Tuesday, 31 August 2010

The Price of Honor: Opening Bid US$430 Million

The National carries the story of Mr. Peter Barker-Homek, once CEO of Taqa, now dismissed and in court in Michigan to assuage the insult to his honor with a US$460 million lawsuit in the State of Michigan. Of which US$430 million is for pain, suffering, reputational damage, etc.

 In case you're wondering his claim is for approximately 21% of the Company's net worth at 30 June 2010 (excluding minority interests and shareholder/government loans).   Or 2.11 x the net income for the first six months of 2010.

The Investment Dar and Commercial Bank of Kuwait - Settlement of Boubyan Bank Shares

Quoting informed banking sources, AlQabas reports that Commercial Bank of Kuwait has proposed to TID that the BB shares be sold and that any amount remaining after the settlement of TID's obligations to  CBK will then be remitted to TID.

In effect then, CBK is proposing to treat the transaction as a secured loan rather than a failed repurchase agreement.  Under the latter, CBK would be entitled to absolute ownership of the shares with no payment at all to TID.

Clearly, CBK doesn't want to enter into the rescheduling as one of the creditors and share the BB shares (very good collateral) with the entire set of creditors in return for "security" in the pool of what Adnan Al Musallam has more than once described as "strong" assets (which are probably less "strong" and certainly less liquid than Boubyan's shares). 

There is a reason why some creditors lend on a secured basis as opposed to an unsecured one.   They get to pick the collateral that gives them the credit comfort they need to extend the loan.  And know that if the borrower doesn't pay, they have a second way out that doesn't involve a rescheduling.

The proposal seems an eminently reasonable solution.  

As the parties have haggled over this problem, they lost a chance to conclude a quick sale with a willing buyer with deep pockets (National Bank of Kuwait).   Perhaps, the Central Bank can be persuaded to allow NBK to buy another 19.196%.  The share price is an attractive KD0.560.

Monday, 30 August 2010

Aayan Leasing and Investment - 1Q10 Loss of KD7.8 Million

ALI announced its 1Q10 earnings today on the KSE.  As usual only Arabic text  (below) is available. The Central Bank of Kuwait approved release of the financials on 16 August.  There was no explanation for the delay.  Based on "history", I'm guessing that as with the Company's 2009 financials, the delay has been occasioned by the KSE's more than usual scrutiny.

The headline number is a loss of KD7.8 million for the first quarter compared to a loss of KD12.5 for the period the year earlier.  Shareholders' equity is KD23.6 million versus KD89.1 million at 1Q09.  Equity was KD31.2 million at 31 December 2009. 

As you might expect, the auditors have raised a matter of emphasis about the Company's ability to continue as a going concern.  Current Liabilities (KD410 million) exceed Current Assets (KD166 million).  Accumulated losses are KD75 million.  

That last comment has got me scratching my head.  On 10 August ALI held its OGM/EGM in which shareholders agreed to use Reserves of KD37.8 million plus reduce the paid in capital to KD29.6 million (from KD63.9 million) to offset accumulated losses.  They also agreed to a KD10 million capital increase by way of a rights offer at par (KD0.100 per share).  So is it that the legal steps to accomplish this have yet to be finalized?  If so, isn't this fact worth noting?  That is, that the Company is taking steps to rectify the situation. Otherwise readers might infer there is an ongoing unaddressed  violation of Article 171 of the Commercial Companies Law.

The auditors also mention ALI's default on some KD100 million of debt.  In the August 10 OGM/EGM Ali "T" AlGhanem, the Company's Chairman, predicted the signing of a rescheduling agreement within two to three weeks.   KFH is the lead bank on the rescheduling negotiations.

A difficult situation. 

[13:38:23]  بلغت (خسارة) (أعيان) (7.7) مليون د.ك لل3 أشهر المنتهية في 31-03-2010‏
يعلن سوق الكويت للأوراق المالية أن شركة أعيان للاجارة و الاستثمار (اعيان)‏
حصلت على موافقة بنك الكويت المركزي على بياناتها المالية المرحلية للفترة ‏
المنتهية في 31-03-2010، يوم الاثنين الموافق 16-08-2010 ،
وفقا لما يلي:‏
البند       ال3 أشهر المنتهية في 31-03-10     ال3 أشهر المنتهية في 31-03-09
الربح (خسارة)(د.ك)               (7.785.523)              (12.553.455)‏
ربحية(خسارة)السهم (فلس كويتي)   (12.6)                    (20.6)‏
اجمالي الموجودات المتداولة      165.971.276             248.207.741‏
اجمالي الموجودات               510.637.020           595.882.901‏
اجمالي المطلوبات المتداولة      410.252.612             351.840.048‏
اجمالي المطلوبات               441.957.164             458.057.552‏
ِ اجمالي حقوق المساهمين        23.643.193              89.142.376‏
بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 66.680 د.ك
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 1.303.522 د.ك
علما بان تقرير مراقبي الحسابات يحتوي على عدم التأكد المتعلق بالاستمرار
على اساس مبدأ الاستمراريه :‏
دون التحفظ في نتيجتنا ، نلفت الانتباه الى الايضاح 2 حول المعلومات الماليه
المرحليه المكثفة المجمعه و الذي يبين ان المجموعه تكبدت خسائر بمبلغ ‏
ِ8.042.649 د.ك لفتره الثلاثة اشهر المنتهيه في 31-مارس-2010 ، و كان لدي ‏
المجموعه خسائر متراكمه بمبلغ 75.175.026 د.ك ، وكما في ذلك التاريخ تجاوزت ‏
المطلوبات المتداوله للمجموعه موجوداتها المتداوله بمبلغ 225.830.362 د.ك
اضافة الى ذلك ، عجزت الشركة الام عن سداد التزامات دين بمبلغ 99.993.871د.ك
و علقت دفعات سداد المبالغ الاساسيه لالتزامات الدين الى البنوك و المؤسسات ‏
الماليه ، و هي تعمل بفاعليه مع الممولين لاعادة جدولة التزامات ديونها ‏
بالكامل ، ان هذه الظروف مع الامور الاخرى المبينه في ايضاح 2 تشير الى وجود
عدم تأكيد مادي مما يمكن ان يثير شك كبير حول قدرة المجموعه على الاستمرار ‏
في اعمالها على اساس مبدأ الاستمراريه .‏


Kuwait Stock Exchange: 11 Companies Warned to Pay 2010-2011 Listing Fees

The Kuwait Stock Exchange published a list of 11 companies who have not yet paid their 2010-2011 listing fees, warning that 31 August is the last day for the payment of such fees.   Failure to pay results in suspension of trading.  Presumably, most of these firms will pay the fees.

As you will notice from the list below, seven of the companies have already been suspended (for failure to provide financials within the required period).  I've indicated those already suspended by highlighting that word in blue.  These include The Investment Dar (number #2 on the list).

