Global Investment House - Restructuring Agreement Signed

Global Investment House issued a press release to announce that it has signed an agreement with its bank lenders for a rescheduling. You'll recall that there is no restructuring for GIH's bonds, though GIH has provided collateral.  But see the "devil in the details" below regarding pro-rata application of repayments.

Here are some of the points from the press release that caught my eye along with my comments in blue italics.

1. There has been a fundamental change in GIH"s business away from more capital intensive  proprietary and real estate investments.   AA:  The new GIH is going to be a much different entity focused on client services:  asset management, investment banking and brokerage.  It will have a much smaller balance sheet.  As a result it will require less debt.   
   
2. Assets from the discontinued lines of business have been segregated into two separate companies., structured as funds.  One in Bahrain to manage equity investments (proprietary investments) and one in Kuwait to manage real estate investments.  AA:  The fund structure allows GIH to sell off shares to investors - which could prove another way to secure funds for debt repayments.   As well, the entire companies could potentially be sold to another fund manager.   That being said, the most likely scenario is asset sales.  Looking at GIH's 30 September 2009 financials Note 26 Segmental Analysis, you'll see that these two areas account for KD866 million or roughly  88% of GIH's total assets.  While accounting rules require that assets be allocated to business segments, management has some discretion in the allocation. And every asset has to have a segmental "home" so this is an approximation - though probably reasonably close to actual.
   
3. These two companies, the proceeds of their activities, and other assets have been pledged to the lenders. As well there is a telling phrase near the end of the description of the new facilities - that   "certain of Global's other income streams" have been pledged.  AA:  I'm reading that latter comment to mean that revenues from asset management, brokerage, etc. have been pledged.  Lenders who are owed roughly KD615 million (KD500 million in  loans and KD115 million in bonds) want to have a sufficient over collateralization in case asset realizations fall short.
   
4.  The new facilities have a three year tenor and are amortizing.  AA:  This is a relatively short period.  If markets recover slowly, GIH may be forced to sell assets at less than ideal prices.  It would have been better - and I think not represented a material increase in risk - to give Global a four year tenor.   Also note that there is a 1% step up in the interest margin on the loans each year from the first year's margin of 1.5%.  The idea is to create an economic incentive to GIH to pay.  And to compensate lenders for additional risk.
5. Lenders and bondholders share pro-rata in the asset realizations and other payments.  AA:  I think the three year tenor of the loans and this mechanism answer why the lenders agreed to let the bondholders keep their original maturities.  The banks have a similar maturity - the bond payments are heavier in 2012 and 2013.  And payments are going to be applied pro-rata.
6. GIH has shareholder approval to issue 1.5 billion new shares at KD0.110 per share (a KD0.010 premium to the nominal value).  A share issue is not planned immediately, but later when market circumstances are favorable.  AA:  Shareholders would naturally be reluctant to put additional capital into Global unless they were sure the funds were going to be used to develop the business and not merely to pay off the lenders. 
   

GIH has a restructuring deal with its lenders.

The terms are tight:

1. GIH's business model has been changed.  I think this has more to do with the lenders than with a change of strategic heart at GIH.  It's hard to imagine the lenders allowing GIH to conduct business as usual, particularly in areas that demand significant new capital during the three year rescheduling period.   
2. The company has been effectively mortgaged to the banks.  
3. The three year tenor and increasing interest margin place pressure on the company to liquidate assets.  I think these two elements are potentially onerous.  Creditors have a duty to their stakeholders to get their money back.  They also have a duty not to harm their borrower if they can.  
4. GIH's strength has been its asset management business (seeded by the KIA where Ms. AlGhunaim worked before joining the firm).   At 30 September Global had some KD2.2 billion in assets under management.  It also has a reasonably good track record with its funds.  So there is a solid basis on which to base a continuing business.
   
5. It's likely that Global will emerge from the restructuring.  However, it will be a much different and slimmer firm than it was in 2007.