of those shares preserved, or, in this case, increased from zero.

In such a case it would seem that at a minimum that lender would demand that ALF give it a proxy,  assuming it does not already “own” the shares through realization of its collateral.

The main focus of the meeting was a discussion of the implications of the failure to hold the EGM this year, following a similar failure earlier.

Mr. Yusuf Taqi a member of the Board asked the “regulators to provide directive on this issue {continuity of the bank} given that it may not be possible to hold at EGM in the future”.

BMB’s counsel opined that failure to convene an EGM and take the legal steps to maintain continuity of the Bank could lead to the bank being wound up or placed under administration.

Mr. Isa al-Motawaj, Director of Wholesale Banking at the CBB, noted that the CBB understands that BMB is in an “abnormal situation’ vis-a-vis its majority shareholders. (Note the plural in the minutes).

Is ALF included in the phrase “majority shareholders”? 

And, if so, is their inclusion a reference to their own significant financial difficulties? 

Or is there something more here?

Or is it an inadvertent slip? A reference to the fact that AN Investments is owned by the three Turkish “amigos”?

Mr. al-Motawaj stated that the CBB had evaluated that directing the bank to liquidate or be put under administration “would not be in the best interest of the stakeholders” particularly as there are other financial institutions exposed to the same defaulted parties as BMB is trying to recover funds from.

He also went on to assure the Board that they were duly constituted and operating in line with legal requirements, noting the importance of the asset recovery efforts underway.

He also responded to a board question about the legality of the AGM, noting that the representative of the MOIC&T had vouched for compliance wiht Bahrain's Commercial Companies Law, even though only one share was in attendance.

The CBB has gone on the record that it is willing to give BMB some leeway given its unique situation.

That being said, even with a successful EGM, BMB’s future is bleak.  

Recovery is highly unlikely to be in full.  

Additional capital will be required.  

Hard to see investors rushing to commit equity.

As a wholesale bank, BMB is unlikely to benefit from rescues afforded retail banks in the Kingdom.

Finally, kudos to the one shareholder who apparently believes in exercising his or her corporate governance responsibilities.

All markets, not just those in the GCC, need more shareholders like this individual.

Wednesday, 18 March 2020

Bahrain Middle East Bank - Apparent Way Forward to Hold EGM

A while back I wrote that it was highly likely that ANI (BMB's Turkish-owned) major shareholder would not attend Extraordinary General Meetings (EGMs) and that given their roughly 81% shareholding there could not be a quorum for the EGM. 

This would frustrate the ability of BMB to comply with the Commercial Companies Law (CCL) requirements to enable it to continue as a “going concern” given the bank’s negative capital.

It seems that a “solution” has been found in the CCL Section 203 as outlined in BMB’s announcement on the Bahrain Bourse of its upcoming AGM and EGM.
For the purposes of discussing and passing this Resolution, AN Investment W.L.L. shall not be entitled to count in the quorum or to vote on said Resolution, on the basis that the Bank’s total outstanding exposures which has caused the said loss of capital are to one or more related parties of AN Investment W.L.L. Such shall be in accordance with Article (203) of the Commercial Companies Law No. 21 of 2001, as amended.

This appears to be based on a broad reading of the last sentence in Section 203.
No member may vote for himself or on behalf of whoever he represents on issues in which he has personal interest or on a dispute existing between him and the company.
As outlined here, the minimum acceptable quorum for a BMB EGM (third meeting) is 25% of shareholders.

Eliminating ANI’s 80.77% from the base, means that to get a quorum at a third meeting, shareholders with 4.81% of BMB’s shares would have to attend. 

AlFawares is the registered owner of 14.48%.

If AA has done his sums right, always a concern, then unless ALF participates, an EGM cannot proceed.


Netting out ALF’s shareholding, all other shareholders comprise 4.75% short of the 4.81% required.

It’s almost certain that all of them will not attend as attested by past history. As well the substantial unclaimed dividends indicate many are sleeping, perhaps eternally. Note 27 in BMB’s FY2019 Audited Report.

If ALF or its proxy participates, then it’s likely the call for the first EGM will be successful because ALF’s 14.48% would be over 75% of BMB outstanding shareholding after exclusion of ANI’s shares.

What this means is that it is likely BMB will cross one hurdle to remain a going concern.

One step forward.

However, the key issue is finding new capital. And that will be a journey of more than 999 li.

Probably at least 200 million li.