The four unsuspended companies are in order:  National International Holding Company (#4),  AlDar National Real Estate ADNAK (#6) , Abbar (#8), and Mushrif Trading and Contracting (#9).

For 2009-2010, only two companies, Shabka and Safat Global were suspended for failure to pay listing fees.  They're indicated in red.

[13:31:26]  ِ.إيقاف شركات عن التداول في حالة عدم تسديد رسوم الاشتراك السنوي ‏
يعلن سوق الكويت للأوراق المالية بأنه سوف يتم إيقاف تداول الشركات
التالية في حالة عدم تسديد رسوم الاشتراك السنوي لعام 2010- 2011 ‏
اعتباراً من 1-09-2010:- ‏
ِ1- المجموعة الدولية للاستثمار ‏(المجموعة د)(موقوفة) ‏
ِ2- شركة دار الاستثمار ‏(الدار) (موقوفة) ‏
ِ3- الشركة الخليجية الدولية للاستثمار ‏(غلف انفست)(موقوفة) ‏
ِ4- الشركة الوطنية الدولية القابضة ‏(وطنية د ق) ‏
ِ5- شركة لؤلؤة الكويت العقارية ‏(لؤلؤة)(موقوفة) ‏
ِ6- شركة الدار الوطنية للعقارات ‏(ادنك) ‏
ِ7- شركة الصفاة العالمية القابضة ‏(صفاة عالمي(موقوفة) ‏
ِ8- شركة برقان لحفر الابار والتجارة والصيانة ‏(ابار) ‏
ِ9- شركة مشرف للتجارة والمقاولات ‏(مشرف) ‏
ِ10- شركة الابراج القابضة ‏(الابراج)(موقوفة) ‏
ِ11- شركة الشبكة القابضة ‏(الشبكة)(موقوفة) ‏
علما بان اخر موعد للسداد هو 31-08-2010 .‏
علما بان اخر موعد للسداد هو 31-08-2010 .‏
علما بان اخر موعد للسداد هو 31-08-2010 .

Sunday, 29 August 2010

DEPA 1H10 Loss: The AED185 Million Burj Al Khalifah Claim

If you've seen DEPA's 1H10 financials, you know they declared a loss of some AED117.5 million of which AED103.7 million is attributable to the shareholders of DEPA.  The firm bills itself as the third largest interior contractor in the world.

You've also seen their earnings press release that this loss relates to expenses incurred on a contract at Burj al Khalifah (but not with Emaar the project developer).  Apparently, a large portion is for overhead expenses incurred over a couple of years.  As per the press release, were the claim paid, DEPA's 1H10 results would have been a net profit of AED81 million, making the size of the claim AED185 million.

That seems a rather large amount.  Unclear what this represents as a percentage of total project cost.  And what the likelihood of getting the full amount is.  As well as the identity of the project owner (obligor).

Perhaps, The Real Nick can weigh in with an observation.  And certainly anyone else out there with something to contribute is welcome as well.

The Investment Dar - The Zakat Issue

As is often the case, our readers contribute greatly to the posts here, providing additional information and correcting my mistakes.

Such is the case with two recent posts on TID and Zakat.  The first here.  The second here.  And at the latter you'll find the reader's comments that sparked this post.

Let's start by going over the history.

In the first, I relayed a comment in Al Qabas that the Creditors' Coordinating Committee had been surprised by TID advising them that some KD12 to 15 million of Zakat was unpaid.

In the second, I got into a discussion with one of our readers, who prefers to remain Anonymous, about whether there was a delay in payment of Zakat by TID.  He directed me to a source that I should have reviewed before uncritically repeating what Al Qabas had said in its article:  TID's financial statements. 

Like reading one's computer hardware and software manual before proceeding, it really does pay to read the financials.  (And this exchange has occasioned a new "label" or "tag" - "RTF" - shorthand for Read the Financials).

So there are three issues here:
  1. Did TID "surprise" its creditors by recently informing them of pre-existing liability it had not disclosed before?
  2. Has TID delayed payment of Zakat?
  3. And related to the above two topics, how is TID calculating its Zakat obligation?
On the first question, a quick glance at TID's 2008 audited financials Note #15 shows that TID has disclosed its unpaid Zakat obligation.  KD11.4 million of Zakat is shown as part of the balance of Payables for FYE 2008.  Comparable balances disclosed earlier were KD5.5 million at FYE 2007 and KD1.3 million at FYE 2006.  So no surprise to those who RTF. 

As a side note, if you look carefully at the Consolidated Statement of Changes in Equity, you'll notice that TID's Zakat appropriations from Reserves are a year in arrears.  That is,  the appropriation in 2008 was actually for Fiscal Year 2007.  So, it's likely that there is a Zakat amount due for 2008 to be reflected in 2009's annual report and for 2009 to be reflected in 2010's annual report. Again careful readers of TID's financials will not be surprised that these obligations are there.  What will be the unknown is their amounts.

It may sound surprising that after reporting a major loss in 2008, TID would be subject to any Zakat at all for that year.

So let's turn to how TID calculates Zakat.  There are two ways:
  1. A statutory obligation as per Law 46 of 2006.
  2. Its adherence to Shari'ah. 
As per Law 46 of 2006 (English here and Arabic here), all companies in Kuwait (except government entities) are required to pay 1%  of income to the Ministry of Finance as Zakat.

And we learn from Note 38 to the 2007 financials:
During the year ended 31 December 2007, the executive regulations of Zakat has been issued and which stipulates that, each Kuwaiti shareholding company should deduct 1% of its net profit as Zakat and should be forwarded to Ministry of Finance. The amount of Zakat expense has been calculated on the basis of the Group’s profit multiplied by the number of days starting from the date of issuing the executive regulations  on 9 December 2007 to 31 December 2007.
What this means is that TID is complying strictly with its statutory obligations.  The Law came into force on 9 December and so its 2007 income subject to statutory Zakat is  only 22 days out of the year.  Because there was a loss in 2008, no statutory Zakat is due for that year.

Beyond its legal obligation, since Fiscal Year 2005, TID has been computing Zakat as follows (Note # 2.17):
Based on the recommendation of the Sharia’a Supervisory Board, the Group started to calculate Zakat based on Wea’a Al-Zakat which consists of assets and liabilities that are subject to Zakat. Zakat is deducted from the voluntary reserve.
Note 3.18 in the 2008 audited financials confirms that the Company is still calculating Zakat on this basis - which means there is likely to be a provision for 2008 despite the loss that year because this Zakat is calculated based on assets and liabilities - which while diminished are still there.  To complete the story, prior to 2005, TID computed Zakat on the basis of its adjusted Equity.

TID only recognizes the statutory Zakat (Law 46/2006) amount as an expense in its financials.   The  Wea'a Zakat amount is directly charged against Reserves.  Therefore, this amount does not appear as an expense on TID's income statement.  I presume that TID adjusts this Wea'a Zakat amount for the statutory amount so it doesn't "double pay" Zakat.

