Sunday, February 28, 2010

Dubai World - Debt Tribunal Opens But No Claims Lodged Yet


The National reports that the special tribunal has received about 100 inquiries on the process for filing claims though no claims have been filed yet.

The article also notes that if DW files a notice of an intent to restructure the Court can grant it a 120 stay of legal action to develop such a plan and present it to creditors.

Whether or not the company can restructure as is hoped depends on its economic position.  If that is weak and there is no external support, then it's hard to see how it can continue except under a disguised wind down.

I'd guess that this is precautionary move on the part of creditors.  They are preparing for a breakdown in the debt restructuring or some other need to prove their claims.

Earlier one of the reasons given for the delay on the DW side in presenting concrete proposals to its creditors was that it needed to "sort out the mess in its accounting".  If that is indeed the case, then it is perhaps just as likely that not all liabilities were recorded properly.  Back in the early 80's when oil prices collapsed many Saudi and foreign contractors found out that those "change orders" which their clients had needed done on a rush basis were not documented properly.  Whether it was a matter of proper procedures or a way to ride the trade and get discounts, the Saudi authorities slowed payments down dramatically.  Some improperly documented changes were disallowed.  A creditor (particularly one whose obligation is not a clear cut loan or bond) might be wise now to make sure its debt were acknowledged by the obligor.  And if not to prepare to litigate.

Saudi Capital Markets Authority - Three Fines Levied

The CMA announced it had levied three fines today:
  1. SAR50,000 on AlRajhi Bank for delay in notifying the CMA of the resignation of  the GM of the Finance Group and GM of the Commercial Group.  Link to AlRajhi's English page at Tadawul.
  2. SAR50,000 on Shams (Sun) Tourism Enterprise Company for failure to advise the CMA of the firing of the CEO by the Board.  The Board took its decision on 22 December 2009 but didn't notify the CMA until 27 December 2009.  Link to TEC's English page at Tadawul.
  3. SAR50,000 on Sabb Takaful for failure to advise the CMA of several (unspecified) changes in senior management during the period 13 January 2008 through 13 October 2009 until 21 December 2009.  Link to Sabb's English language page at the Tadawul.
These are admittedly small amounts.  What I think is the story here is that the CMA is monitoring and penalizing companies for the sort of infractions that would have been overlooked in the past.

You can switch from the English language company pages to the definitive Arabic language ones by using the button at the top of the upper left page next to the "Home" button.  Also note that generally the announcement on fines are not translated into English at either the Tadawul site or over at the CMA's website. 

Saturday, February 27, 2010

3-1

 

Speedy recovery Aaron.

Friday, February 26, 2010

عيد المولد النبوي الشريف



Happy National Day and Liberation Day



Happy National and Liberation Days

Arabtec Stops Work on Nakheel Project Due to Non Payment


This article from The National is not encouraging.  AlFurjan is one of Nakheel's largest projects (housing).

If Nakheel is unable to conduct its business, it's not going to generate a cash flow.  It's also going to have a knock-on effect on other firms.  Not good news for bankers. Especially since a promise was made to use the Abu Dhabi $10 billion contribution to pay suppliers and contractors.

Interesting Blog: The Race for Iran

The Race for Iran from Flynt and Hillary Leverett.

Some "outside the box" thinking on the issue.   Often the best sort of thinking.

Whether or not you agree I think you'll find your mind stretched.

Where Is The World Economy Going?

Interesting post at Wall Street WTF on Bernake and his likely actions.

And another by Martin Wolf at the Financial Times.

And a piece by William White, former Chief Economist at the BIS.

I think this issue "boils down" to some fundamental questions:
  1. Do we have the right diagnosis for the disease?
  2. Do our economic doctors have an effective course of treatment?
  3. Has the right treatment been prescribed?

Thursday, February 25, 2010

The Psychogenesis of Restructurings



Make yourself comfortable on "Dr." Arqala's metaphorical couch as we delve into the darker recesses of the "psyche" of finance – those connected with restructurings.

We'll conduct our forensic study by tracing the various stages in the restructuring process with tongue firmly in cheek. A planned subsequent post, "Great Moments in Restructurings" will provide some concrete examples from case studies.

Restructurings are usually thrust on the participants. Sometimes this occurs in a rather violent fashion with an unexpected failure to make a payment. Whatever the triggering event, restructurings heighten a wide range of latent pathologies, both traditional as well as those associated with behavioral finance.

Stage 1: "Houston, We Have A Problem"

When confronted with a serious problem (before the payment failure), the borrower's first reaction is to ignore it. "It's just a temporary setback." "When the market recovers, so will we." If I pretend it isn't there, it won't be.

But when the problem refuses to go away and the date of the payment inexorably approaches, the obligor develops an almost religious faith in miracles. "We'll sell our newly formed subsidiary in Waziristan." Or maybe just 40%. "We're going to IPO our not yet created affiliate in Marjah (Afghanistan)." "Our lenders will gladly refinance their loans to allow enough time for our assets to regain their value."

Sometimes borrowers recognize the problem themselves. But usually they don't. Many hire an advisor in the belief that a new loan or a quick refinancing will solve the problem. AA's particular favorite is a bond exchange. In such cases the advisor's first task becomes convincing the obligor that the problem is really serious – two aspirin and a band-aid won't do the trick. At this point the advisor is well advised to refrain from pointing out that in large measure the problem is self-made. That can be dealt with later. And then presented as a remarkable contribution made by the client to finance theory. Through his pioneering efforts the world has discovered heretofore unknown financial principles such as the danger of too much leverage or the risk of financing long term or illiquid assets with short term money. Or that markets and asset prices sometimes go down. Who could have imagined?

Stage 2: "From Hero To Zero"

A great relationship with one's creditors is contingent on there being no problems. The old saw about commercial bankers sums this up quite nicely: "A commercial banker is someone who gladly lends you an umbrella on a sunny day. And then at the first sign of rain demands it back immediately."

The natural tendency for the borrower is to presume that his lenders will understand. "Why they told me that I'm a strategic customer". "I have a personal relationship with their (insert as appropriate) Chairman, Deputy Chairman, Global Head of Syndications, etc. and they won't treat me the way they did (insert name of another company in difficulty)"

Creditors don't react well to the unfortunate news that payments cannot be made on time, particularly if the "news" is delivered by the non payment itself. It's not just a matter of disappointment. A solemn promise has been broken. What could be more sacred than the vows in a financial contract? What sort of person would break them? "How could you do this to me? I trusted you" is not only the lament of the betrayed spouse but the disappointed banker.