The proverb cited above gives no guidance on the success of so long a journey.

Wednesday, 4 March 2020

GFH Announces FY2019 AGM - Time for Shareholders to Review Suggested Questions for AGM

What Did Umberto Say About the Ignorant?
GFH has announced its FY2019 AGM date and agenda on the BSE. 

The meeting will be held 23 March.

If there isn’t a quorum, the second meeting will be on 30 March and, if necessary, a third on 6 April.

Shareholders will certainly benefit from a close reading and re-reading of my previous posts on GFH’s FY 2019 performance and as well my analysis of what is behind GFH’s rather expensive foray into Treasury Shares as preparation for the upcoming AGM.

Of note from the agenda is GFH’s recommendation that shareholders approve a 5.57% cash dividend (approximately US 50 million).

That represents some 63 % of GFH’s FY 2019 income attributable to GFH shareholders.

In that context, I’d remind shareholders and readers that in February GFH “successfully priced” a USD 300 million sukuk at 7.5% fixed per annum. Quel succes.
In my post I noted that during FY 2019 GFH engaged in purely discretionary uses of cash of some USD 140 million.

If it had forgone these, it could have raised USD 140 million less saving USD 52.5 million in interest over the life of the Sukuk.

Adding in the USD 50 million in dividends, adds another USD 18.75 million to interest, bringing the total to USD 71.25 million.

AA is frankly stumped to come up with a sound business rationale for such an action.

It would, however, neatly fit with the theory that GFH’s Treasury Share and Dividends are designed to prop up its share price rather than build new value for GFH’s shareholders.

KHCB Announces OGM and EGM Dates and Agenda More Questions for the OGM and EGM

KHCB has issued the announcement that its FY 2019 OGM and EGM will be held on 25 March 2020.

If a quorum is not reached, the second meeting will be held 1 April. 

If a third meeting is required, the date is 8 April.

Time for shareholders to take another look at AA’s earlier post with questions for KHCB’s Board and Management.

This post adds some new questions on the proposed meeting agendas.

Ordinary General Meeting
  1. Item 10 Authorize Board to appoint a “market maker” who will use up to 3% of GFH’s shares. 
  2. Item 11 Authorize the Board to take necessary steps to delist from the DFM.
It’s pretty well known that as a general rule, the BSE has liquidity issues so appointing a market maker makes sense.

Shareholders, however, should make certain that “market making” doesn’t become a cover for costly transactions designed to prop up the share price as is the case at GFH. 

KHCB’s shareholding is concentrated: four shareholders hold just over 75% of shares and would likely have to trade their shares in “off market” transactions (BSE Special Order Market). 

What then is the appropriate amount of Treasury Shares that the market maker needs to provide liquidity to retail shareholders?

Extra-ordinary General Meeting
  1. Item 2- Approve capitalization of losses via a reduction in paid-in-capital to BHD89,211,948 from BHD105,000,000.
  2. Item 3: Approve issuance of Sukuk in an amount up to USD 200 million as Additional Tier 1 Capital.
Shareholders should probe on why the amount being raised is roughly 5 times the BHD 15 million capital shortfall. 

Is this a sign of an extremely serious problem at KHCB?  Recall that as of FYE 2019 the CAR was a respectable 16.5%  

Or is KHCB planning a major acquisition?

If fully issued, the impact on existing shareholders ability to receive dividends and the market price of shares is going to be significantly adverse because given its size and required tenor to quality as AT1 capital, this is going to be a very costly instrument.  

There may be very little left of net income for ordinary shareholders.

Given the pattern and concentration of shareholding, retail investors are going to have no real say in the outcome, unless they can persuade representatives of the Bahraini authorities that their rights are being ignored. 

However, GFH shareholders may have more ability to influence things because GFH has more diverse shareholding. That is, there are not one or two shareholders who control a majority of the shares.

What’s Behind GFH’s Treasury Share Transactions?

You Should Have

A shareholder's relationship with the board of a company in which he or she has invested in is similar in several ways to the relationship of a younger sibling with an elder brother. 

This isn’t the first time I’ve posted on this topic.

Earlier posts here and here have focused on quantifying the costs to shareholders. 

Today I want to step back and offer some hopefully informed speculation on what might be going on

See if you agree

Treasury Share Transaction Basics – Not an Income Statement Event

To provide a framework for this post, some basics on Treasury Share transactions.