As per Note 16 in the 2007 audited report  you'll notice that the statutory amount is a relatively small KD78,874  - less than 1.9% of the net KD4.2 million that TID added that year to accrued Zakat. 

I'm making the presumption here that since the Wea'a Zakat amount is voluntary, there is not necessarily a deadline for its distribution.  Nor are the amounts required to be paid to the Government or another third party.  That means that the Company has discretion to whom and when to distribute.   Technically then TID would not violated any requirement for payment.  Strictly speaking, it would not be "late".

Though if I'm wrong on this latter point, I hope someone will post and correct me.

But let's look a bit deeper at the accumulation of unpaid Zakat obligations by looking at two tables.

The first is an attempt to derive the cash payments of Zakat that TID actually made during the period 2005 through 2008.   Amounts are in thousands of KDs.

Year Open Bal Additions Close Bal Payments 
2005         2.7   1,096.9     320.5    779.1
2006    320.5   2,848.3   1,342.0 1,826.8
2007 1,342.0   5,746.4   5,541.31,547.1
2008 5,541.3   6,734.7 11,373.8   902.2
TOTAL16,426.3 5,055.2 

  1. Derived Payments = Open Balance + Additions - Ending Balance.
  2. Opening and Ending Balances are from the Payables Notes in TID's Annual Reports for the period.
  3. Additions are per the Consolodiated Statement of Changes in Equity.  You will notice that for a couple of fiscal years there is an increment to Zakat from TID's subsidiaries which appears as a separate entry to Retained Earnings.  The Zakat additions for TID are charged to Reserves.  I have used both in my calculations for Additions.
  4. 2007 Additions in the table above includes KD78,874 of Statutory Zakat as there was no adjustment to net income for that year to back it out.
Now let's take a look at Zakat payments per year as a percent of Opening Balance and Additions during the year.

Year Percent 
2005 71% 
2006 58% 
2007 22% 
2008 7% 

Clearly, there is a sharp decline in amounts disbursed in 2007 well before the crisis started.  And the overall distributions during this period are some 30.8% of the Zakat accrued.

Perhaps, the cause is having to deal with larger amounts and the need to thoroughly vet a recipient before  disbursing funds.   Or, perhaps, it is a cash management issue.

If the timing of distributions is purely discretionary, then I wonder if the lenders can insist that Zakat distributions be stopped or greatly limited until they are repaid?

Saturday, 28 August 2010

A Tale of Two Headlines: Arabic Knowledge at Wharton Jeff Silver Interview

Arabic Knowledge at the Wharton School of Business at the University of Pennsylvania recently published an article with Jeff Singer, CEO of Nasdaq Dubai.  They don't just teach finance at Penn, but market segmentation as well.

Here's a link to the Arabic version and the English version  Presumably the first is targeted at Arabs and the second at non Arab English language speakers.

The Arabic headline is "International investors are not looking to own most of the shares in the region".

The English "Now is the perfect time for exchange consolidation".

An insight into the assumed different focus of each group.

Wharton also publishes Knowledge@Wharton which befitting a great university like Penn often has  interesting articles.

The Investment Dar - Al-Musallam Denies Problems

This Thursday (26 August) TID held its 2008 shareholders' annual meeting (delayed because of the delay in finalizing its financials).   Both AlQabas and AlWatan have accounts of that meeting.  Some 73.11% of shareholders' interests were represented.  As per the KSE, the only disclosed major shareholders of TID are the Kuwaiti General Organization for Social Insurance (7.7%) and Efad Real Estate Company and associated companies (18.21%).  So there appears to have been broad shareholder participation.

AlQabas notes that the meeting was held in an atmosphere of "impressive calmness".   All items on the agenda were approved, including agreement with the Board's recommendation that no dividend be declared for 2008. (TID reported a net loss of  KD80.3 million for 2008 of which KD78.6 million is attributable to TID shareholders.  From 2007 to 2008 TID's total shareholders' equity declined from KD349.6 millionn to KD168.5 million due to KD52.9 million of 2007 dividends, KD 37.4 million of losses recorded directly in equity and net purchases of treasury shares of some KD12.2 million.)

The tenor and results of the meeting no doubt a clear reflection of shareholders' confidence in Mr. Al-Musallam's stewardship and performance.

Mr. Al-Musallam also took the opportunity to "set the record straight" on several points, including most of the assertions in a recent AlQabas article:
  1. As he has on several earlier occasions, he noted that statements that TID was going to be liquidated were not true pointing out the strength of TID's assets.
  2. The CCC is not discussing resigning.
  3. In that connection he commented that TID is happy to have the Central Bank of Kuwait's supervisor, Dr. Abid AlThafiri, stay on, but that decision is solely the CBK's.
  4. There are no differences with the CBK.  The CBK poses questions and TID answers them.
  5. More than 83% of the creditors have agreed to participate in the rescheduling.  The remaining 17% represent only KD110 million.
  6. He expects to achieve success with Commercial Bank of Kuwait and Cham Islamic Bank (Syria)  and then will have 89% agreement.
  7. He's optimistic about obtaining the Central Bank of Kuwait's approval for TID to enter under the protection of the FSL.  
  8. He noted that many of the creditors who have indicated they intend to pursue legal claims (the 17% soon to be 11%) were waiting to see the results of the current stage (presumably whether TID gets under the FSL) before proceeding.  The unspoken point here being that if TID enters the FSL, then perhaps some or all of these holdouts may join the rescheduling.  Not an unreasonable assumption.
  9. Contrary to rumors, there is no raise for any senior member of TID's management.  Apparently, not even an "unrealized" one! 
  10. TID is not late with its prior year's zakat.  Though the wording used here seems to imply that perhaps the committee has not yet distributed it - which would qualify as being "late" for a simple minded guy like me.  وأكد المسلم أنه لا يوجد تأخير في دفع الزكاة عن الشركة، مستشهداً برأي لجنة الفتوى والتشريع التي أكدت على ان الشركة لم تتأخر ولكن هذه الزكاة تعود الى السنوات الماضية، منوهاً الى ان اللجنة تقوم باخراج الزكاة من وقت الى آخر حسب الحالات التي تقوم بدراستها من وقت الى أخرى
  11. Perhaps, the answer is that "class is not yet over" and the studies continue?  Anyone who can confirm or amend my translation, please jump in with a post.
  12. He did take the time to point out that the 2008 loss (largely due to provisions of KD89.5 million) was not realized.  
  13. Asked about 2009's financials and the CBK's requirements for additional provisions, he declined to answer, commenting that the Company respected its regulator's (the CBK's) views, would have the auditors review them. But in the final analysis will do what the CBK requires.
  14. One other important "bit" he stated that the Company had appointed new auditors (dual case used).  In 2008 TID used the local incarnations of Deloitte and Touche and KPMG.  
  15. The Ministry of Commerce and Industry raised comments during the meeting that the Board did not meet during 2008 (I take this to mean regarding 2008 financial performance not that there were no board meetings that year) and that TID failed to properly register its shares in Bahrain Islamic Bank,.  These shares (8.7% of BIsB) were acquired by TID in satisfaction of a financing receivable and are discussed in Note #8 to its 2008 financials. Mr. Al-Musallam said that the Board did not meet because the financials were not approved (presumably he's referring to the auditors and CBK).  The BIsB shares are in the process of being registered.
A new Board was elected as follows:
  1. Adnan Abdul Qadir Mohammed Al Musallam, Chairman and MD
  2. Rajam Al Roumi
  3. Ghanem Al Ghanem
  4. Adel Behbehani
  5. Adnan Nisif
  6. Musa'id AlMukhaytar
  7. Nabil Abdul Rahim
And "reserve" directors (in case of need for a replacement of a sitting director):  Nabil Amin, and Abdul Muhsin Al Kandari.

