Monday, November 30, 2009

Japanese Bank Exposure to Dubai - JPY100 Billion

Japanese banks' exposure to Dubai at JPY100 bln -Nikkei - as per Reuters.

DBS Bank Singapore US$1.28 Billion Exposure to Dubai Entities (Mostly in Asia)

SINGAPORE, 30 November 2009 - DBS said today its total exposure to the city-state of Dubai is approx SGD1.8 billion (USD1.28 billion). The bank believes that the situation is manageable as a substantial portion of this is to Dubai owned companies operating in Asia that are sound, such as Labroy and South Beach, which is collateralised.

As of today, the only credit that is captured under the standstill notice is a SGD558 million (USD400 million) bilateral loan to Dubai World Finance which represents 0.2% of DBS’ total balance sheet. The bank has no exposure to Nakheel.

DBS' exposure to the entire Middle East region accounts for around 2% of its balance sheet.

Kuwait Banks Disclose Exposure to Dubai

This won't be a big surprise to anyone out there familiar with GCC banking, but the Kuwaiti banking sector has little to no exposure to Dubai.

Let's run down the statements to date:
  1. National Bank of Kuwait- No exposure to any company owned by Dubai Government.  NBK also pretty much avoided the Suq Al Manakh.  Abu Shukry was at the helm there then.
  2. Boubyan Bank - No exposure to Dubai World or Nakheel.  
  3. Kuwait Finance House KFH - No exposure to Dubai World or Nakheel. 
  4. Ahli Bank of Kuwait - US$20 million in bonds.  No loans.
  5. Kuwait International Bank - No exposure to any Dubai company which has announced a standstill.  This is the "old" Kuwait Real Estate Bank. 
  6. Bank of Kuwait and the Middle East -  No exposure to Dubai World or Nakheel.
  7. Burgan Bank - No exposure to Dubai World or Nakheel.
Not yet reporting Gulf Bank and Commercial Bank of Kuwait.

Also Arab African International Bank Egypt  - in which the Kuwait Investment Authority ("KIA") holds 49.4% or so - disclosed it had US$700 million in loans to companies in the UAE.

As a final word:  This doesn't mean that Kuwaiti banks don't have exposure to other entities or companies in the UAE including Kuwaiti companies and/or individual investors.

UAE Markets Lose AED33 Billion (US$9 Billion)

ADX down 8.2% and DFM 7.3%.  The ADX drop was the largest in is history.  The DFM hasn't had a drop like this for over a year.

On the ADX (Abu Dhabi) there was a broad decline with many stocks down 9% for the day.  While one would expect declines in the banking, real estate and construction sectors, there were also large declines in companies such as Aabar (AD Government owned energy company), Abu Dhabi National Hotels, Agithia Group (Food Company).  Clearly a general market sell-off as investors  rush to liquidity (cash).   Looking at individual stocks, the forward order books are one-sided - all "asks" (sell offers) and no "bids" (buy offers).  That suggests market pressure for tomorrow.

On the DFM (Dubai), essentially all of the market's drop was in the first 45 minutes of trading - from 1970.2 to 1942.6 with a further slight drop to 1940.36 in the last 45 minutes.  I couldn't find the forward order book summary.  But again a quick glance indicates a broad sell off as in Abu Dhabi.  I'd expect more selling pressure tomorrow at the DFM as well.

On Nasdaq Dubai, Dubai Ports lost 14.88% (and earned the distinction of being the stock with the largest drop and the largest trading volume).  You'll recall that the Government announced that DP would not be part of the debt standstill.

Trading patterns suggest an absence of buyers during today's session.  And as indicated above (at least based on ADX data), there don't appear to be many buyers waiting to jump in tomorrow morning. 

Nakheel Asks NasdaqDubai to Suspend Trading in Its Bonds

Apparently in a move to prevent price deterioration  and further negative sentiment towards Dubai World.

First Gulf Bank - A Non Announcement of Its Exposure to Dubai World

Here's the official non announcement from FGB.

Commercial International Bank Egypt - No Exposure to Dubai World or Nakheel

CIB issued a press release this morning on the ADX.

No exposure to Dubai World or Nakheel.

Emirates Business 24/7 Weighs In

Emirates Business 24/7 weighs in.

However, the markets might react, this is Dubai we are talking about. An emirate that has redefined the terms "vision" and "ambition" for the world, which has given it the tallest tower, the largest mall, the tallest hotel, the largest man-made harbour and, in-the-making, the world's largest airport, among a host of other marvels. It has a track-record second to none. Dubai is one of the foremost centres of world gold trade and has indeed been gaining in importance as the preferred global destination for tourism, entrep t, real estate and construction activity, especially over the past three decades.

The Dubai dream lives on. If anything, this latest episode is a sign of Dubai's economic maturity, a clear conscience and commercial intent.

This Is Getting Serious - Dubai Police Intervene For Those Who Have Not Yet Gotten The "Message"

Well, I guess some people are hard to educate (not a real surprise when the intended audience is bankers and journalists  - their past and most likely future behavior indicates a need for more than one lesson).  The sight of a badge may focus some unfocused finds.

In an official press statement carried on WAM, Lt. General Dahi Khalfan Tamim, Dubai Police Commander and Head of the Dubai Government's Budget Committee (I guess there's a logical connection there somewhere between these two positions) noted that:
  1. "... in the whole region, real estate continue to be the top earning sector and that reality investors were still safe from the global slow down."
  2. "Only speculative real estate investors have been affected by the slow down in the sector," he added.
  3. Speaking of the budget process for next year, he remarked:  "The department heads showed remarkable efficiency in setting financial and administrative strategies that will ensure Dubai's continuous excellence," he said.
  4. "Dahi Khalfan pointed out that Dubai has more than a single landmark to be proud of.  'Usually, each of the world's countries has an icon to be proud of. Dubai has many, such as Burj Dubai, Burj Al Arab, Dubai Mall, as well as Dubai International Airport and the Emirates Airlines which are seen as major drivers for tourism.' Dahi Khalfan, who also heads Dubai's Crisis management Team, stated that Dubai government had no debts issue.
  5. "Dubai has rather an issue of unfair competition by some circles which seek to undermine the successful emirates and to unseat it as a global centre for finance and business and a magnet for foreign investments that thrived and succeeded in Dubai." "I noticed that Gulf and foreign media, as well as a large segment of general public, confuse between debts of Dubai government, which are almost non-existent, and the debts of local companies. This confusion should be corrected and the public should be made aware that to separate between the two types of debts." 
  6. "As for the real estate sector, Dahi Khalfan said it should be referred to as a "recovering sector" for the investors who are in the market for medium and long term gains."  AA: Admittedly, I may need another lesson.  I am having trouble reconciling statements #1 and #2 above with this one.  How precisely does the market differentiate in setting a price for a "speculator" from the apparently much higher one it sets for an "investor"?
In any case it's a tradition in some of the "sophisticated" Western countries that when the sheriff speaks up, he has the last word.   As was said a little more than two weeks ago, it is time to be "quiet".  Nothing to see here.  Move along.

Dubai Finance Department Educates Press - Crisis Officially Now Over

Director General of the Dubai Finance Department, Abdul Rahman AlSaleh, has issued a clarification to the market.

The crisis is now officially over.  Time to be "quiet".  I mean just how many times do people have to be told.