Under generally accepted accounting principles, gains or losses on Treasury Share transactions are reflected directly in shareholders’ equity in the Consolidated Statement of Changes in Owners’ Equity.  

That is, they do not appear in the Income Statement.  

And because of this some shareholders might miss them!

However, when a firm engages in these transactions, there is an economic gain or loss to shareholders, particularly because most of the time these are cash transactions. 

Thus, it's proper to consider them as "income" or "loss" as I will in this post. 

And it's important for shareholders to be aware of them as these transactions affect the value of their firm.

History of GFH Treasury Share Transactions

As the chart below demonstrates, it’s only since 2017 that GFH has become very active in Treasury Share transactions. 

Both the volume and value of transactions has increased dramatically during this period as have FYE holdings, shown here in USD terms (EOP Value) and as a percent of total issued shares (% TIS).

GFH Treasury Share Transactions
Millions of US Dollars
FYE Buy Sell Cancel EOP Value % TIS
R2014 $0 $0 $0 $1 0.11%
2015 $5 $2 $0 $4 1.09%
2016 $7 $11 $0 $0 0.10%
2017 $83 $25 $0 $58 2.89%
2018 $161 $134 $0 $85 6.94%
2019 $215 $177 $51 $73 8.05%

How did GFH fare on these transactions?

Over the period FY 2017 through FY 2019, GFH has incurred losses on Treasury Share transactions totaling USD 58 million. 
  1. USD 3 million in FY 2017
  2. USD 27 million in FY 2018 and 
  3. USD 28 million in FY 2019.
Beyond that in FY 2019 GFH canceled Treasury Shares that it had purchased for USD 51 million.

In FY 2019, it acquired USD 32 million in Treasury Shares for a “share incentive scheme”. No economic gain or loss but a use of GFH shareholders' funds.

It also obtained OGM approval to use 140 million of Treasury Shares for an acquisition or acquisitions, subject to CBB approval.

That’s a quite a lot of expensive Treasury Share transactions –none of which appear in GFH’s Income Statement.

Let’s take a closer look to try and understand what is going on and why.

2019 Treasury Share Cancellation

After having acquired 207,547,170 shares of its own stock for USD 51 million, the Bank with the approval of shareholders and its regulator canceled these shares of stock.

Instead of canceling them, the Bank could have retained these shares or sold them back to the market and obtained cash. Perhaps, not USD 51 million in cash but likely a substantial portion of that amount.

Why then would it cancel the shares?

There is a theory that share buybacks and subsequent cancellation of the shares can improve both the book value and market value of a stock because reducing the number of shares increases earnings per share (EPS).

This assumes that the cost of acquiring the shares, including future earnings on those foregone assets, is less than the value created by cancelling them.


AA doesn’t believe this theory. 

Increasing the price of an individual share does not increase the value of the firm. 

If a company wanted to increase the price of a share, it could simply do a reverse stock split. Number of shares reduced, EPS increaased, no large amount of cash spent

Buying and then cancelling shares may in fact decrease the value if the purchase of the shares removes cash or other assets that the firm needs to increase its value or maintain its ongoing earnings stream.

There is in AA’s view one possible exception. When a company has cash but no compelling investment opportunities, then a share buyback may make sense if tax laws favor capital gains over ordinary income.

Absent that, these transactions tend to amount to spending real assets to achieve an accounting gain. 

But let’s assume the theory does work.

After all as Madame Arqala could tell you, AA is not always right.

The quantum of shares extinguished needs to be significant to have a significant effect.

GFH extinguished roughly 5.6% of its existing shares.

It’s hard to see this having a material effect on the per share price.

According to AA’s rough calculations and assuming this theory has validity, the price of a GFH share would have increased USD 0.01 in 2019 assuming a P/E of 10x.

But there’s more that makes this transaction baffling.

Having extinguished the shares, GFH proceeded to issue bonus shares equal to the number of the shares it cancelled. 

In effect undoing whatever value enhancement the cancellation may have had.

The cost of this apparently pointless exercise? One that had no apparent positive impact on its shares, save for an accounting “gain” of USD 4 million? 

In case you’re wondering that gain was also refected directly in equity.

A mere USD 51 million in cash in exchange for USD 4 million in non cash “income”.

What are some comparable amounts?

It’s roughly 45% of FY 2018 reported net income attributable to GFH shareholders! 

Or 64% of that in FY 2019.

What would motivate GFH to do this?

AA believes that GFH wanted to make “room” to buy more Treasury Shares because the Central Bank limits the number of Treasury Shares GFH is allowed to hold.

