Wednesday, July 28, 2010

The Investment Dar - Central Bank Gets Another Four Months to Ponder


Quoting Reuters, AlQabas reports that the Central Bank of Kuwait applied for an additional four months to determine whether TID should be allowed to enter the FSL process - a step that would give it protection from court actions in the State of Kuwait.  And as well, I suspect, from court actions in most other jurisdictions.

The new period runs from 10 July.

Clearly, the CBK is not as convinced as it would like to be that TID can make the current restructuring plan.  

As noted in an earlier post, it's expected that the CBK will impose some conditions on TID as the condition for an approval.  And perhaps propose some modifications to the restructuring plan itself.

From this distance it's hard to see what the CBK's motive is:
  1. Reluctance to make a decision that may turn out to be wrong?
  2. Hope that if it waits long enough, events will make the decision for it? 
  3. Desire to put pressure on the parties to revise the deal - more to the CBK's liking?
  4. Need for time to figure out what the right additional conditions are? And negotiate with the parties?
  5. Hold TID's feet to the fire a bit longer as a form of punishment?  Though this risks alienating creditors.
The danger with a delay is that those creditors who are pursuing legal cases may win judgments in foreign jurisdictions.  Though I would expect TID to mount a legal defense in such cases that it was partially under the equivalent of Chapter 11 and that foreign proceedings should be stayed until the CBK made its decision, such a defense may prove less effective than TID being finally and formally under the FSL.

A delay does allow the CBK to increase pressure on both TID and the creditors to accept its conditions with minimum negotiation.

    18 comments:

    Chapter 11 said...

    Ridiculous. This is coming from a country that wants to be a financial hub? There is no reason to reinvent the wheel. Failure is a normal element of doing business, and as such, the GCC needs to be faster in acknolwedging it, settling, and moving on so that capital can be redirected to more productive uses.

    Laocowboy2 said...

    Ridiculous indeed. If I were a non-Kuwaiti creditor I would now take immediate legal action in a jurisdiction where there are assets. Presumably there is nothing to stop the Kuwaiti courts then granting another extension in October/November and so on... In the meantime the expenses clock keeps running, asset values weaken and thigs just drift

    The Rageful Cynic said...

    i believe only one four month extension is allowed as per the law's articles.

    although, I don't see what's gonna change from now to November....

    The lack of transparency on this issue is appalling...

    Chapter 11 said...

    Is Aston Martin (SPV or otherwise) on TID's balance sheet or held in client accounts?

    Abu 'Arqala said...

    Reactions to Comments So Far


    (1) Failure
    In the developed West, make that the highly developed West, failure is an option rarely used. Lehman was the exception rather than the rule. Heck we even did it for car companies.

    (2) FSL
    Only one four month extension is allowed. Article 19.

    http://www.bakertillykuwait.com/images/BailoutLaw2009_AR.pdf

    http://www.bakertillykuwait.com/images/BailoutLaw2009.pdf

    (3) Aston Martin

    On balance sheet. Valued using Equity Method. Note 12 2008 Financials. Roughly KD 70.6 million. Which appears to be roughly 1.6x book of AM.

    http://www.inv-dar.co.uk/Investment%20Dar%202008%20Financial%20Statements.pdf

    But note TID is a shareholder in AM. In the event of any financial distress at AM, AM's creditors get paid before TID gets a single fils. In the interim they could sell their equity. What am I bid for an auto company - with a great deal of past prestige but with less than stellar current prospects? Also note the loan covenants on AM prohibit the payment of any dividends.

    Chapter 11 said...

    I dont agree, FDIC seized 103 banks so far this year. I call that being allowed to fail, managed as it may be.

    Chapter 11 said...

    Buying a high-end luxury carmarker at the top of a secular debt-induced consumer binge. Hmmm, great macro call.

    Abu 'Arqala said...

    Chapter 11

    Thanks for your comment.

    And the opportunity to continue our مناقشة

    You're right about the FDIC seizing over 103 banks so far.

    But - and there's always a "but" with me.


    There's a difference in the action depending on the size of the institution. It didn't seize BofA, Citibank. It provided equity. And is letting them grow out of their problems. Bear was rescued into the waiting arms of JP Morgan (with a sweetener) guarantee. Lehman was let go.

    TID is rather a big fish in the Kuwaiti "investment" firm pond. In rough numbers KD1 billion in debt, including "Islamic" capital market issues. Making it the single largest Kuwaiti firm investment firm borrower. KIPCO and Global are way behind. It has significant exposure to "wise" international banks.

    Just as in the USA, I think the Kuwaiti regulator might be more inclined to rescue or close down the Citizens Bank of Commerce of Shuwaikh or the First National Bank of Bnayd AlGar than TID.

