Friday, 24 June 2016

Global Investment House and National Bank of Umm Al Qaiwan - $250 Million Deposit

The Art of the Deal?
When last (18 October 2010 to be precise) we looked, Global Investment House and National Bank of Umm AlQaiwain were locked in an epic legal battle over a US$250 million “deposit” (if you’re GIH) or a “contractually binding pre-payment” for convertible securities (if you’re NBQ).

You’ll recall that in July 2008 NBQ and GIH had signed an MOU for GIH to purchase NBQ convertible bonds. GIH deposited the funds, but December that same year requested their return as it began to encounter debt problems of its own.  NBQ refused stating that there was a binding deal to buy the convertibles.  

The Dubai courts became involved shortly thereafter and the case was still live in early 2015 with no final ruling.    

During that period, the Supreme Court of Dubai several times reversed lower court judgements and sent the case “down” for a second look by the Appeals Court.  “Experts” from the Dubai Financial Market were asked to provide their input.  That apparently wasn’t enough.  So “experts” from the Emirates Securities and Commodities Authority were pressed into service.

AA is pleased to note that during 2015 the parties agreed an out-of-court settlement.  Of the $250 million original amount, NBQ kept $35 million plus the equivalent of another $34 million (the penal interest amount, the Dubai court had required NBQ to place in escrow with it).   The remaining $215 million was returned to GIH --more precisely to GIH’s creditors who acquired this asset along with no doubt many other “fine” ones in the debt swap.

NBQ is roughly $79 million richer.  GIH’s creditors $35 million plus lost interest/lost opportunities poorer.  GIH poorer as well but hopefully wiser.

Another chapter in structuring and legal documentation breakthroughs (or more precisely breakdowns) of convertible securities in the GCC comes to a close.     On that topic, relevant posts here:

While this saga has ended, AA’s interest has not.  Expect a post soon on Global Investment House.

Memory lane:

Earlier posts on GIH/NBQ can be found here.

If you’re interested, Note 14 in NBQ’s 2015 Annual Report provides a summary of the court saga. 

Thursday, 23 June 2016

The FGB/NBAD Merger in a Global Context

Both the Size of the Fish and the Size of the Pond are Important

Recently, the GCC financial market has been all aflutter following reports of a potential merger between First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD).  

Weighing in at a hefty $170 billion plus in assets, the new entity would displace QNB as the largest bank in the GCC.

Reuters noted that the new bank’s market capitalization of $30 billion “would make it more valuable than Credit Suisse Group AG, Standard Chartered Plc or Deutsche Bank AG.”

Quite impressive until one looks a bit closer.
First, as to the “more valuable” comparison.  Fair enough, but the banks mentioned aren’t exactly in ruddy health. 

DB currently trades at a princely 0.29x book value. CS at about .546x, and Stan Chartered at about .55X.  
P/BV ratios like these are not signs of robust positions.  It seems strange—perhaps only to AA—to compare the UAE and GCC’s new “champion” to banks in such situation. 

AA might be forgiven for also wondering if price discovery and thus market valuation in the markets that DB, CS, and Stan Chartered trade in is more robust than markets in the UAE, particularly when free float is considered.
NBAD is roughly 69% owned by a single non-trading shareholder and so free float is 31%.  FGB reportedly has about 88% free float.  AA was told some years ago, that the bank was actually majority owned by the two sons of Sh. Zayed who were Chairman and Vice Chairman. 

However, I will not contradict the records of the ADX nor the basis on which MS made the determination to include FGB in its MSCI index.  
Second, some comparative metrics to put the new  bank in a global context.

Total assets of GCC banks as of 31 March 2016 were some $2 trillion, according to AA’s analysis of GCC central bank reports.  Note that the data for Bahrain that I used was dated 3Q15, the latest information I could find on CBB’s website.   All the other central banks reported data as of 1Q16.
At 31 December 2014, ICBC of China held $3.3 trillion in assets.  Another 12 banks each held more than $2 trillion.  That means that each of these individual banks was larger than the entire GCC banking sector and obviously much larger than a FGB/NBAD merged entity.  That same data shows that the 50th largest bank held $656 billion. 

