Suq Al Mal

Awal Bank Chapter 11 Filing Update - Request for Extension of Time to Provide Information

2010-11-04T21:03:00.003-04:00

Here's an update from Bell Pottinger Middle East on the case. BPME is the PR company used by Charles Russell for the Awal Bank engagement.

Awal Bank files request for extension of time

Bahrain, 4 November 2010: Charles Russell LLP, acting as External Administrator and Foreign Representative (the “Foreign Representative”) of and for Awal Bank BSC (“Awal Bank”) has filed a request for an extension to the deadline to file schedules of assets and liabilities and statement of financial affairs (the “Schedules”) in the Chapter 11 Case commenced on 21 October 2010.

The request follows the first day hearing that took place on 26 October 2010 at which the Foreign Representative sought an order to establish a workable protocol to administer the Chapter 11 Case in cooperation and coordination with the Bahraini administration. After hearing from both the Office of the United States Trustee and counsel for the Foreign Representative, the Bankruptcy Court directed that the Motion be further considered at a later date in order to allow more time to assess the information provided and after giving opportunity for creditors to make representations regarding the relief requested in the Motion.

The Foreign Representative has determined that additional time is required to assess, among other things, creditor views in relation to the Chapter 11 Case. Upon this assessment being undertaken, the Foreign Representative will determine whether to further pursue the Chapter 11 Case. The Office of the United States Trustee has indicated it has no objection to the Foreign Representative’s request for additional time to file the Schedules.

In October 2009 the Foreign Representative obtained “foreign main proceeding” recognition from the Bankruptcy Court under Chapter 15 of the U.S. Bankruptcy Code for Awal Bank’s administration proceedings in Bahrain.

The Bahraini administration governed by the Central Bank of Bahrain and Financial Institutions Law (“CBBFIL”), continues to be recognised as the foreign main proceeding under Chapter 15. The U.S. based legal activities form part of a multinational litigation process, with court proceedings also currently underway in Bahrain, the Cayman Islands, the Kingdom of Saudi Arabia, Switzerland and the United Kingdom.

Please contact David J. Molton, Esq. from Brown Rudnick LLP, counsel to the Foreign Representative, at 00 1 212 2094822 with any inquiries.

Gulf Finance House - Draft Terms on New Sukuk = 23% Annual Return

2010-11-01T19:50:00.000-04:00

Choose Your Door Carefully. Some Deals are Better than Others.

As you recall, GFH announced with great fanfare its plan to raise up to US$500 million in new capital. If you don't, here's an earlier post.

I've just gotten a copy of the draft term sheet for the Sukuk from a reliable source.

First, a recitation of the terms:

Type - Convertible Murabaha Facility
Status - Senior Unsecured Debt
Maturity - 3.5 years
Profit Payment (aka Interest Rate) - Indicative 12% per annum!
Conversion Price - US$0.31 per share
Incentive Structure - If conversion election made before 31 December 2010, last 2.5 years Profit Payment in shares at US$0.31 conversion price.

Before the commentary, two very important caveats:

GFH's shareholders have not approved the issuance. GFH's first OGM and EGM failed for lack of a quorum.
The terms sheet is marked "indicative" meaning it's not binding, but rather serves as a basis for discussion/negotiation with potential investors.
Nonetheless, these terms provide a window into what GFH's board and management believe will be necessary to secure investor interest. In that regard, I'd note that the accompanying investor presentation (a future post will comment on that) states: "Some commitments already received from Chairman, strategic investors, and related parties". So you can be pretty sure that GFH has drawn on these disinterested parties to set market-based terms.

Now to the commentary.

Assuming a take and hold investor who does not elect conversion until after 31 December 2010, the promised return (IRR basis) is roughly 23% per annum.
12% of that return composed of cash (the "interest payments"). It's hard to see GFH earning sufficient returns to have much left for shareholders after the interest payment is made.
11% of that from the discount on the shares (assuming the shareholders approve the 1:4 reverse split and GFH trades at 4 times its current US$0.125 per share. A rather substantial dilution of existing shareholders.
The total promised return reflects the weak financial condition of the company when it has to offer essentially private equity like returns for its debt. Of course, the actual return will depend on GFH's performance which may indicate a market judgment on the probability of such performance.
It also establishes what might be considered an "unfortunate" benchmark for GFH's debt issues. Particularly, when one considers this is apparently an early offer to potential investors. And as we all know the first price in the suq is not the last.

Gulf Finance House to Ask Sukuk Holders for Three Year Extension

2010-11-01T19:00:00.002-04:00

Reuters is quoting an unnamed GFH spokesman that the Bank intends to ask the holders of its US$200 million Sukuk issue (US$137 million outstanding) to roll the Sukuk on its original terms for three years. That is, to extend the maturity from 2012 to 2015.

I'm not sure if "chuzpah" is an Islamic banking term, but it would sure seem to apply here. The Sukuk is currently trading at around just a whisker over 50% of face value.

I'd also note that earlier this week GFH formally stated that it had not issued the information the Gulf Daily News report that it intended to either (a) sell assets to US$90 million in debt next year or (b) reschedule debt. If you recall the original GDN article, there was a third alternative mentioned - which was extinguishing debt via asset transfers. Interestingly enough, what is mentioned in the GDN article is precisely what I see on page 13 in the copy of GFH's October 2010 "Return to Growth" Presentation to investors which I recently obtained.

It is, I suppose, indeed sad that someone is issuing presentations using GFH's highly respected name in such a fashion.

As to pricing for GFH debt, please see my soon to be issued companion post on the draft terms for GFH's proposed new Sukuk.

National Bank of Kuwait – Related Parties’ Loans Analysis

2010-11-01T18:53:00.001-04:00

One of our regulator and insightful commenters, Advocatus, said that there were rumors in the market that NBK was experiencing problems with its exposure to M Al Khorafi and had to extend the loans more than once to keep them from becoming classified as non performing.

An intriguing comment.

Abu Shukri is known as a careful banker, but even Homer nodded from time to time. And sometimes it is very hard to say "no" to a very well connected shareholder. As they say: "Past performance is not a guarantee of future results."

Without access to NBK's internal records, it's not possible to say one way or another. Let's look and see if we can find any signs of difficulties in NBK's financials.

Related Party Information

The first assumption is that loans to MAK or other AlKhorafi entities would be reported in the Related Parties Section. The data below is taken from the Related Party Notes in the Bank's Quarterly financials and is expressed in millions of KD.

Quarter	RP Loans	Collateral	% Cover
1Q07	215.1	519.7	242%
2Q07	262.2	608.4	232%
3Q07	294.9	634.3	215%
4Q07	307.3	672.6	219%
1Q08	285.5	728.2	255%
2Q08	295.2	742.0	251%
3Q08	316.6	719.1	227%
4Q08	350.6	494.4	141%
1Q09	278.8	451.5	162%
2Q09	310.4	544.9	176%
3Q09	189.7	363.8	192%
4Q09	219.3	343.8	157%
1Q10	210.7	380.2	180%
2Q10	186.5	350.7	188%
3Q10	183.7	413.1	225%

Collateral coverage is reasonably comfortable, except for 4Q08. If there was a problem with Related Party loans, it's likely this is when it occurred. Two factors accounted for this change: a very dramatic decline in collateral and an increase in outstandings.
The significant drop in collateral coverage in 4Q08 coincides with the dramatic decline in market values following the collapse of Lehman. This suggests that the collateral is composed of equities and other marketable securities.
One would also expect that this would be a time of liquidity and cashflow stress leading borrowers to draw down additional amounts to cover their needs.
However, there is remediation on the principal side in 1Q09 with a KD71.8 reduction (twice the increase in 4Q08). That's quite remarkable because this was not exactly a "boom" time for Kuwait or the world in general.
Further declines in 2010 appear to indicate that there is no problem with RP loans. By 1Q10 these were below their 1Q07 level. Collateral coverage remains comfortable and the absolute of loans outstanding is below those in 1Q07.
I'd guess that Zain shares make up a good portion of the collateral for MAK exposure. But that is just a guess. If so, the Itisalat acquisition should lead to a further dramatic reduction in RP loans.

Renegotiated Loans

Another place to look is for the IFRS #7 Note on renegotiated loans.

Note 28.1.4 to NBK's 2009 financials state that only KD8.4 million of loans were renegotiated in that fiscal year and nil the year before. I didn't seem similar disclosure in the 2007 financials.
If NBK were having problems with MAK exposure, one might expect to see larger "renegotiated" amounts, though it is possible in this sort of situation for a bank to extend a new loan to repay another short term loan and treat it as a new loan. One would expect that interest would have to be paid in full for the auditors to sign off. I'd note that one's expectations are not always fulfilled.

Conclusion

The financials don't disclose any problems, though as mentioned above this analysis is based on an external diagnosis without benefit of x-rays (details of NBK's exposure to the AlKhorafi Group).

International Investment Group - KPMG Report to be Released

2010-10-31T07:53:00.000-04:00

IIG announced in several venues today that its new board had approved the release of the KPMG report to certificateholders of its Sukuk.

"Unfortunately", AA missed this "wonderful" investment opportunity. What was I thinking? And, so, I won't be getting a copy.

Anyone who has a spare copy that they don't mind sharing please contact me via this blog's Contact Page.

Awal Bank Chapter 11 Filing - Statement on Behalf of Charles Russell

2010-10-29T17:50:00.005-04:00

In response to my request I received the following from Alisdair Haythornthwaite at Bell Pottinger Middle East (UAE). BPME is a division of Chime Communications, a leading UK public relations firm (among other things).

Awal Bank BSC Chapter 11 Case Update

U.S. Court Delays Consideration of Awal Bank’s Proposed Chapter 11 Protocol

Bahrain, October 27, 2010: Charles Russell LLP, acting as External Administrator and Foreign Representative (the “Foreign Representative”) of and for Awal Bank BSC (“Awal Bank”) attended a “first day” hearing on October 26, 2010.

At the hearing, the Bankruptcy Court considered the Foreign Representative’s Motion for Entry of an Order Establishing Protocol for Chapter 11 (the “Motion”). After hearing from both the Office of the United States Trustee and counsel for the Foreign Representative, the Bankruptcy Court directed that the Motion be further considered at a later date after giving opportunity for creditors to make representations regarding the relief requested in the Motion.

The U.S. based legal activities form part of a multinational litigation process, with court proceedings also currently underway in Bahrain, the Cayman Islands, the Kingdom of Saudi Arabia, Switzerland and the United Kingdom. It is therefore necessary that any Protocol established in the U.S. works alongside the work being undertaken in Bahrain. In this regard the Foreign Representative is considering whether to further pursue the relief requested in the Motion.

In October 2009 the Foreign Representative obtained “foreign main proceeding” recognition from the Bankruptcy Court under Chapter 15 of the U.S. Bankruptcy Code for Awal Bank’s administration proceedings in Bahrain. The Bahraini administration governed by the Central Bank of Bahrain and Financial Institutions Law (“CBBFIL”), continues to be recognised as the foreign main proceeding under Chapter 15.

I'll keep monitoring the Bankruptcy Court of the Southern District of New York for electronic filings on the case to see if there is anything on the Court's reasoning for its decision.

Damas - New AED 614 Million Agreement with Abdullah Brothers

2010-10-28T05:26:00.000-04:00

Damas announced on Nasdaq Dubai that it had revised its agreement with the Abdullah Brothers regarding the amounts they owe to Damas.

One key item is the fixing of the price of the 1,840,250 grams of gold the Brothers stole from the Company at AED 256 million.

Presumably, this has been set so that Damas is not disadvantaged.

Setting the amount owed is a key step. Collecting it may prove a bit more difficult.

Awal Bank Chapter 11 Filing

2010-10-27T23:14:00.000-04:00

There's a report in AlQabas Thursday edition that Judge Groper denied Awal Bank's Chapter 11 petition. At this point, there is nothing posted on the NY Southern District Bankruptcy Court website. The last document there is the notice of 26 October for the hearing to be held today (27 October).

Gulf Finance House 3Q10 Financials: A Train Wreck

2010-10-27T22:45:00.031-04:00

Studio Lévy & fils 1895
When You Turn the Corner Make Sure the Track Goes There

Get out your magnifying glasses and join me in reading the full 3Q10 financials that GFH submitted to the Dubai Financial Market Wednesday morning. Since I've got my soapbox out for a later tirade, I might as well take this opportunity to suggest to the DFM that they invest a few dirhams in upgrading their electronic imaging system for faxes they receive. There really is no good reason in this day and age that the output cannot by A4 size.

Looking at the financials we see from Note 12, that GFH's US$115 million loss was primarily caused by provisions. Some US$101 million of them. But not provisions for investments. Rather US$60.5 million for an investment banking service receivable. And US$36 million from the sale of investments. I guess if one sells assets of "volatile" quality, one might expect some "volatility" in the receivables from the sales.

That being said, GFH has continued to maintain in its Other Assets the US$134 million "magical asset provision" and US$161.8 million in "Financing to Projects".

Another unfortunate trend is operating income which is running US$60.7 million negative for the first nine months of 2010 as compared to US$36.7 million for the comparable period the previous year. This is due to a collapse in revenues. On the cost side GFH has actually done quite nicely in bringing costs down. But, if one can't pay the light bills from operations, it's hard to see a bright future.

As a result of the net loss, GFH's CAR has slipped below the 12% minimum set by the CBB. In the financials, KPMG coyly states in Note 2:

"Further, the capital adequacy ratio of the Group as at 30 September 2010 was below the minimum required by the regulatory ratio …"

No quantification is given. We don't know if GFH just missed the ratio and has a CAR of 11.99%. Or, if it's CAR is 1.9%. You might think that the auditors would consider it important to quantify this shortfall. It certainly is a bit of "material" information that stakeholders would like to know. And more importantly should know.

If like me that's what you think, you're disappointed by KPMG's apparent lack of action on this point. They were silent on this topic. And they did not force GFH to disclose this information in a note to the financials. It's unclear if this is due to desire not to embarrass its client. Or slavish adherence to some accountant's taqlid as to the wording used for "emphasis of matter".

Note to Central Bank of Bahrain: It might be a good idea to specify in Module PD that when the CAR regulatory threshold is breached, the Licensee state the resulting ratio with details of the calculation. And if anyone from the CBB is reading this, I'd reiterate my earlier suggestion that Module PD be amended to require that Licensees report on the BSE the more detailed of (a) what Module PD requires and (b) what they are required to report on other exchanges. There is no reason that Bahraini investors should get second rate incomplete information which is available to investors in Dubai or elsewhere.

We don't have all the information required to calculate GFH's CAR at 30 September 2010. But we can make some estimates which should give a pretty good directional sense of the CAR.

The Table below summarizes these:

	30-Jun-10	Case A	Case B
Regulatory Capital	US$ 363,220	US$ 248,220	US$ 114,229
Total RWA	US$2,811,417	US$2,683,417	US$2,549,417
CAR	12.92%	9.25%	4.48%

Notes & Assumptions:

30 June 2010 CAR is as per GFH's Basel II Pillar 3 Disclosure.
The key assumption is that there is no real significant change in Regulatory Capital or Total Risk Weighted Assets (Credit, Market and Operational Risk) except for the adjustments specified in the two "cases". These adjustments are made from the 30 June figures reflected above. This is a simplifying assumption so the ratios derived will not be exact but should be "close enough" to get a good sense.
Case A: US$115,000 (the 3Q10 loss) is deducted from Regulatory Capital and US$128,000 is deducted from Total RWA at 100%.
Case B: US$134,000 (the "magical asset" provision) is deducted from both Regulatory Capital and Total RWA. And again at 100%.

And if you have any doubt about the realisable value of any of GFH's other assets, like those Project Financings which may very well be to the same firms whose financial condition caused their bankers to pull the GFH guarantee, it's not too much of a stretch before the CAR is negative.

The results are to say the least not encouraging. It's hard to see how even the "Prettiest" words could convince even the "wisest" of investors to put equity into this firm.

The Gulf Daily News is reporting that they've seen a GFH "Investor Presentation" in which GFH states it intends to sell assets to raise cash to pay back some US$90 million in debt maturing next year or restructure that debt. In further discussions with GFH, the GDN was told that other options being considered were an IPO of some of its mega projects (North Africa and India) or perhaps giving creditors land, shares or other of GFH's highly valuable assets. There is a danger with the latter for creditors. As the choice assets are stripped from GFH's balance sheet, remaining creditors are left with lesser ones to settle their debts. The only option not mentioned here was putting a brick from one of these projects under EJ's pillow in the hopes that the Real Estate Jinn would put US$500 million under his pillow.

It's hard to imagine a "wise" creditor putting funds into GFH.

And it takes a bit of "optimism" to see a real future for GFH.

You can find more posts on GFH by using the Label "Gulf Finance House".

Gulf Finance House 3Q10 Financials: GFH Continues to "Turn Corner". But Unfortunately Into Oncoming Car

2010-10-27T05:35:00.003-04:00

Not sure how GFH will spin this, but they've announced a loss of US$115.1 million for the 3Q10 making the loss for the first nine months of the year US$162.8 million. And, no, the optimistic US$134 million of reimbursement rights remains on the balance sheet. So this loss is due to other problems,. The reimbursement problem has yet to be acknowledged - which means of course that GFH is in a "world of trouble".

As a result, Shareholders' Equity is at US$303 million, well below the US$400 million TNW covenant. As well as breaching the Central Bank of Bahrain minimum CAR requirement.

More later when I have time.

Footnote for the Central Bank of Bahrain.
As usual, GFH has released the absolute minimum on the BSE, while releasing its entire 3Q financial on the DFM. It's unclear why Bahraini investors should be disadvantaged. Perhaps time to revise the regulation to require that if a firm is required to disclose more on another exchange, then it disclose the same on the BSE.