Hopefully, this impressive performance (there's that word again) will silence the unfounded criticism of TID in the market, leaving only the founded sort.

Wednesday, 25 August 2010

Dubai World: No Assets Ring Fenced From Sale

Reuters has published an exclusive report that they have a document circulated among DW's creditors which states that:
  1. Total DW debt is some US$39.9 billion instead of the mid US$20 billions.
  2. Though there is an apparent US$11 billion non recourse debt at Istithmar subsidiaries and US$2 billion at Infinity.  These amounts are important because they will affect the net proceeds from the sales of those assets.  Debt at the subsidiaries will have to be either assumed by the buyers or repaid by the seller (Istithmar).  
  3. DW warned that if it sold its assets quickly it could only raise US$10.4 billion.  It's a safe bet that DW is being conservative as it doesn't want to give the lenders incentive to push for a quick sale.
  4. Rather it needs 5 to 8 years to realize the assets at higher prices - the midpoint of which is US$17.6 billion.  The highpoint of which is US$19.4 billion.
  5. Heretofore strategic and ring fenced assets are now on the table:  DP, JAFZA, Barneys, Atlantis Hotel, etc.   Though one might question whether this is more a negotiating tactic.  It's hard to imagine the Emirate parting with these assets.  So the hope may be that a recovery in markets will lead to higher values recognized on other assets.  Or that bankers' and investors' ADD will kick in and Dubai World will be able to refinance after five or so years.  Either case obviating the need to part with the "crown jewels".  And, thus, any sale would be an absolute last resort.
  6. In an attempt to get banks to sign on to the rescheduling, DW is offering a signing bonus / consent fee.
Quite a remarkable turnaround.

But with roughly US$40 billion worth of debt and US$20 billion from asset sales, there is quite a "financing gap" to fill.  Even more so, when one considers the fact that as the prize assets are sold, DW's right to their earnings and cashflow will end as well.  Is the gap to be funded by the Emirate?  If so, quite an expensive admission ticket to a relatively short ride on the "leveraged assets express".

Anyone out there who would like to share any creditor documents with me can contact me using the Contact Form.

The Investment Dar - Creditors Committee "Fed Up" or Posturing for the Central Bank?

Today's (25 August) AlWatan and AlQabas carried two quite different articles on the Creditors Committee.  One can consider these straightforward news items.  And perhaps, just perhaps, attempts to influence the Central Bank's decision making process.

Playing the role of good cop is Bader Abdullah Al-Ali, CEO of Gulf Investment House Kuwait, the official spokesman of Creditors' Coordinating Committee ("CCC").  As reported in AlWatan, he noted:
  1. That the Central Bank of Kuwait had played a pivotal role in the rescheduling expending considerable efforts to bring agreement between the concerned parties.
  2. That the CCC believed the rescheduling remained the best means available and offered the ideal reclamation of lenders' rights.
  3. That the fundamental goal of the CCC was the essential role of involving the lenders in crafting the rescheduling according to generally accepted international principles.
  4. That the CCC was confident that the CBK understood the role the CCC played.
  5. That the CCC hoped for the response of the CBK in the shortest time possible.
Or in other less polite words:
  1. You've done your part and we acknowledge your professionalism.  So now it's time to acknowledge ours.
  2. The plan is fine we, the CCC on behalf of the lenders, crafted it according to generally accepted international principles (which should no doubt trump any purely local or regional views that you might have).
  3. So don't tamper with it.  And be sure not to exclude us in the process.
  4. Get off your duffs and approve it.
The bad cop role falls to unknown sources who have provided AlQabas with the background for its article.
  1. TID's application for entry under the FSL has effectively ended the productive work of the CCC.  The Central Bank has the entire file in its hands.  As a result, the CCC is reduced to holding meetings to discuss the latest developments without being able to influence them.
  2. The FSL represents the last chance of the Company.  If entry is rejected, a myriad of lawsuits against the Company and its management will be launched seeking bankruptcy.
  3. Ernst and Young have bluntly told the CCC that they were engaged by the CBK and have no connection with the CCC or the lenders.  Their marching orders come from the CBK alone.
  4. The CCC, mindful of its responsibility to the lenders, are fearful that actions may be taken affecting the Company without their involvement or knowledge.
  5. As a result, they discussed at their last meeting whether or not they should withdraw and resign en masse.
  6. Adding to their rancor from exclusion from the process are several items, some of which have recently emerged.  
  7. Apparently TID has advised the CCC that it had some KD12 to 15 million of  unpaid Zakat arrears which date from before the crisis.  The CCC do not understand why these were not paid as the associated profit has already been distributed.  There was no note of these in information provided.  Nor does there appear to be any fatwa authorising the delay.
  8. There are increases in salary for one of the senior executives as well as a requested bonus.  (No doubt a "performance" bonus.  And, yes, the term "performance" is used in the same sense as in my recent post on GFH's 2Q10 financials).
  9. The Company's failure to present financials for periods after 2008.
  10. The resolution of TID's file is dragging on and may extend to next year.
  11. The dissolution of the CCC would deal a fatal blow to the Company as the CCC is the glue which binds the "alliance" of consenting creditors.
  12. Failure to obtain the protection of the FSL will lead to thousands of lawsuits which will rain down on the Company.
  13. The article closes by noting the frustration of the CCC with TID's public relations firm who are felt to have issued a torrent of meaningless press releases about nothing.  Adding insult to injury, it seems that TID has incurred payables of 7 million (presumably KD) for these services.  This last bit has me questioning my translation as I'd expect there would be some sort of expense controls in place from the CBK appointed manager and/or the CRO.  So I'm inviting comments on my translation - the last sentence in the Al Qabas article.
Certainly, there's a lot of justification for rancor in the CCC and among the lenders.  They've expended a lot of time dealing with the rather slippery management at TID to get this far.  That matters aren't moving more quickly has got to be distressing.  As I am sure are the latest "shenanigans" of the Company - though frankly speaking, the lenders can no doubt expect many many more during the implementation phase of the restructuring.