Often such events lead to equally startling revelations about the character of one's client. He is suddenly unmasked as incompetent, a habitual liar, and perhaps even a crook. Particularly if the customer has previously told his bankers that there wasn't a big problem. Or that one or more miraculous events would occur. Financial takfir is often pronounced. Or, if not spoken, at least thought.

You can imagine the shock of the borrower at his great fall. And the psychological damage it causes. "How could they turn on me? It wasn't my fault." Betrayal it seems is a two-way street – at least in the borrower's mind.

Stage 3: "And Where The Offense Is, Let The Great Axe Fall"

Such an outrage must have consequences – dire consequences. A virgin or one or more members of senior management must be thrown into the volcano to appease now angry lenders. Since management is the more likely of the two to be handy, a member of management is tossed in.

In some cases professions of contrition and suitably fast talk may secure some reprieve and avoid a sacrifice.

In some lesser emotionally developed markets, the lenders insist that the obligor feel acute pain, even if it is evidently but a pale reflection of their own profound distress. Sometimes the crudest financial revenge is sought – "to obliterate, to punish and to discourage others". Not necessarily at the outset. Perhaps later when the restructuring is being crafted. Hell hath no fury like a scorned banker.

Sometimes the borrower unilaterally takes such an action to show it is serious about the restructuring. A pre-emptive sacrifice to dispose of a senior manager whose credibility with the bankers may be such that he is more a liability than an asset in the negotiations.

Stage 4: "Send In The Clowns"

Negotiations begin.

If the creditor group is large enough, a "Steering Committee" or "Creditors' Committee" is formed to facilitate the process.

By and large the same great minds – both among the lenders and the borrower - that made the original loan are involved in its restructuring. Who better to straighten out the mess than those who created it in the first place? After all, they've already demonstrated their competence in matters financial.

The process begins with a mutual show of lack of trust. The bankers for the unmasked miscreant who days before was their "best customer". The borrower shocked to find that all the prior assurances of relationship were empty words. Blame needs to be assigned. Feelings must be vented.

Then comes the hard part of agreeing the way forward. The borrower wants nothing simpler than to continue his previous path – the sound business strategy and vision that got him into his predicament not through his own fault but due to the manifest errors of others. The bankers want their money and want it now. Business empires have to be dismantled. Plans for the future all have to be shelved to achieve this end.

Generally the borrower's unrealistic ambitions and delusions can be made to surrender to the creditors'.

The problem often is that often the most difficult negotiations take place among the creditors themselves. A process described as trying to herd cats.

During negotiations, the borrower is often told something can't be done because the syndicate won't accept it. "We understand your request, but not all the banks will accept it." A rather convenient excuse to deflect criticism from the Steering Committee for imposing harsh conditions on the borrower or ignoring its requests. As with many commercial negotiations the bankers' "kalaam" on this topic isn't always "sharif". But what duty of honesty does one owe to someone who doesn't honor solemn bond regarding his debts?

Creditors who evidenced scant understanding of banking during underwriting now step forward boldly to advocate a variety of really silly and/or trivial things. No longer quieted by the prospect of joining a "great deal" as they were at the underwriting, they give free rein to their imaginations and lack of knowledge to develop "great ideas". The task of the Steering Committee is to try and bat down the silliest or least useful of these. But to get a deal done sometimes compromises are made. In other cases there is no will. Ultimately it is the borrower who suffers. And what better person to suffer in such a case than the "faithless one"?

Great amounts of time and money are spent in the process. It is here that one can observe "Abu Arqala's Law of the Conservation of Due Diligence" in action. If creditors by and large failed to do a reasonable level of due diligence at the underwriting stage, they will more than make up for it now. With overcompensation directly proportional to the extent of their earlier failure. Legal issues are parsed with Talmudic zeal. Legal and accounting fees pile one upon another.

As usual, the only guaranteed winners from every restructuring are the legal and accounting firms. They get richly compensated no matter what happens. And collect their fees before the first principal repayment is made. The advisors in the Lehman restructuring have already been paid over US$642 million for 16 months' work. And their labors have not yet ceased!

Stage 5: "This Is A Court Of Law, Young Man, Not A Court Of Justice"

A major factor affecting the course of the negotiations is local law and the state of the judicial system. Laws and legal systems that favor the borrower can lead to prolonged negotiations. In some cases the borrower is almost immune from creditor efforts to liquidate it. A strategy of delay to wear down the creditors can work well here. Where the law gives creditors the upper hand, the process can be quicker. If it's too quick, it can turn into a lynching. A general rule of thumb is that the longer it takes to conclude the restructuring the more value that is lost (or more aptly squandered) in the firm and in the ultimate recovery of the lenders' funds.

As well, if the legal system is deficient or can be gamed, the party able to take advantages of these defects has a strong advantage. This applies not only to creditors versus borrower but within the creditor group itself as discussed in Stage 8 below.

Stage 6: "Do You Want to Know A Secret?"

Just like people, companies, all companies, have secrets they would like to keep. Behavior they're not especially proud of and would rather not have come to light. Or be the subject of open discussion. The due diligence process generally exposes these embarrassments. In a restructuring one's kimono is not just open. It's taken off.

These can be "simple" things like that expensive redecoration of the executive floor or more "complicated" things like uses of corporate resources for private projects. Or that "performing" asset that really isn't performing so well. In one view being provided intensive care and nurtured to recovery. In another view, a failure disguised. The lapses in procedures. The special deal for a friend.

Though they have their own similar behavior, banks naturally react with horror and often feigned indignation to the moral shortcomings of their borrowers. I once was involved in a creditors' group which contained a very outraged banker who complained unceasingly about the borrower's moral and business failings. As we all were, that chap was billing that borrower for his attendance at meetings – travel, lodging, meals. His expenses also included rather frequent in room "massages" at his hotel. Apparently, he had a very sore "back". And to ensure his ability to function properly at the meetings during the day required at least one and sometimes two "massages" a night. He was also apparently quite generous in providing beverages for the masseuse.

The more outrageous "sins" are of course terminated. In some cases, tolerated as the "price" of a restructuring. Restructurings are often not the step to financial soundness but moral as well. At least for the borrower.