I will make no comment about the ethics of a firm that engages in such selective disclosure, particularly one that claims to follow the teachings of a noble religion.

Another Cut from Kawalis (Al Qabas)

2010-10-24T20:12:00.003-04:00

Another gem from Kawalis.

- سئل مدير استقال من شركة استثمارية غير مدرجة عن ملايين دنانير طارت خلال عهده، فأجاب بأنها رشاوى دفعت لجهات حكومية!

That's funny I'm sure all my Gulf friends and those from the Levant and parts further West told me that Rashwa was a singer. Sort of like Nancy but more modestly dressed and without all her provactive gyrations. And so suitable for performances even for the self-proclaimed religious. "Discreet yet beautiful" was how one described her. I'm guessing Rashawi is the name of her new band. Perhaps like the Spice Girls. But definitely more modestly dressed as I said above.

Translation: "A manager who resigned from an unlisted investment company was asked about the millions of dinars which "flew away" during his tenure. He responded that they were bribes (rashawi plural of rashwa) paid to government departments."

Pretty clear to me that this isn't an item about Kuwait.

3-0

2010-10-24T15:59:00.000-04:00

Getting generous in he gets older?

New Addition to List of Interesting Blogs - Dubai Nights

2010-10-22T17:16:00.000-04:00

Another addition to our list of interesting blogs. Dubai Nights.

More on Awal Bank Chapter 11 Filing

2010-10-22T11:17:00.002-04:00

Updated for comments on Chapter 11.

Here are some additional details on Awal's filing.

The case number assigned by the Bankruptcy Court of the Southern District of Manhattan is 10-15518-alg. Awal's previous Chapter 15 filing has case number 09-15923alg.
As indicated by the "alg" at the end of the case number, Justice Allan L. Gropper has been assigned this case.
The Bank is being represented by Brown Rudnick LLP who filed the Voluntary Petition for Bankruptcy under Chapter 11.
The filing was authorized by Awal's Administrator, Charles Russell, LLP. Presumably before proceeding CR obtained the no objection of the Central Bank of Bahrain who appointed them. I think this is a pretty strong indication that the CBB has decided to proceed with the liquidation of the Bank. Note: A Chapter 11 proceeding is of course a reorganization not a liquidation. The latter is Chapter 7. Chapter 11 allows the debtor to propose a plan for dealing with its existing obligations - either payment in full, in part, conversion to equity, etc. Post implementation the debtor continues as a going entity (e.g., Continental Airlines). So what I mean here is that the CBB has decided to proceed knowing it will cause the lenders some pain. That in turn means the situation is beyond repair. And that the Bahraini authorities have decided to "bite the bullet" and take the reputational damage that will come from such action.

As part of its filing, Awal Bank made the following statements:

After the payment of various expenses including that of administration, there will be no funds available for distribution to unsecured creditors.
Estimated creditors are between 50 and 99.
US assets are above US$50 million up to and including US$100 million.
Estimated debts (worldwide) are over US $1 billion. (This is the largest amount provided on the Bankruptcy Filing Form).

As required on the Filing Form, the debtor lists its top twenty unsecured creditors. No amounts are provided though.

Here they are in the order of appearance on the Form:

Abu Dhabi Commercial Bank, Abu Dhabi
Abu Dhabi Islamic Bank, Abu Dhabi
AlGosaibi Money Exchange, Saudi Arabia
Bank of Montreal, Canada
Bayerische Hypo-und Vereinsbank, United Kingdom (London Branch)
Bayerische Landesbank/Bayern LB Germany
Boubyan Bank, Kuwait
Calyon Corporate and Investment Bank, United Kingdom
Commercial Bank of Kuwait, Kuwait
Commercial Bank of Qatar, Qatar
Commerzbank Global Equities AG (formerly Dresdner Bank) Germany
Commonwealth Bank of Australia, United Kingdom (London Branch)
Fortis Bank, Belgium
Gulf International Bank, Bahrain
HSBC, Australia
HSBC, United States (NY Branch)
HSH Nordbank AG, German
JP Morgan, United Kingdom (London Branch)
Kuwait Finance House (Liquidity Management House), Kuwait
The International Banking Corporation, Bahrain

If you're wondering about TIBC (which also filed under Chapter 15 in 2009) taking a similar action, a court hearing is scheduled under their case next week Tuesday (26 October). Stay tuned.

Awal Bank FIles for Chapter 11 Bankruptcy in US

2010-10-22T08:06:00.004-04:00

In terms of recovery all venues are likely to be highly inconvenient.

Update: See subsequent post.

According to news reports on Bloomberg, on 21 October Awal Bank filed for Chapter 11 bankruptcy in the Southern District Court of Manhattan listing assets of between US$50 million to US$100 million and liabilities of more than US$1 billion.

That would not seem to augur well for creditors. Though it should come as no surprise.

Earlier Awal had filed under Chapter 15 of the US Bankruptcy Code. That Chapter is used when a company asserts its proceedings are taking place under a foreign jurisdictions laws and procedures broadly equivalent (in fairness) to US procedures. It will be interesting to see what arguments were advanced for moving the proceedings to the USA. Forum non conveniens?

Global Investment House Pays Another US$72.5 Million on its Restructured Debt

2010-10-20T18:24:00.000-04:00

Global announced that value 21 October 2010 it had paid down another US$72.5 million of principal on its restructured debt.

With that payment it will have paid down 8.8% of its total debt. It has nine quarters to pay the rest. A journey of one thousand miles begins with a single step.

Global Investment House - Better Times Coming. Capital Increase in 2011?

2010-10-19T20:03:00.002-04:00

Au or FeS₂?

Also from the Reuters Middle East Investment Summit, Ms. Maha Al Ghunaim noted that:

Global's performance for 2H10 will be better than 1H10. (Global lost KD34.4 million in 1H10 compared to KD98.6 in 1H09.
The Company continues to monitor its costs and further reductions are in store.
It expects to begin discussions with unnamed strategic investors in 1Q11 to discuss a capital raising.

Gulf Bank Kuwait - On the Mend. No More Loans to Saudis.

2010-10-19T19:48:00.004-04:00

A banker's memory is a wonderful thing.
Even the most painful experiences can be forgotten.

Michel Accad gave an interview at the Reuters Middle East Investment Summit in which he made the following points:

3Q10 is the turning point in GB's two year strategy to rebuild.
Each subsequent quarter will be a relative improvement over the previous.
By 3Q11 the rebuilding will be done (apparently one quarter ahead of time) and the bank will move to strengthen its income generation or its geographic coverage.
The goal is to increase local market share from today's 12% to some 16% in five years.
After 3Q10, the Bank will not need to provision as much but will continue to do so for precautionary reasons (rather than need).
The Bank has decided not to make any loans to Saudi clients for at least 3 years. No doubt a reaction to its troubles with AlGosaibi and Saad Groups.
Instead it will, however, make loans to foreign investors for their projects in Kuwait. And no doubt concentrate on its high quality Kuwaiti clients.
As of 3Q10, the Bank has successfully reduced its non performing loans below 20% of the total portfolio. That's a lot of "Saudi" clients, it appears.

International Investment Group - Update from Delegate on IIG Funding Sukuk (Hint: No Good News)

2010-10-19T06:55:00.000-04:00

Deutsche Bank as the Delegate on the above transaction issued an announcement on Nasdaq Dubai advising that:

IIG had advised that it was awaiting ministerial approval of its new board so that they could vote to release the KPMG study to certificateholders who had signed a confidentiality agreement.
The Paying Agent advised it had not received the funds for the 12 October payment.
Certificateholders reminder of Dissolution Events and that they need to vote to accelerate.
That IIG has not honored the claim served under the Purchase Undertaking.
That the Delegate is not obliged to take actions unless indemnified to its satisfaction. Apparently, it has not been.

National Bank of Umm Al Qaiwain 3Q10 Financials - Update on Global US$250 Million Deposit Dispute

2010-10-18T20:38:00.001-04:00

NBUQ released its 3Q10 financials earlier today. (Yes, I'm still stubbornly using that abbreviation even though their stock symbol is NBQ But I will alternate today between the two to partially satisfy those who have "complained".)

The major focus is as usual on the dispute over the US$250 million "deposit" (if you're Global Investment House) or the "prepayment" (if you're NBUQ). As you'll recall the dispute turns over whether an MOU between the two parties was a binding contract obliging GIH to buy securities convertible into NBQ equity. Yet another example of poor transaction structuring and legal documentation involving this instrument - which has been a rather costly mistake for purchasers in the past.

You can find more on this topic by using the labels "Convertible Bonds" and "National Bank of Umm Al Qaiwain".

The relevant notes in their financials are Other Assets (Note 13) and Other Liabilities (Note 17).

As per Note 17, NBQ is holding the funds in a non interest bearing account in the amount of AED918.25 million (equal to US$250 million at the FX rate as of 30 September). But as you'll see from Note 13, it has deposited AED1,034 million with the First Instance Court of Dubai pursuant to an order from that Court.

The difference (just under AED 116 million) is presumably interest and perhaps legal costs for Global. The amount represents a little over one quarter's net income for NBUQ.

The Appeals Court is scheduled to hear NBQ's appeal on 8 November 2010. The 29 September session adjourned without taking a decision and was designed to let NBQ object to both the decision in Global's favor and the interest payment.

You'll also note that in Other Assets, NBQ is showing some AED82.7 million in "split deals". Shades of Mashreqbank and its deals with Awal Bank and with TIBC.

The Sharp Tongue of Al Qabas

2010-10-18T19:58:00.002-04:00

Sometimes the Pen is a Sword

Here's today's Kawalis from Al Qabas:

- مدير في البورصة اصيب باحباط شديد بعد تعيين لم يكن يتوقعه اذ كان مطمئنا لوعود.. لم تتحقق!
- مسؤول نفطي استعجل اصدار بيان عن «انجازات» وصفه البعض بأنه بمنزلة لفت نظر الى من يسعون الى اقصائه في تعيينات مرتقبة.
- طلبت السفارة الاميركية السيرة الذاتية لمدير البورصة الجديد حامد السيف.. ولدى السؤال عن السبب قال طالب السيرة: نطلب سيَراً كثيراً من وقت لآخر

I love the last bit attributed to an unknown person at US Embassy Kuwait who when asked why the Embassy wanted the biography/CV of Mr. Hamid AlSaif, the newly appointed Director of the KSE, said, "We ask for a lot of biographies from time to time".

The first two items deal with the difficult job market in Kuwait. The first someone who was promised the position of Director of the KSE and didn't get it. The second an oil executive who prepared a list of accomplishments designed to get him a new job (expected appointments).

Kuwaiti Investment Companies Blame Central Bank for Delay in 2009 Financials

2010-10-18T19:36:00.000-04:00

AlQabas reports that unnamed listed Kuwaiti investment companies have launched a sharp attack against the Central Bank claiming that they provided their financials four months ago, responded to requests from the Central Bank for clarifications three months ago and have heard nothing.

Since CBK approval is required to release financial reports and since financial reports are a condition for the holding of the required annual shareholders' meeting, these meetings have not taken place exposing the companies to fines from the MOIC.

The article also notes that where another company has a significant ownership stake in a "delayed" company its own financials are delayed because the first company's auditors don't have enough information to complete their audit work.

While Al Qabas did not name the companies, according to the KSE, the following companies have been suspended for failure to provide 2009 financials:

The Investment Dar, last financial released 31 December 2008. It is therefore missing the quarterly reports from 2009 plus FYE 2009 plus the first two quarters of 2010.
International Leasing and Investment, last financial released 30 September 2008. So it is missing FYE 2008, the first three quarters and FYE for 2009 plus the first two quarters of 2010.
Abraj Holding, last financial released 31 July 2009 so it is missing FYE 2009 (October fiscal year end) and the first two quarters of 2010. (Technically Abraj Holding is not an "investment firm", though it may look like one from its activities).

Perhaps, it's a question of whether they (CBK) believe what they been given.

Footnote: As if "poor" Abraj didn't have enough problems already, a group of shareholders has reportedly written to the MOIC complaining that in contravention of the law two government employees are member of the board: one gentleman who works in the general administration of the fire department and the second who works in handicapped citizens affairs.

Dubai Sovereign Bond: "Pay to Play"

2010-10-18T15:22:00.000-04:00

An article in the FT today reports that bankers were told that lead underwriters on Dubai's recent US$1.25 billion sovereign bond were told that in order to be considered they needed to make loans to the Emirate. Supposedly a two-year loan for some US$300 million priced at Libor +300 bps.

A couple of observations.

First, this is a pretty standard request, particularly from a client having a bit of a problem. Just as the good banker is taught to seek to increase his "share of a customer's wallet" in good times, borrowers especially those currently out of favor in the market look for their bankers to be understanding in more difficult times. In both cases there's a lot of talk about the importance of relationships. How strong they are. Sentiments said with no doubt more sincerity than the average politician's promise. But just as meaningful for that.

Second, Dubai's Sovereign Bond was "priced to place". Dubai could not afford to have this transaction fail. With a bond, a low price means the interest rate was set higher than it needed to be. Pretty much the same rationale as IPO pricing. Under price the security by a bit so that the offer is successful. And then as the share rises in initial trading, you've got a good story for the company and the investors.

I've seen estimates that Dubai's pricing may have been as much as 0.75% to 1.0% higher than required. The underwriters who "sat" on a substantial portion of their allocations may not too far in the future have large capital gains - though probably not until after issuance of the DEWA bond. If they've placed it with clients, as some will have, then they will derive some relationship benefits there and can use those to secure additional business from those clients. Just as the investment firm that can allocate IPOs to its customers gets something back.

For HSBC and Standard Chartered with major domestic operations in the UAE, being seen as a good friend is a useful thing. If indeed SC's threat to move its corporate headquarters to the more tax and regulation friendly shores of Dubai is more than mere posturing, another good reason.

Finally, there's probably also a very hard headed calculation here - that it's going to be some time before Dubai regains full market access. Amounts are likely to remain limited and increasing only slowly. Pricing will probably improve even slower. As the thinking goes, there are opportunities for profit here.

And of course, there is one other factor in play: banker and investor ADD.

Do bankers have short memories?

Excuse me, could you repeat that, I've forgotten what you asked.

2-1 (Bit of a Scare There)

2010-10-17T23:06:00.000-04:00

Saudi Capital Markets Authority Levies Fines and Penalties in Excess of SAR102 Million

2010-10-17T20:07:00.001-04:00

On 12 October the Saudi Capital Markets Authority levied another set of record fines and penalties but not as high as its all time record of SAR278 million last January. If you look closely, you'll see that many of those cited today were also involved in that fine.

The CMA levied SAR800,000 in fines and SAR99,434,098.10 in penalties (disgorgement of illegal gains) against seven individuals (two of whom were apparently not involved in illegal activity but received gains from that activity). The fines and penalties concern trading in the shares of Al Baha Investment and Development Company between 23 July 2006 and 27 September 2006 as follows:

A. Mr. Jarrallah Bin Muhammad Bin Nassir Al-Jarrallah

Return of SAR28,923,826.57 in illegal trading earnings on the trading.
A fine of SAR 300,000.
Prohibition from purchasing traded shares for seven years.
Prohibition from working in a securities firm for seven years.
Prohibition from acting as a broker, portfolio manager or investment advisor for seven years.

B. Messrs. Sa'id Bin Muhammad Bin Nassir Al-Jarrallah, Fa'iz Bin Salih Bin Abdullah Bin Mahfouz, Nabil Bin Mu'id Bin Yahya AlQahtani

Sai'd to return illegal trading gains of SAR2,119,935.00
Nabil to return illegal trading gains of SAR24,896,213.23
Each of the three of them fined SAR100,000.
Prohibition from purchasing traded shares for five years.
Prohibition from working in a securities firm for five years.
Prohibition from acting as a broker, portfolio manager or investment advisor for five years.

C. Mr. Abdulrahman Bin Abdulmuhsin Bin Sulayman AlMoajil

A fine of SAR200,000.
Prohibition from purchasing traded shares for five years.
Prohibition from working in a securities firm for five years.
Prohibition from acting as a broker, portfolio manager or investment advisor for seven years.

D. Mr. Muhammad Bin Nasser Bin Jarallah Al-Jarallah

Return of illegal trading gains in his account of SAR38,293,835 caused by actions of Jarallah, Said and Fa'iz. No fine as he apparently was not involved in the activities just a beneficiary.

E. Mr. Nasser Bin Muhammad Bin Nasser Al-Jarallah

Return of illegal trading gains in his account of SAR5,200,288.30. Like Mr. Muhammad immediately above, a fine was not levied against him, presumably because he was not involved in the illegal activities.

I'm guessing our friends above just didn't trade two stocks back in 2006 so we may be seeing more enforcement actions from the Saudi CMA.

Gulf Finance House - Capital Reorganization and Raising - A Look "Behind the Curtain"

2010-10-17T17:43:00.002-04:00

"Pay No Attention to the Man Behind the Curtain"

GFH published the agenda for its shareholders' general meeting on the capital reorganization/raising to be held 31 October. So far only in Arabic on the DFM and on the KSE (copy below so you can follow along). Strangely not yet on the BSE.

As the picture above suggests, by looking behind curtain we can get a real understanding of what's going on.

In brief the key points are:

The capital reorganization and US$500 murabaha are being structured to make them as attractive as possible to new investors. That means that existing shareholders are being substantially diluted through a variety of clever means - which might not be apparent to most readers of the agenda for the shareholders' meeting.
A share swap transaction between Mr. Janahi and GFH which seems designed to strengthen GFH's creditworthiness as well as provide some much needed "relief" on the CAR both in terms of risk weighted assets and potentially equity.