The sad thing (a profoundly sad thing for that matter) is that some "sober" bankers and investors actually thought they had government guaranteed paper when they made their loans and investments.   And that they had a "Greenspan put" to the nice sheikh up the road in Abu Dhabi.

And perhaps even more distressing, they will do this yet again in some other venue. 

"But, the government owns it and it undertakes 'strategic' projects". 

It's a general rule of business - I suppose - that government entities always undertake strategic projects, like hotels that are uneconomic (Anyone want to buy a Burj?) or indoor skiing mountains. 

No Time Like Good Times: The Times is Back

Apparently, The Times is back on the newstand.  Or at least the weekday Times.

This is why Abu Arqala always maintains a suitably deferential respect towards the relevant wise leadership - of whatever country.

National Bank of Abu Dhabi US$345 mm to Dubai World Group

NBAD issued a press release detailing its exposure:
  1. US$120 million in the Nakheel Bond
  2. US$100 million general corporate loan to Nakheel
  3. US$125 million to Limitless.

Sunday, November 29, 2009

0-3 or 3-0 Red and White Forever

No need to say more.

No News is Good News: The Times Banned

In addition to the press campaign in the UAE about how the world is distorting the story of Dubai  as well as being unfair comes this gem of a news item. 

The authorities have apparently banned The Times.

I recall reading in the past that the ambition was to create a Singapore in the GCC.

Let's chalk this up as a success in that endeavor - at least in one respect.

Islamic Financing & Restructuring Part II - TID Global Sukuk 1

A second installment in my series on Islamic Financing and Restructuring. 

 But first just a note that I am not a lawyer and the following is not legal advice.

Tonight I want to look at The Investment Dar's "TID Global Sukuk 1" issued in September 2006.

Before we set off, let's make sure we have the right gear in our "kit":
  1. AAOIFI February 2008 Sukuk Principles  - You'll recall the issuance of this document was credited with causing turmoil in the market.  Here's Norton Rose's take.
  2. TID Global Sukuk 1 Offering Memorandum  ("OM")
  3. TID Global Sukuk 1 Musharaka Agreement   ("MA")
Some short details on the transaction:
  1. US$150 million issue
  2. Five-year final maturity with Periodic Distribution Profit computed at Libor plus 1.25% for the first three years and then Libor +1.75% for the last two with payments each 20 March and September.
  3. Principal repayment at the final maturity date  (Musharaka End Date).  A "bullet" structure.
  4. Islamic structure - Musharaka (Profit Sharing Agreement).  TID to contribute value in kind in form of Trust Assets  8,532 cars (as per the MA) plus property in Kuwait.  As a result, TID will hold 51.22% of the Musharaka.
  5. Legal structure - limited recourse certificates - recourse is to the Trust Assets.  Additional protection is given by a Purchase Undertaking by TID.  Re the Purchase Undertaking OM Section 8 (Pages 66-67) set forth an Early Redemption Date (voluntary redemption).  OM Section 9 (Pages 67-68) set forth redemption under a Dissolution of the Trust.  You might consider this a guarantee but don't let AAOIFI hear you say that.
     Let's turn to the detail.

    (1) The Trust Assets

    As per the OM page 7 "Proceeds of the Trust Assets are the sole source of payments on the Certificates".

    Let's take a close look at them given their importance.

    As per the MA Section 2.5 (d) "It [TID] shall hold and maintain such registered title as agent for the Musharaka and shall not do or omit to be done any act, matter or thing which will, or might reasonably be expected to, result in either of the Partners [TID and the Sukuk holders] breaching any of its obligations under any Transaction Document."  AA:  In other words, the Trust Assets remain legally registered in the name of TID.  The issue here is similar to that discussed in my earlier post about The International Banking Corporation and its trust arrangements with its parent, Ahmad Hamad AlGosaibi and Brothers.  One needs to be sure that such arrangements are "bullet proof" so that one's trust assets don't wind up in the legal estate of the agent.

    The critical issue for investors then is the strength of the trust agreement and its enforceability under Kuwait law.  Why Kuwait?  Because that's where these assets are located.  The trust indenture itself is drawn under English law as are the other Transaction Documents.   Since the Sukuk certificates are subject to English law, there is some logic in having a key document like the Trust Agreement also subject to English law.  However, marching into a Kuwaiti court with an English law agreement does pose some problems.  Kuwait does not have reciprocal agreements with England to honor each other's court judgements.  And any local judge - not just a Kuwaiti -  may wish to review the case.

    (2) The Purchase Obligation

    As per the OM Sections 8.1 and 8.2 (Page 66), investors have a "put option".  Nor more than 180 days and no less than 120 days prior to the Early Redemption Date (the sixth Periodic Distribution Date, i.e. 20 September 2009), the investors can require the Trustee (TID) to buy all or a portion of their certificates. and the Trustee is legally obliged to buy them.  

    The Purchase Obligation is also triggered by a Dissolution Event (an "event of default" in typical non-Shari'ah finance speak).

    The Purchase Undertaking is included to give investors recourse to TID so that they have a claim on its creditworthiness.  Clearly, the benefit of this arrangement depends on the ability and willingness of the Trustee to make such a purchase.  Assuming it works, TID is in effect an obligor on the certificates. 

    And note, if TID is an obligor (as in a guarantee) but does not pay, that guarantee obligation should be pari passu (equal in status) to funded debt - at least in most jurisdictions.

    The critical issue then is how a court treats the Purchase Undertaking.  Is it the equivalent of a guarantee?  If so, it then becomes an obligation equivalent to a loan made to the Trustee.   TID gives a representation to this effect in the OM on Page 4.  If the Purchase Undertaking is merely a commercial contract, could a court void it?  I don't know enough about Kuwaiti law to provide a definitive answer.  Would a Kuwait court take an English law determination?

    (3) Periodic Distribution Amounts

    Under a Musharaka, the partners participate pro-rata in profits and losses.  Since this is really a borrowing, the transaction has to be structured so that the Sukuk investors get their interest payment only.

    Let's step through the document.

    First, there is the obligatory comment in the OM (Page 3):  "Each Musharaka Partner, pursuant to the Musharaka Agreement, shall be entitled to share in the profits of the Muskahara and bear losses of the Musharaka ratably in accordance with the proportion that such Musharaka Partners' Units in the Musharaka bear to the aggregate of the Units then held by both Musharaka Partners".  AA:  The Shari'ah principle is upheld.

    Second, on the same page:  "The Management Agent [TID] shall be entitled to a management incentive fee computed as provided below.  AA:  Nothing obnoxious to the Shari'ah in compensating the Managment Agent for doing a good job. 

    Third, on the same page:  "The Management Agent is entitled to certain fee ("Incentive Fee") when, in respect of any Accounting Period (as defined herein), the Musharaka Accounts (as defined herein) show a Net Cash Profit payable to the Issuer greater than the Periodic Distribution Profit Amount [Libor plus the margin]".   AA: In other words, any profit over the Periodic Distribution Profit Amount (let's call that interest for the moment) is the Incentive Fee to the Management Agent.   That's some incentive.  But it achieves the goal.  This is a borrowing and the lender is entitled to his interest.  Exercise left for the student:  Are Shari'ah principles pristine at this juncture?   

    (4) Accounting Treatment

    TID's last annual audited statement was issued for Fiscal 2007.  This Sukuk and one issued previously are shown as liabilities in the balance sheet, equivalent to borrowings.  Note 18 describes the Sukuk transactions in more detail. 