But as we did above with the good cop's position, let's translate the bad cop's argument into less politically correct speak:
  1. We, the CCC, are the critical guys in the process holding the creditors together. If we walk, TID comes crashing down.
  2. You're ignoring us.
  3. We're fed up by your inaction and by the Company's shenanigans. (Notice, as usual, AA is being highly charitable.  And my zakat in that respect is being paid on time!).
  4. If we don't get what we want, we're going to take our ball and go home.
  5. Then you'll be the culprit as TID collapses.
While no doubt this tactic does put a bit a pressure on the CBK, in the final analysis it's not very credible.  The lenders are not going to walk away from their best hope of recovery:  the rescheduling and the FSL.

If the Central Bank is looking for way out of approving TID's request, then this may be just the entree they're looking for.    That being said, I don't expect that.  My worst case scenario is that the CBK comes back with modifications to the plan - which by that time the parties thereto should be sufficiently exhausted that they will willingly accept what the CBK wants in order to finally close the file and move forward.

Tuesday, 24 August 2010

Gulf Finance House - 1H10 Financials: Now You See It Now You Don't -- The Magical US$137 Million Provision

GFH has finally posted its 2Q10 interim report.

Let's get straight to the heart of the analysis and our headline, Note 15:
"During the period, the Group's credit enhancement amounting to US$ 102 million issued to financial institutions against credit facility arrangements for a project managed by the Group were enforced by the lenders due to contractual defaults by the project company.  Further, based on the Group's assessment of the likelihood that another project will be able to meet the financing when they fall due, the Group has estimated that its financial guarantee of US$ 35 million may be enforced.  In accordance with the requirements of IAS #37, Provisions, Contingent Liabilities and Contingent Assets, the Group has recognised a provision of US$ 137 million towards these liabilities until revised/ renegotiated terms are agreed with the lenders of the project companies.  The Group has recognised an equivalent amount of reimbursement right which has been included in other assets (note 8)."
Presto, changeo with a bit of Accounting Magic a potential US$ 137 million addition to 1H10's net loss is transformed into an asset!  What's even more astounding is that these projects that cannot meet their debt commitments (to the apparently impatient lenders) will nonetheless be able to honor GFH's reimbursement claim upon them.  Now that is truly magical!

(Side Note:  According to my copy of KPMG's Third Edition of "Insights into IFRS" page 635 commenting on IAS 37.35 (about the recognition of Contingent Assets), KPMG states:
"When realisation of a contingent asset is virtually certain, it is no longer considered contingent and is recognised.  In our view, virtually certain generally should be interpreted as a probability of greater than 90 percent."
Unfortunately, I don't have the latest edition so I would caveat that there may have been some new thinking on the topic of what constitutes "virtually certain".)

Taking this amount to the income statement would roughly triple GFH's loss.  It would also breach the US$400 million minimum shareholders' equity covenant.  But there's one more adverse effect making this US$137 million truly a "triple threat".

As we learn in Note #2 during the discussion of the going concern issue, GFH's capital adequacy ratio at 30 June was 12.92% - leaving little room for maneuver or in the words of KPMG "which restricts the Group's ability to absorb further losses or undertake additional exposures".   (Note to KPMG:  You need to amend the reference in your report to the matter of emphasis from Note #1 to Note #2.)

And I suppose -- to add a fourth reason -- such a loss and such consequent events might make a difficult capital raising exercise just a "wee bit" more difficult.

Where there is a need and a will, there is a way -- as the old saying goes.

Turning to the rest of the financials:
  1. Note #5: US$115.4 million (95%) of 1H10's US$121.4 million of Placements with Banks and Other Financial Institutions is pledged against commitments and facilities of projects of the Group.   And so should be excluded from liquidity.  You'll notice it is in the Cashflow Statement.  Some might suggest that proper presentation would be to have these amounts in Other Assets.  And well they might but to no apparent avail.   Some of this cash may be pledged to those adversely affected projects discussed in Note #15.
  2. Financing Receivables US$14 million decline (which took place between FYE09 and 1Q10) is still a mystery to me.  It's not in the cashflow statement so it must have been offset against something else?
  3. Receivable from Investment Banking Services declined from US$85.3 million at 1Q10 to US$40.5 million at 2Q10.  I can find a provision of US$20 million but am unable to locate the remaining US$25 million in the cashflow statement.  Another magical offset?
  4. Note #6:  Assets held for sale include Bahrain Financial Harbour Company (US$175 million), $50 million of GFH's long outstanding Receivable from Sale of Investments (now reduced to US$44.5 million and carried in Other Assets) plus US$35 million of Financing to Projects.  The first two items will be settled "against receipt of consideration in the form of cash and land plots."  Well, when you can't pay cash why not settle your obligation with a highly valuable piece of (no doubt) blank land.  The upside potential is, well, enormous, especially at current depressed prices! 
  5. Other Assets - As noted above there are reductions of some US$85 million (See Point #4 above), against the introduction of reimbursement rights of US$137 million whose collection is no doubt at least virtually certain if not certain to a much higher degree.
  6. Note 9 updates on the financing.  The LMC US$100 million facility (US$80 million outstanding) carries a "profit rate" (read interest rate of 8.5%!).   The rescheduled West LB facility a 3.75% profit rate (reduced from 5%).  This facility is now secured by GFH's shares in Khaleeji Commercial Bank, which no doubt explains why the promised sale of this asset suddenly was postponed.  Perhaps, the collateral will be sufficient cover to prevent an impairment under IAS #39. Also of note during 2Q10 some "wise" and brave lender has provided a US$16.64 million Murabaha financing due in November 2010.
  7. Note #10:  Some 69% of Other income (1H10: US$8.6 million) is composed of income declared because certain liabilities were no longer payable (US$4.2 million) and from recoveries of project expenses (US$1.7 million).  
All in all quite a performance in 2Q10.  For those curious that's not a reference to financial performance but the magic of accounting.

Global Investment House v National Bank of Umm AlQaiwain: NBUQ Deposits US$250 Million with Dubai Court

National Bank of Umm al Qaiwain ("NBUQ" or "NBQ", if you prefer) announced on the Abu Dhabi Stock Exchange this morning (23 August) that earlier this morning (the 23rd) it had deposited the US$250 million which is the subject of the lawsuit between it and Global with the Dubai Court.   It went on to note that previously the amount had been on deposit with the Central Bank of the UAE.  

NBUQ described this step as evidence of its good intentions in the matter.   It also noted that it had appealed the verdict of the Dubai Court of First Instance in Global's favor.  The first session of the Appeals Court is scheduled for 29 September.

As I've posted before, if NBUQ can drag the proceedings out, the pressure increases on Global to reach a compromise since it's facing a looming cash crunch due to the unrealistic and unprofessional repayment schedule imposed on Global by its "wise" lenders.  With markets as they are asset sales are difficult.   And the price of an asset fire sale probably much more than paying a break-up fee and forgiving the interest on the "deposit" (if you're Global) or "prepayment" (if you're NBUQ). 