First, let's look at what's immediately visible: the agenda for the shareholders meeting. Shareholders are being asked to:

Approve a share swap between GFH and its Chairman/Executive CEO, Mr. Esam Janahi. In return for his 104,923,734 shares in Khaleeji Commercial Bank ("KHCB"), GFH will give him 100% of its shares in AlAreen Company for Leisure and Tourism (whose main asset is the Lost Paradise of Dilmun Water Park in Bahrain) plus US$3 million. The latter either in cash or Treasury Shares of GFH.
Reduce the number of GFH's issued shares from 1,896,332,565 to 474,083,141 in a reverse 4:1 share split.
Reduce the paid in capital from US$625,789,746.45 to US$142,224,942.375. A difference of US$483,564,804.075.
Reduce the par value of shares to US$0.3075 from US$1.32.
Approve the issuance of up to US$500 million in a privately placed convertible murabaha through a special purpose company set up by the bank or established at its request. (That is, the SPV will lend to GFH. It will obtain its funding from various investors.)
The profit rate ("interest rate") on the murabaha to be the "market rate" according to the rate and formula established by the Board of Directors shortly before issuance. Such profit rate to be payable in cash or additional GFH shares.
The conversion price to be between US$0.31 and US$0.40 per share - with the rate of discount not less than 20% to 40% of the market price of the shares - but not below the nominal share price. The conversion price to be set by the Board shortly before issuance.
A tenor of 3.5 years.
Conversion at investors' option with right of Board to offer an early conversion "incentive" according to conditions the Board will set. Note that means that the murabaha does not count as equity for either regulatory (CAR) or accounting purposes until it is converted. For the latter, only the embedded equity option is counted as equity under IFRS.
Waiver of pre-emptive right of shareholders to new equity.
Authorization for Board or whoever it appoints to take necessary legal steps to implement and for Chairman or whoever he appoints to sign the necessary legal documents.
Conversion of GFH's share register to electronic form according to the rules of the Central Bank of Bahrain and the BSE.

Now a look behind the curtain via some hopefully informed analysis:

A. Share Swap - KHCB for GFH

GFH gets several benefits from this transaction.
Immediate strengthening of GFH's creditstanding. KHCB is a better asset than the Water Park, which is why the West LB syndicate asked for the former. Probably better earnings and better future. The Water Park like the Riffa Golf Course, no doubt, looked like a very "wise" idea on paper. In the real world, it's probably not.
Regulatory relief on the CAR - a matter of great importance to GFH who sit right on the edge. The first way this comes is by moving this "puppy" (the water park, which is risk weighted in the GFH's CAR calculation) to someone else's kennel (balance sheet). In return GFH gets KHCB, increasing ts holding from 36.99% to 46.99%. Currently, GFH partially consolidates KHBC, and, thus, it doesn't have to worry for CAR purposes about fluctuations in KHCB's share price - which has dropped by roughly 50% since last year this time. Since KHCB's CAR is roughly 31% as at 30 June 2010, the impact on GFH's Risk Weighted Assets and thus its CAR should be positive.
As you'll notice, the US$3 million owed to Mr. Janahi can be paid in cash or GFH shares. So there's a potential boost to equity if the latter can be used to settle this amount. Treasury Shares are deducted from Shareholders' Equity at their cost. What this means is that if GFH gets more than zero in proceeds from the sale or conversion of Treasury Shares, the amount of its Shareholders' Equity will go up by the amount of the proceeds received. This happened in 2Q10 where GFH sold US$29.1 million (original cost) of Treasury Shares for US$7.6 million and recognized a US$7.6 million consequent increase in Shareholders' Equity. While admittedly a small card in the scheme of things, this could be just the thing that helps GFH keeps its head about the 12% threshold in a close situation. As I suspect the 2Q10 Treasury Share sale was.
And, to round things out, a footnote on KHCB. Without qualifying my opinion about the credit benefit of acquiring KHCB, I call your attention to Note 3.4 in KHCB's Basel II Pillar 3 Disclosures as of 30 June 2010, which shows that some 24% of its Islamic Financing Assets are past due. According to that information, some 42% of the past dues (BD47,385 - which is the total amount of the past due loans not just the past due installments which are BD10,487) are up to 30 days late. Proceeding cumulatively, 51% up to 60 days, and 72% up to 90 days. According to KHCB's risk classification system, some 59% of the past dues are rated Credit Grades 1-6. Personally, I would have thought a past due loan would automatically go on the "watch list" (Credit Grades 7-8) but then I don't have the details of KHCB's loan portfolio including collateral. In any case those concerned with KHCB should keep an eye on this area to see if there is deterioration or improvement in the future.

B. Capital Reorganization

Under the Bahraini Commercial Companies Law of 2001, GFH is obliged to take action now that accumulated losses are 75% or more of paid in capital. Approved methods for rectifying this situation are: (a) reducing paid in capital by an amount sufficient to offset the losses and/or using other equity reserves (share premium, statutory or voluntary reserves), (b) raising additional capital and (c) a combination of (a) and (b). Generally, financial institutions use Method (c). In some cases a bank might get away with merely offsetting the losses against existing capital - assuming its pre-reorganization CAR were robust. GFH's is not so it must do both.
As you'll notice, GFH is not using its reserves. Why? Very simply put: the path it has chosen is designed to make the murabaha more attractive to investors. Under GFH's plan, they will get more of the total shareholding of the Bank for each dollar they contribute.
1H10 financials provide the details of the components of GFH's capital. If GFH were to use its US$206 million share premium and US$85 million statutory reserve (total US$291 million), it would only have to "use" US$192 million of paid-in-capital. Thus, leaving original shareholders holding US$433 million in common equity instead of US$142 million.
To take control, the new money would have to put in US$433 million plus $1. Under GFH's reorganization plan it only needs to put in US$142 million plus $1.
Similarly, if the new investors put in the full US$500 million, under GFH's plan they get 78% of the total equity. If the reserves were used as outlined above, they would only get 54%.
Clearly, there is a conflict here. Existing shareholders want to be diluted as little as possible. New shareholders want the most value for their new dollar. Sadly for the existing shareholders, including the even "wiser" ones who invested in late 2009, their money is already spent. The new and presumably much wiser investors need to be persuaded to part with their money. GFH has set the reorganization and the terms of the murabaha to make it as easy as possible to get the money that it desperately needs.

C. US$500 Million Murabaha

Use of an SPV as the lender can be quite a useful device in shielding the identity of the new lenders/shareholders, particularly if the SPV is not incorporated in Bahrain. It will depend on how much transparency the CBB wants to demand here and how far it can push this Bank which has an important and powerful friend in Bahrain.
One would expect the market rate for unsecured GFH debt to be rather hefty. And the value ascribed to the option on GFH shares much less so. The Board will price "at market" - which will mean in effect what investors demand.
The approval also provides for a discount from market price of between 20% to 40%. This is where the reverse split comes to play. There is nothing in the Bahrain CCL that requires this as part of the capital reorganization. I suspect GFH is hoping that the reverse split will work a bit of magic on their market price. Over the past two weeks, GFH has traded at KD0.033 (roughly US$0.11) per share. A 4:1 reverse split should bring the price to say US$0.44 per share - allowing the Board to discount the conversion price to say just a whisker over par to make the transaction even more attractive.
"But wait there's more" as they say on the late night TV ads for the ShamWOW! The Board is allowed to offer an incentive (terms unspecified in the approval) for an early exercise. That allows an even greater discount to attract new investors. So, if the conversion price is set at a whisker over par, can the Board issue shares below par through this device?
You ask about the hapless existing shareholders? Well, GFH already has their money and needs more. So they are out of luck.

KSE announcement below.

[12:17:53] ِ.اجتماع الجمعية العمومية العادية و غير العادية لبيت التمويل الخليجي
يعلن سوق الكويت للأوراق الماليه بأن بيت التمويل الخليجي أفاده بأنه
سوف يتم عقد جمعية عمومية عادية و غير عادية للبنك في الساعه 9 من
صباح يوم الاحد الموافق 31-10-2010 في فندق منتجع و قصر العرين
وقد طلب البنك ايقاف التداول على اسهمه في السوق اعتبارا من اليوم
الاحد الموافق 17-10-2010 وحتى اشعار اخر حيث حصل على موافقة ‏
مصرف البحرين المركزي على ذلك .‏
هذا وسوف يتم خلال الجمعية العمومية مناقشة ما يلي
أولا : جدول اعمال الجمعية العامة العادية
ِ1- المصادقة على محضر الاجتماع السابق .‏
ِ2- المصادقه على معاملة استبدال الاسهم بين بيت التمويل الخليجي و رئيس
مجلس ادارته السيد /عصام جناحي و التى سيتم بموجبها تحويل حصته في المصرف
الخليجي التجاري ش.م.ب بالكامل (104.923.734 سهم ) الى بيت التمويل الخليجي
مقابل الحصول على حصه البنك في شركة العرين للترفيه و السياحه ش.غ.خ و ‏
البالغه 100% (جنة دلمون المفقودة) بالاضافه الى مبلغ 3 ملايين دولار تدفع
اما نقدا و / او بواسطة اسهم خزانه بيت التمويل الخليجي .‏
ِ3- الموافقة على تغيير سجل مساهمي البنك من سجل عادي الى الكتروني ‏
وفقا لاحكام مصرف البحرين المركزي و سوق البحرين للأوراق الماليه .‏
ثانيا : جدول اعمال الجمعيه العامه الغير عاديه ‏
ِ1- المصادقه على محضر الاجتماع السابق .‏
ِ2- التباحث في والمصادقه على دمج الاسهم الصادرة لبيت التمويل الخليجي ‏
بمعدل 4:1 لينتج عن ذلك تخفيض عدد الاسهم الصادرة من 1.896.332.565 سهم
الى 474.083.141 سهم .‏
ِ3- التباحث في والمصادقه على تخفيض راس المال المدفوع من 625,789,746.45 ‏
دولار امريكي الى 142,224,942.375 دولار امريكي بسبب الخسائر المتراكمه ‏
ِ(سيقدم المدقق الخارجي السادة كي بي ام جي بيانا مستقلا يتعلق بتاييدهم لهذا
التخفيض ) .‏
ِ4- التباحث في والمصادقه على خفض القيمة الاسمية الجديدة للاسهم والتي ‏
ستبلغ 1.32 دولار امريكي بعد الدمج و تخفيض راس المال المدفوع المشار اليه
في البندين 2 و 3 من بنود جدول الاعمال الى 0.3075 دولار امريكي .‏
ِ5- التباحث والمصادقه على قيام بيت التمويل الخليجي من خلال اية شركة
غرض خاص يؤسسها البنك او تؤسس بناء على طلبه لاقتراض ما يصل ‏
الى 500,000,000 دولار امريكي من خلال مرابحة تمويليه قابلة للتحويل
الى اسهم بناء على البنود و الشروط التاليه :‏
ِ- معدل ارباح يحدد وفقا لسعرالسوق ووفقا للمعدل والصيغه المحددة من قبل مجلس
الادارة قبل وقت قصير من تاريخ السحب . يمكن دفع هذا الربح نقدا او في صورة
اسهم عينية في بيت التمويل الخليجي .‏
ِ- سعر تحويل يتراوح من (0.31 دولار امريكي الى 0.40 دولار امريكي) ‏
ِ(بمعدل خصم لا يقل عن 20% الى 40% من القيمة السوقيه في اعقاب
الدمج بحيث لا تقل عن القيمة الاسمية للسهم) فيما سيتم تحديد السعر النهائي ‏
من قبل مجلس الادارة قبل فترة قصيره من تاريخ السحب .‏
ِ- مدة تصل الى ثلاثة سنوات و نصف .‏
ِ- غير مضمونه و لكن قابله للتحويل بمحض خيار المستثمر الى اسهم في بيت
التمويل الخليجي قبل انتهاء المدة ووفقا للشروط التى يحددها مجلس الادارة.‏
ِ- حافز التحويل المبكر لتشجيع المستثمرين على التحويل الى اسهم قبل
نهاية المدة وفقا للشروط التى يحددها مجلس الادارة .‏
ِ6- منح التنازل عن حق الاولوية الخاص بمساهمي بيت التمويل الخليجي ‏
فيما يتعلق باصدار اسهم عادية جديده سيتم اصدارها عند تحويل تمويل المرابحه
وفقا لبنود الفقرة 5 من جدول الاعمال .‏
ِ7- تخويل مجلس الادارة و/او من ينوب عنه للقيام بجميع الاجرءات الرسمية ‏
المطلوبه و الصحيحه لتفعيل تمويل المرابحه بما في ذلك دون حصر تحديد و/او
تعديل شروط المرابحه والمستندات الاخرى ذات العلاقه .‏
ِ8- تخويل رئيس مجلس الادارة او من ينوب عنه بالتوقيع على تعديل عقد
التأسيس و النظام الاساسي نيابة عن المساهمين امام كاتب العدل فيما يتعلق ‏
بالتغييرات في راس المال لتعكس ما تقدم .‏
علما بأنه في حالة عدم اكتمال النصاب القانوني لهذه الجمعية سيكون الاجتماع ‏
الثاني يوم الاحد الموافق7-11-2010 في نفس الزمان والمكان وفي هذه الحاله ‏
ستسري احكام الماده 57 من النظام الاساسي للبنك. وفي حالة عدم اكتمال النصاب
القانوني في الاجتماع الثاني ، سيتم عقد اجتماع ثالث يوم الاحد الموافق ‏
ِ14-نوفمبر-2010 في نفس المكان و ذلك بسريان احكام المادة 57 من النظام
الاساسي للبنك . ‏

Abyaar Real Estate KD50 Million Asset for Debt Swap?

2010-10-16T21:14:00.001-04:00

Citing informed sources, Al Watan reports that Abyaar will sign an asset for debt swap of KD50 million with a group of lenders. The amount represents 35% of FYE 2009 debt.

The article also claims that additional debt settlement/restructuring agreements are near to signing and will follow in train.

Earlier post on Abyaar here.

Gulf Finance House to Seek US$500 Million in Additional Equity

2010-10-16T20:21:00.003-04:00

SWI (Search for "Wise" Investors) Project

The Large Array at Jabal Dukhan Bahrain

Asa Fitch over at The National reports that GFH has issued a press release in which it advises that it intends to call a shareholders' general meeting to approve:

A reduction in paid in capital (4 old shares for one new) in order to absorb accumulated losses in retained earnings. Like other GCC states, Bahrain has a law that when a company's accumulated losses reach 75% of paid-in-capital, it must take action to eliminate those losses. That can be done by raising new capital. Or by reducing paid in capital and using reserves (if available) to offset the losses. As a financial institution, GFH, has to maintain a minimum 12% CAR and so unless it could reduce assets (which it cannot without incurring more losses), the bank has to raise new capital.
The issuance of US$500 million in new equity. This is up from the US$300 million originally mooted by GFH. It's unclear why the increase. It may have found that there is substantial demand for its new shares. I find that hard to believe. It seems to me that with its track record and current market conditions, raising even US$300 million would have been a very hard sell. Hence the picture above. Alternatively, it may be that the additional amount is designed to cover the US$137 million in 2Q10 provisions that GFH magically turned into an asset.

At 30 June 2010, GFH's capital structure was composed of:

Paid in Capital US$626 million
Share Premium US$206 million
Treasury Shares (US$23 million)
Reserves US$88 million
Accumulated Losses (US$480 million) Equal to 77% of PIC.
Total Equity of US$417 million.
If the "magic" provision assets of US$137 million are factored in, Accumulated Losses are (US$617 million), resulting in Total Equity of US$280 million.

GFH are savvy enough to know that a failed rights offering would be an extremely unhelpful event. So either this is an act of desperation (perhaps motivated by its auditors awakening to the US$137 million charade) or GFH has found some wise investors to carry the issue. And that may become evident if the Board proposes that shareholders approve a structure under which any shares unsubscribed for in the Rights Offering be placed by the Board with "strategic" investors.

One tactic the Bank can use is to mitigate its deal failure risk is to obtain shareholder approval to issue up to US$500 million over a period (usually the maximum is two or three years I think but am not certain). In this way it could issue multiple tranches so that the amount it brings to the market at any one time is more digestible.

As to the motives behind the raising of new equity, I think these include more than just funding operating expenses:

Regulatory compliance. GFH's CAR is "on the wire".
Market credibility. New equity would be a demonstration of confidence in the future, though a failure will be a major setback.
Funding for upcoming debt repayments.
Funding for operating expenses.

The "Developed" West - A New Kind of Forthrightness

2010-10-14T11:38:00.000-04:00

A quote from the Financial Times on JPMorgan Chase's 3Q10 earnings conference.

Switching between annoyance at one analyst’s use of a “squawk box” to terse replies on JPMorgan’s soaring reserves against litigation and passionate perorations about the bank’s role in society, Mr Dimon displayed his customary forthrightness even if he was not always forthcoming about some of the details.

This was just too good a quote to let pass without comment. Positively brilliant.

And, I'd note it sets a high standard for this blog's favorite investment bankers in Kuwait and Bahrain to aspire to. (And, yes, each word in that sentence has been deliberately chosen).

New Addition to List of Interesting Blogs - Felix Arabia

2010-10-14T08:28:00.001-04:00

Felix Arabia by Sultan Sooud Al Qassemi.

Hat Tip to David Roberts of The Gulf Blog.

The "Developed" West - Burger King Kids Banking

2010-10-14T07:39:00.000-04:00

"First-Class Business in a First-Class Way"

It's got to be gratifying to work for a first-class firm that labels you a "Burger King kid".