    Section 18.2  of that Note states:  "Islamic Sukuk are secured by assignment of finance receivables amounting to KD 18,251,420 as of 31.December 2007 (KD 30,495,918 as of 31 December 2006)."   AA: This structure was approved prior to the AAOIFI February 2008 statement of principles.  While the balance sheet treatment looks uncomfortably close to a loan, one could argue that since TID is the majority owner of the Musharaka, under accounting principles it must consolidate the entire entity.

    (5) Restructuring Issues


    (a) Strength of the Trust Arrangement

    The Sukuk and non Sukuk holder are going to be motivated by their assessment of the value of the assets in the Trust.  If there is real value there, the non Sukuk holder will attack and the Sukuk holder will uphold the Trust Agreement.  If not, the Sukuk holder might try to argue that there was no Trust  so that he can access more assets as a general creditor.  In such a case the non Sukuk holder would argue for the Trust. 
    Another issue has to do with Sukuk holders changing the Trustee.  If the Trustee is in difficulty, getting the Trust Assets registered in another Kuwaiti entity's name - one not in a debt restructuring - would be ideal.  Without the text of the Declaration of Trust, it's not possible to determine  what can be done.    It would be a matter of law as one would expect the English law firms involved in drafting the Transaction Documents would try to incorporate this principle.   The potential "rub" would be Kuwaiti law and practice.

    What's also important here is the precise claim the investors have over the Trust Assets.  Is it merely the proceeds they generate?  Or do the investors have the right to the assets themselves?


    (b) Management Agreement

    What are the circumstances under which the Sukuk investors can replace the Managment Agent?  If the Agent is unable to fulfill his duties, the underlying property might suffer dimunition in value.  Those obligated under the car or property receivables might have a legal right to hold payment.  Or might choose to take advantage of diminished oversight to try to avoid their own obligations.  Again one would expect this to be addressed in the Management Agreement  And like the Trustee issue above, Kuwaiti law and practice would be the practical issues.  There is a disconcerting statement on Page 3 in the OM in the Management Agreement section "... the Management Agent shall be irrevocably appointed as manager of the Musharaka."


    (c) Purchase Undertaking

    Is this the equivalent of a guarantee?  Or a voidable contract?  Again a logical target for a non Sukuk holder creditor to attack.  This would be similar to the attempt made by the non Shari'ah BIB creditors described in my first post on this topic.


    (d) Public Policy

    As a final word, it's important to recognize that public policy is highly likely to influence decisions - not merely the letter of the law.  Countries in the area are unlikely to set precedents which undermine "Islamic banking".


    Central Bank of UAE to Guarantee Dubai World?

    Rumors in market that an announcement will be made before the stock markets open in the UAE today.

    Just a few hours from now.

    Nothing on WAM so far.

    Could last Thursday's announcement been a shrewd move by Dubai in the face of Abu Dhabi reluctance to step up for US$10 billion for the second tranche of the bond issue?

    UPDATE:  No guarantee from the CB UAE or for that matter from the Emirate of Dubai.

    First Gulf Bank Denies Dubai Exposure Reports




    The CEO of FGB has denied his bank has exposure to Dubai World in the amount mentioned in press.

    You'll recall a previous post at SAM which quoted Maktoob that FGB had AED 5 billion (US$1.36 billion) in exposure.

    Another chap no doubt worried that his customers may be a bit nervous when the doors open for business tomorrow.

    Shirk Fil Baraada (Unbelief in the Coldstore)

    AA's better half doesn't like her tahini with oil.  Not one to practice taqiya, she is very upfront: she  asks if she may pour off the oil in the store so that none will get mixed with the tahini on the way home.  And, yes, she comes prepared so the shop keeper will not endure any mess.

    Last week, on a mission for choice olives undertaken without AA, who was busy with work, she ventured into our local  Lebanese grocery.  Since Ibn AA  was returning from university for Eid AlShukr, we had decided to prepare hummus (the old fashioned way).   In case you're wondering, yes, as per her mathhab she eats her hummus bidun zayt zaytun.  On the other hand, I  have my own personal bottle.

    In any case, the request to pour off the oil triggered not only dausha but also fauda in the grocery.  One of the "Mutatahiniyin" in the store took away the jar and refused to sell it to her. Others sprang to action to block aisles.  Jars of Tahini were shaken to mix the oil.  Voices were raised.  Takfir was pronounced.

    The missus was, however, unmoved. 

    Eventually a younger more liberal member of the staff  allowed her to make the purchase and to pour off the oil.

    We had excellent hummus.  And, yes, she used AA's personal bottle of zayt zaytun quite liberally on the hummus for Ibn AA and AA.

    I am looking forward to our next trip to the grocery (the olives are fantastic and they sell Cafe Najjar - and we never seem to have enough CN here at bayt AA).  And we're out of tahini!

    My wife on the other hand has her eye on a Pakistani grocery in the neighborhood where such behavior is tolerated though not actively encouraged.

    I suppose I shouldn't mention that she prefers Turkish tahini to Lebanese?

    More Dubai Aftershocks: UAE Central Bank Affirms Support for Banking Sector

    The Central Bank of the UAE issued a press release today:
    1. advising that it was making available an additional liquidity facility to both domestic banks and branches of foreign banks in the Federation
    2. noting that the UAE banking sector was in better shape than it had been one year ago
    3. pointing out that the banking system is composed only of retail banks with stable deposits  "the best banking model"
    4. in light of the previous comment, it noted that UAE banks get most of their funding from customers with interbank deposits only at 10.3% of aggregate liabilities and foreign deposits only 5%
    Issuing such a statement during the Eid Holiday indicates a strong concern at the CB UAE about a potential run on banks tomorrow.

    This is in line with rumors of heightened expat "chatter" about securing their funds.

    I Hope This Isn't True, But Happy Easter to All

    Franklin Lamb has reported that last Thursday US Embassy Beirut wished the President of the Republic of Lebanon a blessed Eid al Fitr.  And that this is the second consecutive year!

    Anyways, since it's Sunday and one Sunday is I guess pretty much like another, I'd like to wish all min Qaumi Issa (samra or otherwise) - or at least the Western wing of the Qaum -  a very Happy and Blessed Easter.  (Mayna turwil 'atshan)

    I'll try to remember the Orthodox, but someone remind me is it one week later or earlier.

    Saturday, November 28, 2009

    A Favor

    Please go here.

    I think you'll find intelligent solid commentary.

    If you agree then go here and vote for the
    MEI Editor's Blog

    Two reasons:
    1. First and most importantly that blog deserves a vote for its content.  Solid and insightful.
    2. Second, whenever, he mentions my site, my hit numbers go way up.  I figure if he wins an award and then mentions Suq Al Mal my numbers will go up even further.  Afterall, this is  Suq Al Mal.  If you're looking for a qird hassan, you're at the wrong site.

    More Dubai Fallout - GCC and MENA

    Dubai dropped the first shoe - its request for a debt repayment standstill.  And what a big shoe it was.  Still causing shockwaves.

    Not only have Dubai and the region been affected but there have been knock-on effects.  European banks - who reportedly hold some US$35-45 billion of Dubai debt - have seen their shares fall.  As have European companies where Dubai and other GCC countries are shareholders.

    Real estate investors in major centers are reportedly licking their lips thinking about  potential fire sales of assets - the Adelphi Building in London and so on.

    Let's take a look at some repercussions closer to home.