Previous posts can be accessed using the tags "National Bank of Umm AlQaiwain"  or "Global Investment House Kuwait".

Monday, 23 August 2010

Gulf Finance House - Esam Janahi Appointed Executive Chairman More Details on Capital Raising

GFH announced on the BSE today that:
  1. Esam Janahi had been appointed Executive Chairman meaning that he would have a role in management presumably superior to that of Ted Pretty, Group General Manager.  (The CBB's Rulebook #2 (Islamic Banks) Module High Level Controls (Module HC) Section HC-1.3.10 expresses a preference that the Chairman be non executive.)
  2. "The Board of GFH has also resolved, subject to relevant regulatory and shareholder approvals, to seek a further re-capitalization of GFH by way of issuing equity linked convertible murabahas or similar instruments to raise up to US$300m. Such money will be used solely for acquisitions and growth initiatives. Further details will be made available to the market shortly."
  3. Deutsche Bank had been appointed as GFH's "restructuring advisor".  
What's interesting here is that the capital raising does not appear to involve a Rights Offering but rather the offer of convertible securities similar to the one that Deutsche Bank raised earlier.  In which case keep your eyes open for possible discounted instruments as the DB issue was.  With all the implications for leveraged dilution of existing shareholders.  Presumably, the Board has determined that there is insufficient appetite for a straight common equity offer?  Also the comments about the "controls" are designed to reassure potential investors that the new issues won't be used solely for debt repayment, but rather for "growth". 

It's also not clear precisely what DB's role is.  Is GFH seeking to restructure its existing debts?   Or is DB going to focus on the capital raising exercise?  A combination of both?

In commenting on Esam's appointment Ted Pretty said many flattering things about the new Executive Chairman, as you might have expected.  One comment though does stand out:
We now need to aggressively pursue new business in new markets and Esam has an enviable track record in leading such initiatives.
If I'm not mistaken, it was Esam's prior initiatives that led to GFH's current predicament.  Unless of course one believes that the global (lower case "g" please) financial crisis is the sole culprit here.

Oqyana Group - KD72.6 Million Loss for Fiscal 2009

AlQabas reported on Oqyana's annual general shareholders meeting which was held at the Ministry of Commerce and Industry.  As you might guess from the latter statement, that's not a particularly favorable development.  The MOCI doesn't rent out space for meetings.  When a company has a shareholders meeting there, it's because the Ministry has instructed the company to hold one so that it can convey  information directly to the shareholders, usually to advise them of regulatory and other violations  by the company.  These days the MOCI seems to be holding a lot of such meetings.

AlQ mentions two of the comments made by the Ministry:  the Company's financials were delayed.  And it had not registered a piece of property it owns in Bahrain in its own name. Oqyana's Chairman, Nabil Jafar Abdul Rahim noted that the delay was because of the delay in Stehwaz preparing its financials and Oqyana holds 100 million shares in Stehwaz (!).  As to the second comment, he noted that the Company had set up a 100% owned Bahraini subsidiary to hold the real estate.

The Chairman also commented that the primary cause of the Company's loss of KD72.6 million for 2009  versus a gain of KD98 million the year earlier was the revaluation of assets.  Or perhaps more precisely devaluation of assets.  Shareholders' equity stood at KD369 million at FYE09 versus KD429 million the year earlier.  Total assets were down from KD493 million to KD438 million.  

Oqyana holds both Stehwaz and The Investment Dar shares in its investment portfolio.   What value they are being carried by Oqyana is not clear.  If you're not aware, all three companies can be considered distinguished business partners and members of The Investment Dar Group.

Abdul Rahim also noted that Nakheel had given the Company a two year extension to develop its property in Dubai.  Originally the property was to have been developed within 42 months ending in 2009.  Oqyana was unable to secure the necessary financing.  So the extension.  It's unclear  but presumably it's two years from 2009.   Recently, it's been knocking on the doors of local and other banks looking for between US$50 million to US$100 million in loans to move forward.  But it has had no success so far.   

As I'm sure The Real Nick can confirm, a real estate development company without access to loans is in dire straits.  Sort of the equivalent of "The Donald" losing his ego.

On the subject of financing, the Chairman noted that the Company had obtained a loan from a bank in Bahrain against shares of Stehwaz.   This apparently dates from more than a few years back given that Stehwaz has been in rather distressed conditions for some years now.

A new board was elected consisting of Mr. Nabil Jafar Abdul Rahim and representatives of TID, Safwat Real Estate, Efad Real Estate (also affiliated as a business partner with TID), and Adeem.  

If you're not familiar with Adeem, you can link here to "The Navy Seals" of the Investment World!  You can also use the tags "Adeem", "Stehwaz" and "The Investment Dar" to find earlier posts on those entities if you're interested.

Sunday, 22 August 2010

Gulf Finance House - Plans to Increase Capital By Up To An Additional US$300 Million

GFH announced on the BSE today that its Board had decided to recommend that shareholders approve a n up to US$300 million increase in capital.   The Board has delegated executive management to take the necessary steps.  A shareholders meeting will be called in the near future as soon as the required regulatory approvals are received.

Lost in Transmission: AlBoom's US$20 Million


Abid al Boom's slow moving US$20 million lands him in jail.

Kuwait Stock Exchange: List of 23 Companies Currently Suspended From Trading

Here's the official list of the 23 companies whose shares are suspended from trading on the KSE due to failure to provide financial statements.  As you'll notice they are organized by the number of "missing" financial reports.

Also at the bottom are the three companies whose losses are 75% or greater of paid in (legal) capital.