Also on the subject of documentation, which is a frequent rant here, the rule should be very simple: No note, no foreclosure.

If making a mistake in drafting a contract is rookie behavior, losing one's contract is below the level of incompetence. The Burger King Kids, as the bright executive had it, may be in the executive suite.

The Capital Adequacy Ratio – How Accurate a Measure?

2010-10-13T22:45:00.015-04:00

Hard to Tell the Time With Just One Hand

In a post on the Booz & Company study on Kuwaiti banks' stress tests, I said that The National Bank of Kuwait was the most creditworthy bank in Kuwait.

Advocatus, one of the frequent readers/commenters on this blog, challenged that statement noting that as of 31 December 2009, NBK had the lowest CAR 15.03% versus 15.9% for Gulf Bank, 17.23% for Ahli Bank of Kuwait and 18.22% for Commercial Bank of Kuwait.

I'd like to address his remarks in a bit more detail than is convenient in a comment reply. So I'm moving the discussion to the "main board".

My intent is to reply with two posts. The first theoretical. The second specific to NBK and a few other Kuwaiti banks.

In this post I will discuss some shortcomings in the CAR which make it an inaccurate as well as incomplete measure of financial strength.

To start off a bit of introduction.

What is the CAR?

It is a ratio which measures equity capital against risk weighted assets ("RWA"). Neither the numerator nor the denominator in this ratio are the same numbers that appear in the financial statements. Rather both are constructed according to certain rules set forth in Pillar 1 of the Basel II Framework. A document of some 192 page. As that suggests, the rules are complex. Rather than delve into too much detail, I'll give a broad overview.

Regulatory Capital

The first step in determining regulatory capital is the allocation of a bank's accounting capital into one of three tiers. Tier 1 is considered the most solid. The others progressively less so. For example, common equity is Tier 1. Subordinated debt Tier 2. The amounts of Tier 2 and Tier 3 capital that a bank can use in calculating its regulatory capital for the CAR are limited. Tier 2 may be no more than 100% of Tier 1. Medium term subordinated debt may not exceed 50% of Tier 2 capital. However, to be counted even at the 50% level it must have an original maturity of five-years. If the maturity is shorter, it does not count. If the subordinated loan is a bullet loan, each year it must be reduced by 20% for CAR purposes. Tier 3 capital consisting of short term subordinated debt can be only used to support market risks and only to the tune of 72.5% of such risks. Any amount over these limits for Tier 2 and Tier 3 capital is not counted as part of regulatory capital for the CAR.

Once these have been determined there are a series of further adjustments. Goodwill is deducted from regulatory capital as are significant minority investments (which are deducted 50% from Tier 1 and 50% from Tier 2) and excesses over the 15% single obligor (Group) credit exposure limit. The full amount of equity in insurance firms may be required to be deducted from regulatory capital at the discretion of the national regulator. There are also a variety of haircuts on revaluation reserves for both property and securities.

Risk Weighted Assets

Basel II classifies risks (for the CAR) as either credit, market or operational.

The Basel Framework allows banks three options for determining Credit Risk.

A Standardized Approach (the bank is given formulas to apply to the face value of its exposure).
An Internal Ratings Based Foundation Approach ( the bank determines the Probability of Default for customers but uses the Loss Given Default, Exposure at Default, and Maturity as mandated in Basel II).
An IRB Advanced Approach (here the banks determines all these factors).

For Market Risk there are two basic approaches.

The Standardized Approach (banks use the set of factors given in the Basel II Framework to determine risk weighted "assets" for market risk)
A Model Approach (generally VaR).

For Operational Risk there are three approaches:

The Basic Indicator Approach
The Standardized Approach and
The Advanced Measurement Approach

Most banks in the MENA region use the Standardized Approach for credit, either the Standardized or a Model for Market Risk and the BIA or Standardized Approach for Operational Risks. As a general rule, Central Banks in the area prohibit use of the more advanced models: the two IRB approaches for Credit Risk and the Advanced Measurement Approach for Operational Risk.

One way to get a quick sense of how this system works is to look at the Basel II Pillar 3 disclosures of Kuwaiti banks. For 2009, you'll find NBK here (starting on Page 33), CBK here, and Gulf Bank here (from page 17).

What's the purpose of the CAR?

Regulators are charged with preventing problems at a single bank or group of banks from having a systemic impact on their economies. Accordingly, Basel II is designed not only to measure risks (to give early signs to the regulator of impending problems) but by the very act of measurement itself (expressed in the CAR) to dissuade banks from certain types of activities which are felt to be risky. This is achieved by raising the risk weights for these activities.

It's important to understand this function. It is not merely a measure of creditworthiness. It is also a control device. And since the stakes are high, the controls are generally set with large safety margins.

What are the major issues with the CAR?

Capital

From the above discussion it should be clear that regulatory capital does not consider all the equity support a bank may have. One simple example: If subordinated debt at Bank A is twice its Tier 1 capital, half of that subordinated debt is not factored into the CAR. Yet, if Bank A encounters problems, that "excess" is still subordinated to other creditors providing an element of protection.

More importantly, one critical aspect of capital the quality of retained earning is not considered. And often is not considered on a consistent basis.

One example are changes in the fair value of financial instruments. If a bank takes these changes to income (Fair Value Through Profit and Loss – FVTPL), they are considered a part of Tier 1 capital dinar for dinar. If the same financial institution were to take the changes in fair value to equity (Fair Value to Equity), this income would be considered part of Tier 2 capital and would be haircut 55%. Calling these earnings FVTPL or FVTE does not change their fundamental economic characteristics. Yet for calculation of the ratio it does.

One might also argue that changes in fair value are not the same as cash earnings. If these changes are deliberately inflated or markets are in a period of irrational exuberance which reverses, equity can vanish with astounding rapidity.

Classifications of bond holdings as "banking book" versus "trading book" can result in different income and fair value treatments for exactly the same securities. Again the economic substance is the same, yet the CAR will differ. Same asset. Same economic reality. Different income and equity treatments.

Assets

Credit Risk

As indicated above, the mere act of classification of an asset can have an impact on its value. The same with its risk weighting. Securities held in the trading book generally have lower risk weights than those held in the banking book.

But the key issue for banks is the Standardized Approach for RWA for loans, the major earning assets of most commercial banks.

Under the Basel II Standardized Method for Credit Risk, risk weights are assigned to loans to private sector companies based on their credit grades (if any).

AAA to AA- receive a 20% risk weight
A+ to A- a 50% weight
BBB+ to BB- a 100% weight
Below BB- a 150% weight
If the loan is unrated, a 100% weight.

You can well imagine that weaker credits avoid ratings like the plague because if one is objectively a B credit but not rated, one gets the same risk weighting as a BBB- to BB+. Again the presence or absence of a rating (but not the underlying economic reality) drives the CAR.

More importantly, the following are not considered in determining the risk weight of a loan: the final maturity, the pattern of principal repayments, and the pattern of interest payments. Thus, a five year loan to Company XYZ has the same risk weight as a one year loan. A five-year bullet loan with quarterly interest payments is the same as a five-year zero coupon loan and is the same as a loan with quarterly principal and interest payments. The purpose of loans is not considered. A loan for real estate speculation is treated the same as a loan for a factory. Many forms of collateral are not recognized for CAR risk mitigation purposes, e.g., real estate, except the latter gives a partial mitigation for residential mortgages. Yet, the bank does have recourse to that collateral in the event of a borrower default and is more protected than one that has no collateral. Yet, the CAR does not reflect this.

Operational Risk

For Operational Risk, banks are generally limited to the Basic Indicator Approach or Standardized Approach. Under the BIA Operational Risk is 15% of the average of past three years' revenues (adjusted for certain banking book securities income and other items). If a bank has had zero adjusted revenue for those three years, it has no Operational Risk - at least for the CAR. Under the Standardized Approach a similar formulaic approach is used against revenues for eight defined lines of business with specific assigned LOB risk weight to each of the 8 ranging from 12% to 18%.

As you might expect, banks generally determine which method will give the lowest Operational Risk charge and select that method as being the most "accurate". Again the mere selection of the measurement method affects risk – at least for the CAR, though not I'd add in the real world.

Market Risk

Market risk calculations are more complicated so I'm just going to wave my hands here with an unsupported assertion.

Sometimes VaR will give a lower market risk number than the Standardized Approach. Sometimes not. Depending on the choice of the measurement method, the same portfolio can have quite different risk weights. No difference in economic reality. But a difference in CAR.

Examples

Let's take two imaginary banks: Bank A and Bank B. For simplicity sake we'll ignore market and operational risk.

Bank A is a conservative bank that lends only for productive activities (no speculation) and structures its loans to require semi-annual payment of interest and principal. It also diversifies its risk among many customers, has a wide variety of tenors on its loans, and makes a practice of taking real estate as collateral with borrowing base of 50% of collateral. Its KD100 loan portfolio is all to unrated clients so its RWA are KD100. After adjustments it has KD13 in capital giving it a CAR of 13%.

Bank B is less conservative. It also has a KD100 loan portfolio. Its underwriting standards are much lower than Bank A's. If a borrower can find his way to a Bank B Branch, he can get a loan. As part of its customer friendly approach, Bank B does not take real estate or other collateral. All the loans it makes are for five-year tenors with interest and principal due at maturity. It also is less diversified than Bank A and has numerous customers with loans equal to 14% of its regulatory capital (just under the 15% threshold). After adjustments it has KD 15 in capital.

Bank B's CAR is 15%. Bank A's CAR is 13%.

Based solely on CAR, one might think that Bank B was a stronger more creditworthy bank than A. It is not.

What credit factors are not considered in CAR?

The quality of the Board and senior management. Are they seasoned and prudent bankers? Do they have a good business and strategic sense? Or do they chase the latest fad? As long as the music is playing, are they dancing?
Corporate culture and ethics. Loose standards lead to problems.
The quality of credit underwriting and structuring. Most problems in the portfolio are caused by easy credit standards, weak or sloppy loan terms, etc.
The quality of loan monitoring and administration. The earlier a bank finds a problem the earlier it can try to fix it.
The quality and liquidity of assets. If the bank needs to raise cash, can it do so quickly? What sort of discount, if any, will be required on its assets?
The quality of earnings. Equivalent to cash or accruals of imaginary promises?
The structure of liabilities. Diversified across lenders, instruments, and markets? Are maturities appropriate for the bank's business? Or is the bank dependent on a very limited source of funding? Most or all of which is short term?

These are critical factors that can impact the ability of a bank to weather a storm. They are an essential element of its financial health. The CAR does not consider them at all.

For these reasons, one cannot rely on the CAR alone as the single measure of a bank's financial health and strength. A wider view is required. One that evaluates a range of factors, such as the CAMEL approach used by US regulators. To its credit the Basel Committee on Banking Supervision has recognized this - which is why it instituted the Pillar 3 disclosures - a first step to giving lenders and investors a look under the "hood" of a bank.

The above also explains why some banks (Bank B in our case above) should be required by the regulator to hold more than 12% capital. Economic capital is the buffer than absorbs unexpected risks. The riskier the bank the more capital it should hold.

Shocking Developments in Chile Mine Rescue: 34th Man Emerges. 35th Man Left Behind.

2010-10-13T21:46:00.001-04:00

Surprise 34th man emerges from San Jose rescue shaft.

Today the World witnessed the remarkable rescue of 33 brave men trapped roughly 700 meters below the ground in the San Jose mine in Chile since August. Bienvenidos, hombres!

After the last miner had been lifted to safety, crowds were amazed at the emergence of the President of Iran from the rescue tunnel as shown in the above exclusive Al Ahram photograph.

As with events of this sort, amid the joy there was some profound sorrow. An Egyptian citizen, one Mr. Mohammed H. Mubarak, who was scheduled to be the first to come to the surface, has been left behind alone in the mine as the rescue shaft was too narrow to accommodate him. Apparently, the physical description contained in his official Egyptian Government biography - which was used in designing the tunnel - understated his weight and girth. Informed sources have confirmed that he has been provided a chisel and hammer and is slowly working his way to the surface. Suq Al Mal has been told by its sources in Egypt in yet another Suq Al Mal exclusive that Al Ahram expects to publish a picture tomorrow showing him emerging first from the tunnel.

What Does Fitch's Study on CDS Spreads as Predictors of Default Tell Us About Modern Finance Theory?

2010-10-13T10:08:00.000-04:00

Fitch released a report "CDS Spreads and Default Risk Interpreting the Signals" which has received a good deal of coverage in the press. One example from the Financial Times.

Analyzing five property-sensitive sectors in USA market in the wake the recent housing crisis, Fitch found that all five of these sectors had wild swings in their derived default risk. For example, USA REITs went from a CDS-derived probability of default ("PD") of 0.7% at June 2007, to 10.1% in October 2008, to 18.0% in March 2009, and then to 4.4% in August 2010. Details on the other four sectors are in the Table on Page 3. Despite these highly elevated PD's, actual defaults did not increase as predicted. The derived PDs were inaccurate. Fitch cites the volatility of CDS markets and the tendency for directional momentum (that is, an imbalance of demand and supply) as the cause of these false positives.

There are two key conclusions.

CDS-derived PDs can give potentially erroneous and costly portfolio management signals.
More importantly, as shown in the Table on Page 9, if the derived PDs are used in Basel II IRB models, financial institutions would be forced to dramatically and needlessly increase provisions at precisely the wrong time in a crisis. A pro-cyclical move which would depress the probability and strength of a recovery.

Fitch's study confirms what various analysts (including yours truly) have been saying about CDS spreads. The market is too thin to give reliable information. These are at best directional indications of PD. Fitch's detailed empirical analysis on this topic is therefore highly welcome and useful.

But there's more here. Fitch's report raises fundamental questions about current finance theory: both the construction of models and the use of market data – whether direct or derived – as inputs to those models during periods of crisis. And so challenges some of the fundamental assumptions of corporate finance orthodoxy about market prices – both at the macroeconomic and microeconomic levels.

The simple empirical fact is that during periods of stress or exuberance, markets are dysfunctional. Prices no longer reflect, if they ever did, intrinsic values. During a crisis, there is a dramatic increase in liquidity preference motivated usually by fear. We see this most clearly in the breakdown of "normal" correlations among markets and asset classes. During a boom, a dramatic decrease in liquidity preference motivated by greed and irrational exuberance.

This happens not only in illiquid markets like those for CDS but in the most liquid markets. In the period after 9/11, the NYSE plunged dramatically. While the attack was horrific, our way of life was not under serious threat. Our economy was not in danger of being destroyed, particularly by a relatively small band of cave dwellers in Afghanistan and Pakistan. For that task it would need and subsequently got some timely domestic help.

In such circumstances as in booms, the usual assumption about what market equilibrium means has to be thrown out the window. When markets are not rational, in no sense do their prices reflect intrinsic or fair values. Using the values they give – potential inputs into our "sophisticated" models – makes little sense. Market equilibria are much more unstable than during more "normal" times.

But, even if we assume that markets continue to function in such periods, we are misled by another myth: the imaginary no profit equilibrium derived from microeconomics. As this theory goes, intense competition leads sellers to lower their price until goods are sold at cost. Now, I recognize this is the one sacred doctrine on which all or nearly all the various economic cults agree. They may dispute vociferously with one another over which is the sole efficacious economic sacrament – the gold standard, the quantity theory of money, deficit spending, tongue of Newt, tax cuts etc But on this issue there is by and large doctrinal unanimity.

However, back in the real world, I don't know many businesses that price at cost. Or that stay in business if they do. Yet, we derive our financial models based on this illusion.   Often we use it to derive inputs for those models. As you'll notice from Fitch's report, the standard equation for deriving PD from a CDS is to take the CDS spread in bps and divide it by the presumed loss on default (LGD) in percentage terms. The result is the PD expressed in percentage terms. So a 100 bps CDS spread with a 50% LGD turns into a 2% PD.

As you'll notice, this calculation assumes that the seller of risk protection is content to receive as his compensation exactly the amount of his expected loss. This is far removed from the standard microeconomic theory of equilibrium, which would have the seller's price result in an overall break even position. Here the seller does not recover his operating costs – salaries and other expenses which I believe it would be safe to say are not small in most investment banks. One might, I suppose, argue that in normal non crisis or non boom markets we can ignore these costs because they are spread over large volumes of business. Perhaps.

But in a crisis or in a boom where there is excess demand for a product, I'd expect any rational business man or trader to take advantage of supply/demand dynamics and increase his profit margin. which as I've argued above was not at "zero" from "normal" times. More importantly, in a crisis where an institution and a trader are assuming an ongoing risk (like a CDS), I'd expect there to be a strong incentive - both for the trader and his firm - to price up to cover that risk taking. The personal and institutional consequences of a wrong bet can be rather serious – just ask AIG. So we should rationally assume that during a crisis CDS spreads include not just the protection seller's objective best estimate of the PD and LGD but also a fear/caution based adjustment of those factors plus a rather hefty profit margin. It's not hard to imagine a seller demanding profit margin well in excess of 50%.   As before, in line with best doctrinal thinking, we're ignoring costs. Clearly, the profit margin and the additional fear induced safety margin in pricing are going to be a major component of the pricing. All of which of course explain why often CDS spread-derived PDs are greater than 100%. And why using them in models makes scant sense because the resulting PDs are inflated. Probably by significant factors. Not percentages that would be considered "normal" tolerances.

We like to think that we are more advanced than our predecessors. We have elegantly constructed apparently "sophisticated" and "scientific" models. Finance theories are expressed with imaginary mathematical precision.

Yet at the very heart of these models are assumptions that would make a medieval scholastic blush.