Stage 7: "Let's Make A Deal"

At some point, often mutual exhaustion, the parties decide it's better to strike a deal than continue negotiating in circles. Sometimes one side can take advantage of the other's greater predisposition to exhaustion to secure an advantage on this or that point. This is where the nature of the legal system can play a major role.

In any case, once the moment arrives, the borrower and the Steering Committee become serious and hammer out a draft termsheet - a document that contains the basic terms of the rescheduling but is not the formal loan agreement. One that does not include all the details. Often the termsheet is agreed with what appears to be unnatural speed, particularly when the time taken to reach this point is considered.

Since the termsheet is the result of a process of "give and take" by the two sides, one might think it was the product of careful analysis of reality and agreement on reasonable projections for the future forged in the furnace of debate. One would be disappointed. Repayment schedules are more often based on what is acceptable to the banks rather than what is required. One simple example: a borrower might need seven years to repay. Banks will insist on five years. To avoid a problem in the early years, payments will begin at modest levels with the problematical amounts shifted to the latter years in large unrealistic payments. Why? Because it is easier to sell such terms to credit committees. "It's a five year deal, honest." And one doesn't really want to harm one's career by advocating the longer (required) tenor. The hope, as I've posted before, is that if any problem occurs it will be on someone else's watch not one's own. And thus by good business logic, the fault of that person.

But this is only a small step forward. The terms must be agreed by all the creditors.

Stage 8: Herding Cats

As the title implies a difficult process. Primarily because individual banks now hold more power than they did at the inception of the loan. Then, if they raised too many issues, they would be dropped and another "wise" lender would take their place. Deadlines for decisions were cast in stone. A failure to respond could cost one's place in the deal. Now there are no such constraints. The lender is already in the deal. Its vote is critically important.  

At this point, an institution may require more time to come to a decision.  Analytic skills which atrophied due to lack of use in the underwriting stage may need a bit more time to regain their full vigor. Decision making which proceeded with alacrity at underwriting may now need to proceed at a more thoughtful measured pace – much more thoughtful and measured. 

What suddenly gives an individual bank such power?

Legal matters which often give a single bank a right of veto.

The first of these has to do with the legal regime in the country of the borrower. Some jurisdictions have mechanisms that allow a specified majority of creditors - but less than 100% - to approve a restructuring. Under this regime, dissenters are forced to go along with the majority vote. They are "crammed down". The old loan contract is superseded by the new one. And thus all creditors lose their right to sue to enforce the old loan contract. If other jurisdictions recognize the validity and integrity of this procedure, they will also deny dissenters the right to bring suit in their jurisdictions.

On the other hand, other jurisdictions, for example the GCC states, require 100% creditor approval to abrogate the old contract. So despite the fact that The Investment Dar has a "deal" in Kuwait, its dissenting creditors still have the right to sue under their old loan agreements for payment and potentially overturn the deal. That's why the strong preference of lenders is to secure the requisite number of votes to preclude such actions.

The second of these has to do with approval on facilities that have more than one bank as lender. Syndicated loans require that 100% of the creditors must agree to any material change in the terms of the financing for it to be binding. These would include final maturity, the amount and pattern of principal repayments, the interest rate, or other material deal terms. One bank can therefore hold up the approval of a syndicated facility even if it only has a very small portion. And, just to be clear, cram downs don't apply at this level unless specifically provided for in the original loan documentation. I've never seen a loan agreement that allows this.

As you might expect, where a single creditor or a relatively small number of creditors can make a problem by delaying a deal, they may exercise this power in the hopes of causing enough trouble so that someone buys them out. Larger creditors with much more at stake who can't let the deal fail. Or the borrower or a "friend" of the borrower. The "friend" because loan agreement covenants prohibit preferential payments (like buyouts) - those not made to all of the syndicate members.

One example of the potential power of the dissenting creditor – though in a (different) pre default context - is the Nakheel Bond where QVT put together a group sufficient in size (usually bond indentures have a low 25% threshold for acceleration) that Nakheel could not strike a deal for a payment standstill or rollover because the QVT group would call default – triggering cross default on other Nakheel obligations. Here the power stopped a default from happening and secured on time payment of 100% of the amounts due.

As well, there can be other impediments to approval. A resolute creditor can revive its previously dismissed "bright" ideas. Where the Steering Committee is powerful and chooses to exercise its power, it may threaten retribution to recalcitrant banks. "Play nice or we'll cancel your lines." Where it is not or chooses not to, less than optimal creditor ideas are included in the restructuring.

Stage 9: The Devil Is In The Details

Once the termsheet is finally approved the creditors' lawyers begin their drafting of the rescheduling agreement. The creditors insist their counsel do this to ensure their control over the process.

This is not only a time for legal wordsmithing but an opportunity for a clever lawyer to try and recast the deal in the termsheet. Or sometimes for a sloppy lawyer to undo aspects of the deal.

In some cases concepts in termsheets are expanded beyond the original understanding of the parties – particularly the borrower's. The idea is that at this point as the train is moving forward to the station, the borrower will be reluctant to get off.

Sometimes what are thought to be brilliant ploys to impose new terms on the borrower turn out in retrospect to have been unintended favors – sometimes quite significant economically. Like the angry creditor who unintentionally gutted a cashflow sweep mechanism – significantly reducing the borrower's mandatory prepayments.

Documentation must be satisfactory to all parties. Once again a determined or slow responding lender can affect the time to complete the restructuring because it isn't legal until all the "bits of paper" are signed. Before signing them, a lender must find them acceptable. The borrower also has a chance here to object.

Another step in the process is the borrower complying with whatever "conditions precedent" it has agreed (or been forced to agree) as part of the deal with the lenders. In the Global Investment House restructuring, certain assets were to be transferred to two special purpose vehicles. No doubt, arranging those transfers was a condition precedent to the restructuring becoming effective. Until GIH did this, its restructuring deal wasn't complete.

Stage 10: "You're Only Using One Side Of The Toilet Paper?"