[10:18:13]  ِ.الشركات الموقوفه عن التداول
يعلن سوق الكويت للأوراق الماليه بأنه تم وقف تداول اسهم بعض الشركات وفقا
لما يلي :-‏
اولا:الشركات التي لم تقدم بيانات 31-03-2009 و30-06-2009 
و30-09-2009 ‏
و31-12-2009 و31-03-2010 و 30-06-2010 :- ‏
شركة الصفاة العالمية القابضة(صفاة عالمي) ‏
شركة الدار للاستثمار (الدار) ‏
ثانيا: الشركات التي لم تقدم بيانات 31-2008 12-
 و30-06-2009 ‏
و30-09-2009 و31-12-2009 و31-03-2010 و30-06-2010 :- ‏
الشركة الدولية للاجارة والاستثمار (د للاجارة) ‏
شركة فيلا مودا لايف ستايل(فيلا مودا) ‏
ثالثا: شركات لم تقدم بيانات 31-03-2010 و30-06-2010 :- ‏
شركة بيت الاوراق المالية (البيت)‏
المجموعة الدولية للاستثمار (المجموعة د) ‏
شركة اعيان للاجارة والاستثمار (اعيان) ‏
شركة الشبكة القابضة (الشبكة)‏
الشركة الاهلية القابضة (اهلية) ‏
شركة لؤلؤة الكويت العقارية (لؤلؤة)‏
رابعا:شركات لم تقدم بيانات 30-06-2010 :- ‏
الشركة الكويتية للاستثمار (كويتية) ‏
شركة المستثمر الدولي (مستثمر د) ‏
شركة الاستثمارات الصناعية (ا صناعية) ‏
شركة مجموعة الاوراق المالية (م الاوراق) ‏
شركة مجموعة عارف الاستثمارية (عارف) ‏
الشركة الخليجية الدولية للاستثمار (غلف انفست) ‏
الشركة الكويتية للتمويل والاستثمار(كفيك) ‏
شركة المدار للتمويل والاستثمار(المدار) ‏
شركة الصفاة للاستثمار (الصفاة) ‏
الشركة الكويتية البحرينية للصيرفة الدولية (صيرفة) ‏
شركة المعدات القابضة (المعدات) ‏
بيت التمويل الخليجي (تمويل خليج) ‏
خامسا: الشركات التي لم تقدم بيانات 31-10-2009 و31-01-2010  
و30-04-2010:- ‏
شركة الابراج القابضة (الابراج) ‏
سادسا:الشركات التي تجاوزت خسائرها المرحلة 75% فأكثر من رأس المال:‏
الشركة الخليجية الدولية للاستثمار (غلف انفست)‏
شركة المعدات القابضة (المعدات)‏
شركة الشبكة القابضة (الشبكة)‏

Saudi Zain: Indications of Turnaround - Though It's Not There Yet

In reviewing the 1H10 results of Gulf Finance House, Global Investment House, and Shuaa, I've commented that the only signs of a turnaround that I could detect were comments in the accompanying press releases where such a happy event was more a case of wishing than doing.

So what does a real turnaround look like?

As I've said before, the major sign is in the Company's ability to generate revenue.

Let's look at Saudi Zain for indications of a turnaround.  Note, that doesn't mean there has been a turnaround.  There hasn't.  SZ is still bleeding rather profusely - roughly SAR1.3 billion loss for 1H10 versus SAR1.6 billion for 1H09.

As the first step the usual link to the 2Q10  financial reports:  Arabic version here and English version here.

But there are some positive signs:
  1. 1H10 Revenues of SAR2.545 billion a 98% increase over 1H09's SAR1.283 billion.
  2. 2Q10 Revenues of SAR1.450 billion 106% more than 2Q09's SAR0.702 billion.
  3. 1H10 Gross Operating Income of SAR992.374 million a 256% improvement over 1H09's SAR278.573 million.
  4. 2Q10 Gross Operating Income of SAR608 million - 358% over 2Q09's SAR133 million.
  5. Gross Operating Margin at 39% (1H10) and at 42% (2Q10) versus 22% (1H09) and 19% (2Q09).
This was accompanied by a reduction in expenses of 45% in 1H10 and 56% for 2Q10 versus the comparable periods the year earlier.

Is SZ out of the proverbial woods yet?  No, it's not. 
  1. Financing expenses (read interest) are up significantly.  1H10 SAR545 million (2009: SAR261 million) and 2Q10 SAR317 million (2009: SAR 150 million).  Roughly doubled.
  2. It has a matter of emphasis from its auditor (PwC) on the going concern assumption.  (Note #1).  Important because of the impact on lender, supplier, and shareholder sentiment.
  3. It still has a very significant debt burden, including SAR2.2 billion provided by BNP in June 2010 with maturity December 2010.  A reason why the rights issue is of key importance.  Plus an SAR9.75 billion Murabaha facility due (bullet payment) August 2011.
Key questions are its ability:
  1. To continue to grow revenues while maintaining a reasonable gross operating margin.
  2. To maintain expense discipline.
  3. To restructure its liabilities by a significant increase in capital which, if successful, should reduce financing costs by reducing the quantum of debt as well as hopefully the interest margin on the remaining post reorg debt.
Those questions can't be answered now.  But there are some positive signs - certainly better than at the companies cited above.

Board of Saudi Zain Proposes Capital Reorganization for Shareholder Vote

Saudi Zain announced on the Tadawwul (Saudi Stock Exchange) today 21 August a plan for a capital reorganisation to be put to a vote at an extraordinary general meeting of shareholders for their ratification subject to the Company obtaining the prior approval of the Saudi Capital Markets Authority, the Ministry of Commerce and Industry and any other concerned body for the plan.

The reorg will take place in two steps:
  1. In the first capital will be decreased.  While it's not stated, this is clearly to eliminated accumulated losses.
  2. In the second a partial restoration of capital.
Here are the details. 

Capital Reduction 
  1. Reduce paid in capital from SAR14,000,000,000 to SAR7,328,843,885.  This covers the accumulated losses of SAR6,671,561,150 as of 2Q10.  2Q10 financials:  Arabic version here and English version here.
  2. There will be a reverse split with shareholders getting 1 share for approximately each 2.096 shares they currently own.  As a result, 667,156,115 shares will be canceled.
  3. Not stated, but the balance represented by these shares SAR6,671,561,150 will be transferred to Accumulated Losses zeroing it out.
Capital Increase
  1. Increase capital by SAR4,383,487,180 to to SAR11,711,926,030.
  2. 438,348,718 new shares are to be issued.  There is no discussion of the offer price.  SZ's nominal (par) value is SAR10 per share.  If the shares are offered for a higher price (at a premium) then SZ will raise more than the SAR4.4 billion.  My guess is that there will be a strong incentive to issue the shares at par given the Company's financial condition and a desire to obtain as close to 100% take-up as possible.
  3. In addition to the normal pro-rata allocation among shareholders, founding shareholders will be able to convert all or part of the debt they've extended the Company.  That amounts to SAR2,914,000,000.  Of that amount Zain Kuwait holds SAR1,859,397,000 (63.8%).  Zain Kuwait holds 25% of SZ's stock and 50% of the Founding Shareholders' portion.  The Saudi General Organisation for Retirement and the Public hold the remainder.
  4. Kuwait Zain's response to the new share offer will give a clear indication of Zain's ability and willingness to continue as a shareholder.  There is perhaps an indication of their attitude in that the SAR2.2 billion 6 month supplier credit SZ obtained in June 2010 was guaranteed by one of the Founding Shareholders, presumably Zain Kuwait.
In a bit I'll post on Saudi Zain and the indications of a turnaround.

Saturday, 21 August 2010

AlGosaibi v Maan AlSanea - More on The "Fix"

They say there is no surer proof of someone's intelligence than the fact that he or she agrees with you. (See point #3 below).