    Following Dubai's real estate boom, everyone who was anyone in the real estate game had to have at least a $1billion dollar project.  And like Dubai, the more adventurous ventured from their home markets.  Jordan, Egypt, Tunisia, Morocco and so on.  Dubai even has a sky scraper building in Doha. Salam Resorts in Bahrain and Oman.  Sama Dubai.

    Now that bankers and investors have belatedly rediscovered risk (but perhaps as usual only temporarily) there is bound to be a slowdown.

    What is the fate of the projects a-building?  And what is the fate of new developments?

    Not likely a positive development (sorry for the pun) for some of the less rich, less resilient economies.

    Update on Dubai's Options from The National

    Here's an update from The National.

    I'm puzzled by one thing - just what did analysts think HSBC was going to say at this juncture?

    Dubai: The Typical Banker and Investor Response

    No sooner had Dubai announced its debt standstill request than the typical banker/investor reaction set in place.

    First, was the usual fear- "nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance".   Proof yet again, if any were required, of the power of the insights of behavioral finance.

    Second, came the typical recriminations.  Only a short time ago, Sheikh Mohammed was a man of vision.  A reformer who would lead a modern day renaissance of the Arab world.   A leader who would build a new Singapore in the Gulf.  Today suddenly he's changed - or at least we are asked to believe he's changed - to a charlatan or an incompetent.  What a difference a day or two can make!  And a debt standstill request.

    As an example, (though to be clear I am not accusing the FT or Ms. Khalaf of previously mindlessly cheerleading for Dubai), today's FT's lead editorial and a column by Rula Khalaf detail the manifest profligacy and unwise business and financing strategy of Dubai.  And do so in less than gentle language.  A small detail that the efficient market apparently overlooked - not the language, the analysis.  Sober bankers and investors tricked yet again despite the most careful due diligence and solid risk management skills.

    Third, there are the (sadly) usual calls for a bailout.

    The FT thunders that:  
    "For its part, Abu Dhabi should give whatever help is needed to bring this episode of incompetence to a close. Abu Dhabi allowed it to be believed that it was backstopping Dubai, so it should make good its promises. This will require a public guarantee of Dubai’s debts – and soon. The reputation of the whole UAE depends upon it."  

    Free market capitalism without the difficult central teaching of Adam Smith.  But done of course not to bail out bankers but to protect the reputation of the whole UAE.   A worthy goal.

    Perhaps, while Abu Dhabi is at it, it might help out the BBA by guaranteeing the debt of Saad and AlGosaibi.  The repuation of the GCC may well depend on it.

    Sadly, though, there is no thought of the reputation of banks and investors who have yet gain made some bone-headed lending and investment decisions.  Who indeed will restore their reputation?  Though one might search long and hard before one finds any criticism as scathing as that levied against Dubai.  In any case, responsibility is dealt with quite nicely by the market as described in the next point.

    Fourth, once again the transference of responsibility.  When the going gets tough, the tough apparently find a scapegoat.  Clearly, not the sober careful bankers and investors  themselves.  No, it is Abu Dhabi who misled them.  And as well, I suppose, the now hapless Sheikh Mohammed.

    Abu Dhabi Banks' Exposure to Dubai

    As per Maktoob:  "Abu Dhabi Commercial Bank has at least 8-9 billion dirhams ($2.2-$2.5 billion) exposure to Dubai World and related entities, forcing the bank to book more provisions, a senior executive of the bank said. First Gulf Bank has at least 5 billion dirhams ($1.4 billion)".  Followers of Middle Eastern finances will recall that to date among UAE banks who have declared their exposures, ADCB is the largest lender to Saad/AlGosaibi with some US$609 million equivalent.

    At 3Q09, ADCB had some AED20 billion in equity.  At that date FGB had AED22 billion.  Both banks should be able to withstand the shock.  The Abu Dhabi Government is not going to let these banks fail - particularly given their connection to the government.  One is 65% or so owned by the Emirate of Abu Dhabi.  The other has a "major" ownership stake by the sons of Sheikh Zayed (deceased father of the current Amir).

    Other Abu Dhabi banks are likely to have significant exposures to Dubai.

    Perversely, these large exposures may be good news for Dubai as one would expect these banks to take a softer line in any restructuring because of the government connection.

    The International Banking Corporation - Comments on 2008 Financials

    Not so long ago I took a look at Awal Bank's financials, today it's TIBC's turn.

    From a review of TIBC's financials, it's clear that the bank was exposed to significant risks  arising from certain legal arrangements with its holding company, Ahmad Hamad AlGosaibi and Brothers ("AHAB").   AHAB held legal title to TIBC's investment portfolio and to the collateral on its loans.  And this may be a large part of the reason for the collapse of this apparently well capitalized bank.

    In both cases, under the legal agreements between AHAB and TIBC, AHAB held these assets in "trust" for the bank.   But the critical legal issue is whether such a trust structure would be recognized by a Saudi Court.  That is, would the Saudi Court look through AHAB's legal title to ascribe direct ownership of the assets to TIBC?  If it did, then these assets would be outside of AHAB's "estate" and would not be subject to  an AHAB bankruptcy, insolvency or administration.  If it did not,  then  these are AHAB's assets to be divided among  AHAB's creditors - not just TIBC.   

    Update:  From the Golden Belt 1 Sukuk (Saad Group):  ""The concept of trust as deemed in common law jurisdictions does not exist in Saudi Arabian law."  Here's the link to that post.


    I'm guessing as with Awal that TIBC's problem is solvency not liquidity.  With  TIBC's relatively high equity to total assets ratio, there would have had to been a substantial erosion in asset values to trigger insolvency.  From the structure of TIBC's balance sheet the two areas  where this is most likely to have occurred in are loans and investments.   The loss of the assets themselves would have the most impact on the  bank's equity.

    Now to the detail.

    Unlike Awal, TIBC posts more financial info on its website.   At the "Publication" drop down menu, you'll find quarterly financials for 2008 and audited annual financials for 2005 through 2008.

    As with Awal, let's focus on the changes from 3Q08 to 4Q08.

    Total Assets declined US$498.5 million from US$4.3 billion to US$3.8 billion - roughly 11.6%.  Compared to 4Q07 the decline was a more modest 6.6%.

    On the liability side, the major declines were US$268 million in due to banks, US$70.5 million in due to customers, US$30.9 million in due to related parties, and US$12 million in other liabilities.  A total of  US$381.5 million. A decline of US$117 million in equity accounted the remainder.  Declines are all fairly reasonably spread and there is no one group with a major cashflow in its favor as with Awal.

    It's difficult to use TIBC's 2008 quarterly financials to analyze term loans because the bank and its auditors appear not to have been able to make their minds up about a consistent presentation of term loans on the balance sheet during 2008.  After appearing earlier in the year, these completely disappeared in 3Q08 only to re-emerge in 4Q08.  Looking at Note 10 in the fiscal year end ("FYE") 2007 financials, TIBC had US$375 million of outstanding term loans.  US$100 million was due in the next twelve months.  In  the 2Q08 financials  term loans had decreased by $100 million and US$75 million was shown as due in the next twelve months (Note 8).  This suggests that there was no prepayment of term loans.  However, if there were, it would appear to be only for US$75 million - though this amount may be included in Due to Banks as a current payment.  The presentation in TIBC's financials is confusing on this score and so it's difficult to be definitive.

