Sunday, August 1, 2010

Damas: A Gem of Loss AED1.9 Billion for Fiscal 2010

You may have seen the news articles on the loss.  Here in the Gulf News.  Or Khaleej Times.  As usual, if you're looking for more content, you'll find it at The National.

Hopefully, this post will expand the discussion.

For this excursion, here are Damas' Press Release and its Audited Annual Report for 2010 (inexplicably missing the audit report).  Presumably a technical issue because ASDA'A - Burson Marsteller was involved in distributing this. I've sent NasdaqDubai an email to note the oversight.  If you live in the Emirate, you might give them a call. 

The first thing that becomes obvious is that the new board and management are  "taking an accounting bath" - writing down everything they possibly can.  This associates the loss with the previous board and management.  And then when there are recoveries in these same items in the future, they (the new "team") will look like "blooming business geniuses". 

The second thing is that the number of areas where writedowns or provisions have taken place give an idea of the extent of the corporate rot.  There seems scarcely an asset category  or company activity that was not touched.  In cases like this one has to be quite a charitable soul to ascribe the lowest possible level of intelligence and competence to those involved.  Otherwise one would be forced to conclude that they were complicit in the Abdullah Brothers' crimes.  That would, of course, include Damas' Accounting and Finance Department, its internal auditors, its Board Audit Committee and its then external auditors. 

Let's step through the charges.