By comparison, as per FRB data, $173 billion in total assets would earn the ranking as the 13th largest bank in the USA.

Even more telling, according to 2015 data, three banks had more than $173 billion in market capitalization (Wells Fargo, ICBC, and JPMorgan).   That is, the market value of their equity was larger than the NBAD/FGB merged entity’s total assets.  Based on that data, $30 billion in market capitalization would merit 50th place.  

Saturday, 18 June 2016

Second Look: Barclays 2008 Capital Raising – The Curious Case of the Warrants

Shaykh Mansour Cheers His English FC On
As I restart the blog after my lesser ghaiba, besides posting on new items, I’ll be taking a selective stroll through the past, disinterring old posts for a fresh look. 
Two “bits” of recent news motivate this post.
  1. The GBP 1 billion court case by Amanda Staveley against Barclays that alleges illegal side payments to Qatari investors related to the offering disadvantaged her as she was a potential investor and not merely an adviser. 
  2. IPIC’s involvement in the 1MBD saga reminded me of their role in the Barclays 2008 transaction.  

Attached below is a file with an account of key milestones in HH Shaykh Mansour Bin Zayed Al Nahayan’s (Sh. Mansour) investment in Barclays.   

Because Barclays is listed on the NYSE, it is subject to SEC filing requirements.  Barclays resulting 6K, Schedule 13-G, and Schedule 13-GA filings provide an excellent source of information on the MCNs and the Warrants.  The RCIs as debt instruments were not reported in the filings.  Note that Barclays relies on filings/information provided by investors in the instruments—information it is not in a position to independently verify.    I’ve provided sourcing in the file to save you the trouble of trawling through Barclays voluminous filings to find the UAE related parties’ filings.  However, key “bits” of information (terms and conditions of the disposition of the MCNs, RCIs, and Warrants) are missing so the conclusions drawn are educated guesses and guesstimates in some places.  I’ve used my judgement to make some estimates, but note the conclusions are not definitive. 