    On the asset side,  cash and banks were down US$429.4 million.  This funded the  reduction of US$381.5 million in liabilities plus increases in loans of US$77.2 million and other assets of $24.5 million.  The US$171 million drop in investments was largely due to  US$117 million in  (non cash)  fair value adjustments  (reflected directly in equity) plus an apparent US$54 million of cash realizations.

    At 31 December 2008, equity was US$1.3 billion and total assets US$3.8 billion.  Like Awal, rather  sharp declines in asset values would have to have occurred to significantly erode capital to zero or near zero.

    Let's take a closer look at the balance sheet.
    1. Cash and Banks was US$1.1 billion.  Three key items from Note 4.  (a) 86% of these deposits were with banks and financial institutions in Europe. (b) 76% of deposits were with A rated counterparties.  (c) TIBC claimed a strict risk concentration limit of 10% of capital.  Also there are no related party deposits of any significance disclosed in Note 25.  Taking these comments at face value, one would not expect a major loss in this asset category.
    2. Investments were carried at US418.1 million with negative fair value adjustments of US$426.6 million.  Earlier in the year TIBC carried its investments at fair value through profit and loss ("FVTPL").  At 31 March 2008, TIBC had recorded a net loss of US$204 million. due to investment losses taken through the income statement.  After 1Q08 TIBC engaged in an asset sale and asset purchase with related parties (presumably its parent AHAB).  Sales of US$867.2 million and purchases of US$839.1 million.  The sales would allow TIBC to dispose of the FVTPL assets - transferring them to available for sale ("AFS") would not have been possible.   However, the new investments could be booked as  AFS with no problem.  Why AFS?  Because any changes in fair value could be taken directly to equity by passing the income statement.   Through the miracle of accounting principles, TIBC was able to report a net profit of US$156.1 million for fiscal 2008.   The US$426.6 million loss on investments was recorded directly in equity.  However,  when we look at comprehensive income, we see that the bank actually had a loss for the year of US$270 million (US$156.1 million in net income minus the US$426.6 million in  negative fair value adjustments).  Another key piece of information is in Note 7 where it states that the bank's investment securities are registered in the name of the holding company (AHAB).  Use of a Saudi registered company to act as shareholder would facilitate TIBC making investments in the Kingdom.  There is no obvious legal reason/advantage to have AHAB hold shares in  the UAE, Kuwait or other GCC stockmarkets.  However, as outlined above, this arrangement could also present a danger to the bank if there were a problem at AHAB and a Saudi Court did not recognize TIBC's title.  Then the bank would be one of AHAB's creditors with a claim on AHAB's estate rather than as the legal owner of the investments.  This could be a potential area where asset values were lost.  Bolstering this view is that it appears the investments were shares traded on the Tadawwul (Saudi market).  There has not been a complete collapse in share prices on that market.
    3. TIBC's main business is commercial lending with US$2.3 billion out of the bank's US$3.8 billion of assets at FYE 08.  Again from Note 4, 99.9% of the loan portfolio was in the GCC/Middle East region.  TIBC also discloses that the majority of loans and advances are secured with a minimum coverage of 110%.  Describing the collateral later in the Note, TIBC says that it is land deeds, plant and machinery or cash collateral.  From the liability side of the balance sheet (customer deposits), it's clear that cash collateral is de minimis.   Usually with land or plant and machinery, most banks use a much lower borrowing base.  That is, they will lend maybe 50% or so against such assets given their illiquidity and high discounts required to sell.  If Borrower A didn't make a go with his factory, why would Buyer B believe he could unless he could get them at a steep discount a la Irridium?  And again there is the same note as with investments.  The holding company is the legal holder of the lien on a trust basis for the bank.  That implies that most of the loans were in Saudi Arabia - as there would be no advantage to using AHAB to hold collateral in another country.   There is the same problem as with the investments: if the holding company gets into trouble, all the collateral may be blocked in its estate, leaving the bank as a creditor of the holding company and with uncollateralized loans.
    Finally, one parting comment on a recent report that creditors had tracked down some gold shipments involving AlGosaibi and Saad.

    TIBC began gold trading in 2006 with sales volumes of some US$1.2 billion, followed by US$2.3 billion in 2007 and US$2.5 billion in 2008.  Profit margins were roughly 1.4% of sales.  It's unclear if TIBC were matching spot trades or whether it was taking actual possession of the gold.  The news articles suggest it was taking possession - at least for the sums mentioned in those articles.   It will be interesting to follow developments on this topic.

    Friday, November 27, 2009

    Sadiq AlBahrain AlAmin




    Long ago in a much warmer place, my then landlady made a comment that the patron saint of Lebanon was not Mar Marun but rather Jamal Abdul Nasir because his economic policies in Egypt were responsible for the rise of Beirut.

    Over the past 10 or so years, Dubai has mounted a serious challenge to Bahrain's role as the regional  banking center.

    I wonder if my landlady has an opinion on this issue?

    Two Timeless Classics - Perhaps Quite Timely Now

    Irving Fisher's Debt Deflation Theory.

    Hyman Minsky's The Financial Instability Hypothesis.

    Thursday, November 26, 2009

    Saud AlGosaibi Resigns from Board of Saudi Re

    25 November 2009 the Saudi Company for Reinsurance (Saudi Re) informed the Saudi Stock Exchange (Tadawwul) that Saud Abdul Aziz AlGosaibi had resigned as a director in view of his existing commitments.

    He was one of the members of the founding committee of the company and one of the original members of the board.  The company was founded on 17 May 2008

    Presumably related to the ongoing debt restructuring.

    Saud is a board member of The International Banking Corporation (though since the bank is under Central Bank of Bahrain Administration, the Board no longer has any legal powers to commit TIBC).

    Dubai Fallout Continues

    GIB Bahrain postpones its US$4 Billion EMTN program.

    Markets continue to react adversely - jump in Credit Default Swap spreads for GCC with Dubai leading the way reportedly in the 500's.

    And 'Amm Ahmed tries to calm the markets.  So far the market isn't buying it. 

    Earlier posts are here, here  with some in-depth comments here.

    Eid Mubarak

    عيد مبارك

     وكل عام وأنتم بخير

    Official Press Release Re Dubai World Restructuring

    Here's the link.

    More Aftershocks from Dubai Debt Standstill Announcement

    In case you missed it.

    And a press report on market reaction outside the GCC.  As AA modestly notes, predicted much earlier here, though frankly one didn't need that large a crystal ball to see this coming.

    Abaar Loan

    AlQabas quotes an unnamed analyst at National Bank of Abu Dhabi that the loan may be for:
    1. Temporary refinancing of a maturing loan while Aabar sorts out financing options.
    2. Purchase of additional shares in Daimler.

    Global MENA Financial Assets LSE Announcement on AlFajer

    Here's Global MENA Financial Assets announcement on the proposed debt for equity swap with Global Investment House ("GIH").

    From the announcement, it seems that AlFajer isn't doing well right now.  However, GMFA's directors appear to believe it is a company with a lot of potential.   Or at least perhaps more potential than GIH.

    Two paragraphs in the LSE release caught my eye.  Maybe they will catch yours as well.  Blue italics are courtesy of AA.

