Sunday, September 26, 2010

HSBC: Restrictions on Global under its Restructuring

The Short Fuse on Global's Restructuring

Al Qabas has a summary of a recent HSBC report on Global's restructuring.

The main point and the reason for the picture above is the repayment schedule:  10% of the principal in Year 1, 20% in Year 2 and a crushing 70% in Year 3.  The result of the unrealistic short three tenor. 

I've commented on this before, but that won't stop me from saying it again.  It's highly unlikely that Global is going to be able to meet the repayment schedule even with one or two small miracles coming its way.   With the short fuse and the extensive trip wires (by way of covenants below), the spectre of a second default has to be haunting Global's management and shareholders.   It will probably also give pause to clients being solicited by the firm for new business.  

The banks should be worried as well.  One can argue that a short leash increases their protection.  But too short a leash is not good either  - particularly when you want the dog to hunt.  A bit more breathing room - say two more years - and their potential headaches may be much much less.

Restrictions include the customary limits on distributions (dividends), taking new loans, making capital expenditures as well as a requirement that at a minimum the value of assets must be 0.75 times the amount of the loan.  Global is required as well to maintain capital adequacy at 5% until June 2011 at which point the ratio increases to 7%.

Just rounding out the article.  As has been mentioned earlier, the lenders got a 1% flat restructuring fee.  And a 0.25% extension fee from the date of default to the date of the agreement.  Both fees capitalized into the existing pre restructuring loan amounts.  The lenders also have the right to convert their debt to equity if Global doesn't repay 40% of the debt in the next two years.    That last condition coupled with a restriction on dividends seems to me to pretty much make the raising of any new capital a moot point.  Unless of course they're irrationally exuberant investors.

2 comments:

Anonymous said...

FYI Alqabas has a very strong negative bias towards Global. So the way they report the Global news is truncated and exaggerated. Go to the source.

Abu 'Arqala said...

Anonymous

Actually, the Al Qabas article in question merely reported what is supposed to be the HSBC report - which is largely a statement of facts.

The negative conclusions are mine based on my own analysis of Global's business ethics (Global MENA Financial Assets and AlThuraya) and financial condition as well as the terms of the restructuring.

On later point, you'll note that I think the restructuring terms imposed on Global by its "wise" lenders contain the seeds of future problems. The repayment period is too short. Asset values are not likely to recover in three years. So, Global will be forced to sell at low prices and in effect the lenders are liquidating much of the value in the firm when they don't have to. By placing various restrictions on Global - such as the reported requirement that any new equity be used to repay debt - as well as the too short tenor, Global's lenders have complicated the firm's ability to sell new equity.

Your point about Al Qabas having an outlook is correct. One will find the opposite outlook over at Al Watan. It just depends on who ones patron / owner / tribe are.