Below is a summary of key points.   You’ll find my usually fussy details in the attached file.
I’d like to highlight Point #10 which outlines the three step series of transactions that moved the Warrants from IPIC finally to a company controlled by Sh. Mansour.  There is no explanation in public information (none was required) on the prices, if any, associated with these transactions nor on their rationale.  AA is still scratching his head to come up with a compelling economic or business reason for this circuitous path.  Maybe some of you out there have your own theories.  If so, please post comments.
  1. In late 2008 Barclays announced a GBP 5.8 billion “hard” capital raising with the potential for an additional GBP 1.2 billion if all the associated Warrants were exercised. 
  2. The offering comprised:   
    • GBP 3 billion in 14% perpetual Reserve Capital Instruments (RCIs) 
    • GBP 2.8 billion in Mandatorily Convertible Notes (MCNs) 
    • Associated with the RCIs, 1,516,875,236 Warrants entitling the holders to convert each Warrant to one Barclay’s common share at 197.775 Pence per share.   The Warrants were sold for a total consideration of GBP1.52.  (That’s not a typo).  In September Barclays had used Warrants to place 226 million shares at 336 Pence each and in June approximately 1.5 billion shares to various institutional investors, including the Qatari investors in the October 2008 capital raising.  
  3. Two GCC “investors”, (a) Qatar Holdings and an associated company “representing the personal interests of the Chairman of Qatar Holdings” and (2) HH Shaykh Mansour Bin Zayed Al Nahayan subscribed respectively for GBP 2 billion and GBP 3.5 billion, later reduced respectively to GBP1.75 billion and GBP3.25 billion. 
    • Not that long ago, a younger AA was told by a grey-bearded veteran that one of the benefits of working in the Middle East is the opportunity to bring one’s personal life into business to create a better “work-life balance”.   AA has no doubt that this “enlightened” approach is not limited to the MENA region.  
  4. Sh. Mansour’s final allocation was GBP 2 billion of the MCNs, and GBP 1.25 billion of the RCIS.  The purchase of the RCIs entitled Sh. Mansour to Warrants to buy roughly 758.4 million shares.  The cost of the Warrants was 76 Pence. 
  5. Barclays subsequently announced that Sh. Mansour would fund his investment through “an Abu Dhabi government investment vehicle”.  Enter IPIC of which Sh. Mansour was then and is now still Chairman.  
  6. IPIC took the investments on its balance sheet, later recognizing an approximate US$2.2 billion profit in 2009 when it converted the MCNs to Barclays shares, then sold the shares, and placed the RCIs.  During 2009 it also sold the Warrants (more on that below).
  7. Based on an analysis of IPIC’s 2008 and 2009 financials, it seems that the Warrants were  sold for a nominal price, perhaps the 76 Pence purchase price. 
  8. IPIC does not appear to have benefited from the Warrants; instead these were sold/transferred in a series of three transactions ultimately to an investment company controlled by Sh. Mansour as per SEC filings.  Also Barclays paid Sh. Mansour a GBP 110 million fee on the transaction.  GBP 30 million of this was subsequently paid to Ms. Staveley for her services.  Based on the same analysis of IPIC’s financials, Sh. Mansour appears to have retained the fee.  It does not appear in IPIC’s earnings.  Nor does it appear to have been netted against the cost of the MCNs and RCIs. 
  9. While IPIC earned quite a nice return for a roughly seven month use of its balance sheet, it was exposed to the potential decline in the price of the MCNs or RCIs unless IPIC received a guarantee against such losses from Sh. Mansour or another party.  The existence or non-existence of such a guarantee is not on the public record. 
  10. Warrants Transactions:
  • 1 June 2009 IPIC grants KAQ Holdings an Option to acquire Kadin, an IPIC subsidiary which holds the Barclays investments.  As per SEC filing, KAQH is owned 100% by HE Khadem Al Qubaisi, a member of IPIC’s Board and a familiar name in the 1MBD saga.  SEC filings do not require that the price or reason for a transaction be disclosed. 
    • Since both Sh. Mansour and KAQ were members of the Board this does not appear to have been a transaction designed to avoid an appearance of conflict of interest, e.g., selling to the Chairman of IPIC.  It’s not clear to what were the good economic or business reasons for this transaction. 
  • 1 September 2009, KAQH announces it has bought PCP 3 the Kadin subsidiary which holds the Warrants.  The earlier Option having been amended to allow this.  
    • Note there is an apparent discrepancy between IPIC’s announcement in its 2008 financials that subsequent to 31 December 2008, IPIC had sold “all” its investments in Barclays.   If the Warrants were carried at cost or near cost by IPIC (e.g., 76 Pence), an explanation might that the carrying amount of the Warrants was “immaterial” and need not be detailed. 
  • 12 February 2010, KAQH which also reports changing its name to Future Capital Management Ltd. announces that it has “transferred” (note the SEC filing does not use the term “sale” or “sold”)  PCP 3 to Nexus Capital Investing Ltd.  The reason for this transaction or the name change has AA scratching even harder.  Lucky I have a hard head!   NCIL is declared as 100% owned by Abdul Aziz Al Ketbi. 
    • Old GCC hands will recognize the Al Ketbi name.  Fatima bint Mubarak al Ketbi is mother of key sons of the Sh. Zayed, guiding founder of the UAE.   
  • 17 February 2010, NCIL exercises Warrants for 626.8 million shares. 
  • 7 July 2010, NCIL announces it has “transferred” (again note the use of the term “transfer” as opposed to “sale”) 100% of NCIL (owner of PCP 3 the holder of the 626.8 million shares and remaining Warrants) to Abu Dhabi International United Investments LLC which is declared as 100% owned by Sh. Mansour.   
  • 11 October 2010 NCIL exercises the remaining Warrants.   At this point the estimated unrealized profit on the exercise is some GBP 511 million or about $803 million.  
  • Subsequent to this date, NCIL engaged in hedging transactions with institutional counterparty or counterparties finally ending its ownership of the shares 20 June 2013 as per SEC filing.  The actual profit realized by Sh. Mansour is not a matter of public record.
Apparently BlogSpot does not allow the uploading of documents and so instead of AA's elegantly conceived and executed table, you will have to work with text post available at the link.