    Taking the two statements at face value, it would seem that the Directors of GMFA who include Ms. Maha Al-Ghunaim, CEO of Global Investment House (though of course she may be a dissenting board member on this view) have a rather dim view of the recoverability of amounts due from Global.
    1. "The agreed consideration will be the waiver of amounts owing from Global to GMFA under the Islamic finance contracts entered into between GMFA and Global (the "Global Financing Contracts"). As a result, the Company's exposure to Global under the Global Financing Contracts will be entirely eliminated. The Directors believe that this would be a very positive outcome given concerns over the recoverability of these amounts."
    2. "As at 31 March 2009, KD48.6 million ($170.1 million), representing approximately 95.7 per cent. of the Al Fajer shareholders' gross assets was invested in short term assets and money market instruments. Due to the turmoil that has impacted financial markets recently, Al Fajer faces counter-party risk in relation to some of these investments. Al Fajer has made a provision of KD2.5 million ($8.9 million) in respect of these investments in its 31 March 2009 financial statements. As at 30 September 2009 approximately KD20 million ($69.9 million) of Al Fajer's investments were subject to a freeze on redemption. Since this time, approximately KD0.58 million ($2.0 million) has been received and the balance is currently in the process of being restructured."

    Global Investment House Proposes Asset Swap to Global MENA Financial Assets

    AlQabas reports that Global Investment House ("GIH") has proposed to swap its 20% share in Fajr Reinsurance Company as settlement of amounts owed to Global MENA Financial Assets.

    Two earlier posts here and here.  Others can be accessed via the labels Global Investment House and GMFA.

    I'm still a bit unclear on how/why GIH's creditors are tolerating the settlement of Global's obligations to a related party (Global owns roughly 30% of Global MENA Financial Assets) in full and without any rescheduling of obligations.  

    Perhaps, it's that the amount is minor (US$40 or so million) in the context of Global's total rescheduling.  Creditors do seem to have agreed to GIH paying off its existing bonds (KD89.5 million - US$313.5 million) at their maturity dates.

    I'm guessing the argument is that failure to settle these obligations might create potential legal problems that  would potentially upset the  KD500 million restructuring.  Or that it will be impossible to get the "widows and orphans" who hold these instruments to agree.

    If you're wondering, no, AA doesn't actually think that widows and orphans hold these obligations.

    The Investment Dar - Legal Suit Update: Investment Dar Bank and Aref

    More from AlQabas.

    Investment Dar announces following results of legal actions on 24 November:
    1. Bahrain:  The Bahrain Court (presumably Court of Appeals though not specified) has ruled in TID's favor and lifted the legal freeze on its assets in Bahrain, including those all important (from a monetary standpoint) shares in Bank of Bahrain and Kuwait.
    2. Kuwait:  TID noted that the judgment in Aref Investment Company's favor was issued by the Court of First Instance and the mere lodging of an appeal (to the Court of Appeals) would stay the judgment.
    There are two interesting points to note:
    1. Investment Dar Bank Bahrain is listed by Investment Dar Kuwait as an affiliate/subsidiary.  And there was earlier speculation in the Kuwaiti press about the rumored resignation of one of Investment Dar Bank's directors.  Earlier post here.  It is highly uncommon for a subsidiary/affiliate to sue a parent.
    2. As I commented earlier, the existence of the Aref lawsuit is not helpful to the restructuring process.   Bankers don't like the threat of lawsuits hanging over obligors.
    For more on TID use the label: The Investment Dar.

      Wednesday, November 25, 2009

      Dubai US$5 Billion Debt Sales - Less Than Meets the Eye and An Explanation for the Restructuring at Dubai World

      Two stories came out today with contradictory themes:
      1. The first was that Dubai had successfully sold US$5 billion in bonds from the Second Tranche of its US$20 billion program.  
      2. The second was that Dubai announced the appointment of a Chief Restructuring Officer at Dubai World and more importantly asked creditors for a payment standstill until May 2010.
      The explanation for this dissonance is in an article in Thursday's The National (Abu Dhabi).

      It seems that the US$5 billion sale was actually US$2 billion in cash now with the promise to buy the remaining US$3 billion over the next year.  

      US$ 2 billion is not enough to address the Emirate's  near term cash flow needsd - payments to suppliers and debt maturities, including  an AED12.85 billion Sukuk (US$3.5 billion bond) issued by Nakheel. 

      So the Emirate was left with no option but to ask for a six-month debt repayment standstill.  

      Looking behind this, what are the conclusions we should draw.
      1. As I posted earlier and as The National confirms, this is an Abu Dhabi Inc. deal.  It is not a private sector non governmental deal.  
      2. Despite attempts by Dubai to spin the bond sale as proof of access to the market, the Emirate  has only limited access.  If it did, it would have raised more money and not needed to tap Abu Dhabi again.  Today's announcement is likely to further restrict access.  
      3. Abu Dhabi is still supporting Dubai but extending the time over which the cash is infused.  This presumably is to put pressure on Shaikh Mohammad to make some real changes. Until just recently Dubai was talking of raising the full US$10 billion of Tranche 2.
      4. It is also a signal to the market - to other creditors - that Abu Dhabi is not necessarily the lender of last resort for Dubai.
      5. The sudden dismissal earlier this week of Dr. Sulayman at DIFC and the replacements at the IFD are probably related.  And perhaps preparation for today's bad news.  Change that hopefully creditors will believe in.  New sober faces.  The guys who will use both sides of the Xerox paper.
      6. Expect to see more evidence of a fundamental change in Dubai's strategy.  The new CRO at Dubai World is just the first step in this direction.
      7. The standstill request is going to send shockwaves through the financial markets. Look for a reaction at the Dubai Exchange and some spillover elsewhere in the GCC. 
      8. The credit markets - already struggling with Saad, AlGosaibi, The Investment Dar, Awal, The International Banking Corporation, Global Investment House - are likely to react negatively.   Not just foreign lenders and investors but also regional ones.  Spreads on Dubai Credit Default Swaps are going to increase.  Banks and bond investors are going to become more cautious across the region.   
      9. As a result, Dubai's market access is going to be reduced.  It is going to have to focus primarily on restructuring its existing debt.  New financing, if any, is likely to be relatively modest compared to the past.  
      10. This will have a direct impact on the local economy which was largely fueled by  an intense multiplier effect of a series of transactions of apparent (and note that is a deliberate word) increases in value - but whose primary basis was debt.  
      11. Even Aabar may be impacted.  It could wind up paying more for the refinancing for its recently announced six month US$1.625 billion club loan.
      The announcement seems to have been timed  to the Eid holiday - no doubt in the hopes that some of the shock will dissipate before markets begin trading again next Monday.

      There will be more to come.  And the prognosis is not for good news.

      AlGosaibi/Saad: Gold Shipments

      A couple of interesting reports on gold shipments involving the Saad and AlGosaibi Groups as well as their banks. 

      Here and here.

      This may be the start of the explanation where the missing money went.

      More Problems in Dubai Inc - Dubai World Restructuring & Debt Standstill

      Gulf News reports that the Dubai Government has announced the appointment of a Chief Restructuring Officer for Dubai World (Aidan Birkett of Deloitte).

      A bit further down is the more depressing news:  Dubai World is asking for a standstill on debt repayments until 31 May 2010.

      Here's Khaleej Times report.

      Just what is it they're humming down there?

      UAE and Bahrain Rulers Join Forces to Combat Sand Shortage

      26 November marks the last official day of Saudi sand exports to Bahrain.

      As of tomorrow, there will be an official sand drought in Bahrain.

      As noted in an earlier report, the Nass Company has already begun importing sand from Oman.