To do this GFH would have to find a "way" to remove the Treasury Shares from its balance sheet.

That means a sale or cancellation.

It almost certain that GFH couldn’t find a buyer for a block sale or block sales in “off market” transactions because there just wasn’t appetite given GFH’s condition and prospects.

That would mean GFH would have to sell those shares “in the market” almost certainly lowering the price of GFH stock.

Thus offsetting the effect of GFH’s purchases and undoing all its previous "good" work. The stock has been in slow decline for some time now.

So cancellation was the one remaining option if GFH wanted to continue Treasury Share purchases to "support" its share price.

I can’t think of another good reason for this bizarre economic transaction.

Keep that thought in mind as we take a look at GFH’s Treasury Share purchases and sales.

Treasury Share Purchase and Sales

Why would a bank be buying and selling its shares?

There are several reasons.

Market Making

One reason is to provide liquidity to the market so that shareholders can buy and sell their shares without causing temporary demand/supply imbalances that move the price dramatically.

GFH have engaged SICO to make a market in GFH shares on the DFM and BSE. Until recently the KSE did not allow market making.

What does a market maker do?

The canonical answer is that a market maker supplies liquidity to the market, filling in transient gaps on the demand side (purchases) or supply side (sales) as needed.

How does that role help the market in a company’s shares to run smoothly?

Buyers or sellers can conduct their transactions without having to conduct transactions at prices significantly different from the “fair” value of the shares.

Two simple examples.

Shareholder Abdullah wants to sell his shares on the BSE but there are not any or not enough interested buyers close to his desired price to fill out the buy side of his ticket.

The market maker steps in to supply the missing demand at what the market maker believes is a fair price.

Brother Abdullah can sells his shares to the market maker without having to reduce his price dramatically, conduct his sales over a prolonged period, or not sell all the shares he wants.  

The market maker now owns the shares.  He either holds them in "inventory" so he has sufficient shares to fulfill his responsibility on the sell side.  Or if he has "too many" shares he gradually sells shares into the market to reduce to the appropriate level.

On the other hand, suppose Brother Jassim in the UAE wants to buy GFH shares at the DFM but no one is selling in the amount he wants to buy. The market maker steps in to save the day, selling from his (the market maker's) inventory of GFH stock.

The market maker of course keeps a sharp eye on price trend in the stock and generally holds no more "inventory" than he needs to in order to fulfill his role.  The last thing he wants to do is hold shares that lose value.

If, by a happy circumstance as appears to be the case here, the stock issuer bears the risk of price declines, then the market maker may take a more relaxed approach to inventory valuation.

Over time one would expect that the market maker to earn an appropriate profit or break even.

If market making results in continued large losses, then this is a sign that the “problem” with the particular stock is not liquidity but rather fundamental value. Or a system wide lack of liquidity in the market. That would be noticeable across more than one stock though. Or the market maker is an idiot.

Two years seems to be more than an adequate time frame to make the call on GFH shares. 

It’s not liquidity. 

It’s lack of demand, fueled no doubt by investors’ ratings of the stock.  

SICO is a professional shop. It acts as market maker in the BSE and DFM for other shares and seems to be doing quite well.

Because it's not one of the two latter cases, then what's happening is that GFH is trying to support its share price.

A completely different goal. 

And one that perhaps should not be called “market making” so much as “share support”.

If shares continue to decline, then it seems that all that is being accomplished is delaying the inevitable and spending shareholder money on a futile quest.

Let’s look at some “performance” data.

During FY 2019, GFH sold Treasury Shares with a cost of USD 177 million for USD 150 million.

That works out to a gross margin of roughly negative 15%. That is, for every USD 1 GFH “invested” via a TS purchase, it received USD 0.85 on sale.

During FY 2018, GFH sold USD 134 million for USD 106 million, a gross margin of negative 21%. For each USD 1 invested, GFH received USD 0.79.

This doesn’t look like “market making” it looks like an attempt at price support as do the dramatic increases in the volumes of transactions.

Less charitable folks that AA might say given the volumes of transactions and losses involved it looks like market manipulation.

As noted in an earlier post, during 4Q18 GFH was responsible for almost 40% of the trades on the three markets in which it is listed (Bahrain, Kuwait, and DFM). To be clear that’s GFH Treasury Share transactions as a percent of total trading on all three markets. Not that GFH was trading in the KSE.