First "impairments" of AED 790.6 million.   Note 11.
  1. AED457 million against the AED767 million due from the Abdullah Brothers (Note 26).  A provision of 59.6%.  This is composed of the AED606 million  in unauthorized withdrawals plus AED150 million in a lost deposit - lost as a bank seized it for a gold loan to the Abdullah Brothers.  Less AED3.3 million in Board fees for fiscal 2010 - we'll file that  under "insult added to injury".  Seems Damas has a soft spot for the Abdullahs and still believes it needs to compensate them for the wise and highly beneficial services they provided to the Company during fiscal 2010.  We can be sure of one thing.  The Company will recover at least AED150 million from the Abdullahs by offsetting the AED150 million subordinated loan the Abdullahs made to the Company.
  2. AED106.1 million against real estate due to a downturn in the market values.
  3. AED54.7 million for investments in persistent loss making jointly controlled entities which are impacted by a change in the role of the Abdullah Brothers.  Since the losses were incurred while they were running the Company, is the assumption that now that they are not, the situation will change for the worse?
  4. AED28.4 million for certain associates due to uncertainty of future cash profits.
  5. AED84.4 million for long term loans and receivables from related parties.  Apparently wisely made by Damas with no fixed repayment tenors, no interest applicable and no collateral.  
  6. AED14.1 million for available for sale investments.
  7. AED16.0 million for intangible assets.
  8. AED29.8 for receivables.
Now to Provisions - AED572 million.  Note 12.
  1. AED434 million for Inventories (Note 22 (ii)).  Seems Damas gave gold from its inventory to certain "consignment vendors, ventures, debtors, associates, and jointly controlled entities without any margin and to certain parties against cash margin."  Some AED618.2 million (of which AED613.5 was gold) against which it had AED183.8 million in collateral.  It has fully provisioned the remaining amount AED434.4 million.  Once Damas "lent" gold or other inventory, then those assets should have been separated from the rest of inventory.  Especially since the amount is significant - 30% of total inventory.
  2. AED121.1 million for doubtful receivables - in very rough numbers 37% of gross receivables.  There's one proven business way to increase sales and that's to sell on very easy terms.  Selling to people who can't or won't pay back works every time.  We are told that this provision is motivated by the change in the role of the Abdullah Brothers in the Company. It seems that the Abdullah Brothers originally approved the extension of these receivables. Which is perhaps why they weren't collected.  Now that they are no longer in control we are to conclude that the receivables won't be collected and must be written off? Frankly, I'm not following the logic here.
  3. AED16.6 million for "slow moving inventories".  Since a jeweller's inventory turns really slowly these have to be some "real gems", no doubt.
Third, an AED79,6 million loss on settlement of bank liabilities (Note 13). 
  1. AED73.3 million:  Damas couldn't meet margin calls against gold loans.  Wonder where the gold went? Borrowed by an Executive Director?  So the Company had to give Inventory with a cost of AED140.1 million for which the bank gave them AED66.8 million.  That led to an AED73.3 million loss.  Damas is buying back the inventory in a phased manner at the purchase price originally paid to the bank.  
  2. AED6.2 million loss on a jewellery for debt exchange.
Provision for Dubai Ventures Loan AED311.5 million (Note 21).
  1. You'll recall this transaction was part of the fraud perpetrated by the Abdullah Brothers at the time of the IPO.   They gave Damas funds to Dubai Ventures - part of the Dubai Group - to buy a portfolio of Damas shares to meet the minimum "free float" requirements.  This portfolio became a loan in Fiscal 2008.  And now "poof" it's provisioned.  Though management asserts it will do everything to collect the loan.  Since DV is holding highly valuable Damas shares, I guess it will be a matter of a few trades on DFM/NasdaqDubai.
 Other matters.
  1. There are AED94.7 million in losses on Discontinued Operations.  A glance at Notes 15, 38 and 39 discloses a rabbit's warren of companies.  It's unclear to me how any lender could keep either an eye or control on his money once it enters a "black box" like this. That's not to say that there was any malfeasance at Damas on this score.  Just that this is a "tricky" situation for an unsecured lender.
  2. Damas' Press Release refers to AED1.9 billion in one off expenses and provisions.  I think that's overstated.  Damas appears to be considering net interest expense of AED132 million as a one off expense as well as some of the losses on subsidiaries.
  3. Damas is showing AED775.2 as Cash and Banks classified as a Current Asset.  Some AED392 million of this amount is pledged as security for loans (Note 29).  It seems a real stretch to consider these Current Assets.
  4. Rescheduling:  There's a bit of cognitive dissonance between the Annual Report MD&A and the Press Release.  Presumably, the Press Release is the later document so we'll use that information on the structure.  The Press Release states there will be three tranches: Tranche 1 an amortising debt.  Tranche 2 a working capital facility probably "revolving" (not reducing).  Tranche 3 a term loan (presumably with no or a very pushed out amortisation schedule).   Note 2 to the Financials discloses that the proposed tenor is 6 years.   And that recovery from the Abdullah Brothers is not required to repay the debt.
Finally, as always with announcement like this, we at Suq Al Mal are on the look out for contributions to distressed debtors' rhetorical spin.  I'm happy to report that Damas has advanced this art significantly.  Here are some of their contributions:
  1. A "difficult, if not unfortunate year".  (Chairman's Statement).  AA:  Unfortunate indeed.
  2. "Unfortunate in that the problems which the Group now confronts are of its own making, through the failings of the then Board of Directors and, in particular, the actions of the Executive Directors, the Abdullah Brothers". (Chairman's Statement).  AA:  We can probably explain this statement by two facts.  It's true.  And there's a new team with no reputation at stake.
  3. Operating performance "reconfirms the value proposition of the Group's core business"  (Chairman's Statement).  And from the MD&A:  "The robustness of the underlying business model was tested under actual stress conditions ..."   AA:  Much better than a "proven business model".
  4. "The Group’s difficulties and the continued involvement with the Abdullah Brothers have raised a number of concerns, publicly. While recognising these concerns and putting in place the appropriate governance structure to mitigate against any potential issues, the continued involvement of the Abdullah Brothers is of strategic importance.  Fundamental in this regard is their knowledge of the  industry, in the areas of product design, quality, but more importantly their involvement in the  recovery of accounts receivables and the inventory given on consignment. In their role as Advisors,  the Group will be able to secure a knowledge transfer and an expedited, if not enhanced, recovery of  its receivables and consignments."  AA:  One certainly hopes so.  Wonder what the compensation is?  And if it's cash or reduction in their payable?

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