      I was trying to think of a funny spin to put on this.  But it is a serious problem and steps are being taking to resolve it.

      AA will, however, keep his eye on Saudi exploration to discover new sand reserves.

      Earlier posts can be found through the use of the label "sand".

      Learning to Let Go

      They say that the ability to leave one's work at one's desk is the key to a happy life. 

      Seems Mr. Pinto described in the article as a "financial compliance officer" was able to do just that on his lunch hours.

      Tie Your Camel First, Then Trust in God - Part IV Or Not Exactly the Right Sort of Advertisement of Professional Skills

      From the Gulf Daily News.

      Dubai Raises US$5 Billion from "Private Sector" - Or Did It?

      You've probably seen the news that Dubai raised US$5 billion in the second tranche of its US$20 billion bond program.

      Much is being made of the fact that it secured funding this time from the "private sector" and didn't have to rely on help from the Emirate of Abu Dhabi.

      Last time I looked the majority owner of both National Bank of Abu Dhabi and AlHilal Bank was the ADIC (Abu Dhabi Investment Council).

      Isn't this pretty much what happened with Tranche #1?

      Abu Dhabi didn't actually directly  purchase the bonds from Dubai.  The Central Bank of the UAE did (the first US$10 billion.)  Of course, with money given it by Abu Dhabi.

      To characterize Tranche 2 as a non Abu Dhabi Government private sector deal is a bit of a stretch.  Well, maybe more than a bit.

      And when you think about it, if you're Abu Dhabi, isn't it better to have the CBUAE or NBAD/AlHillal fronting your money?  It's a lot easier for a Sheikh Mohammed to stiff a brother ruler than it is the central bank or two financial institutions.

      Aabar Raises US$1.6 Billion Six Month Club Loan

      Aabar disclosed to the Abu Dhabi Exchange that it had raised a US$1.625 billion six-month club loan from a group of international and local lenders.

      Looks like a bridge to a capital markets issue or perhaps a syndicated loan.

      Bahrain Islamic Bank Denies Market Rumor That Investment Dar Intends to Sell Its Shares to Repay Debts

      Today Bahrain Islamic Bank issued a statement to the Bahrain Stock Exchange regarding a market rumor that The Investment Dar intended to sell its shareholding interests in Bahrain Islamic as part of its settlement of existing debts.

      BIsB stated it had contacted TID and TID had denied.

      BSE announcement here in Arabic.

      Aref Announces KD12.6 Million Judgement in Its Favor Against The Investment Dar - Investment Dar Replies

      Aref Investment Company issued an announcement on the Kuwait Stock Exchange that the court had ruled in its favor in its case against TID and awarded it KD12,644,771 (US$44,256,699).

      [9:33:4]  ِ.صدور حكم لصالح مجموعة عارف الاستثمارية ‏
      يعلن سوق الكويت للاوراق المالية بانه ورد الينا الان من شركة مجموعة ‏
      عارف الاستثمارية بانه تم صدور حكم لصالح الشركة فى الدعوى رقم ‏
      ِ2009/47000 تجاري كلي 9 ،ويفيد الحكم بالزام المدعي عليها (دار الاستثمار)‏
      بان تؤدي للمدعية (مجموعة عارف الاستثمارية) مبلغ وقدره 12,644,771 د.ك ‏
      والزمتها بالمصاريف .‏
      وعليه سوف تعاد الشركة الى التداول بعد عشر دقائق من نزول الاعلان .‏

      And TID issued its own KSE announcement in reply:  this is only the first round (first level court) and that they will lodge an appeal with the Court of Appeals.  By lodging an appeal, TID will stay enforcement.

      [12:25:40]  ِ.ايضاح من دار الاستثمار بخصوص الحكم الصادر ضد الشركة ‏
      يعلن سوق الكويت للاوراق المالية ،بان شركة دار الاستثمار افادت بخصوص ‏
      الاعلان المتعلق بالحكم الصادر فى الدعوى رقم 2900/4700 ت.ك/ 9 ‏
      المقامة من شركة مجموعة عارف الاستثمارية ضد شركة دار الاستثمار ،
      افادت الشركة بان ذلك الحكم هو مجرد حكم ابتدائي صادر من محكمة اول ‏
      درجة وغير قابل للتنفيذ اذ ان حجيته مؤقتة وتزول بمجرد الطعن عليه ‏
      بالاسئناف ،حيث ستقوم شركة دار الاستثمار باسئناف الحكم سيما وان ذلك ‏
      الحكم لم ينظر دعواها الفرعية المرتبطة بهذه الدعوى .‏
      وافادت الشركة بانها سوف تقوم بموافاة ادارة السوق باى مستجدات مستقبلية ‏
      بهذا الخصوص .‏

      Coming on the heels of the report of less than a brilliant meeting Tuesday by the Creditors' Co-Ordinating Committee, this is another bit of bad news for TID as it will embolden other creditors in the "no" camp.

      The Investment Dar - Dissension in Creditor Group?

      AlQabas has a fairly negative report on this Tuesday's meeting of the Creditors' Co-Ordinating Committee with lenders.   

      Here's a quick recap for those who don't read Arabic, plus a few opinions.
      1. The restructuring plan is a five year term with increasing principal repayments:  6% in the first year, 10% in the second, 12% in the third year.  There also seems to be some accommodation to be made to small creditors, though the nature of that arrangement is not specified.  AA:  This leaves 72% of the loan to be repaid in the last two years.  Fairly typical in a difficult situation.  Banks structure a deal to restore the loan to performing status - those all important interest payments with a bit of principal reduction - in the near term.   After a couple of years of the borrower making those (easy) contractual repayments, a restructured loan can be considered performing and no longer need be reported in IFRS-based financials as restructured.  And, perhaps more important, as long as contractual interest and principal payments  aren't past due (usually 90 days), the loan is performing from a regulatory standpoint. No need for provisions or non accrual.  So with a  repayment schedule like this, the hope is that things will work out  in the future (a miracle).  Or failing that  those later maturities can be extended later.  Another benefit is that loan officers can present a five year restructuring to  credit committees.  Both can then pretend the loan tenor is only five years, when it may really need to be seven or more.   Today everyone can be happy.   The future day of reckoning  hopefully will be the problem of some other chap at one's bank.   In other words push the difficult bits of the problem to the future.  Extend and pretend.  Or if you're an "Islamic" banker, delay and pray.   I'm guessing the "deal" for small creditors is designed to secure more positive votes for the  restructuring proposal rather than a sudden burst of conscience. 
      2. The plan is to get the approval of 66% of the creditors to declare effectiveness.  Legal advisors to some creditors are quoted as saying that the Committee Spokesman is either ignorant of or ignoring the law.  100% of creditors need to sign up.  If 100%  don't sign, then those who have not agreed remain free to pursue legal action.  AA:  Usually by now, especially in a difficult situation, banks have decided that their best course of action is to "go along" even if they don't believe.  At this point usually there are some small creditors looking to get bought out by refusing to vote yes.  The absence of a Chapter 11-like legally enforceable cramdown on dissenting creditors makes this a viable strategy.   100% is required for the deal to proceed.  The small creditor hopes that  if he is difficult enough, the bigger lenders with much more at stake will want to avoid recognizing a big loss, and so  will buy him out.  But  I think there is more going on.  What I think we're seeing here - assuming this article is correct - is that there is a significant group of creditors (at least 34%?) who don't want this deal.  That view is bolstered by the article mentioning two lenders - one with claims of KD20 million (US$ 70 million) and another with KD30 million (US$105 million) who are in the "no" camp.  An indication that major lenders not just small ones are opposed.  You'll remember (if you read this blog) my earlier comment about Wakala transactions perhaps being "outside" a rescheduling as they are "trust" transactions not deposits.  Perhaps, these lenders hold such obligations and feel confident of a favorable legal outcome.
      3. The article also states that a large number of attendees at the creditors meeting (the word "aghlabiya" is used) complained about a long-winded boring presentation and useless details in the presentation of the plan.  So much so that they are reportedly going to ask for  detailed information in writing so they can study.  AA:  Usually these meetings turn out to be mini circuses (minus the bread) with lots of lenders speaking, many sadly who have little idea about banking or law.  And many with less than helpful ideas.  It is no fun being the chairman of such a meeting.  Again there appears to be more going on.  What I'm taking away from this comment is that  there remain substantial differences among the lenders about the way forward.  And if lenders lack confidence that the Co-ordinating Committee is up to the job, that is not a recipe for progress. 
      Taking the article at face value, I would expect the deadline is going to have to be moved into next year.  Lenders apparently still need to be persuaded that this is the best deal and that failure to accept it means they will lose more than if they sign up.  If by now they are not convinced, a lot more work will need to be done to persuade them.  With upcoming holidays, not much chance of making the 23 December deadline.  