Assume a market with perfect information and no transaction costs and you will discover, perhaps - but hopefully not - to your surprise, that it turns out to be an efficient market. Something I believe has to do more with logic than economics: the principle of tautology.

Assume that the market price reflects intrinsic value and you are highly likely to input the silliest numbers as variables into your model.

What's needed at the core of this discipline like any other is a healthy does of skepticism, a constant challenging of revealed assumptions and a cold hard eye on results.

Norton Rose Survey on Middle East Lending

2010-10-12T20:55:00.000-04:00

You may have seen some references to this survey in press articles.

The Middle East survey, which really seems to be focused primarily on the UAE and the GCC, is part of a larger NR global survey "Global Financial Recovery: A Matter of Perspective". The ME Section is pages 58 through 64.

As with all exercises of this sort, it's utility is a function of the selection of the group asked to participate and then those who actually did.

Dubai Courts: Potential Conflict of Jurisdiction Between Onshore and DIFC Court

2010-10-12T20:07:00.000-04:00

Bradley Hope over at The National reports on the case between Taleem versus Deyaar and National Bonds. In September the DIFC ruled that the case could be heard in its system. Earlier National Bonds had sued Taleem in Dubai Civil Courts.

Justice Chadwick of the DIFCC wisely did not issue an order to the DCC to stay their proceedings preferring sensibly to wait until he sees their ruling. At that point if it is contrary to the DIFCC's then it will be time no doubt to seek the intervention of a higher power. And hopefully this case will lead to a mechanism for co-ordination between the two courts on future such situations.

It seems this is all about a failure in precision to specify the governing law and judicial forum. And so I'd mark this down to a lapse in one of the most routine matters of contract drafting. As the episode of Shuaa's convertible securities, those of Citi Group, and those of National Bank of Umm AlQaiwain show, it really does pay to pay attention.

And as with the examples cited above, the amount involved is no small beer -- AED236.6 million.

Hard to understand this. The parties to the examples mentioned above consider themselves sophisticated firms. The amounts are substantial. Yet they fall down on rookie mistakes?

Mayzoon the Magnificent

2010-10-12T19:43:00.000-04:00

Kuwait sheep sold for KD25,000. Apparently gets KD200 per night for his "particularly good breeding ability." Next stop Dubai?

This beats Sa'eed Al Huweiti's take on his falcon. But not yet those tasty Kuwaiti pigeons!

International Investment Group - Explanatory Note on 2009 Financials

2010-10-12T07:36:00.000-04:00

IIG Funding issued a brief explanatory note on IIG's 2009 financials on Nasdaq Dubai today.

Dubai Escrow Law: Exemptions Fueled Boom and Left Buyers High and Dry

2010-10-12T07:14:00.002-04:00

Credibility - Now You See It, Now You Don't

A very good piece of investigative reporting by Asa Fitch at The National.

In 2007 with great fanfare Dubai passed a law requiring that developers set up escrow accounts to ring fence buyers' funds so they would only be used for construction and related costs on the projects that the buyers invested in.

Rather quietly and quickly the Dubai Land Department gutted the law by granting exemptions to certain master developers. Among this select group were Nakheel and Emaar as well as other Dubai World entities. The latter two have recently (three years later!) disclosed this fact. Apparently, neither they nor the DLD considered it material information an investor/buyer might be interested in knowing or have a right to know.

A couple of quotes:

The developers of multiple projects in Dubai that are stalled spent money in this way, and now homeowners find that their investments were spent but that the projects cannot continue without new funding.

But having to comply with escrow laws could be burdensome for developers such as Nakheel and Emaar because of their obligation to build expensive infrastructure in their master developments. Emaar said in its prospectus last week that if it had to comply with escrow laws, its "business model may be significantly impaired as it would only be able to finance the construction of projects with corresponding purchase price instalments once certain construction milestones are met".

Poof, there goes the last illusion of Dubai as a world class financial center.

And, no, it's not a matter of professionalism as one "expert" has it. It's much more basic. It's a matter of running a fair, honest market. When the games are rigged, one is well advised to go to another casino. When one doesn't get a fair shake (or a fair Shaykh), it's time to look to another market.

To be very clear, the central issue here is not that an exemption was given. It was that the granting of the exemption was not disclosed. Neither by the Government or the companies. There may have been what were considered at the time very good reasons to give an exemption. The problem was that buyers had no way of knowing. They should have.

International Leasing and Investment Company - Attempt to Stack Board?

2010-10-11T19:01:00.000-04:00

Al Qabas has a follow-up to their earlier report of the resignation of 3 directors at ILIC. See earlier post on that topic here.

The Company has supposedly written to the MOCI requesting that it approve the replacement of Mr. Mohammed Al-Jasser with Mr. Basil Al Mutawa (a relative of Mr. Bassim Al Mutawa one of the major shareholders). If this is approved then Abraj Holding/Boubyan Bank would not be represented on the Board despite AH's 32.3% share in the Company. Boubyan has made a loan to Abraj and its representation on ILIC's Board was no doubt a way of looking after its interests in the collateral.
Also the Central Bank is said to have approved ILIC's 2008 financials which reportedly show a loss of US$120 million with the result that shareholders' equity was reduced to US$45 million. Loans are said to remain at 2007's level: US$600 million. The CBK has, it is said, reservations on the financials. And the auditors are refusing to give an opinion.
The two directors from the Islamic Development Bank are still tendering their resignations given their concern that the actions being taken are not in the interest of rescuing the Company. Official bodies are reported to have rejected charges levied against the two directors as inventions and levied by parties who want to take control of the Company without involving other shareholders.
When the 2008 financials are released various infractions will be disclosed. It's said that the auditors have concerns about the use to which loans were put.
The same parties behind the Board machinations are reported to be trying to block Mr. Faisal Al Zamil (Kuwait's representative on the IDB Board) from assuming a position in executive management in the Company in order to enable them to put in someone who will look after their interests.
Finally creditors are said to be disgusted with the developments at the Company.

As I mentioned earlier, IDB and Abraj Holding, control over 60% of ILIC and should be able to take control of the Board. If the Central Bank can finalize ILIC's financials, then the MOIC can call for a shareholders' meeting and presumably the majority of shareholders can vote in their own candidates for the Board - at least a majority.

Gulf Finance House - Back in the Game with Tunis Financial Harbour

2010-10-11T06:57:00.006-04:00

Today on the fringes of the IMF/World Bank meetings in Washington, GFH announced the addition of a Financial Harbour to its existing project in Tunis.

This takes me back to the heady days of 2005 and 2006.

Can the US$10 billion Suq Al Mal Financial Harbour Cafe & Blog be far behind? Get in on the ground floor, while you still can! The Turkish coffee and baklawa concession could be easily worth twice that. But be sure to scotch-guard those carpets.

SICO Bahrain: Dubai Debt Problems Just Deferred Until 2014?

2010-10-10T22:17:00.000-04:00

SICO Bahrain has issued a new report, "Dubai Debt Concerns Deferred to 2014". SICO Research is only available to registered users so you'll have to sign up to read the report in detail.

Here are some highlights. Themes that might already be familiar and some not.

Forgetfulness of investors in limelight. Some history on the trends in CDS spread differentials between Dubai and Abu Dhabi (180 bps in October 2009 to 480 bps in early December and then again to similar levels around the Greek crisis).
Recent US$1.25 billion issue not sufficient to plug the 2010 deficit (estimated at US$1.6 billion). Plans to slash subsidies and other transfers by 64%, though wages to increase by nearly 20% as the Government needs to make room for more nationals entering the workforce.
Repayment schedule remains a challenge. SICO estimates very modest debt repayments in 2011 and 2012. For the period 2013 - 2015 excluding bilateral, the estimates are US$1.7 billion in 2013, US$19.23 billion in 2014 and US$0.5 billion in 2015. So a definite debt hump in 2014 - and the reason for the title to SICO's article.
Economic recovery may not improve Government revenues. Trade and tourism not expected to generate significant large government revenues.
Not many options to improve finances. Taxes a possibility but pose competitive disadvantage vis-a-vis other GCC states.
Sale of assets a possibility. SICO believes the Government may take the strategy of selling partial stakes to raise cash rather than relinquish control of strategic assets.
Dubai increasingly "leveraging" the UAE brand. Apparently in the prospectus for the recent bond, a great deal was made of the fact that the UAE has a AA sovereign rating. SICO sees this as a way of diverting attention from Dubai's 395 bps CDS roughly 296 bps higher than Abu Dhabi. In my opinion it may also be a way of reminding investors of Abu Dhabi's deep pockets.
Despite the negatives, SICO does not believe a sovereign default is likely. It seems to me that the major issue here is one of pricing of credit as well as lenders and investors being careful about the quantum they commit to the Emirate.

Boubyan Bank to Liquidate Shares Owned by Awal Bank to Partially (Very Partially) Collect Debt

2010-10-10T18:52:00.000-04:00

Mohamed Sha'ban at Al Qabas reports that having received judicial authority, Boubyan will sell some 300,000 shares in International Finance Company on the KSE to partially settle a debt of SAR 111 million owed by Awal to it. Furthermore it will sell some 61,000 Global GDRs listed on the LSE through the manager of the fund holding the shares.

Since AlDawliah is trading at around KD0.250 per share the recovery is half of that pictured above. A penny on a dollar of debt.

US Elections: Nur Ein Wenig Harmloser Spass (Just A Little Harmless Fun)

2010-10-10T12:53:00.009-04:00

Spot the Republican candidate for the ~~Reichstag~~, sorry, Congress from the 9th District in Ohio. Rich Iott.

He's not on the far right but second from the right which I guess might make him a moderate of sorts when you consider the wider context.

He explained that he participated as a history buff and as a way for a father to bond with his son. If I remember correctly, there is an old saying "The family that goose steps together" though I forget the rest of it. I suppose that's the important bit, though, isn't it?

While I'm probably confusing a historical event, I believe the candidate was also heard to say:

Ich erkenne mich nicht schuldig.
Befehl ist befehl.
Die Fahne hoch!

In any case, those familiar with this repulsive ideology know the central importance of the Viking in the "Aryan" myth along with the Celtic Cross and Runic symbols. That's why of course the SS Unit adopted the name in the first place. And why other later adherents of the ideology did. The Wiking-Jugend. Several "Aryan" rock bands with variants of Wiking in their names.

Just a little harmless fun, so they tell us.

Department of the Tragically Absurd: A New Structure for Arab Joint Action on the Table

2010-10-10T08:43:00.005-04:00

It's Got to Hurt When Only a Few Recognize Your Completely Imaginary Genius

As Emirates 24/7 informs us:

Chairing the opening session, the Libyan President Colonel Muammar Al Gaddafi welcomed the Arab leaders and said that the summit would discuss a new structure for Arab joint action.

He added that a five-member committee under his chairmanship was formed during the last summit in Sirte to oversee implementation of the new structure.

Another decisive step forward. A new structure. Proven visionary leadership. What could possibly go wrong? (For one thing see picture above).

Who could possibly object?

Amr Moussa voiced some skepticism and warned that steps should not be taken which would undermine the highly effective Arab League.

But as the report tells us several critical breakthroughs were made at the meeting:

HH Sheikh Mohammed Al Maktoum had several very important visits.

He visited Egyptian President Mohamed Husni Mubarak on Sunday for a session filled with Hope.
He met with Syrian President Bashar Al Asad also on Sunday. While we're not told,, I believe this session was about Change. (Quite a busy day, it seems).
On Saturday the Bahraini Deputy Prime Minister and his entourage visited HH and his entourage and conveyed the greetings of King Hamad of Bahrain! That was, if I'm not mistaken. one of the major achievements of the conference.
Though there were no doubt many more, perhaps more than could be recorded. One of note, that was, was a visit to a heritage market.

This event certainly lived up to its billing as the extraordinary Arab summit.

Despite the many imaginary achievements of this remarkable event, I am left with one nagging doubt. What sort of people make a habit of indulging a psychotic in his delusions?

Golden Belt Sukuk 1 Certificateholders Make Up Their Minds

2010-10-10T07:42:00.001-04:00

Today via an announcement on the Bahrain Stock Exchange Citibank, the Delegate on the Golden Belt Sukuk, advsied:

The Delegate refers to previous notices issued by the Delegate dated 24 August 2009, 7 October 2009, 17 November 2009, 23 November 2009, 2 February 2010, 16 March 2010, 28 April 2010 and 22 July 2010.

In these notices, the Delegate noted that, in accordance with the Terms and Conditions of the Certificates, prior to acting upon any instructions from Certificateholders it is entitled to be indemnified to its satisfaction.

The Delegate confirms that on 27 September 2010, it entered into a deed of indemnity (the Deed of Indemnity) with a number of Certificateholders (the Indemnifying Certificateholders). The Indemnifying Certificateholders represent at least 25 per cent in aggregate face amount of the Certificates outstanding.

Acting under instructions from the Indemnifying Certificateholders, the Delegate has served a Notice of termination of the Sub-Lease and made a demand for all amounts due under the under the Costs Undertaking.

The Investment Dar - Creditors Warn TID Central Bank Will Not Impose Restructuring Against Our Will

2010-10-09T22:12:00.001-04:00

Nancy Reagan

White House Photo in the Public Domain

Al Qabas, as it often does, has a different take on the story about TID proposing a 50% haircut than Al Watan.

Here the story is that the creditors have said that if Dar's request for a 50% haircut proves true, then this will give the Central Bank of Kuwait full justification for turning down its application for the FSL. (You may as I have been struck by this formulation. Either a deficient translation on my part. Or maybe the story of the 50% haircut was wrong).

They also remarked that the Central Bank will never force a restructuring on them without their consent as they are the owners of the money and should decide their fate. So a consensual plan agreed by all parties will be required.

Finally they are quoted as saying that there is an indication that the entity charged with preparing the report on Dar's ability to remain a going concern and pay its debts shares Dar's opinion that it can comply with the financial ratio set in the new Central Bank of Kuwait regulations if it can deal with approximately KD500 million of burden which will strengthen shareholders' equity in addition to bringing it in compliance with the new principles. I'm taking Al Qabas description of the "entity" to mean E&Y. And am not sure why the circumlocution is necessary.

As I've indicated before, I really don't understand the fixation on the new CBK principles. Dar is in a life or death situation with the rescheduling. It seems eminently reasonable that if it can't meet the new regulations that should be a very minor consideration in the greater scheme of creditor repayment and the continued existence of the Company. There are many ways this can be "handled" to preserve the regulation but give Dar some breathing room. Would one really "put down" Dar because it couldn't meet a ratio if it could repay a substantial portion or all of its debt?

All this talk of the regulations makes about as much sense to me as arguing about the poor quality of the band as it plays the final songs just before the Titanic sinks.

Maybe one of my regular readers can tell me precisely what I'm missing.

It's also unclear if this story came before or after this one.

Ah, Kuwait land of mystery and intrigue. And also family values.

The Investment Dar - No Intent to Ask for 50% Haircut

2010-10-09T20:25:00.001-04:00

Barbershop in the Bus Station Tirth Raj, Rajasthan
Copyright funky footage

Creative Commons Attribution 2.0 Generic

Al Watan quotes sources close to The Investment Dar as saying that the Company has no intent to ask for a 50% haircut (KD 500 million) on its existing debts . That it intends to repay its debts in full. Moreover it would never sue the Central Bank of Kuwait which it respects and values. I guess the meaning here is won't sue again as they did earlier.

You'll recall earlier that there were reports that TID had made just such a request bypassing its creditors and writing directly to the Central Bank of Kuwait.

"Islamic" Property Financing in Syria "This Time It's Different. Really, It Is."

2010-10-09T19:43:00.002-04:00

Rasha AlAss over at The National has an interesting article on how the pricing on "Islamic" banks' real estate financing in Syria and Lebanon is much higher than at conventional banks. While she doesn't give a reason, I'm guessing that it's their much higher cost of funds and not any desire to earn an outsize profit. The latter of course would run afoul of prescriptions to deal fairly. Wouldn't it?

A couple of quotes from "wise" local bankers:

Some bankers are pleased with this, pricing their products on the speculative idea that property prices will continue to rise. Explaining why the traditional mortgage rates are so high, one banker says: "Well, real estate in Syria keeps going up. So even with a high interest rate, the appreciation will still be higher." Mr Darkazally echoes this sentiment. "Real estate prices in Syria will never go down," he says.

So does this constitute aggressive lending? And could the speculative behaviour by customers and bankers on a property boom that has not yet gone bust lead down the same road that brought the world to its knees in the recent credit crunch? "Not in our day," says Mr Darkazally .

Normal financial laws apparently don't apply in Syria. This time it really is different.

Oh, and if you want a real surprise on your "Islamic" real estate loan, buried there in the fine print is a "prepayment penalty" or perhaps something called a profit rate protection clause.

Department of Sycophancy: "Sheikh Mansour Emerges as the Arabian Warrent Buffet"

2010-10-09T14:58:00.000-04:00

الشيج واران بوفيت منصور

So we're told by Arabian Business.

When I think of Warren Buffet I think of many things:

A determination to succeed and lots of hard work. Warren began his career delivering newspapers from his bicycle (which he duly depreciated on his tax return!).
A ferocious pursuit of deals, many originating from "cold calls" on firms.
A generally single-minded focus on a particular investment philosophy (value investing as taught by Benjamin Graham).
A cool rational head not swayed by whatever was the then current irrational exuberance.
A painstaking building of a fortune. Earning money, saving, reinvesting, making a profit, and repeating the cycle
Many highly profitable and visible deals.
Despite all of this, little affect on his ego or lifestyle. He lives in the same rather modest house in Omaha that he bought long ago.

Arabian Business is silent on all but the sixth point so we can only imagine how the other six apply to the Sheikh.