    It's a lot easier to deal with small local banks with limited exposure to creditors. Mostly domestic. Less resources required. Less waves caused.

    Also there are two factors that make that sort of action a bit more difficult in Kuwait.

    (1) Kuwait's zip code. Letting TID crash and burn would cause a major problem for Kuwait. Especially since I guess that TID is less saleable than Aston Martin right now - unless the Government were to step up with a massive guarantee or cash infusion.

    (2) Family Oriented Culture. The culture and the size of the country mean "family values" are more important than in say the USA or UK.

    Chapter 11 said...

    AA, thanks for following up. I think it would be hard however for anyone to compare the "systemic importance" of BoA and Citi (both domestically within their jurisdictions and within an international global market context) to that of TID.

    The amount of credit (for use of a better term) extended to TID by those "wise" international banks you mention is most likely a tiny exposure for them in the grand scheme of things - that is if they even kept the exposure on balance sheet, and didnt syndicate or SIV it.

    You may have written about this before, or have better insight, but do we know what the composition of TID credits looks like from a geographical, number perspective? i.e how much is local to kuwait, regional, international etc.

    Chapter 11 said...

    Also, from my limited, un-halal perspective, TID was never a big financial intermediary, counter party in the global swap market etc. The analogy of a flee on a dogs' bollocks comes to mind.

    We need more egg on the faces of these Islamic finance "titans". It's a shame that shariah compliant investors have such quality products to choose from. As for the mafioso club of scholars, that's a story unto itself.

    If I was to repeat my career, I'd ask the good lord to bless me with a respectable beard and bring me back as a shariah scholar. Ka-ching. Now which Ijara product shall i park my winnings in?

    Laocowboy2 said...

    The genesis of TID explains a lot. It strted as a consumer finance business - something they did fairly well although as funding came from KFH mainly, they could not hope to match the effective margins that KFH achieved - unless they pushed out the risk envelope. While they did this as well, it was the diversification into non-consumer finance and then real estate that set them on the rocky slope. The consumer finance market was small, crowded and offered limited growth prospects. Real estate and direct investment however seemed to offer boundless possibilities.

    A'Ayan was started by ex-TID people who thought they could do it better. They too started out with consumer finance and then ... etc etc.

    The ability to add a lot of leverage does not automatically make you George Soros - something a number of "institutions" accross the GCC seem to have missed. These firms have no future and should be quietly buried. Putting off the evil day just makes the eventual hole larger.

    Abu 'Arqala said...

    Chapter 11

    Thanks your response.

    Enjoying the exchange.

    Systemic Importance
    Yes, TID is not systemically important say as Gulf Bank. Which received quick action and cash. But it is important to the system for the following reasons.
    (1) A failure casts a shadow on the regulator. Now while most locals know that regulation in Kuwait is like Big Foot (seldom seen but much discussed around the bankers' campfire), most "wise" foreigners don't have a clue. A TID failure raises some rather uncomfortable questions.
    (2) Zip Code - Foreign capital is naturally skittish about the area. One doesn't want another reason for foreign capital to say "no". Equally, many domestic and regional investors are "shy" about investing in the area. The comprador and rent seeker mentality seeks to hedge its local risk by having its 401K in "safer" havens.
    (3) Knock On Effect - Kuwaiti banks that are by their nature systemically important have wisely extended loans to TID and would be hurt.

    Quantum of Foreign Debt
    You're right if the foreign banks were to write off their TID exposure it would not be life threatening.
    But all banks - foreign and domestic - don't like to write off loans. It's almost a religious principle to say nothing of the career implications for the poor chap who writes. I suspect -- but don't know for sure -- that many of the wise foreign lenders wisely decided to keep the TID loans on their books.

    Composition of Creditors
    Sorry for the pun. No, I don't have a list. But if someone wants to send a copy to me, I do have a Comments Page and will be delighted to arrange a mechanism to have the list sent to me. Hint Hint.

    In the absence of a list of creditors one has to look for other signs. There are a couple here.

    (1) HSBC and Lloyds Bank are on the 9 member steering committee. Now there I suppose many reasons why a bank could get a seat on such an august body. Generally though the "wisest" lenders (defined by size of ticket) get first choice at a seat.

    (2) Advisors. The use of a firm like Morgan Stanley suggests a significant non local/regional presence. That group generally tends to prefer accounting firms. Though if I remember the sequence of events correctly, one might argue that creditors' hiring of MS was in response to TID hiring Credit Suisse.
    Initially TID had hired Gulf Bank - presumably for something other than its imagined expertise in the field.

    Abu 'Arqala said...