      TID has yet to release its 2008 fiscal report.  Each day longer it is still in the water, the harder it will be for it to restart its engines and earn enough to pay banks back.  And even if it does,  it may be left fundamentally wounded by this delay.  While banks have a responsibility to their stakeholders to get their money back, they also have a responsibility to the borrower not to needlessly damage it.

      We may be getting near the time to consider rescheduling under the Financial Stability Law. 

      The Investment Dar - Apparent Good News in the Noor Investment Co Lawsuit

      AlQabas also reports that TID has issued a press release (not yet on their website) that they Court of Appeals has ruled in TID's favor.

      Noor had earlier filed a case charging TID's chief executive  (Adnan Musallam) and executive management with criminal behavior.  The Appeals Court has reportedly upheld the judgment of the lower court which rejected Noor's case.

      It seems that now TID will return the favor by suing Noor's management for raising ibelous and untrue  accusations and sue for damages to their reputation.

      British Bankers Ask UK Govt for Help on Saad and AlGosaibi

      You've probably seen today's Financial Times.  

      Thomas Harris, Chairman of the British Bankers Association Trade Policy Committee, reportedly wrote to the UK Minister for Trade, Lord Davies, urging him to push the Saudi authorities to help foreign banks (read "British banks".  This is the BBA after all)  resolve their problems with both Saad and AHAB.

      Frank Kane has more details on the letter in Abu Dhabi's The National.  And he is a bit less gentle.  The FT has more to protect that The National.

      Clearly, the leak of this letter is designed to put pressure on the Saudi Government.

      First reaction.

      It's fairly typical for bankers who have gotten themselves into trouble to seek  to identify those responsible for their predicament.  For some strange reason, they rarely look close to home.  Rather they blame regulators, accountants, the weatherman, and the chap standing on the corner for their misfortune.   Equally, it's typical for them to look for governments, central banks, and regulators to extricate them  - usually justified as needed to protect the good name of the country and future business. We're seeing a bit of the latter in this letter:  a  not so subtle threat that if the authorities fail to "assume responsibility", then future business will suffer.   Not a highly credible threat  as bankers  are known as a group to be congenitally pre-disposed to ADD.

      But added to that normal pattern of behavior are a few other complicating factors:
      1. The side deal cut to favor local banks.  A Saudi preferential tradition so it seems if the stories about Redec are correct.
      2. Lenders' knowledge that the Saudi legal system presents formidable obstacles to redress through the courts, particularly for foreign lenders.  It's remarkable how laser-like the focus is on legal matters after the problem has occurred.  It's not just punters in the equity market who are  often irrationally exuberant.  Many times it's those presumedly sober pin-striped bankers.
      3. As well, their knowledge that securing full and frank information will be difficult.
      4. Both borrowers' apparent attempts to use the above and their financial difficulties to settle their obligations for pennies on the dollar.  
      Certainly, a difficult situation, particularly when the sums involved are large.  And clearly they are.  The BBA is not writing letters to Lord Davies because the sums are modest.

      One wonders (or at least AA does) how many times a person or a banker has to get hit in the head before he or she catches on.

      Commercial banking is a fairly simple business.  A key element is understanding the market one is doing business or proposes to do business in - well before one looks at the credit of an individual obligor.  If there are  fundamental problems with the law itself, the enforcement mechanism, business practices, transparency etc,   there is a problem with the market.  If that is the case, one adjusts one's lending strategy - amounts, terms, collateral (offshore of course) - or simply does not lend. 

      Tuesday, November 24, 2009

      New Feature At Suq Al Mal: Links to Blogs and Other Sites

      I've started the process of adding links to other websites, which I think are of interest/useful.  These are on the right hand side of the page right below "What is Suq Al Mal?"

      If anyone out there has any suggestions for additional listings, post a comment.

      I'll take a look at the website you recommend.  If I think it's worthwhile, I'll include it.

      Monday, November 23, 2009

      Tie Your Camel First, Then Trust in God - Success - Part III

      Tamweel has refused to take delivery of villas in AlMazaya Development due to lack of infrastructure.

      There's nothing like a recession to spark a bit of common sense in business.

      Previous posts here and here.

      UK Firms Providing Involuntary Supplier Credit in UAE (Dubai)

      GBP 200 million.

      UK Government asked to help earlier.

      Dues down by 50% from May.

      Who Else Will Miss the Special Security Bus at Doha Airport?


      It's nice being special.

      I wonder if Ambassador LeBaron could check out the in-flight entertainment on Qataria, particularly the selection of songs from Kawkab AlSharq.  If there isn't a TSA regulation on this, there should be.

      And You Thought You Had a Bad Day: Wait Till You Hear the MD at Shabka Holding Kuwait

      Nayef AlEnizi who recently acquired a majority of Shabka's shares and is MD and Board Member described the company to AlQabas  using the phrase "la wujud laha nihaiyan".  "No existence to it in the final analysis".

      If that wasn't enough:
      1. The company has no office.
      2. The new board can't locate records or financial statements.
      3. The company doesn't have a finance director.
      4. The new board isn't sure what the assets or liabilities are.  (See #2 above)
      5. The Ministry of Commerce is delaying issuing certificates to the new board members,
      And if that weren't enough, he expects that the company will lose the suit brought against it by International Leasing.

      And I thought the chap at Safat Global had a sad story to tell.  This one tops Badr's by a kilometer or two.

      As you recall, trading in Shabka shares is suspended for being late with its financials as well as not paying its KSE listing fees.

      Oman to the Rescue: Sand Shipments Arriving in Bahrain - Formation of OSEC Near?




      Picture in Public Domain as Per WikiCommons


      While intensive exploration for sand in Saudi Arabia continues, Bahrain has begun importing Omani sand.

      And it seems testing other countries' sand to determine if they have the quality required.

      Can the formation of OSEC (the Organization of Sand Exporting Countries) be far distant?

      Background on critical sand shortage here.

      AA will continue to follow this story.  Stay tuned.