That, as you know, is a critical time of year, when firms and funds prepare their annual audited financials. A time of year when auditors get serious about the numbers they are asked to audit.

What other reasons might a company buy back its shares?

Opportunistic Investments

The market is underpricing a company’s shares. The company can buy them “cheap” and then later sell them “dear”.
Given the secular decline in GFH’s share price over years and its weak condition and prospects, this doesn’t seem to be a likely scenario.

Rather it seems that GFH is buying “cheap” and then selling “cheaper”.

Currency for Acquisitions

A company buys its shares in order to use as “currency” in an acquisition. You’ll recall that GFH obtained shareholder approval to use up to 140 million of Treasury Shares for acquisitions, subject to CBB approval

This doesn't seem a realistic scenario..


It’s hard to imagine that potential sellers of assets to GFH on an “arms length” basis have a substantially different view than the market about the worth of any shares to be proferred. 

However, this method can work in special cases.

A seller who knows that his “fine” assets are worth less than the asking price, may well sell his overpriced assets for overpriced stock as long as he achieves his goal of getting a certain value for those assets, avoiding a loss, declaring a profit, etc..

Having been around the proverbial IB block multiple times, AA has seen more than a few valuation miracles.

Ones where buyer and seller agree values divorced from reality to mutually assist one another in achieving each other's goals.

You may be familiar with some “round-trip” asset sales in the GCC where the same assets passed between two parties at increasing prices over the years with such sales justified by offsetting changes in the buyer’s and seller’s “strategies” that promote a transaction. 

U wants a pan MENA network of banks and then it doesn’t. 

B wants to sell its network and then it wants to buy it back.

AA’s smarter brother has even seen one where a considerable “gift” was given to a debtor in a rescheduling. 

Instead of taking 70% of the debtor’s equity as all reasonable models determined, a compassionate creditor took only 30%. 

Thankfully, AA’s brother was not asked to “fix” his model to show that valuation.

AA’s “Call” - GFH’s Treasury Share Transactions are Designed to Support the Price of Its Shares

There seems to be no reasonable business rationale for the amounts spent by GFH on Treasury Share transactions – the USD 51 million in share cancellation and the USD 58 million losses on Treasury Share sales.

Nor any compelling reason why GFH would suddenly find the need to buy USD 32 million in Treasury Shares for a “share incentive scheme” in a single year.

The proposal to use 140 million Treasury Shares for an acquisition also seems a bit far fetched at least for one on a true arms-length basis.

It seems to AA that GFH is using the latter two transactions to provide rationale for acquiring more Treasury Shares.

The goal certainly seems to be to prop up the price.

The question is for whose benefit?

Well, if a shareholder borrowed funds to buy GFH shares and pledged the shares to a lender, it would be mighty inconvenient for that shareholder if the price of GFH shares declined. 

The shareholder might have to provide additional cash to top up the collateral or reduce the loan principal.  In extremis, he might have to sell shares at a loss to reduce or repay the loan. 

Neither very appealing.

Declines in the value of unpledged shares can also be mighty inconvenient if one has to mark them to market. 

One’s performance record is tarnished, hampering new business generation.

One’s own shareholders might ask embarrassing questions.

A truly uncomfortable position particularly if the shareholders are VIPs or, as they’re sometimes known locally, VISs.

This may also explain why GFH declared a cash dividend for FY 2018 despite the fact that it had no real cash income that year. See post here.

Dividends help defray interest on a loan.

Dividends also provide a return on one’s investment. Just the thing one might need if the stock price is trading down instead of up.

One would expect that expenditures of this amount would be taken for an important shareholder.

Who might that be?

The 7,464 Abdullahs with holdings less than 1% each in GFH- some 62% of all shares-- probably don’t have the “wasta” or the “weight” to command such largesse.

That leaves just 15 other shareholders.

14 of whom own 20% of the shares and appear not to be related to one another. 

Leaving just 1 shareholder with 10% who no doubt by mere coincidence became a shareholder one year before the Treasury Share transactions began in earnest.

Is there incontrovertible proof this is the case and that GFH is trying to prop up its share price?


Just a pattern of behaviour that AA assesses is the most likely explanation for GFH’s actions.

It may well be the case that GFH’s Board has heard of problems among the Abdullahs who hold its shares and is trying to mitigate their troubles.

Or is undertaking these transactions for solid business reasons that AA isn't clever enough to discern.

As we say in the region “ الله أعلم “