What we do learn from the article apropos of the sixth point is that:

He owns Manchester City Football Club. How this came about and how it was funded are presumably too well known to require recounting, which is perhaps sad because we are left not knowing how he displayed his legendary skill in closing this transaction. Did he begin with a paper route for The National or perhaps more likely Akhbar Al Arab? Save his first earnings and by repeating the cycle amassed the GBP 300 million to buy the Club?
"He" made an investment in Barclays in the dark days of 2008 and has now made US$3 billion on an "exit". One that we learn that leaves "the sheikh exposed to any upside in the share price and completely protects him from any downside."

The latter deal sounds almost miraculous. He exited Barclays yet retains upside in the shares.

So how can we understand Arabian Business's statement: he "completed his exit from this cool investment"? Frank Kane has an account here. As the words suggest, risk has been hedged but not eliminated.

First, PCP3, not the Sheikh, will continue to own the shares. PCP 3 has entered into a derivatives transaction with Nomura. In effect risk on Nomura has been substituted for Barclays.

And as always with derivative transactions the devil is in the details. What are the conditions for exercise? Any restrictions or limits on the number of shares to be "put" at any one time? What is the strike price (or its equivalent) on the transaction? Current market price? Something lower? Is there a time limit at which point the (derivative) contract expires and Nomura is no longer obligated? Will PCP3 need to roll the derivative forward to maintain its protection at that future date at a price to be determined? And perhaps very importantly what did the derivative cost? Are there future costs associated with it? One presumes Nomura priced for the risk they're taking considering both price and time. So this isn't a costless transaction. But then PCP3 gets to keep the upside.

Still a remarkable return. One worthy of much praise. Especially when one considers such debacles as one SWF's investment in Citibank convertible securities.

But before Arabian Business rushes to describe the Sheikh as the Arabian Warren Buffet, it may be appropriate to wait for the development of a consistent track record.

Not so long ago, Maha AlGhunaim, Esam Janahi and others were lauded for their investment prowess. And like many a legend, time has not been kind to these.

Special Dubai World Court Orders Nakheel to Pay CDG's Legal Costs

2010-10-07T19:40:00.002-04:00

According to Tom Arnold over at The National, Sir Anthony Evans, The Chairman of the Special Tribunal, ordered Nakheel to pay CDG's legal costs.

At this point the Court has not rendered a judgment on CDG's claim.

Dubai's Real Estate Woes Continue

2010-10-07T14:31:00.000-04:00

A Not So "Unique" 50 Story Dream from 1997

One of our regular readers/commentators, Laocowboy2, called this New York Times article on the continuing woes in Dubai's real estate market to my attention.

Some quotes with captions.

"We're not in Kansas anymore, Toto" The biggest mistake - mistaking a foreign country for your own - and assuming that legal systems, services, construction quality are just like "back home".

“It’s not like in Western countries. It’s very difficult to exit here if there’s a problem. And we’ll never get our money back, but now we’re stuck dealing with this hole.”

AA's Second Law of Lending and Investing: "Due Diligence Before the Deal Not After"

"At the time, few asked if there was a legal framework for resolving potential disputes. Now, with the glitter gone, interviews with investors, legal specialists and real estate analysts here show that many who bought in are finding it hard to get out."

“The rules of the game are definitely opaque here,” said an investor who has bought several properties in Dubai and who insisted on anonymity because of delicate talks with developers and regulators. “In the United States, I would know my legal position much more clearly and could take actions if necessary.“

Besides "location, location, location" supply and demand also impacts prices.

Although about 70 percent of empty lots from three years ago have been filled, real estate construction since then has far exceeded the purchases, more than doubling the amount of vacant space available, said Timothy Trask, the director of corporate ratings at Standard & Poor’s in Dubai.

No mention of quality of materials and construction. Perhaps, that will become more widely apparent in a few years time, though there's always the odd Discovery Gardens or Sky Gardens or The Villa to help discover flaws.

The Investment Dar - Rumor of Restructuring Bombshell: Request for 50% Hiarcut

2010-10-06T23:26:00.004-04:00

Major Al-Musallam Rides to Glory

Before we go further to be very clear this is an account which neither the Company, the Central Bank or the creditors have confirmed.
Update: TID has denied this story.

Al Qabas reports that TID has submitted a completely new restructuring plan to the Central Bank of Kuwait which calls for lenders to forgive 50% of the existing debt, i.e. KD500 million. According to the report, lenders were not consulted or advised prior to TID sending the proposal to the CBK.

What's going on here is anyone's guess.

Mine is that the Company and the lenders are jockeying from (what I think is) the fallout from the Ernst and Young report. As you'll see below. TID and its lenders appear to have been discussing alternatives /modifications to the original plan. From the Al Qabas account these seem predicated on the fact that the Company cannot repay all the debt. The unpayable quantum seems around a 50% or so.

I suspect that Ernst and Young came back with a very negative assessment of TID's ability to repay in full and, thus, case serious doubt on the Company's ability to continue as a going concern. As you're aware, the Financial Stability Law is designed to give protection to viable companies. It is not intended as a mechanism to provide legal cover for disguised liquidations. If I'm right (and as Umm Arqala will tell you that's a rare occurrence), a report like this would have thrown quite a large "wrench" into things, complicating the CBK's acceptance of the already agreed restructuring. How could the Central Bank recommend to the Court that the Company be allowed under the FSL under such circumstances?

I'm also guessing this occurred prior to the end of the first four month period the CBK had for evaluation of the suitability of the original plan and of TID to enter finally under the FSL.

What leads credence to both assumptions are reports in the article that the lenders have floated some proposals or modifications of their own and the timing of those negotiations. One was the conversion of roughly half the debt to equity with some preservation of the rights of the existing shareholders. Presumably, the lenders could quite easily make the argument that if a debt conversion were required, the old equity has been lost . And thus the old equity holders should be wiped out. Their proposal is reported as more generous, though it's not clear what percentage they would allow the old shareholders in the post conversion equity. Leaving 10% or 20% might for example be considered highly generous by the lenders and an "outrage" by the existing shareholders. Negotiations on this proposal supposedly took place between July and September. The story goes that TID's Board went back on a tentative agreement because some of the existing major shareholders did not want their equity interests diluted. (Unclear to me how you dilute something worth nothing. There's also a hint here that the major shareholders are very important people. And, if you know Al Q's politics, you might suspect they are pointing the finger at regal personages).

As a second alternative, the lenders suggested taking some assets in exchange for the debt. The article says that E&Y determined that this proposal was acceptable under international principles. Dar supposedly made a counter offer that brought things back to zero.

At this point, the two sides are in a deadlock. I think that TID's proposal (assuming the report is accurate) is more a negotiating tactic than a viable proposal. Rather it is an attempt to break the logjam by setting forth a maximum position. One they probably know both the lenders and the Central Bank would have a hard time accepting. What this proposal does, though, is shift the parameters of the debate. While lenders may reject a 50% discount, it may be harder to avoid some meaningful haircut - particularly, if the choice is bankruptcy. And in order to get itself out of having to make a decision that may prove wrong or hurt its and the country's reputation, the CBK may be inclined to lean on the parties to compromise. TID has just set one bound on the compromise.

It could be that they are trying to play for time - hoping for a miracle. Realistically playing for time hurts all parties - TID, the lenders, Islamic Banking, and Kuwait. But maybe that's the goal - to maintain the status quo.

The article describes the choices in front of the Central Bank as:

Issue a conditional acceptance of the proposal subject to conformity with accounting principles and the agreement of the lenders. (Or in other words neatly pass the buck. Or is that the dinar? As Al Q elegantly puts it, getting the lenders to agree may be very difficult given the Company's breach/violation of the existing agreement. That raises AA's first law of underwriting and due diligence "know your customer".)
Reject the proposal. In which case it's expected that TID will sue the CBK in an attempt to confuse the issue and buy more time. As Al Qabas elegantly puts it الى ما لا نهاية . (Probably not a first choice. More likely is forcing the Company and its creditors back to the negotiating table. Or putting them in a situation where they will decide the fate of TID, if that fate is to be bankruptcy).
Push the lenders to bankrupt the Company - which will lead to all sorts of negatives for all parties and harm the financial sector, Islamic Banking and the reputation of Kuwait. (I'm guessing not an alternative high on the CBK's list).
Convert TID to a holding company. This would remove it from Central Bank supervision so that the lenders can apply the restructuring deal agreed. Also the CBK's June ratios would not apply. (This seems to me to be a bit of red herring. The CBK can grant an exemption to TID as a finance company from the regulations. Supposedly the lenders will reject this because they don't think the administration of the company is really interested in solving the problem. The lenders have on more than one occasion made it quite clear what they think about management's ethics. They began by asking the CBK to place a minder in the Company. Then they pushed for the appointment of a Chief Restructuring Officer).
Force TID back to the negotiating table with the lenders to find a solution and return to the original plan. (This seems contradictory. The original plan is probably moot at this point. I think the lenders are going to have to accept some changes - and these will be against their interests. From the report of the alternatives they've offered already it seems pretty clear that they've accepted this - even if it was no doubt reluctantly. The CBK may well force the parties back to the negotiating table but there will be a new deal. Perhaps the CBK could impose a time limit for reaching an agreement using as the deadline some date prior to the date it's required to give a recommendation to the FSL Court).
Give TID an exemption from the new ratios saying the old plan was devised based on Central Bank advice to the lenders and thus it's not fair to change the rules on them. As per the article, TID has apparently been saying that the original restructuring plan doesn't conform with the CBK's "new rules". The implication being the plan must be modified. (I don't think that the CBK new rules are the real issue here. The sticking point is TID's ability to pay and to continue as a going concern. If the new rules were the only point, then I think the CBK would have given the exemption. This could be quite easily fudged as an agreed plan to implement the new rules. And so it could be presented not so much as an exemption but a granting of additional time to achieve the goal. When the debt is paid in full, TID will clearly be in compliance).
Exit TID from the FSL and leave it to its fate. (The CBK probably doesn't want to be the one who puts down this dog. Better to have the lenders do so. The "trick" is to find a way to put the parties in a situation where they either come up with a solution or fail - a way which keeps the CBK's hands pristine. The time limit for the CBK to give its recommendation to the FSL Court is a neat escape hatch. If the parties haven't agreed by then, the CBK can tell the Court it cannot make a recommendation. The Court should then refuse to allow TID final entry into the FSL. Since this is the last extension allowed, the matter is out of the CBK's hands. Nature and the courts then take their course. That should be quite a frightening thought for the lenders . As they stare into the abyss of almost a complete loss, all sorts of discounts and compromises may become possible).

Finally to close out this post, a recap from the Creditors' Committee official letter to the Central Bank rejecting TID's new plan "in whole and in detail":

TID's proposal makes a gift of the money of others (the lenders) to the Company and strengthens (supports) the rights of equity at the expense of the lenders who have not received a single fils since the beginning of the crisis but only promises. (But they were some really nice promises. Perhaps, even said with one's hand on the Qur'an).
TID's proposal is contrary to international and global practices (customary usage) and puts the lenders in the situation of a fait accompli with the proposal being put forward without their agreement or consultation.
TID's management is "hitting" (harming) the interests of the creditors and shareholders. Therefore the lenders reject the idea of a discount which is unjust.
The Committee considers that TID's proposal ignores the repayment schedule already agreed. 10% in Year 1, 20% Year 2, 20% Year 3, 30% Year 4 and 20% Year 5. (There seems to be an argument of a breach of faith here. And, yes, while the lenders may be thinking of a breach of the agreed business contract for the rescheduling, AA also is thinking that in this context the term applies as well to religion).
TID's proposal prefers (in the sense of giving priority) the shareholders over the lenders contrary to what was agreed previously.
The Company has wasted the shareholders' money hiring financial and legal advisors and wasted the banks time negotiating the past 18 months.

This has been a bad situation from Day #1. The passage of time has not made things better. It's likely to get worse.

The lenders face a real dilemma. Do they compromise to try and get back as much as they can? Or at some point do they just bring down the house of cards? With 18 months of time on their hands, lenders may have built rather hefty provisions against this name. That may give them a bit more negotiating room.

The Central Bank is in the most uncomfortable of positions. It's got to be hoping that third parties or events are dispositive and that it doesn't have to make a difficult decision.

Threats to Capitalism International Edition: Dateline Qatar Taxes at the QFC

2010-10-06T18:26:00.000-04:00

Outside the QFC in the Near Future?

Asa Fitch over at The National reports some distressing news from the Qatar Financial Centre - a corporate tax of 10%. To add insult to the "grievous" injury caused the tax is retroactive.

Dubai’s Back: CD Spreads Down But …

2010-10-06T13:12:00.001-04:00

Jakub Hałun
GNU Free Documentation License Version 1.2

富士山- 5 合目

There have been numerous stories in the press how Dubai is making progress coming back. The conclusion of the Dubai World restructuring agreement and the issuance of the sovereign bond are touted as a watershed in this process.

That's not to say that there is no progress, but that it's a bit premature to declare success.

I'm planning a post on the bond later. Today I'd like to turn to the CDS spreads.

What we are told is that there has been a remarkable compression in CDS spreads which touched 650 or 660 bps, if I remember correctly, at the height of the crisis. The spreads are now down to pre-crisis levels, though pre-crisis is measured as the spread just before the announcement.

There's an apparent fallacy in that statement. Prior to Dubai's November announcement, its spreads were not in some "golden age" except when compared to the market reaction post announcement. And a lot of that was over reaction due to the market being one-sided (a preponderance of demand for protection over the supply of protection) coupled with the fact that the CDS market is rather thin on the best of days. And even thinner the further one's obligor from the major markets.

There is a tendency among some to imagine that credit is like a light switch. It's either good (on) or bad (off). That's not the case. There are gradations and usually (but not always) credit improvement or deterioration takes place over time.

Prior to the DW announcement, Dubai's CDS spreads had been trending larger, reflecting deterioration in its credit.

As an illustration, let's take a look at some very easily accessible data on five-year CDS spreads from Markaz. You won't need a Bloomberg for this.

Country	Spread
Germany	38.1
USA	47.1
Japan	59.1
China	62.9
UK	63.8
France	79.0
Saudi Arabia	80.2
Qatar	95.3
Abu Dhabi	106.4
Turkey	150.9
Bahrain	175.7
Oman	221.0
Egypt	227.7
Lebanon	288.7
Dubai	391.3

As indicated above, there are a lot of factors besides credit that affect the spreads. But I think this gives a relatively good idea of where the market sees Dubai's credit. And one would expect Dubai to be higher in the ranking.

So progress has been made. But … there's a longer way to go as indicated in the picture above. And if you got to the Fifth Station on the bus as many do, your most strenuous efforts are yet to come. Such is the case with Dubai.

Unicorn Investment Bank - A Second Look at 1H10 Financials

2010-10-05T20:22:00.004-04:00

Unicorn has now released its 1H10 financials as well as the Central Bank of Bahrain-mandated Basel II Pillar III disclosures.

I waited after they posted the first copy of the financials in the hopes that the "fancier" copy to follow would have more details.

Sadly, it did not.

The number of notes in 1H10's report is only five compared the sixteen that were in 1Q10's report. Or for that matter the 17 in 1H09"s report.

Cynics out there might say that after losing US$160.5 million in 2Q10 the bank is trying to hide something. Personally, I think it's motivated by a cost cutting campaign. Ink is quite expensive. Even the virtual ink used on the Internet.

Because of the paucity of information in the financials, analysis is a "bit" difficult.

First the good news, no problem with the US$51.5 million in fair value losses on Investment Securities. The net change from 31 December 2009 to 30 June 2010 is US$67.1 million. It's composed of (a) the fair value losses through the income statement of US$51.5 million (b) fair value losses directly to equity of US$3.2 million, (c) securities sold of US$36.4 million plus the US$4.3 million loss on the sale partially offset by new securities purchased of US$28.2 million.

The problem is with the US$97.4 million in impairment provisions. As above using the information in the Cashflow Statement, it appears that there were no purchases or sales of Investments in Associates or Joint Ventures. The net change from 31 December 2009 to 30 June 2010 is US$27.5 million and it can be assumed that this is due to impairment provisions. (But note it's an assumption. It's not proven).

Other Assets are down US$95.7 million over the comparable period. The Cashflow shows US$70.2 million in proceeds received, leaving US$25.5 million unaccounted for. Interestingly enough in Note 3.1.4 of Unicorn's Basel II Pillar III disclosures, the increment in impairment provisions between 31 December 2009 and 30 June 2010 is US$20 million (from US$5mm to US$25 million). It's unclear what is going on here. The Total Column doesn't seem to add in some cases. And certainly in more than one case does not tally to the balance sheet. My working assumption is that Unicorn considers some of the assets in Other Assets as not subject to credit risk. Perhaps, prepayments?

At this point we've accounted for (or at least think we have) some US$53 million of the impairment provision.

Assets Held for Sale have decreased US$40.6 million though the Cashflow Statement tells us that US$7 million in cash was received. So that's another US33.6 million of implied chargeoffs. If they hadn't occurred, then the bank would not have broken even on the sale. So we're now at US$86.6 million. (As a side note, it seems the liabilities associated with the Assets Held for Sale have been folded into Other Liabilities. Though I can't reconcile to the Cashflow Statement showing a US$5.6 million decline in Other Liabilities).

The charge for Goodwill gets us another US$2 million making the running total US88.8 million.

Finding the remaining US$8.6 million is left as an "exercise for the student".

We can look at this another way through Note 5 Segment Information which provides a breakout by business line. All amounts below are rounded to the nearest million of US$.

