Monday, May 31, 2010

Kuwait: The Myth of the Asset Purchase Solution

 Apple House II  Danny Bradury   

Muhammad Al-Itrabi over at AlQabas had a positively brilliant article with a rather longish title "Companies have misled the people and want to deceive them when they call for the government to purchase assets".

Trust me, the article is much better than the title.  And much better than this rushed translation.

From the opening sentence "Perhaps frankness is the missing link in the local crisis" to its final  one describing trash assets he's both funny and scathing.

He says that despite all the official rhetoric about purchasing assets, when you interview officials off the record, then you really obtain the true story - the refutation of the equivocation that confuses many. 

"What is behind the reluctance to embark on the purchase of assets when the Governor of the Central Bank and the team with him which was created to solve the crisis first began discussing this solution and then just as quickly abandoned it?"

Basically, the answer is that assets on offer are duff assets:
  1. Minority shares in companies that are in trouble where the purchaser will have to invest additional funds to rescue them.
  2. Only a very few good assets are on offer.  Due less to the desire of companies to hold on to good assets than the fact there aren't very many.  The KIA was only able to find a single orphan asset - Global's stake in Bank of Bahrain and Kuwait.  KIPCO allocated KD100 million for asset purchases and couldn't find a single one. 
  3. He also notes that companies are hanging on to their few good assets as their way out of the crisis - generation of funds to pay debt service, presence provides a comfort to lenders, etc.
  4. Of the assets for sale many are illiquid due to both the quality of the asset and the inability of purchasers to obtain financing.  These assets don't have a market and are unlikely to.
  5. Toxic assets that are a burden on companies.  Purchased for exaggerated prices and financed with debt.  Thus placing heavy burdens on the owners balance sheets and requiring large expenditures.  In effect practically non existent assets.
  6. Real estate composed of unfinished/undeveloped properties plus  القسائم parcels(?) coupons (?).   Anyone out there with the correct translation, please post.   Land in artificial islands where ownership has reverted or where millions are needed for development.
  7. Undeveloped tracks of land in foreign countries "in the desert" as is the case in Dubai and Bahrain acquired at gigantic cost and financed with loans at high interest rates.  And which cannot be disposed of at any price.
  8. Many of the prices are unrealistically high as though we were still in normal times and not where cash was dear.
  9. Assets that don't fit with the guidelines (trends?) for government entity investment.
  10. Duplicative assets (I suspect he's referring in part to the pattern of cross holdings among Kuwaiti "Groups") where one would have to buy a myriad of companies to get control of the assets.
  11. Assets that consist of licenses to develop real estate or "empty boxes".
Well worth the read.


    Laocowboy2 said...

    Wish my Arabic was good enough to read but your summary really says it all. Unless and until all the rubbish is cleared out from balance sheets (and some companies are deservedly consigned to the dustbin of history) the KSE is going nowhere. If the government were to buy, it would merely allow others to sell - thus shifting still "dead" assets from private to public ownership but not otherwise affecting matters in any (positive) way.

    Ig government money is to be spent, better be it on projects (thereby boosting demand in the economy) and in perhaps recapitalising the banks to allow them the financial room to foreclose on and write off these "ghost" assets.

    The Rageful Cynic said...

    Laocowboy2 makes a good point about the shifting of dead assets..

    i'm surprised more Kuwaiti companies (especially the plethora of investment firms) haven't gone under yet.

    agree about the KSE, although I think there's room on the down side especially since "investors" are reacting to negative news while practically ignoring the (scant) positive news.

    Abu 'Arqala said...

    Laocowboy2 and TRC

    Thanks your comments.


    What's also required is effective regulation of the KSE. For too long it's been the playground of "Groups" who manipulate prices, shuffle assets between companies, etc.

    That perhaps is coming.

    Development is also perhaps an answer if one believes that some of the silly behavior by the private sector is the result of constrained economic opportunities. The problem with that theory (which by the way I find makes a good deal of sense) is that profits in these sort of activities will be much less than those available in the financial sector. So it also involves a shift in mindset away from the trading/mercantile mentality.

    The Rageful Cynic said...

    No doubt that regulation is needed on the KSE, but I don't think the CMA will come about very soon, definitely not this year... these things take time in Kuwait, while everyone thinks on it and argues about utterly irrelevant aspects of the issue....

    Nasser Al Nafisi wrote an excellent article about the difference in performance between the weighted index and the regular one..

    Abu 'Arqala said...



    Agreed with the prognosis on the CMA.

    Do you have a link to Nasser's article, I missed that one?

    The Rageful Cynic said...

    its a monthly write-up on the market.