Monday, June 14, 2010

Kuwaiti Funds - The Impact of Investment Firm Distress

Isa Abdul Salaam at AlQabas has an interesting article on one of the knock on effects of the distress among Kuwaiti investment companies.  Many of the distressed companies have borrowed money from money market and other funds managed by other Kuwaiti investment companies.

What caught my eye particularly in the report was his brilliant phrase:   فعند صباح كل يوم جديد ننتظر أن نسمع عن أزمة جديدة لهذا القطاع الذي لطالما ملأ الأرض بالحديث عن إنجازات لم نعد نراها فعلياً على أرض الواقع
Indeed each new day's morning we expect to hear about a new crisis for this sector which has long filled the earth with talk about achievements which we do not see actually existing.

The distressed companies have not repaid the sums borrowed due to their financial conditions.  For a while apparently with Central Bank of Kuwait tacit approval the funds have been rolling over these obligations on a six month basis.  Recently again with CBK consent, the terms have been changed to monthly.

As per the article several of the investment companies who manage funds have written to other investment companies demanding immediate payment in full and threatening legal action if payment is not made.  KIC has supposedly written such letters on behalf of its Islamic Crescent Fund.

The difficulty is that depressed prices for assets are below cost (and no doubt many of the original purchase prices reflected imaginary values).  The funds are similarly constrained as they have their investors to answer to.

The solution as usual in Kuwait is a call to the government to help resolve the problem:  to bail out imprudent lenders and imprudent borrowers.

The article closes with the comment that some investors in these distressed funds have begun taking provisions against their exposures - up to a reported 50% in some cases.

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