	Cap Markets & Treasury	Private Equity	Corporate Finance	Asset Mgmt	Strategic M&A	Other	Total
EBIP&FV	US$19	US$4	(US$1)	US$0	(US$4)	(US$29)	(US$11)
Impairment Provisions	(US$15)	(US$15)	(US$0)	(US$2)	(US$37)	(US$28)	(US$97)
FV on Securities	(US$10)	(US$30)	(US$9)	(US$0)	(US$2)	(US$0)	(US$51)
Net Loss	(US$6)	(US$41)	(US$10)	(US$2)	(US$43)	(US$58)	(US$160)

Two comments:

On an operating basis (before provisions and fair value changes) two LOBs are profitable: Treasury and Private Equity.
However, changes in fair value are a measure of operating profit. That means that only Treasury was profitable.
After accounting for impairment provisions and fair value changes, each of Unicorn's LOBs was loss making. Now I suspect that the new CEO wants to clear the books of any potential losses so he starts with a clean slate. And sometimes there i a strong motive to over provision to provide a bit of lift to future earnings. Reversals of provisions or mark to models can be quite handy in establishing one's value. It also gives the company a story to tell about dramatic progress as it tries to overcome the lingering effects of the bad times on its reputation. Hard to know if there's a real problem in the assets or if some of this is "taking a bath".

International Leasing and Investment Company - 3 Directors Reportedly Resign

2010-10-05T19:14:00.002-04:00

Outside the KSE: They Walk Among Us But Are Forbidden to Trade

According to Tamir Hammad at Al Watan 3 members of ILIC's Board have resigned in the past two days. On Sunday, Mohammed Ahmed Saad Al-Jasser, the representative of Abraj Holding (a 32.3% shareholder in ILIC). On Tuesday Messrs. Khaled Mohamed Nasser Al-Aboude and Badr AlDeen Noyoh, representatives of the Islamic Development Bank (a 28% shareholder).

As the story goes, the three former directors refused to give a reason. Indications are that there are sharp differences in the company which will be laid at the feet of the regulators to sort out.

And much there is to sort out. Among the listed but suspended (from trading) companies on the KSE, ILIC and Villa Moda have the dubious distinction of having failed to issue 7 financial reports - their last being 30 September 2008. Even poor old TID only has 6 reports past due and shares that honour with Safat Global.

You'll recall there was an earlier flap over whether Mr. Fuad Hamed Abdulqader Al-Homoud was returning in an executive role to the company. Apparently, that rumor has surfaced again. Supposedly, a neutral party was negotiating a debt rescheduling agreement with the lenders supported by the IDB and Mr. Al-Jasser. The latter to take a key management role. Then some shareholders started pushing for the return of Mr. Al-Homoud as the story goes. Apparently, those who thought his previous stewardship exemplary. In any case this supposedly led the 3 directors to exit.

What's interesting here is that shareholders with more than 60% of the firm don't seem to be able to control the Board.

Anyone with an insight or opinion, please post.

For those interested in a trip down memory lane, you can access earlier posts by using the tag "International Leasing and Investment".

TAQA: US$3.1 Billion Facility Rollover Discussion in Early Stage

2010-10-05T07:43:00.000-04:00

Here's TAQA's announcement on the ADX today confirming that it is in the early stages of negotiations to rollover its US$3.1 billion facility maturing next August.

The press release notes that only US$1 billion has been drawn and that the facility was extended by a 14 member banking syndicate composed of local and international banks.

HH Shaykh Mohammed Bin Rashid Al Maktoum Interview: "Dubai is Back"

2010-10-05T07:34:00.001-04:00

Here's the Bloomberg interview with Shaykh Mohammad and Shaykh Hamdan.

And as well, here are some unbiased reactions to the interview by various local personalities.

Department of No Surprises: Leaked Results of Booz Study - One Bank is Strong the Rest at Lower Levels

2010-10-04T19:23:00.000-04:00

5 October's Al Qabas contains a supposed "leak" of the study Booz did for the Central Bank of Kuwait. The results one bank is strong and the remainder satisfactory and partially satisfactory.

Since no names were given, I suppose it's a big mystery who the one strong bank is. That is, of course, if you don't know anything about Kuwait and Kuwaiti banking history.

Al Qabas' sources tell it the report was given to the Central Bank last week and that the CBK is studying Booz's conclusions to determine which banks need to raise additional equity and which can strengthen their balance sheets by issuing bonds.

AlGosaibi v Maan AlSanea - Secondary Sales and the Fix

2010-10-04T19:05:00.000-04:00

Here's an interesting article from AlQabas which reports that some international lenders have sold a part of their debts to the two troubled family groups to hedge funds and distressed debt funds at between 20 and 40 cents on the dollar.

The motive of the selling banks is given as concern that collection of any amounts will take a long time given the complicated affairs of the companies as well as lawsuits from every side. Or as the Arabic has it more poetically دعاوى قضائية من كل حدب وصوب . Even if there is a settlement between the two groups and their creditors.

This raises an intriguing question. Why are the buyers buying? Particularly in such a distressed scenario as this where the amounts are so very very large. And at prices up to 40 cents????

There are a few possibilities here:

Al Qabas' informed banking sources may not be so well informed.
The funds have lost their minds.
Or they know (or think they do) something that the wider creditor group doesn't. One answer would be that there's some sort of "fix" going on to settle the debts.

The only thing mitigating against this last explanation is the price range. In a case like this secondary prices should be in the teens, if that.

So why is presumably "smart" money paying more?

Without knowing the volumes, the identities of the buyers (which may show whether the money is inherently smart or not), and if the buying is focused on particular loans, it's hard to say.

But if the upper bound to the price given is right, I'm betting it's irrational exuberance.

IMF Working Paper: Recent Credit Stagnation in MENA

2010-10-04T07:18:00.002-04:00

The IMF has released a Working Paper on credit stagnation in MENA prepared by four staff members, though it should be noted that IMF WP's do not represent official views of the IMF.

The report provides some interesting statistics on credit growth compared to measure of "normal" credit growth and some decomposition of changes in bank balance sheets post crisis.

I didn't see anything particularly controversial in the findings. Or findings that would challenge intuitive analysis.

The country by country data does provide a context for viewing credit growth across the region.

The Investment Dar - New Look to the Website

2010-10-03T22:58:00.005-04:00

Overheard on the sidelines of the recent OGM, the Chairman/CEO (in the middle) listens to two stockholders discussing the firm's fall:

"There's a 269th Rule of Acquisition?"

Our friends over at The Investment Dar have a new look to their website. A space theme. Much "neater" looking than the new one over at The National.

Wonder if the lenders approved the expense for the redo?

And wonder if they're ready to boldly go where no lender has gone before? (Under the FSL)

Global Investment House - A Global Leader in M&A?

2010-10-03T21:12:00.001-04:00

Everything is relative: In a small bowl, a small fish can feel very, very big.

On 27 September, Global published a press release in which Mr. Badr Abdullah Al Sumait was quoted as saying:

"نعتز بهذا الانجاز المتمثل في تبوء جلوبل مراكز متقدمة ضمن كبرى بنوك الاستثمار العالمية في مجال الاستشارات المالية لعمليات الدمج والاستحواذ. ويؤكد هذا الإنجاز الدور الذي تلعبه جلوبل على مستوى المنطقة في تقديم خدمات الاستشارات المالية كما ويدعم سياسة الشركة المستقبلية في التركيز على الأنشطة التشغيلية ومن بينها الاستثمارات المصرفية."

Quite a statement "ranked among the largest investment banks in M&A".

What was the basis for what might appear to be a rather extraordinary claim?

Reports from Thomson Reuters and Merger Market.

In TR's report on the first six months of 2010, Global was:

4th among financial advisors in M&A deals completed in the MENA region
17th among international investment banks for deals completed in the EMEA region.
15th for deals completed in Emerging Markets

In MM's report, Global was:

6th among FAs for announced M&A deals in MENA during the first half of 2010
The Bharti Airtel/Zain transaction on which Global acted as FA was the largest in the MENA region and 8th worldwide.

There's no dispute about Global's position in the league tables, which was due to a single transaction, Bharti/Zain. Each transaction does count. Global was Bharti's advisor and so has earned a place in the league tables. But this single transaction is its only claim to league-table prowess.

And so like the local mutriba after her first big hit, it may be a bit premature to claim to be the next Fairouz or Umm Kulthum, One may well turn out to be, but the claim will only be proven by repeat performances.

Now I'd repeat what Global says in its press release: it is the only GCC or MENA firm to make the list. So maybe Global might more properly see itself as a regional leader in M&A (though I'd still contend that it had to have repeat performances to qualify at that level). Not Kawkab Al-Sharq but perhaps Kawkab Al-Khalij.

To be fair, let's trundle off (electronically, of course) to Thomson Reuters highly intelligent Deals Intelligence Site to take a first hand look at the 2Q10 Global M&A Report. And by doing so, get a bit of context.

A few factoids from that visit.

M&A Volume for the First Six Months of 2010

Announced - US$1.065 Trillion / Completed US$811 billion

Americas: US$523 billion / US$405 billion
Africa/ME: US$ 42 billion / US$ 32 billion
Europe: US$269 billion / US$200 billion
Asia Pacific: US$199 billion / US$114 billion
Japan: US$ 32 billion / US$ 60 billion

Anyway you slice it Global's US$10.7 billion in 2010 transactions are drop in the vast ocean of all deals. 1%. It did have a good sized share among Africa/Middle East deals - 25% Announced Deals and 33% Completed Deals - but Mr. Al Sumait is claiming that Global is among the leading global investment firms in M&A. Not that it's a leading firm for Africa/Middle East M&A.

As the table shows, Africa/ME is rather small beer in the M&A world representing 4% of announced deals and completed deals.

Let's look at this from another angle - the top 25 advisors for worldwide M&A.

Top 25 Global M&A Advisors

Global's name does not appear either in Announced Deals or Completed Deals.
The top ten firms (led by the perennial leader Goldman) had between US$213 billion to US$112 billion in announced transactions and US$169 billion (Goldman again) and US$60 billion in completed transactions. UBS was in 10th place Announced Deals with US$112 billion. And Rothschild in 10th place in Completed Deals with US$60 billion.
The advisory firms in 25th rank Jeffries (Announced) and Blackstone (Completed) had respectively US$21 billion and US$14 billion in transactions.

Generally the first ten firms are considered the leading firms. Unless one is prepared to define "leading" investment banks in a very generous way Global again fails to make the "cut".

Top 25 Financial Advisors for EMEA M&A

Deutsche Bank holds pride of place in Announced Deals with US$94 billion with Citi at US$45 billion in 19th place.
For Completed Deals it's Morgan Stanley with US$85 billion. JPMorgan is in 10th place with US$50 billion.
Global makes its appearance in 23rd place with US$11 billion in transactions for Announced Deals (up from 220th the year before) and 17th place for Completed Deals. Well out of the magic circle of the top ten.

In this category, Global can make the claim that it has made substantial progress - but on a regional not global level. As I said above, the real proof will be if Global's name is in the list next year. But until it cracks the top ten it won't be a leader but a second tier player.

Can anyone out there remind me what Global earned on the Bharti transaction? Earnings are very important in this business. For the first six months of 2010, the Company reported advisory related fees of KD1.9 million up substantially from the KD0.3 million it earned in 2009. That's a 638% increase. One would hope the fee on a US$10.7 billion would be a "bit" more. Maybe we'll see the full force of the fee in the 3Q10 financials?

And finally at the end of the Global press release, you'll find links to Thomson Reuters and Merger Market reports which can give you an insight into the general M&A market.

A Bridge Too Far: 0-2

2010-10-03T14:16:00.000-04:00

Next BC.

Gulf Bank: The Golden "Prize"

2010-10-02T21:12:00.002-04:00

The Gold's There. Look Closer.

According to the informed sources of Al Watan, a European Group is now bidding to acquire a significant/meaningful share in Gulf Bank through the services of a Kuwaiti intermediary. And is therefore bidding against the Qatari Group.

The article goes on to say that GB is expected to declare a profit of KD35 million for the first nine months of 2010. 3Q10 provisioning is expected to be much less than during the first two quarters this year because GB has provisioned 100% of Saad and Al Gosaibi exposure (KD 120 million!) plus 100% for The Investment Dar, 50% for Global, and 50% for Aayan Leasing and Investment.

Anyone out there know if the provision levels for TID, Global, and Aayan are Central Bank mandated? Or if they're just GB's calculations.

I guess Global may be among the worlds leading investment banks for M&A as Mr. Al Sumait said not so long ago (a post is coming on that topic) but seems to be in rather poor company with respect to its loan repayment prospects. Half full or half empty? But nonetheless better than some others.

DIC Restructuring: Difficult Discussions Over Margin and Covenants?

2010-10-02T20:26:00.000-04:00

Asa Fitch over at The National reports that discussions between DIC and its creditors over the proposed five-year rescheduling are focused on:

The margin. DIC would like 85 bp. The lenders appear to be sensibly asking for more. Though the precedent set by Dubai World's rescheduling is not in the lenders' favor.
The lenders would like covenants triggering default if certain levels of asset sales aren't met in the second and fourth years of the restructured facility.

While Asa's sources describe the proceedings as "fierce", the Company itself sees things proceeding smoothly.

I suspect this will end up with a cosmetic change in the margin. Hopefully, the banks have their eyes firmly on the prize (the more important point): covenants to force asset sales. An extra 100 or 200 bps is going to be cold comfort, if the banks can't force the return of their principal.

There's nothing like the reluctance of an investor who bought at the top of the market to sell when markets are depressed. He knows there's real additional value there and he has the loans to prove it. Plus do I need to add The Vision.

Is it News or an Advert?

2010-10-02T19:43:00.044-04:00

Dr. Hilton with What Appears to Be Schroedinger's Cat

The National ran this rather remarkable piece yesterday, which sounds to my ears suspiciously like a transcription of marketing literature from Barclays.

Not really news. More like product placement in a movie. Or outright touting. Sorry, TN, but when you publish transparent advertizing like this, the natural question is: Are your "news" columns for sale? Or is this perhaps part of your transition to a new website and your staff are creating filler to see how it looks on the new "page"?

There's no real analysis of the product in the article.

Let's try and fill in that gap.

Before we start a very important caveat: without seeing the marketing materials, I don't know the underlying structure.

So what follows is a bit of speculation (note that word), hopefully informed based on structures I've seen before. To hammer the point home: this article does not necessarily provide a description of the underlying elements of Barclay's product but shows how such a product might be constructed.

Clearly this is no standard commercial banking fixed deposit product. In the current market one doesn't get a 9% return on deposits. And note right up front, it's not a promised return of 9%. But a return up to 9%! There is a difference.

Bankers are not very good on selecting earning assets (that's why a select group of distinguished banks, including those from The Developed West hold a disproportionate share of Dubai World debt) but they are generally fairly good at pricing deposits. They usually are very careful to set the rate on deposits less than the rate they expect to earn on assets. (Note the word "expect".)

Compounding the earnings issue (what the banks will have to use to pay the depositors) is that the tenors are relatively short. And it's a general rule that the shorter the tenor on a deposit instrument the lower the rate. More risky assets (equity, etc) have of course higher returns. One has to ask oneself just how high a return is needed to give the investor a high rate on his deposit/investment. We'll look at that a bit later.

So how does a bank structure the transaction so it can make a tempting offer like this?

To be clear what follows is based on structures I'm familiar with - which are multi-year tenor instruments.

First, in order to "guarantee" the principal, the bank "buys" a zero coupon bond with a portion of the proceeds of the deposit. This theory is that this "guarantees" the depositor his principal back at the end of the term. At maturity the redemption value of the zero coupon equals the original principal. If the bank or the investor wants a higher return, the amount of the zero can be reduced so that the depositor has this "guarantee" for some percentage less than 100% of his original principal, e.g. 90%, 85%, etc.

Sometimes when investors or depositors hear about the zero coupon, they think they have a guarantee of the return of principal. Generally, they don't because the bank buys a "zero" coupon bond from itself. So the depositor has a promise from the bank to pay him back secured by the bank's creditworthiness In effect the exact same promise he gets if he places a conventional deposit. In either case if the bank is in financial difficulty, it won't be able to pay back a straight deposit or a bond.

How could a depositor/investor get a real guarantee on his money? Two steps.

The bank would buy a zero coupon government bond issued by the US, UK, UAE, or Indian governments, thus "guaranteeing" that at maturity the receipt of the face amount of the bond in US$, Sterling, AED or Rupees respectively. I'm assuming that each of these sovereigns would "print" enough money to satisfy its obligations if that would be required.
The bank would legally pledge these government bonds as collateral for the investment/deposit. If they're not pledged, they are part of the estate of the issuer (the bank) in bankruptcy. And the depositor/investor is an unsecured creditor of the bank.

Sometimes the transactions will be described as "guaranteed". That occurs when a subsidiary of the bank issues the investment certificate or the deposit. Then the parent guarantees its subsidiary's payment. Again stripping away the form, the substance is that the same as if the depositor had placed a deposit with the parent (the bank). There is no third party guarantee. It is "all in the family" as I often like to say here at SAM.

Sometimes a minimum interest rate is "guaranteed". This can be achieved very simply, by taking some of the remainder of the deposit after the zero is bought and putting it aside. Say the bank wants to promise 1% interest. It deducts $1,00 from the US$9.09 or the US$2.91 and puts it in a deposit.

The remainder of the principal of the deposit (what's left after the "zero" coupon security is bought and any minimum interest guarantee reserve funded) is then used to "punt" in the investments - equities, commodities, options and derivatives, etc..