Lenders want to ensure that the borrower's funds are directed to repayment of their loans on a priority basis. As you'd expect this is a critical issue for creditors. To achieve it they impose a variety of restrictions. Major cashflow items like cash dividends or significant new capital expenditures are controlled by explicit limits or prohibited outright.  Other expenses are scrutinized for ways to conserve cash. These restrictions along with financial undertakings and ratio maintenance are made covenants in the restructuring agreement. Violation of these gives a stated percentage of lenders (usually more than 50%) the right to call a "default" and accelerate the maturity of the (restructured) loan. Most of these controls make eminent sense.

But often minor expenses which have no real economic bearing on ultimate repayment are targeted. The borrower must be made to live a more frugal almost monastic lifestyle. More often than not the economic benefit to lenders is less than 1% of the amount of the obligation. Like the chap in one loan restructuring who wondered why certain members of management needed subscriptions to both the Financial Times and The Wall Street Journal. One rather wry and highly numerate fellow creditor thanked him noting that the impact of this simple action would ensure payment of the loan in 50,000 years. Whether the motive is "to obliterate, to punish and to discourage others" or simple stupidity is not always clear.

Elaborate and costly mechanisms are established to ensure that expenses are controlled.  Frequently, an  accounting firm is engaged to review expenses, charging as is their practice not only an engagement fee but by the hour billing. As you'd expect, it's relatively easy to control a few big items. Not much time or money need to be spent checking if dividends were or were not paid. Or a new building started.

But reviewing a myriad of small expenditures is highly labor intensive. Particularly if a limit is breached. Then offending expenditures have to be identified with elaborate analysis of the justification or lack thereof for each. And a suitably detailed explanatory write-up prepared and provided to the creditors. Not infrequently, the cost of the control becomes more than the face amount of many of these items. To say nothing of management's time diverted from running the business as it must justify each and every overage to avoid running afoul of some covenant in the restructuring agreement.

Unlike funds spent by the borrower, these expenses are always considered perfectly reasonable. As are, the expenses of lending banks: such items as first class airfare, fine hotels, and gourmet meals to attend meetings– all no doubt highly relevant to the restructuring process.

It's hard to find an economic reason for such behavior. A dollar spent however it is spent is in the final analysis a dollar spent.

Postscript

With luck the borrower makes the necessary repayments to the banks and retires the obligation.

Both emerge from the process suitably chastened for previous unwise behavior – though usually only temporarily.

Idiocy Knows No Borders: القذافي يدعو الى "الجهاد" ضد سويسرا


All one has to do is see his name to know where to file the Brother Leader's comments.

BBC report here.

Global Investment House v National Bank of Umm Al Qaiwain US$250 Million Deposit


You'll remember the long standing saga and legal case of the US$250 million deposit that GIH placed with NBQ re a potential investment by GIH in the shares of NBQ.

So what's happened since the last time we looked?

Well here's an extract from NBQ's recently released 2009 audited financials.

"Other liabilities include AED 918.25 million (equivalent of USD 250 million) received from Global Investment House - Kuwait (GIH) as advance payment on the proposed issue of bond to be converted in to 330 million shares of AED 1 each at a premium of AED 6.15 per share totaling AED 2.359 billion, entered through a Memorandum of Understanding (MOU) dated July 16, 2008. This amount is included in  other liabilities without any interest attached towards it.

During December 2008, the Bank has received a letter from GIH for the cancellation of the above transaction and for refunding the advance of AED 918.25 million. On legal advice, the Bank has taken the view that GIH request is not valid and that the MOU is a binding sale purchase agreement. Accordingly, the Bank proceeded for completion of the transaction by seeking the balance due from GIH.

GIH had filed a lawsuit during 2009 in the First Instance Court of Dubai which was rejected due to arbitration clause in the MOU. The Court of Appeal has set aside the arbitration clause in the MOU stating reasons that authorised signatory from GIH who signed the MOU was not explicitly empowered by GIH to arbitrate and thus to sign an arbitration clause which was included in the MOU.

Based on the appeal filed by GIH, the Court of Appeal has decided to return the lawsuit to Court of First Instance and to judge the case based on its merits."

Idiocy Knows No Borders: Modern Day Paul Revere Warns The "Muslims Are Coming"



In times of danger, brave patriots stand watch over our great land.  Frank Gaffney is no exception.  Through his careful exegesis of the recently redesigned logo for the USA's Missile Defense Agency, he's discovered a rather nefarious plot by President Obama.
What could be code-breaking evidence of the latter explanation is to be found in the newly-disclosed redesign of the Missile Defense Agency logo (above).  As Logan helpfully shows, the new MDA shield appears ominously to reflect a morphing of the Islamic crescent and star with the Obama campaign logo.
If you're stout of heart (and that is perhaps the true test of your patriotism), here is Logan's blog which explains in rather graphic detail just how this abominable logo was created.

If you're not afraid after reading his post, you should consider this.  It's a well known fact that the US Congress generally does not meet on Fridays.  Fridays as we all know are the Muslim holy day.   Just a mere coincidence.  Or "chilling" cause of the recent uncharacteristic snowstorms in our nation's capital?

I'd like to thank David Roberts at the Gulf Blog for bringing this shocking revelation my way.   They say there's a special relationship between the USA and the UK and this proves it yet again.  Were it not for his  blog, I might have missed this item and perhaps my last chance to eat pizza with Italian sausage.

I'll be making an emergency trip to his local pizza parlor this weekend (deep dish, of course). 
 

Wednesday, February 24, 2010

Boubyan Bank - Old Board to Resign New Board to Be Elected

 

AlQabas quotes informed sources that the Board of BB has informed the Central Bank and major shareholders that it intends to resign so that a new board can be elected.  Presumably this accords with the wishes of the new shareholders.  The article goes on to praise the old board for taking decisive steps to strengthen the bank, e.g., the decision to take KD66.9 million in provisions and raising additional capital.

The AlQ article says that of the nine member board, 5 new members will be elected and 4 from the old board re-elected.

I guessing the National Bank of Kuwait wants to tighten its grip.  A rather large chunk of capital was provision away for 2009 and that's definitely not the sort of results NBK is known for.

Kuwaiti Businessman's Assets Frozen for Bouncing KD 1.1 Million Check

AlQabas reports that a prominent (but unnamed) Kuwaiti business has had all his assets frozen for writing a KD 1.1 million check that had insufficient cover and was rejected for payment by his bank.

GFH Close to Deal on US$100 Million "Islamic" Loan?

 
So says The National quoting Ted Pretty, Acting CEO.   

