Wednesday, 11 November 2009

Global MENA Financial Assets Ltd (GMFA) /Global Investment House Kuwait

GMFA is a closed-end investment company incorporated in Guernsey on 2 June 2008.  It is listed on  the London Stock Exchange.   LSE link here.

GMFA was formed with the intent of investing in financial assets in the MENA region (including Turkey)

Global Investment House Kuwait ("GIH")  holds 29.99% of GMFA.   GIH is in the midst of major debt restructuring - which hopefully will be the subject of another post in the not too distant future.

Other major shareholders, aggregating 42% of the total, are detailed on page 41 in the Annual Report mentioned below.

Global Capital Management Limited (“GCM”), a subsidiary of GIH, is the Investment Manager for GMFA.

I've just seen GMFA's audited Annual Report and Consolidated Financial Statements for the period 2 June 2008 (inception) through 31 March 2009 (the "Report").

These are their first audited financials and so are of interest, especially given the current GIH debt negotiations and the links between the two companies outlined above.

Rather than interpreting the Report, I'm just going to quote verbatim from it to let the Company speak for itself.  I think you'll find this informative even though you'll have to spend a bit of time reading.  Plunge in.  I think you'll find it well worth your time. 

In a few places I have added some comments in italics preceded by "AA" to identify them as mine and distinguish them from the text of the Report.  These are references to other portions of the Report or to information on the LSE website.  Because the LSE website uses pop-up boxes, I can't provide links.

I would strongly encourage you to read the entire Report to hear all that the Company and its Directors have to say.

From the Chairman's Statement

(1) Islamic Money Market Instruments (Pages 5-6)

"As at 31 March 2009, the Company held cash, deposited with HSBC, Citibank and Standard Chartered Bank of US$145.1 million and Islamic money market instruments in the form of agency agreements (wakalas) and murabahas with various entities: Global and its subsidiaries, two Kuwaiti companies and one Jordanian company, with an aggregate face value, gross of impairments, of US$107.2 million (plus profit).

In the unaudited non-statutory interim accounts as at 30 September 2008, cash deposits of US$273.8 million were shown. Due to a misunderstanding between the Company’s service providers, money market instruments amounting to US$140.0 million, which had been acquired in August 2008 with Global and its subsidiaries, were recorded as cash at Bank of New York and shown in the accounts as such, whereas the wakalas with two Kuwaiti companies of US$74.9 million were shown as foreign currency cash. Although this was a wrong description, it did not affect the net asset value of the Company.

The Board was not aware that the Company and its subsidiaries (the “Group”) had entered into Islamic money market instruments until late December 2008. Following this discovery, the Board engaged its Auditors to review the Group’s accounting entries so that the Board could be satisfied that the Group’s accounting records accurately reflected the Group’s assets. In addition, the Independent Directors gave instructions to the Investment Manager to seek the immediate repayment of monies invested in murabaha arrangements, to terminate all the murabaha arrangements, and not to enter into any further murabaha arrangements or to agree revised terms without the Independent Directors’ approval.

At this time, the Board also learned that the Company, through its wholly-owned subsidiary, FAB, had entered into a further three Islamic money market instruments with Global, a substantial shareholder of the Company and the parent company of the Investment Manager, and its subsidiaries, for an aggregate principal amount of $47.8 million (plus profit). Subsequently, this amount was reduced to US$34 million. The Board also learnt that the Company, through its wholly-owned subsidiary, FAB, had entered into two Islamic money market instruments with two Kuwaiti companies (other than Global) in August 2008, which were later renewed in November and December 2008, on which Global acted as Islamic financing agent, for a total principal amount of US$74.9 million (plus profit) and an Islamic money market instrument was entered into with a Jordanian company in December 2008 for a total principal amount of JD3.0 million (US$4.2 million) (plus profit).

Due to the conflicts of interest existing between the Company, its Investment Manager and two of its directors (by virtue of their position within Global), a committee comprising the  independent directors of the Company was established at the beginning of March 2009 to deal with all matters and business relating to and arising out of the entry into of all of the Islamic money market instruments (the “Murabaha Committee”). The Murabaha Committee, comprising myself and John Hawkins (joined by Terrence Allen and Kishore Dash when they became directors of the Company in April 2009 and July 2009, respectively), has been working with the Investment Manager and the Company’s legal advisers, Ashurst LLP, on the recovery of the amounts invested in the Islamic money market instruments."

(2) Corporate Governance (Page  8) 

"You will see from the Corporate Governance Report that a number of issues have arisen during the year.  The directors believe that the issues have been satisfactorily addressed and that the appropriate internal controls and systems are now in place. There is an issue as to whether or not murabahas were permitted investments but the Board has clarified the position by restricting the holding of cash to deposits with banks of high credit standing and with strict exposure limits.  The Board hopes that it will succeed in negotiating a satisfactory recovery of the monies invested in these murabahas. The Board recognises the importance of the continued co-operation of the Investment Manager in attempting to recover the outstanding monies owed under these arrangements."
(AA:  The Directors' Report on Corporate Governance is on pages 39-40.  The Directors' Report also contains discussions of other matters relevant to corporate governance, various board committees, internal controls, special committees formed by the Independent Directors, etc).
From the Directors' Report

(1) The Put Option (Page 38-39)  
 "At Admission, the Company acquired six unlisted companies from Global comprising part of the initial investment portfolio at a cost of US$152 million. Global granted the Company a put option on these unlisted assets at an aggregate strike price of their acquisition cost, such option to be exercised by serving notice on Global during the period beginning on the first anniversary of Admission and the close of business on the thirtieth day thereafter.

The Directors have considered carefully whether or not to exercise the put option, balancing the attractiveness of the investment portfolio against the deteriorating economic outlook caused by the dramatic events in global capital markets, the current financial position of Global and the Company’s existing outstanding murabaha with Global.
As announced on 17 July 2009, following discussions with Global, the Directors agreed, subject to all necessary regulatory requirements, to terminate the put option agreement for a payment of US$21.259 million from Global. The Board believes there is significant value which can be derived in time from these six investments and indeed the value of two of the investments transferred has increased over the period from Admission to the first anniversary of Admission. Thus whilst the investment portfolio has, as a whole, continued to perform well, the valuation of four of the six investments concerned has been impacted by the fall in markets. The payment to the Company of US$21.259 million represents the difference between the value of these four investments as at 30 June 2009 and their acquisition cost.
The Directors propose to distribute this cash, which is expected to be received on or before 15 September 2009, by way of a special dividend to shareholders in due course."                                        
(AA:  As per information at the LSE website link provided above, at the shareholders' EGM on 29 October 2009, roughly 82% of shares present voted for the Board's proposal to cancel the put option against the US$21.259 payment.  Shareholders representing roughly 30% of GMFA's total shares were present for the vote.  In effect then the motion was carried by approximately 25% of GMFA's shareholders.  I'd also note that it is common that many shareholders do not show up for an AGM or EGM, even when very important matters are on the agenda). 
(2) The Investment Manager (Page 40-41)
"Having considered all the issues, the Directors consider that in the circumstances the continued appointment of the Investment Manager on the terms agreed continues to be in the best interest of the shareholders and the Company. In reaching this conclusion, the Directors have considered a number of factors, including the views of Global and a number of the Company’s other shareholders (see the section below entitled “Relations with Shareholders”), as well as the options available to the Company.

The determining factors were the Investment Manager’s relationship with the unlisted investments, the regional investor base and the support for the Investment Manager expressed by a number of shareholders."

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