    Chapter 11

    Part 1 of response to your first post

    Thanks your response.

    Enjoying the exchange.

    Systemic Importance
    Yes, TID is not systemically important say as Gulf Bank. Which received quick action and cash. But it is important to the system for the following reasons.
    (1) A failure casts a shadow on the regulator. Now while most locals know that regulation in Kuwait is like Big Foot (seldom seen but much discussed around the bankers' campfire), most "wise" foreigners don't have a clue. A TID failure raises some rather uncomfortable questions.
    (2) Zip Code - Foreign capital is naturally skittish about the area. One doesn't want another reason for foreign capital to say "no". Equally, many domestic and regional investors are "shy" about investing in the area. The comprador and rent seeker mentality seeks to hedge its local risk by having its 401K in "safer" havens.
    (3) Knock On Effect - Kuwaiti banks that are by their nature systemically important have wisely extended loans to TID and would be hurt.

    Quantum of Foreign Debt
    You're right if the foreign banks were to write off their TID exposure it would not be life threatening.
    But all banks - foreign and domestic - don't like to write off loans. It's almost a religious principle to say nothing of the career implications for the poor chap who writes. I suspect -- but don't know for sure -- that many of the wise foreign lenders wisely decided to keep the TID loans on their books.

    Abu 'Arqala said...

    Chapter 11

    Part 2

    Composition of Creditors
    Sorry for the pun. No, I don't have a list. But if someone wants to send a copy to me, I do have a Comments Page and will be delighted to arrange a mechanism to have the list sent to me. Hint Hint.

    In the absence of a list of creditors one has to look for other signs. There are a couple here.

    (1) HSBC and Lloyds Bank are on the 9 member steering committee. Now there I suppose many reasons why a bank could get a seat on such an august body. Generally though the "wisest" lenders (defined by size of ticket) get first choice at a seat.

    (2) Advisors. The use of a firm like Morgan Stanley suggests a significant non local/regional presence. "Locals" generally prefer accounting firms.

    Though if I remember the sequence of events correctly, one might argue that creditors' hiring of MS was in response to TID hiring Credit Suisse.
    Matching one "big gun" against another.

    Initially TID had hired Gulf Bank - presumably for something other than its imagined expertise in the field of debt rescheduling - which I believe is mostly limited to getting into such situations. Or perhaps more accurately "was mostly limited."

    Abu 'Arqala said...

    Chapter 11

    A reaction to your second post.

    The problem that Shari'ah Boards is that pool of available recognized scholars is small. They begin with a disadvantage - in terms of knowledge of business matters. And so have to rely on what managements tell them. And perhaps the biggest failing is assuming they will get كلام شريف from those managements.

    Some of them have also adopted the idea that given current circumstances they have to accept less than 100% Islamic structures to develop Islamic finance. And that is the import of the Shari'ah Board Fatwa on Golden Belt Sukuk 1 - which
    notes that the decision was based on (a) legal constraints (b) the need to facilitate and bring ease to those developing Islamic banking and (c) helping the Ummah move from the shackles of riba. In other words, they state this isn't perfect, but there are "policy reasons" for approving it.

    Also TID's Shari'ah Board publicly slapped down TID over its bogus and offensive to Islam defense in the BLOM lawsuit. So there has been a rather public serving of eggs.

    And many of the titans of Islamic financing have been exposed for less than Islamic behavior - TID where the Central Bank had to put a minder to watch management, GFH which has seen its pretensions smashed as well as several "names" in Kuwait - IIG, Aayan, etc.

    Abu 'Arqala said...

    Laocowboy2

    Yes, I've met a lot of self-styled geniuses who by the accident of rising and in some cases rigged markets and/or accounting magic imagined themselves Warren Buffet or George Soros.

    And when their schemes crashed, were equally adept at blaming someone else.

    Though to be fair, this is not a regional phenomenon. Even in the developed West (make that the highly developed West) we have our Fabulous Fabs, Jeromes, and Nicks - to cite just a few lower level superstars.

    Chapter 11 said...

    "Initially TID had hired Gulf Bank - presumably for something other than its imagined expertise in the field of debt rescheduling ..."

    LOL, love it.

    Abu 'Arqala said...

    Chapter 11

    To be fair, Gulf Bank is well experienced in problem loans.

    In the past Gulf Bank has shown an uncanny knack for making bad loans and getting itself into reschedulings/workouts time and time again. So they certainly are well experienced at least in some phases of the assignment. It seems they don't appear to have learned much from those experiences. Perhaps, Michel will change things.

    Hard to say why TID hired them initially. A buy Kuwaiti impulse? Cost? Hoped for access to new financing?