Deal seems to be an initial partial  repayment followed by regularly scheduled amortization (repayments) over two years.

Dynamite Prize in Economics Awarded - Alan Greenspan's Work and Role Acknowledged


In case you missed it, Real World Economics has announced the results of their poll in which over 7,500 votes were cast to nominate the winner of the "Dynamite Prize in Economics".

Alan Greenspan, former head of the Federal Reserve Bank of the United States, won this prestigious award designed to recognize "the economist most responsible for causing the Global Financial Crisis."  

Runners up were Milton Friedman and Larry Summers.
In awarding the Prize, Edward Fullbrook, editor of the Real World Economics Review, noted that “They have been judged to be the three economists most responsible for the Global Financial Crisis. More figuratively, they are the three economists most responsible for blowing up the global economy.”
The prize was developed by the Real World Economics Review Blog in response to attempts by economists to evade responsibility for the crisis by calling it an unpredictable, “Black Swan” event. In reality, the public perception that economic theories and policies helped cause the crisis is correct.
An award richly deserved, though as with many "great contributions" it's clear that many hands labored to bring it about.  And perhaps one of the finest demonstrations we've seen of bipartisanship in the United States in a long long time.

Saudi Zain 31 December 2009 Earnings Announcement

 

Two announcements from Saudi Zain on 2009 results at the Tadawul (Saudi Stock Exchange) today.  One the commentary.  The second a summary of results.

The commentary on results begins by noting achievements:
  1. 6 million subscribers or 18% market share.  As I posted earlier a very key metric especially in a market with over 100% penetration is spend per subscriber.  Apparently, there are a lot of fairly inactive "chips" in the Kingdom being claimed as subscribers by all the major telecom firms.
  2. Company is offering voice, text and broadband services.
  3. Extension of coverage to 83% of the inhabited areas of the Kingdom.
  4. An gross operating profit of SAR 877 million.  Note this is before other expenses.
  5. Then a quote of the auditors' "emphasis of matter" - which by the way is roughly 64% of the entire commentary so SZ is not putting too much sugar on the news.
Financial results:
  1. Net loss of SAR3.099 billion versus net loss of SAR2,278 billion.  (Recall from my earlier post that amortization of SZ's license fee is a major expense burden).
  2. Loss per share SAR2.21 versus SAR1.63 in 2008.
  3. Gross operating profit of SAR877 million versus SAR16 million in 2008.
  4. Loss from Operations of SAR2.467 billion versus SAR1.7 billion in 2008.
  5. Greater loss due to fact that in 2008 (18 month period) the company was not fully in operations so 2009's cost of operations, marketing, and financing were higher.  While it is noted that for four months out of the extended 2008 reporting period the company had no revenues, clearly operating expenses were the cause for the increase in 2009's loss.
You'll notice that the numbers above differ from those in my earlier post.  That post was based on preliminary numbers.  The final audited numbers are here.
    Other posts on SZ can be accessed using the label "Saudi Zain".

      Boubyan Bank - KD 51.7 Million (US$181 Million) Net Loss for 2009


      Since I wrote this this morning, AlQabas has published a report that BB took provisions of KD66.9 million.

      Since I've been following the Rights Offering story, I thought I should continue with the 2009 earnings announcement as the two are clearly related.

      Boubyan had a net loss of KD 51,694,899 for 2009.  I'm guessing that we'll see that provisions were the main culprit when more detailed financials are released.    Shareholders' equity declined from KD135,148,400 to KD87,134,661.  The recent Rights Offering has more than restored capital by raising KD126,704,771.

      Also the Board quite sensibly has recommended against any dividend for 2009. 

      [12:13:8]  مجلس ادارة بنك بوبيان يوصي بعدم توزيع ارباح عن عام 2009‏
      يعلن سوق الكويت للأوراق المالية أن مجلس ادارة بنك بوبيان
      قد اعتمد البيانات المالية السنوية للبنك للسنة المالية المنتهية ‏في
      ِ31-12-2009، وفقا لما يلي:‏
      ِ1) نتائج أعمال البنك:‏
      البند          السنة المنتهية في 31-12-09   السنة المنتهية في 31-12-08‏
      الربح (الخسارة)(د.ك)          (51,694,899)           1,846,045 ‏
      ربحية (خسارة) السهم(فلس كويتي)     (44,36)                1,58 ‏
      اجمالي الموجودات المتداولة 792,676,816            710,830,820 ‏
      اجمالي الموجودات         964,778,554             840,460,750 ‏
      اجمالي المطلوبات المتداولة 859,395,276           699,543,124 ‏
      اجمالي المطلوبات           875,672,913           702,919,776 ‏
      اجمالي حقوق المساهمين     87,134,661            135,148,400 ‏
      بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 3,938,027 د.ك
      بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 685,274 د.ك
      علما بأن بنك الكويت المركزي قد وافق على هذه البيانات المالية بتاريخ
      ِ24-02-2010.‏
      ِ2) التوزيعات المقترحة:‏
      أوصى مجلس ادارة البنك بعدم توزيع اى ارباح عن السنة المالية المنتهية
      في 31-12-2009 .‏
      وعليه سوف تعاد اسهم البنك الى التداول بعد عشر دقائق من نزول الاعلان .‏

      Central Bank of UAE - Lifts Restrictions on Bonus Share Issue for 2009

       

      You' recall earlier that the CB UAE  had imposed restrictions on UAE banks' dividends for 2009, limiting cash dividends to 50% of net profit and script or bonus share dividends to 60%.  The given rationale for the measure being to preserve liquidity and capital within the banking sector.

      At that time I posted that the restriction on script dividends seemed strange as the issue of bonus shares actually was a stronger form of capital retention than a mere ban on the payment of cash dividends.  

      The neat thing about bonus shares is that a shareholder desiring cash can sell the extra shares and thus receive cash, though in doing so he or she reduces his or her relative percentage ownership in the bank.  No cash leaves the bank because this is a secondary market transaction.  Cash is exchanged between shareholders.  Bonus shares also have a downside:  they dilute future earnings per share.

      Apparently, bankers in the UAE "shared" my view and persuaded the CB to rescind its restriction on 2009 bonus share issuance.  Bonus shares up to 100% of 2009 profit may therefore be issued.  The article notes that this restirction on dividends was the first time the CB UAE had intervened in such a fashion.  Also it noted that bankers argued that stock dividends actually strengthened capital.  Shareholders are said to be happy though not as happy as they would have been with bigger cash dividends.