Barclays Capital Raising 2008 Timeline

Technical Note:  For some reason the footnotes in the text don't go to the respective URLS.  So you have to go down into the Endnotes Section and click on them there.
31 October 2008
Barclays announces a GBP 5.8 billion “hard” capital raising with a potential additional GBP 1.2 billion if associated Warrants are exercised.  
Qatar Holdings and  a company representing the personal interests of HE Shaikh Hamad Bin Jassim Bin Jabr Al Thani, Chairman of Qatar Holding initially subscribe for GBP 2 billion  and HH Sh. Mansour Bin Zayed al Nahayan (Sh. Mansour) for GBP3.5 billion.[i] 
The generous deal terms suggest that Barclays is seeking to avoid participation in a UK Government rescue scheme that could impose constraints, including on executive salaries.
Sh. Mansour (UAE) Share Only
GBP 2 billion of Mandatory Convertible Notes (MCNs)[ii]
GBP1.5 billion in Reserve Capital Instruments (RCIs)[iii] Later reduced to GBP 1.25 billion.
The RCIs are accompanied by warrants (Warrants) for the purchase of 758,437,618 common shares of Barclays at 197.775 pence each[iv].    The Warrants are a “true” bargain.  They cost GBP76 pence roughly equal to $1.20.
Barclays initially identifies UAE investor as Sh. Mansour. [v]
25 November 2008 Barclays announces that Sh. Mansour will fund his investment through “an Abu Dhabi government investment vehicle which will become the indirect shareholder of the Warrants, the MCNs and the RCIs.”[vi]
This entity later identified as International Petroleum Investment Company (IPIC) Abu Dhabi (100% owned by Abu Dhabi Government) in Barclays' filings with UK and US regulators.[vii] Sh. Mansour is Chairman of IPIC.
IPIC uses special purpose companies to hold the individual investments.
PCP Gulf Invest 1 Ltd. for the MCNs. [viii]
PCP Gulf Invest 2 Ltd for the RCIs.[ix]
PCP Gulf Invest 3 Ltd for the Warrants. [x]
PCP companies are directly owned by Kadin Holdings Inc. which in turn is owned by IPIC.[xi]
This structure allows Kadin to sell off individual investment types.  
Barclays paid GBP110 million (approximately $174.9 million) in fees to Sh. Mansour on the deal.[xii]  He later pays GBP 30 million to a foreign intermediary per Euromoney.[xiii]  
The fee does not appear as income in IPIC’s 2008 or 2009 financial statements. [xiv][xv]  It does not appear to have been netted against the cost of the MCNs and RCIs. 
Thus, it appears that Sh. Mansour retained the remaining GBP 80 million.
18 November 2008
Qatar Holding and UAE agree to each sell GBP 250 million of RCIs back to Barclays.   No Warrants returned. [xvi] 
Reduction in UAE share of RCIs to GBP 1.250 billion.
The returned GBP 500 million in RCIs were placed by Barclays with institutional shareholders.[xvii] 
These investors had complained about being excluded from acquiring the richly priced 14% coupon RCIs. 
1 June 2009
As per SEC filing, KAQ Holdings (KAQH) announces 8 June 2009 that on 1 June 2009 it acquired the option to acquire 100% of Kadin Holdings Ltd any time after 5 June 2009.[xviii]  As per the same SEC filing, KAQH described as 100% owned by HE Khadem Al Qubaisi (KAQ).[xix] 
Sale price and reason for KAQH’s involvement are not disclosed.
The sale doesn’t appear to be an attempt to avoid appearance of conflict of interest because both KAQ and Sh. Mansour are members of IPIC’s Board.
5 June 2009
As per SEC filing, 8 June 2009 IPIC/Kadin announces that it has sold shares on 5 June arising from conversion of MCNs but that it still holds the Warrants.[xx]   
The MCN’s are exchangeable into 1,304,835,721 shares.  IPIC converts MCNs to common shares and sells.
IPIC’s 2008 annual report states that all Barclays investments sold after 31 December 2008.   E & Y’s audit is signed 22 June 2009 placing the sale of “all” Barclays investments prior to that date.[xxi]