Echoing a theme raised here earlier, AlQabas has an update on the AlGosaibi and Saad debt restructurings:
  1. AHAB has reportedly offered to settle with its creditors at 15 cents on the dollar, an offer that creditors are reported to have rejected as they did the earlier 9 cents offer -- absolutely.
  2. Saad has offered to settle a large (but unspecified) portion of its debt to its creditors but noted that freezes on its assets in the USA and Europe resulting from AHAB lawsuits against it frustrated that desire.
  3. The Saudi Government is currently undertaking intensive efforts to achieve an accommodation (or reconciliation) between the two groups so that reschedulings can move forward.
As you'll notice, Saad's offer is as well a strong tactical move to develop support for The Fix.

While the article doesn't contain proof of its assertions, nonetheless it clearly demonstrates remarkable insight -- at least using the principle stated in the first paragraph. 

The question remains will AlGosaibi itself get "fixed" in the process?

Gulf Finance House - 1H10 Financials: Reports of a Turnaround Greatly Exaggerated

On Friday I was quite excited to see that GFH had posted its 1H10 financials and press release thereon.  That is until I printed out the 2Q10 report and found it was actually that for 1Q10.  While the First Quarter was much much better than the Second, I'm assuming this is just a technical glitch, and not a desire to focus on relatively happier days of 1Q.  Hopefully by the time you use the link  above to the financials  all will have been corrected.

In the interim, here are some preliminary observations on the summary 1H10 financials printed in the newspaper, sans as is customary the all important notes thereto.  More detailed comments will follow when the full report is released. 

Income Statement

  1. GFH doesn't really have much to report for 2Q.  Like Global, GFH's first quarter was much better.  The second for both is rather disappointing to use a charitable term.  
  2. GFH had US$7.4 million in revenues during 2Q10 (28.5% of 1H10's US$25.9 million).  In 1H09 the comparable revenues were US$68 million.  A decline of 61% for 2010.
  3. 77% of 2Q's revenue was due to FX earnings. I don't believe that GFH has an active Treasury function and so this is probably FX translation gains - a non cash non business revenue. 
  4. The US$5.2 million in revenue from "Investment Banking Services" was earned entirely in 1Q10 and as per that Quarter's report US$5.0 million was earned from related parties (Note #11).  That's  96%.  You can tell the economy's bad when when your own "relatives" have no business for you.
  5. US$5.1 million in placement, arrangement and management fees, of which 79% was earned in 1Q10.  From the Cashflow Statement it seems that GFH has only collected US$0.2 million during 1H10.
  1. Staff costs at US$8.8 million are 34% of 1H09's!  Though there is an interesting spike in staff costs in 2010.  In 1Q10 staff costs were US$3.6 million and in 2Q10 US$5.2 million.
  2. GFH took a US$20 million impairment provision in 2Q10 as opposed to zero in 1Q10.  This is down from 1H09's US$80 million.
  3. The bottom line is that GFH's remarkable improvement in 1H10 versus 1H09 is due primarily to the reduction in expenses from 1H09's US$160.1 million to 1H10's US$73.6 million.  Chiefly reductions in impairment provisions and staff expenses.
  4. You'll recall AA's test for a real turnaround in a business is the revenue line.  There is no evidence of any turnaround in the Company's core business. In fact compared to 1H09 core businesses are doing worse.  
Balance Sheet
  1. Cash Positions -  Cash increased US$7.8 million largely it seems (though money is indeed fungible) from the sale of US$29.1 million of Treasury Stock for US$7.6 million.  That's a loss of US$21.4 million.  You'll see these numbers reflected in the changes in Treasury Stock and Statutory Reserve in the Equity Account.  An interesting transaction.  I wonder if this was through the market (presumably on the KSE) or a private placement to a wise investor?  Or to a related party?
  2. Placements with Banks are down to US$121.1 million at 1H10 from US$156.7 million at 1Q10 and US$455 million at FYE09.  The large drop between FYE 09 and 1Q10 is due to  largely to debt repayments during the first three months of 2010.  In any case, as noted earlier the bulk of the remaining funds are pledged to secure GFH's commitments to make investments.  And so should (unless the 1H10 financials reveal otherwise) not be considered as part of the Bank's liquidity.
  3. There was an approximate US$45 million decrease in the Receivable for Investment Banking Services from 1Q10, which I cannot find in the Cashflow Statement.  This may be responsible for the increase in Other Assets by a similar amount?
  4. An intriguing new category "Assets Held for Sale" ("AHAS") with a balance of US$260 million makes an appearance in 2Q10.  Apparently a shift of assets from "Investment in Associates".  It will be very interesting to see the basis on which these are carried on the balance sheet versus Investment in Associates ("IIA").  If I remember correctly, IIA are carried at Fair Value Through Profit and Loss.  A change to a different basis for AHAS could have income statement implications., e.g. fair value through equity for one.  As well if they are no longer fair valued but carried at cost, that could potentially - but not necessarily - provide some relief on the recognition of changes in value as "impairments" have a different set of rules than "fair value changes".   The reason my antennae are up on this is because GFH chose 2Q to make this change at about the same time it has signalled that it wants to slow asset sales down.  So I'll be taking a close look at the note on this category in the 2Q10 report  when it is available to see if there is any potential Accounting Magic at work here.
  5. Other Liabilities have dramatically increased from 1Q10 and from FYE09.   By US$124 million!!  Hopefully, unlike 1Q10, GFH will provide a note with a breakdown of this category for 2Q10.
  6. 1H10 Equity was at US$416.5 million uncomfortably close to the US$400 million net worth trigger in GFH's Sukuk.  Without the 1Q10 remarkable conversion of the Deutsche Bank Murabaha which added US$25 million to Equity, GFH would have breached the covenant.  I use the term "remarkable" because I find it hard to understand why a rational investor would be converting debt in GFH to shares at this point.  Or why there would be a market to purchase GFH's Treasury Shares for that matter.  As I've written before, this transaction's structure allows capital to be infused into the firm without the time consuming process of an Ordinary General Meeting of Shareholders, a Rights Issue, etc.   With the selection of the amount and timing discretionary.  Then again perhaps a wise investor saw and continues to see something here that I don't.
As usual, GFH's Chairman and Group CEO have many favourable things to say about their  imagined turnaround.  And I suppose one would expect them to make these statements.  

However, to attempt to blame GFH's predicament on factors outside its control or to portray GFH as being in the same condition as every other "global investment bank" is a bit much.

First, GFH is not a global investment bank.  It was and is a regional investment bank.  Just as TID, Global, or Shuaa were and are.  In the grand scheme of things looking across the world, rather modest sized shops all of them.  

Second, the list of global investment banks in serious trouble is rather shorter than the list of all global investment banks.   Even if we were to grant GFH temporary hypthetical membership in the ranks of global investment banks, the Goldmine, Morgan Stanley, JP Morgan, Deutsche Bank et al may have tinkered with their strategies.  But they are not fighting for their lives.   Make no mistake GFH is in serious trouble.  Its rating, its share price and its financial condition clearly indicate that.