      The limit on cash dividends was not lifted or modified.

      Tuesday, February 23, 2010

      Gulf Finance House -The Curious Cases of the US$100 Million Deutsche Bank Murabaha and The 4Q09 Purchase of US$35 Million in Treasury Shares



      In an earlier post today I noted that Deutsche Bank had converted another US$10 million of its US$100 million murabaha bringing the total converted to US$50 million.  Since the conversion was being done at US$0.38 per share and the market price is much less, I wondered what the economic motive for such a transaction could be.

      This seems to be a more complicated issue than I originally thought.

      Let's rewind the video tape and go back to that magical date of "2 November/2 October 2009".   GFH announced that it successfully raised US$300 million in a rights offering and would soon have announcements that it had raised "US$450 million in fresh capital in just over a month".

      On 15 November 2009, it announced that it had successfully placed a US$100 million convertible murabaha with Deutsche Bank.  "The announcement is the latest success in the broader GFH liquidity and capital management plan that includes rights issue subscriptions of over US$ 300 million dollars, the partial sale of Qinvest to Qatar Islamic Bank for approximately US$ 51 million and the planned placement of the first US$ 100 million convertible murabaha with Macquarie Group."   While the placement with Macquarie didn't go forward, not an inconsiderable achievement for one month's work.  Recall that the issuance of the convertible occurred before made its first of several downgrades of GFH.  At that happy time GFH was rated investment grade.

      In Note 16 to its 2009 financials  GFH states that the proceeds of the US$100 million murabaha were US$80 million.  Right about now if you're like me, you're wondering what happened to US$20 million from the US$100 million deal announced.  That certainly was the impression I took from GFH's earlier press release.  They had obtained financing of US$100 million.  US$100 million of new cash from the fine people at DB.

      So where is the "missing" US$20 million?

      Is it the requirements of IFRS which makes one strip out the embedded option in the convertible?  But then  the US$20 million should be reflected somewhere else on the balance sheet.   I can't find it.  I do see US$1.226 as the equity component of the transaction.  But that still leaves a lot unaccounted for. And one might not use the word "proceeds" in describing this transaction.  The proceeds would have been US$100 million.  So this probably isn't the case.

      Was this a murabaha facility of up to US$100 million?  That is, is the US$100 million the aggregate amount which DB can take down in several tranches?  The term "proceeds" might be used in this case, but one would expect that surely if this were a partial drawdown, it would have been disclosed.   كلام شريف  would be the operative phrase I think. 

      Or did GFH issue a discounted instrument?  That is, the face value of the instrument issued reflects the cash to be paid at maturity for both principal and interest.  If one takes US$80 million at 8% per annum for three years, the future value is over US$100 million.   But I'd note the period appears to be less than three years: the announcement was 15 November and the maturity is 12 October 2012.   But then this can't be the case because wouldn't  كلام شريف  require that the bank say it had placed US$80 million rather than say it had placed US$100 million?  Or clarify that this was a discounted instrument? After all one doesn't typically count the interest on a non discounted bond as part of the capital raising.  It would seem to me that an issuer would want to be very clear as to just how much was raised, especially if iitwere in the "red zone" in terms of financial condition,

      So, maybe I'm missing something here.  Or maybe GFH's disclosure is a bit incomplete.  

      Anyone out there with the answer or an opinion, please chime in.

      That leaves one more curious item:  GFH's 4Q09 purchase of US$35 million in Treasury Shares.  And to my mind this one is much more perplexing than the DB murabaha.

      During 4Q09, GFH bought 93,806,001 of its own shares at an average cost of about US$0.37 per share. (For those of you who care, at the beginning of the year it held 8,448,808 shares purchased at an average cost of US$2.06 clearly from much happier days). GFH did not purchase any Treasury Shares in the First, Second or Third quarter of 2009.

      Now this purchase is really hard to fathom: 
      1. GFH acknowledges it has a liquidity problem - revenues are way down and upcoming debt maturities loom.  And this problem is at its highest point of intensity during 4Q09 - a time when no doubt GFH either has decided or has some inklings of the massive provisions it is going to take and the rather severe loss it is about to report.
      2. GFH is required under its US$1 Billion Sukuk  Program to maintain US$400 million in consolidated tangible net worth.  GFH wound up at year end 2009 with roughly US$433 million in consolidated tangible net worth.  (The  US$17 million in good will at year end 2008 was written off in 2009.)  US$433 million doesn't appear to leave GFH with much breathing space relative to this covenant.  And a breach of this covenant could trigger an event of default and a potentially life t threatening acceleration of the maturity of the Sukuk (US$302 million outstanding at year end 2009).  
      3. At the end of 2009 GFH had Basel II Capital Adequacy ratio of 12.91% dangerously close to the Central Bank of Bahrain 12% threshhold.  A fact that caused its auditor to raise an "emphasis of matter" in its audit opinion on the year.  Note a very rough calculation indicates that if GFH had not purchased these Treasury Shares, its CAR would be close to a very much more comfortable level of 14%.  A low CAR attracts all sorts of perhaps unwelcome attention from the Central Bank of Bahrain.  Potential restrictions on new business.  As well as demands for immediate remedial action.
      So considering all these factors, what could be the possible motive for GFH  to buy Treasury Shares? 

      This act weakens liquidity. It weakens its Basel II Capital Adequacy ratio.  And it leaves it potentially close to a breach of a covenant on a US$302 million outstanding Sukuk at a time when it is struggling to reschedule 2010 maturities.  All the more surprising because the Sukuk matures in 2011 and has a relatively benign  profit or interest rate on it - when compared to the market price for GFH debt. 

      And that's why I wonder if somehow these two curious cases are connected.  It's hard to understand why one would decapitalize the bank at the very time that capital and liquidity are required.

      Central Bank of UAE - January 2010 Banking Indicators Published

       

      Of note are the continued  high level of provisions.   January's provisions were marginally higher than December's which indicates that problems still remain.

      Boubyan Bank Capital Raising - Formal Announcement on Rights Offering 85.29% Take-up


      Bank Boubyan formally announced the results of their Rights Offering, 496,881,458 shares were sold (85.29% of the amount offered) and capital increased KD49,688,145.