No public information on who bought the Barclays shares.
IPIC engaged Credit Suisse to sell shares and place RCIs, as per Bloomberg.[xxii]
1 September 2009
As per SEC filing KAQH announces it has exercised an amended Option on 1 September 2009 that allowed it to acquire PCP 3 the owner of the Warrants.[xxiii]
There is a discrepancy between IPIC’s report it had sold “all” Barclays investments in June and KAQH’s 1 September date.    
Perhaps, PCP3 wasn’t sold till September and was held at its original cost carrying value ($1.20) and so considered de minimis?
Sale price is not disclosed.
Estimated fair value of the Warrants (341.79P less 197.775P) x 758 million-- about GBP1.1 billion based on 1 September5 share price.  [xxiv]   Using the 5 June share price of 263.27P, the fair value is some GPB 497 million. [xxv] 
 31 December 2009
IPIC recognizes $2,198,074 in profit on sale of its interests in MCNs, RCIs, and Warrants.[xxvi]
As per Note 20 to IPIC’s financials, profit is $2.2 billion equal to net proceeds of GBP 4.7 billion ($7 billion) less derived cost of GBP 3.2 billion ($4.8 billion).[xxvii]
The net proceeds of the MCNs are estimated to have been GBP3.4 billion based on Barclay’s closing share price of GBP 2.6327 on 5 June of 2009.[xxviii]   
The sales proceeds of the RCIs are estimated at GBP 1.25 billion given that the RCIs trading at near par in early June as per London Stock Exchange provided data.[xxix]
This suggests that the Warrants were sold at nominal cost.
12 February 2010
As per SEC filings, 12 February KAQH announces it transferred PCP 3 to Nexus Capital Investing Ltd. (NCIL). [xxx] [xxxi]
In the same SEC filing, NCIL declares its ownership of all the share capital of PCP 3.[xxxii]
Transfer of ownership of the Warrants from KAQH to NCIL.
KAQH’s name changed to Future Capital Management Ltd. [xxxiii]
NCIL.  According to SEC filing, Abdul Aziz Al Ketbi owns 100% of shares of NCIL.[xxxiv]  Fatima bint Mubarak al Ketbi is mother of key sons of Sh. Zayed
FCML is transferor of record of PCP 3 to Nexus.[xxxv]
Note transaction is “transfer” not “sale”.  Does this indicate no payment made?
Reason for KAQH’s name change and transfer not disclosed.
17 February 2010
As per SEC filing, PCP3 exercises Warrants to buy 626,835,443 shares of Barclays' common stock, leaving it Warrants to purchase an additional 131,602,175 shares.[xxxvi]
Shares were not sold so profit was not realized. [xxxvii]
Barclays' closing price per share 17 February 2010 was 279.25.[xxxviii]   Because cost of the Warrants appears to be zero or near zero, the estimated unrealized profit on exercise is (share price less Warrant price of 197.775) times number of shares.   GBP 511 million or $803 million.[xxxix]
7 July 2010
As per SEC filing, Al Ketbi “transfers” 100% of NCIL to Abu Dhabi International United Investments LLC.[xl]
As per the SEC filing, Sh. Mansour owns 100% of Abu Dhabi International United Investments LLC (ADIUI) which in turn owns NCIL.[xli]
Another “transfer” instead of sale. 
11 October 2010
As per SEC filing, NCIL exercises remaining Warrants acquiring 131,602, 175 shares of Barclays.[xlii]  NCIL (Sh. Mansour) now owns 758,437,618 shares. [xliii]
Barclays' closing price per share 11 October 2010 was 275.55.[xliv]  Estimated unrealized profit on exercise GBP102million or  $163 million.[xlv]  
Value of all shares held and thus Sh. Mansour’s total unrealized profit is estimated GBP590 million or $938 million.
20 June 2013
As per SEC filing, PCP 3 no longer holds any Barclays shares.[xlvi]
The reason given is the “closing and settlement of hedging transactions”.  The details of the hedging transactions are not public and so it’s not possible to determine the final profit realized by Sh. Mansour on the Warrants/Barclays shares.