Wednesday, July 7, 2010

Gulf Finance House - S&P Downgrades GFH Terminates Ratings Services


5 July S&P downgraded GFH to CC.   This should come as no surprise as they had said that if GFH needed to restructure again they would do so.

More importantly, GFH requested that S&P no longer rate them.  S&P has complied.  It's website  shows NR for the rating. To add insult to injury - but not without cause - S&P expressed a negative view at this ratings action. 

GFH's termination of the ratings relationship is more telling than the rating action itself.   It is clear  that  they do not see near term potential for an upgrade.

Asa Fitch over at The National observes:
The move may mark a reversal for what has been one of the region’s most remarkable turnaround stories during the financial crisis. Since being brought in last year, Ted Pretty, GFH’s Australian chief executive, has aggressively marked down the company’s assets, restructured debts and announced plans to sell stakes in property projects and banking subsidiaries to raise cash. Under Mr Pretty, GFH posted $728m of losses for last year and revealed plans to raise $250m this year from asset sales.
In my view the story of any "turnaround" at GFH was largely a work of fiction.  And remarkable only because some believed it.
  1. The cold hard fact is that debts are repaid by cold hard cash.  Not "pretty" words or unrealistic scenarios.   GFH's recovery, if any, will come when it is able to generate sufficient cash to service its debt and pay operating expenses.  
  2. On that score it does not have a functioning business model and there has been no real cash generation from operations for over a year now.  It's also unclear whether the new model - at this point only an undeveloped plot - is any more viable.
  3. That leaves asset realisations, largely sales to repay debt.   But make no mistake asset sales - particularly at the levels required in this particular case - do not build businesses.  They dismantle them.  Few if any companies have shrunk their way to greatness. Not more than a few months ago, GFH told quite a "fish" story of US$420 million in asset sales.  And often as happens in such stories the "big one" got away.  That reflects not only the state of the markets as well the quality of the assets on offer.  
  4. As a case in point, you may also remember the "remarkable story" of GFH's US$262 million asset "sale" of its interests in Bahrain Financial Harbour Company to Emar Bahrain.  A sale which garnered only US$40 million in cash.  The remainder of the sale proceeds were land in the neighborhood of the BFH which will be "sold later" or so the story goes.  Interesting to speculate whether the land was owned by BFHC or perhaps by a local royal personage. 
  5. A close scrutiny of other assets reveals the majority of the Company's liquidity is pledged for stalled projects.  Perhaps, itself less than a happy indication of GFH's ability to sell the project related "assets".   Besides the blocked liquidity,  there is the real danger that GFH will have to recognize some rather substantial losses when and if it extricates itself from these projects.  Not a cash drain, but something that would definitely cripple its balance sheet.  Possibly cause a breach of its Sukuk covenant to maintain a minimum US$400 million in equity and, thus,  a potential acceleration of  US$138 million.  Drive its Capital Adequacy Ratio below 12%.
  6. Liabilities are in little better shape.  GFH's talent for rescheduling also appears to be another work of "remarkable" fiction.  The US$100 million stub on the US$300 million West LB syndicate was "rescheduled" for the lengthy period of six months.  Either because GFH's creditors wanted to keep it on a short leash.  Or because someone believed in an asset sales story which in light of asset quality and market conditions may make Dotcom irrational exuberance look like sober thinking.  Last February it was clear that barring a miracle there was no way that GFH was going to be able to make that payment.  Yet, quite a different story was spun.  And one has to really wonder about the use of precious liquidity to buy treasury shares and buyback portions of the Sukuk whose maturity is in terms of GFH's life span the equivalent of a decade away.
Credibility is a very key asset at any time for a financial institution.  During a restructuring it is even more so.  A cardinal rule of the restructuring process is for the debtor to never promise more than it can deliver as its credibility with creditors, shareholders, regulators and other market participants is eroded.

At some point even the most credulous audience will see through repeated tale tales and yarns.  When that day comes the debtor is in a much worse position that if it had stuck to reality. 

As always, we'll be up bright and early to read GFH's disclosure of this piece of  material information to its shareholders and other market parties via its website and announcements on the various exchanges it is listed on.  Based on past performance, I'm sure we won't be disappointed.

4 comments:

Laocowboy2 said...

"Or because someone believed in an asset sales story which in light of asset quality and market conditions may make Dotcom irrational exuberance look like sober thinking".

I rather suspect the six months only rescheduling was to make sure that any cash that was generated from assets sales etc was not routed to another creditor or frittered away on further sukuk etc buy-backs.

Either way RIP - the real question is whether the funeral service will be dated 2010 or 2011.

Abu 'Arqala said...

Laocowboy2

Short leash theory it is.

Don't buy the flowers yet for GFH. It has powerful friends, including a key member of a nautically inclined royal family.

In any case if condolences are in order a lingering disease may be just what the doctor (or regulator anxious to avoid any failures) will order.

A terminal but seemingly unceasing case of AlBaab fever.

Or maybe a quicker but still prolonged case of BIB dengue.

Laocowboy2 said...

Ahhh... That (sort of) explains the ability to continue to walk and talk despite rigor mortis having set in. Unfortunately the authorities (and I mean GCC wide here) have yet to learn that prolonging the agony by keeping zombie FIs around does nothing to help reputations. Cleaning them up and giving them a decent burial would be cheaper and better.

Abu 'Arqala said...

Laocowboy2

A fairly common regulator reaction.

If one believes Bob Abboud (and he certainly has an axe to grind for more than one reason) First Chicago was technically insolvent for long periods.

There there was the curious case of a very major bank from California. Mamma mia!

Even at the "small enough to fail" level. I know of one "ring" of 3 small to medium size banks whose presidents were systematically looting them. When a putative white knight's due diligence team went in to check the books, they spent 2 hours. The head of the team reported back to his management "In one hour of checking we couldn't find a single good loan. We decided that was enough to make a decision".

The banks were allowed to operate until a merger solution was "found". Or perhaps imposed on the largest of the 3 (think a $1 bn or so bank) - in part as the price for some foreign institution to get a banking license.

In the GCC besides the normal considerations, there are several other.

First, small town/tribal solidarity among the locals.

Second, zip code problems. There are enough concerns about these countries that an event like a bank failure could have a real impact on the entire sector. Cost and availability of funds for one. Attractiveness to new entrants.

Third, more zip code. Some countries can basically get away with serious regulatory lapses. Despite financial crises in say the UK or USA, by and large the "market" still treats them as advanced countries with model regulatory systems and regulators. Problems are lapses. Not so for the poor states of the GCC. A serious banking problem and the "market" pronounces their regulations inadequate, their regulators incompetent or venal. Problems are systemic failures.

On that score, I recall at one creditors' meeting another creditor lambasting the Central Bank of Country X for its failure to prevent a bank's problems. Another creditor at the meeting replied (here imagine a flawless Etonian accent) that "Yes, it is indeed a pity that the CB "X" didn't emulate the Bank of England" and the proceeded to name several bank failures in the UK.

Third, in a family business - whether the local McDonalds or a country - the sole proprietor (or shaykh) may feel that criticism of the "business" reflects personally on himself. And may turn his righteous wrath on the "guy who was supposed to prevent the failure".

Fourth, cultural. Some cultures have a larger problem with taking personal responsibility than others. In such a case admitting a "mistake" is extremely hard. When there are no mistakes, such problems vanish.