      In case you're wondering, BB is speaking about the increase in paid in capital not capital in total.  The shares were offered at KD0.255 per share which represents a share premium of KD0.155 per share.  So the issue actually raised KD126,704,771.800 of which KD49,688,175 was added to paid in capital and the rest to share premium.

      As noted in a previous post, the plan is to re-open the Rights Offering because the Legal and Fatwa Department wouldn't permit an offering to third parties.   Earlier post here.   And an earlier one here.


      [12:7:17]  ِ.زيادة رأس مال بنك بوبيان
      يعلن سوق الكويت للأوراق المالية بأن بنك بوبيان افاد بانتهاء
      فترة الاكتتاب طبقا للمدة المحددة في تاريخ 07-02-2010‏
      وتمت زيادة رأس مال البنك من 116.523.531/500 د.ك
      الى 166.211.677/300 د.ك وذلك بالاكتتاب في
      عدد 496.881.458 سهم بما يعادل نسبته 85.289% من
      اجمالي الاسهم المطروحة للاكتتاب وعليه فقد تمت اضافة اسهم
      زيادة رأس المال للمكتتبين في ارصدتهم بالتنسيق مع الشركة
      الكويتية للمقاصة بتاريخ 23-02-20

      Gulf Finance House -Deutsche Bank Converts Another US$10 Million to Shares - Stealth Exit from GFH?

       

      GFH announced on the Bahrain Stock Exchange today that Deutsche Bank had converted another US$10 million of the murabaha to shares in GFH.  That's another 26,315,789.

      Since the conversion was done at US$0.38 per share and GFH's shares are trading at  US$0.25 on the BSE and about US$0.01 to US$0.02 more per share on the KSE, it's seems logical that this conversion is a way for DB to exit its exposure to GFH.  

      That's at a 28% to 32% discount.   And that frankly conversion doesn't make much sense.  If one wanted to make a "wise" investment in GFH shares, one could buy them on the open market now and when one got repaid from the murabaha have roughly 30% more shares.

      I'll be waiting to see the 31 March 2010 financials to see if GFH has increased its Treasury shares in 1Q2010.

      At this point based on previous announcements I've seen, DB has converted US$50 million in total for 131,578,946 shares which would give them just a whisker less than 7% in the bank which should require they be disclosed as a major shareholder.  Earlier post here.  As of today they are not shown as a major shareholder on the BSE website.  But then neither is the 26 November downgrade of GFH by S&P (the first of several downgrades) yet reflected on GFH's website.

      And on that basis assuming that DB is still holding all the shares it converted it would have a paper loss of US$13,815,790 (assuming a current share price of US$0.275).   Hard to believe that DB would keep piling on loss upon loss.  This has to be a way to get out of the credit for them.

      Monday, February 22, 2010

      Kuwait to Face Severe Power Cuts This Summer

      When you don't have a functioning government, even if you're very rich, sometimes basic infrastructure just doesn't get built.

      As a public spirited citizen, but not a Kuwaiti, I'd like to offer one suggestion for electricity saving this Summer.  No A/C at the Majlis Al Umma nor in the offices of the deputies.

      Limitless Seeks to Negotiate Multi-Year Contractor Payments

      The National reports that Limitless is approaching contractors reportedly seeking four year payment terms.

      As well it seems Limitless is scaling back or perhaps canceling other projects.

      What's also interesting is the comment that despite earlier talk about Nakheel settling with contractors no payments have been made.

      When you don't have cash, you can't pay.  And then it makes eminent sense to scale back or halt current or new projects.

      On the topic of Nakheel, I posted last December on how contrary to what one might expect it was actually a source of cash to the DW Group rather than a cash drain as it apparently upstreamed loans within the Group.  If the funds used to pay its recently matured Sukuk are treated as replacement debt rather than a return of funds owed it by the Group, then its financial position will not have really improved.  It will just be a case of rotation of creditors.

      Idiocy Knows No Borders: Missouri Gets Its Budget Priorities Straight


      The Kansas City Star reports on the legislature's "wise" moves to deal with the budget deficit.  

      Cut educational spending.  

      But don't touch the tax exemption for yachts.

      I wonder if "Boss Tom" would have supported the measure?

      Kuwait International Bank Denies Knowledge of Any Takeover Attempt


      KIB published an announcement on the Kuwait Stock Exchange denying any knowledge of a takeover or buyout attempt.  It also noted that any such action would require regulatory approval.

      [11:5:53]  ِ.ايضاح من بنك الكويت الدولي بخصوص ما نشر فى احدى الصحف المحلية اليوم ‏
      يعلن سوق الكويت للاوراق المالية بانه ورد الينا الان بان بنك الكويت ‏
      الدولي يود ان يوضح بخصوص ما نشر فى احدى الصحف المحلية اليوم ‏
      حول سعي تحالف للاستحواذ على حصة فى البنك ، يفيد البنك بان ادارة ‏
      البنك ليس لديها علم بمضمون ما ورد فى الخبر .‏
      وافاد البنك بان عمليات الاستحواذ تخضع لموافقة مسبقة من جهة الاشراف ‏
      وفقا لاحكام القوانين والتعليمات الصادرة بهذا الشان .‏

      Adnan Yousif Predicts Banks May Recover 60% on AlGosaibi and Saad Loans


      Zawya Dow Jones interview with Adnan Yousif Monday on the sidelines of an Abu Dhabi conference.
      1. Anticipates 60% recovery as both groups have assets.
      2. Arab banks hold the largest share in the loans estimated as we've heard before at about US$20 billion.
      3. Arab banks have "turned the page" on the two Groups through taking sufficient provisions.
      He also commented on Dubai World situation saying that the lenders were primarily Emirati and international banks.  Not much exposure among other Arab banks.

      With respect to loans to the Government of Dubai, he said the problems were not of inability to pay but rather temporary cashflow problems which will be overcome.

      For those who don't know, Adnan is Chairman of the Board of the Union of Arab Banks as well as President/CEO of the AlBaraka Group.  He and his brothers (who use the surname Abdul Malik) are among the region's distinguished bankers.

      Sunday, February 21, 2010

      Change of Ownership at Kuwait International Bank?


      AlQabas reports that a group comprising a local company and some individual investors has formed to buy KIB (the ex Kuwait Real Estate Bank).   KREB converted to an Islamic Bank in 2005/2006.  

      The acquirers will need Central Bank of Kuwait approval as well as an agreement with the BuKhamseen Group, the major shareholder. 

      A while back you'll recall that there was news about the Settlement Committee taking action against Mr. Jawad Bu Khamseen.  Earlier posts here and here.  I wonder if this might be related to the potential for a sale of the Bu Khamseen Group's interests in KIB.

      British Banks Negotiating With Saad and AlGosaibi

      Okaz quotes the Lord Mayor of London, Nick Anstee not Boris, as saying that some British banks were in negotiations with Saad and AlGosaibi Groups over the settlement of outstanding debts.   He wouldn't name the banks nor the amounts involved.   But said that his country hoped for a speedy settlement.  The British banks should proceed in a just manner with the two groups and other banks so that the investigation of all of the documents used to obtain the loans could proceed.

      His remarks were made during a visit to the Amir Muhammad bin Fahd University in Al-Dammam.

      Having read the 5 February submission to the Supreme Court of New York, all I can say is "الله معهم".

      Qatar Financial Centre Regulatory Authority

       

      Saudi Zain and the Mobile Market in Saudi Arabia


      If you're following Saudi Zain, a couple of articles from the Saudi Gazette.

      One on growth in the mobile phone market - a reminder that the number of subscribers is just one bit of the revenue equation, the other being spend per customer.


      And one on a promotion by Mobily.

      And finally a brochure on Markaz's report on the GCC referred to in the second SG article.

      The National: "Dubai to Take a Hit on Debt Exposure"




      Frank Kane over at The National newspaper in Abu Dhabi with an update on developments in the  Dubai World restructuring saga.   

      The title carries a pretty strong implication that there will not be 100% recovery for the lenders.  Not from the assets of Nakheel and other subsidiaries to be restructured.  Nor from the Shaykh up the road in Abu Dhabi.   And certainly not from his less rich brother in Dubai. 

      It sounds like the intent is to offer several restructuring options.  Another sign of less than a full recovery.  No doubt with the tenor of each and certainty of repayment inversely related to the offered recovery amount. 

      That's coupled with the news that the DFSF will after all not require that its loans have priority over other lenders'.  As you'll recall that's been a sticking point with lenders.  Having DFSF ahead of them in priority of repayment would make the haircut even larger.  It's unclear to me why this was ever raised in the first place.  Didn't DW realize this would provoke howls of outrage from the lenders?  What were they thinking?  

      Or was the strategy to create a controversy to distract the banks?

      The step by the DFSF is a way of making the pain of the banks a bit more palatable.  And the retreat could be tactical.  Give the banks a victory on this issue.  Then hit them with the haircut, noting that the DFSF was also subject to it.

      One can look at any potential "hit" to DFSF from several perspectives.

      Of course, if the DFSF is pari passu with other creditors then it will be subject to the same menu of restructuring options.  One would expect that the DFSF will be willing to take the longer tranches and be more patient with ultimate recovery, including losses.  As a governmental entity,  it will not face the same constraints that commercially oriented lenders will face with regulatory authorities' capital requirements, Basel II, the strictures of IFRS, shareholders, etc.  So it's pain on these scores will be less.  And unlike the lenders who made a bone-headed underwriting decision, the Fund stepped in to save the day so its losses are calculated and done for the "greater good".

      The total "hit" taken by lenders can be assumed to be an economic benefit to Dubai - money it would not have to pay to the lenders to make up for any shortfall in assets.  Say the DFSF provides $10 billion to the restructured companies bringing total restructured debt to $32 million.  If there is a 30%  haircut, its gain is 2/3 of the 30% .  That of course ignores the losses that will be felt in the local banks in which it has an ownership interest.  

      On the other hand wise and brave lenders out there should be applying any cashflow from the companies against principal.   Those banks from jurisdictions that levy income taxes and allow provisions and write-offs as expenses will also get an offsetting benefit courtesy of the tax payers in those jurisdictions - assuming of course that they actually pay enough taxes.  And where jurisdictions don't allow provisions/write offs as an expense, then reducing interest income (by applying payments to principal) could be a way of generating an expense for tax purposes.

      Another bit of news is that DW's expectations now appear to be to reach a comprehensive deal in a couple of months to four months.  My guess is that it will be the latter.  If the restructuring menu has several options, that will be more working parts for the banks to negotiate over.  And then of course more choices to be made with consequent time required to evaluate each.  

      The Central Bank of the UAE and Abu Dhabi are being "kept part of the dialogue, like many other constituent parts of the UAE. When the time comes for a proposal, nothing in it will be a surprise to Abu Dhabi."  Which implies of course that in the past they were surprised perhaps unpleasantly by the goings on in the Emirate "down the road from them" with its debt management or perhaps more appropriately mis-management.

      Finally, many of the themes sounded by the "government" source in the article are from the script recently recited by the Lord, the Deputy, the IMF, and the Financial Times.  Transparency, fairness, equal treatment, etc.  I guess the bully pulpit can have an effect. 

      Gulf Finance House - Clarification on News Report Regarding Qatar Energy City Project

       

      Gulf Finance House issued a clarification on a news item appearing in the aptly named Kuwaiti Newspaper "AlJarida" today on the Bahrain Stock Exchange.  AlJarida apparently stated that the Government of Qatar was studying withdrawing the Qatar Energy City Project from the Developer, Gulf Finance House.  

      (This press release also appears at the Dubai Financial Market but not at the Kuwait Stock Exchange.  It appears that when one is listed on so many financial markets and has so many clarifications to issue it's quite a logistical feat to get them all out at the same time).

      GFH noted that it had not been notified officially in this regard (i.e., that the Qatar Government was studying whether to remove GFH as Developer on QEC).  It also noted that because there was a court case involving GFH and a Qatari businessman (AA:  That would be AlSuwaidi) before the Courts of Bahrain it was not able to comment out of consideration of the rights of the parties to the case.

      You've probably noticed as I have that when issuing a response to a question or a clarification GFH seems to be very precise in its wording.  You'll recall the day before they announced the rollover of US$100 million of their West LB syndicate, they issued a denial that they were discussing a US$50 million Sukuk with West LB.  The next day they announced they had concluded a US$100 million murabaha with West LB. 

      So maybe you're wondering as I am if they have received "unofficial" word from the Qatar Government that it is considering removing them as Developer on QEC?