Often with leverage where the bank lends additional funds secured by the additional assets purchased. Generally with a mechanism to unwind leverage if volatility in the underlying instruments increases. The bank will tout this as a "protective feature" to limit risk. And it does. However, volatility is a measure of the change of the value of an asset - whether the values are increasing or decreasing. So some of the upside is given away. But a fair trade to limit downside risk, I think.

Now to some numerical analysis.

With interest rates so low and the tenor so short, clearly a large part of the initial principal of the deposit would have to be used to purchase the zero coupon.

The remaining principal is likely to be very small.

Let's look at a simple example for a one year tenor. Assume that interest rates are 10% (clearly they are not now. This is our standard Panglossian best case.) If they were, a zero maturing for $100 one year from now would cost US$90.91. At 3% one year rates, the bond would cost US$97.09.

This means that with the 10% scenario the bank would have US$9.10 of the investors' funds to punt with. And US$2.91 at a 3% level of interest rates (closer to today's level). As you notice, I am assuming there is no promised minimum interest. And I'm assuming there are no upfront fees or ongoing operating expenses. All of these would serve to make the economics even more difficult.

To get the 9% return on the total principal (i.e., US$9 in our example of the US$100 deposit), the bank would have to earn - without any leverage on the remainder (after buying the zero):

Roughly 100% if the remainder were US$9.09. (Our highly unlikely 10% market rate scenario)
Roughly 309% if the remainder were US$2.91. (Our still optimistic 3% market rate scenario).

Neither of these seem realistic returns for current market conditions. And one might even consider that if achieving these rates during the last bout of irrational exuberance was difficult, it might be even more so now.

Add some leverage and the required returns still remain very high.

With total leverage of 3 times:

In the first case the required one year return is 33%.
In the second case, the required return is 103%.

With leverage, the lender always collects his principal and interest first. If asset values decline, and trigger the leverage control, the lender will sell the additional assets and repay the loans (principal plus interest). If the proceeds aren't enough to repay the loans, then he'll take money from the US$9.09 or US$2.91 "remainder" to cover any shortfall on principal and interest. So employing leverage can cause an erosion of the "remainder" under certain market decline scenarios.

If the investing scheme breaks even, then the investor will get the market rate on his or her deposit. The US$9..09 or US$2.91 in our two examples. In effect the one year rates.

Up to 9% sounds great. Getting it will be a little more difficult than reading a glossly brochure.

To be very clear, am I saying it's impossible that this scheme could earn 9%? No. Rather that the probability of earning 9% is rather low. Better I suppose than the odds of Paris Hilton winning the Nobel in Physics. But who knows what she's doing right now?

The National: Mahmood Karzai Villa Sale and US Federal Tax

2010-10-01T00:30:00.000-04:00

The National is in the process of changing its website.

The draft site site has some articles not in the existing site. Here's one about potential US tax issues for Mr. Mahmood Karzai with the sale of his Dubai villa. You'll find other articles and get a sneak peek at the new format by going to www.beta.thenational.ae

You can read the article for details.

The US is one of a few countries that tax their citizens on worldwide income.

Reuters: How Dubai Got Serious?

2010-09-30T23:48:00.000-04:00

An interesting report from Reuters: How Dubai Got Serious.

A deliberate choice of headline? Or perhaps an unintended indication that at one point Dubai was not serious?

To whet your appetite some quotes. My comments follow each quote.

The auditors' task is to investigate exactly where the money went, who lined whose pockets, and what other financial landmines might lie in store. Forensic audits at state-linked firms, such as Dubai Holding, are part of a wider corruption probe that has targeted senior figures from Dubai's boom years.

Lots of commissions to track down to say nothing of more simple misappropriations.

Abu Dhabi's ascendancy began in the wake of 2008's global credit crunch. Reports about debt trouble in Dubai's flagship companies had been circulating within government from as early as 2005, though most people seemed happy to ignore them. In 2008, the end of a six-year oil-fueled boom burst Dubai's real estate bubble while the global financial crisis left the emirate unable to refinance looming debt obligations.

Lenders merrily rolling over loans and pretending everything was OK.

"The announcement was a disaster for Dubai. They were told 'don't worry, Argentina has done this, Venezuela has done it. People forget and they start lending again.' But what they didn't take into account was that those are real economies. This is not a country.

Ouch! But right on target. Not a country in several ways.

"Nakheel's books were so screwed up it wasn't even funny."

"No-one knew the magnitude of what was owed, then the complexity of it," the former adviser to Dubai World says. "A lack of experience -- and ego -- made it hard to admit defeat."

And still make it so for the "Dubai's back" crowd.

Almost two-thirds of Dubai World's debt is held by six banks, four of them British: HSBC, Lloyds, Royal Bank of Scotland, Standard Chartered, and local lenders Emirates NBD and Abu Dhabi Commercial Bank.

Another great moment in banking! There's no fool like and old fool. And then there are bankers.

"They believe that now the problem is solved," says the former Dubai World adviser, who is critical of creeping complacency just a year after the crisis. "The problem is not solved, they still owe the same amount of money. They will have to pay the same amount, only a little later."

See above "We're back".

The Investment Dar - Changes to Restructuring Plan?

2010-09-30T23:16:00.002-04:00

Al Qabas reports that this Wednesday, TID held a meeting in Dubai with the Creditors Co-ordinating Committee and Ernst & Young. This is the first meeting between the CCC and E&Y. Earlier the CCC had submitted a letter to E&Y asking that it look out for the interests of lenders as well as the owners of the Company.

As you'll recall, E&Y has been tasked by the Central Bank to perform the technical study required under the FSL as part of the CBK's determination of whether to recommend that the Special Court make the final decision to either allow TID the protection of the FSL or deny it. So E&Y is working for the CBK and not the lenders or the owners/borrower.

What's intriguing is that the article also mentions that the CCC has been pressuring the Company to inform it of changes and amendments in the restructuring plan which were made without the knowledge of the lenders. If you've read earlier posts here, you'll recall that I mentioned in March that the FSL gave the CBK the right to impose additional conditions on the borrower and amend the plan in order to improve the probability of the borrower's performance.

In this situation, the CBK holds the trump card. It's "yes" vote is necessary for obtaining entry under the FSL. Given that a liquidation under local laws would be messy and greatly reduce recovery prospects, both TID and the lenders are going to find it difficult to say "no" - though I suppose they can try to negotiate. The CBK can counter by citing the report of E&Y - the independent experts asked to assess TID's financial condition and the plan.

It's also important to note that Al Qabas' account is only as good as its sources. Last July the newspaper reported that E&Y was submitting a "final" report. Though I suppose one possibility is that E&Y's report at that time said that the Company's financial condition meant the original plan wouldn't "work" and needed to be modified.

Absent a direct link into the creditor group, we'll have to wait to see what develops. If any creditor out there reads this as an invitation to comment, he'd be right. Or, if the creditor prefers, make contact outside the blog via our contact form.

The article also mentions that during the meeting Brother Adnan, TID's Chairman/CEO, reportedly advised the lenders that he had consulted God before founding the company. «استخار الله ثم اصدر اوامره في تأسيس شركة تحوي بعض الاصول» . Subsequent events would appear to confirm that he failed to maintain subsequent contact for management advice. Or perhaps ignored what advice he did receive. Or perhaps he got a "wrong number" in his original contact

Some of the creditors expressed their disapproval over some of the decisions that Mr. Al Musallam had taken. After a closed debate, he left the meeting and did not return, leaving the CCC and creditors with an advisor. Some creditors are reported to have objected that the advisor had no legal status. He was not an officer of TID. He retorted that he had a position in one of the external entities (whatever that means).

Things aren't going well.

It seems that relations between TID and its lenders are difficult. Mr. Al Musallam should remember that during the rescheduling the lenders will be poking their noses into his business. While the restructuring covenants are no doubt "arranged with the greatest of care in the hopes that the cashflow soon would be there", there will be times when interpretations of meaning will arise. Disgruntled creditors can read things more strictly if their backs are up.

Damas - Standstill Extension Signed

2010-09-30T09:19:00.000-04:00

Damas announced another remarkable bit of progress and as well yet another "vote of confidence" from its lenders in its proven business model.

Here's the PR from Nasdaq Dubai this morning.

Following the announcement by Damas International Limited (the "Company") on 19 September 2010 that the steering committee of the Company's lenders had, in principle, approved an extension of the standstill agreement to 30 November 2010, the Company announces today that the Company has signed an amendment agreement dated 30 September 2010 to the standstill agreement dated 24 March 2010 (as amended pursuant to two amendment agreements dated 27 April 2010 and 13 July 2010 respectively) between the Company and the steering committee so as to formally extend the standstill to 30 November 2010.

A Company spokesman commented that "the agreement of the steering committee to the standstill extension shows once again the confidence that the bank lenders have in the restructuring process and the strength of the underlying business model of the Company".

If you believe the press release, and I hope you don't, Damas has scored yet another vote of confidence from its lenders.

Actually, it has not.

If there was a vote of confidence from its lenders, it is when they agreed the extension not when they signed the agreement. Not when they signed to document that agreement. Sorry, Damas, you only get one vote from this.

But more importantly this is actually a vote of no confidence in the local legal system.

Rather than say no and refuse an extension. Lenders realized that recourse to local courts would greatly diminish their already worrisome recovery prospects. So they went along with another extension on the 19th and signed it today.

Kuwaiti Rules

2010-09-29T07:26:00.000-04:00

MP Waleed Tabtabai, Majlis Al Umma Al Kuwait

In Saudi it would be half the beard as well.

As part of my commitment to you my readership, I will begin growing a mustache after I obtain the necessary green light from Umm Arqala.

AlGosaibi v Maan AlSanea - New Venue The US Congress

2010-09-29T00:48:00.001-04:00

If you've been following the continuing dispute between AHAB and Mr. Al Sanea, you know from reading Frank Kane over at The National that the latest "round" is scheduled for a new venue - the US Congress. As a side comment, if you're not reading The National already, you should.

As per the schedule, the hearing was held on September 28th at 4:00PM. The prepared testimony of the four witnesses can be found here at the US House of Representatives' Financial Services Committee. The listed topic is terrorism finance.

Among those giving testimony was Eric L. Lewis, Esquire, of the Washington DC office of Bachman Robinson & Lewis. As you'll see from the attached biography, he has an extensive background in investigating financial crimes.

His prepared remarks are here.

Interestingly in his description of his experience and current assignments (page 1 paragraph 2), he does not mention his current assignment and that of his firm for AHAB - though it is clear later in the testimony that there is this link. I'm confident this was an oversight and was corrected when he read his statement this afternoon.

His comments do not deal with terrorism per se, but with what he feels are serious defects in the provision of correspondent bank accounts which terrorists might exploit. I am sure that just by perhaps a fortuitous coincidence his remarks might also help the case of his client, AHAB, in their legal battle with Mr. Al Sanea.

In that regard he focuses on what he alleges to be criminal activity by Mr. Al Sanea. As always, let's stop to note that to this day Mr. Al Sanea continues to deny any improper or illegal behavior.

His argument is that there were repeated critical failures of know-your-customer due diligence ("KYC") by the American Bank that opened the main US Dollar clearing account for AHAB's Money Exchange Division in NYC. He notes that the Money Exchange advised the American Bank that it anticipated a volume of US$15 billion per year through its account. As Mr. Lewis notes, this amount was out of proportion to the business conducted by the Money Exchange - which he places at US$60 million per year. He also comments that the total of remittances from the Kingdom were about US$21 billion in 2008. Therefore, it would be unrealistic for the bank to make the assumption that AHAB Money Exchange had the preponderant a share of the remittances business in the Kingdom as it operated from a single office in the Eastern Province.

Mr. Lewis identifies four red flags which he asserts were missed by the American Bank: (a) a high risk region and country (b) a money remittance business which accepts business from "walk in" customers where he asserts the Money Exchange's KYC would be non existent or weak, (c) massive transactional volume, and (d) a transactional volume vastly disproportionate to the customer's ostensible business.

As a side comment, I'd note that these requirements reflect the due diligence standards established by the FATF in its 40 Recommendations. Recommendations 5, 7 and 11 are the relevant ones.

The Financial Action Task Force is an inter-governmental organization set up by to combat money laundering and the financing terrorism. It does not have any legal enforcement powers. Rather it sets global standards, monitors individual countries' compliance therewith, including naming and shaming non compliant jurisdictions (which triggers additional AML procedures under the 40 Recommendations). It also serves as a clearing house for the exchange of expertise and information on money laundering. The FATF has also issued Nine Special Recommendations on Terrorism Finance.

Summing up what he sees as a failure of due diligence, he states (page 3 paragraph 4):

"Yet, in this case, our investigation revealed no evidence of any significant due diligence or AML investigation by [American Bank] of the Money Exchange in connection with the opening of the [American Bank] account in 1998, or really at any time after the opening of the account - even after the imposition of much more strict anti-money laundering and know-your-customer requirements after the tragedy of 9/11."

On page 4 paragraph 2 he levies another serious charge:

"Literally at the same time it was under investigation and was negotiating this settlement with the DA’s office, [American Bank] was in communication with the Money Exchange, which was running about a $20 billion annual volume at that time. [American Bank] asked the company to change its name to something without the words “Money Exchange,” which might be a red flag to [American Bank's] auditors or compliance officials. [American Bank] also asked the Money Exchange to cease engaging in walk-in money remittance business. But this aspect appears to have been perfunctory and not to have been followed up. The Money Exchange simply proffered a new name not suggestive of money remittance services—it went from “Ahmad Hamad Algosaibi Brothers Money Exchange, Commission and Investment” to “Ahmad Hamad Algosaibi Brothers Finance, Development and Investment.” It went right on doing walk-in remittance business. Its enormous movement of funds through its account at [American Bank] remained unchanged. The truth is that if [American Bank] had done its due diligence, it would have been immediately obvious that the throughput in the account actually had nothing to do with any money remittance business. And even the $15 billion a year predicted transaction volume was substantially exceeded. So [American Bank] failed to ask why a money exchange would need to process $15 billion per year and went it started to process in excess of $20 billion or $30 billion per year, it failed to ask why there was an additional $5 or $15 billion per year in transactions. On a per transaction fee basis, this was all good, no-risk business for [American Bank].”

As we look at the issue of the American Bank's requirement that the Money Exchange change its name, the major pieces of public evidence in that regard - of which I am aware - are from the submission by AHAB's counsel (by an attorney from Mr. Lewis' firm) in NY Supreme Court Case 601650/2009 - Mashreqbank v AlGosaibi. These are exhibits #16 (Document #93) and #19 (Document #96). You can read these for yourself by going to the NY Supreme Court's website at http://iapps.courts.state.ny.us/webcivil/FCASMain. Perform an Index Search using the CRN 601650/2009 and follow through until you find a tab for e-filed documents (at the lower right hand of a screen).

Exhibit #19 (pages 7-8) contains a memo dated 12 June 2006 from Mr. Mark Hayley to Mr. Al Sanea relaying his account (I haven't seen any document which purports to relay the American Bank's account) of a meeting with the American Bank:

"The Money Exchange must not act or be perceived to act as a money service business. Accordingly, no walk in business can be accepted, even if the customer is well known to us (e.g., Saad, AlGosaibi and Aramco staff).

Instead we must have a full account relationship with every customer requiring to transfer money and every account relationship requires full KYC documentation and compliance.

According to [American Bank], perception is also important and the words "Money Exchange" in our name could be seen by the regulators as an indication of money service activities. Therefore we need to change our name."

This document can be read in two ways.

In the first - favorable to the American Bank - they are telling AHAB that the Money Exchange can no longer operate as a money exchange. That it must terminate business of that nature. And as a result should change its name so that there is no suggestion that it is engaged in that business. Presuming that it did of course eliminate this business, then it would be highly appropriate for the entity to change its name.

In the second - unfavorable way - the document can be read to imply that the change in name is cosmetic designed to circumvent the bank's internal audit and controls. That the entity would continue to perform money transfer services but for account holders. Under this theory, since the ME was not licensed as a bank or investment company, it would remain a money exchange.

There are really two fundamental issues here:

What is the business this entity is engaged in" Is it a money exchange firm? Is it operating as an unlicensed and unregulated bank? Is is something else?
What is the legal status of the entity? When I was a rookie banker (who dealt with the Money Exchange and other AHAB entities), I knew that it was a division of the AHAB Partnership. That it did not have a separate legal identity. That's a critical matter for a banker as it affects one's rights under the law. Important as well in determining who had the right to sign to commit the entity to a legal document, to sign a payment order. And important for issues like ultra vires defenses.

The memo is crystal clear.

"Since we call National Bottling a "company" it would not be inconsistent to call the Algosaibi Investment Division a "company". By calling ourselves Algosaibi Investment Company we could explain that this is the first step towards eventual incorporation following the grant of a bank of investment company license.

This new name will not change our constitutional position as a division of Ahmad Hamad Algosaibi & Brothers Company -- Partnership. Our letterhead should continue to disclose this -- see attached.”

The memo then notes that they should obtain a CR for the Investment Company. Another key point: one does not need to be a separate legal entity to obtain a CR in the Kingdom. Caveat banker.

Exhibit #16 contains a memo from Mr. Hayley to Mr. Al Sanea dated 14 July 2006 which contains Mr. Hayley's account of a 3 July meeting with the American Bank. That memo notes that:

KYC Anti Money Laundering procedures must be revised to eliminate any "walk in" business and that a draft (apparently incorporating same) was sent to the American Bank.
The account name must be changed to Ahmad Hamad Algosaibi & Brothers Company. (Note that's the Partnership name - a legal entity unlike the Money Exchange.)
The Money Exchange name must be changed. "This is necessary even if our account with [American Bank] is maintained in the Partnership name."

Again it is possible to read this document in a manner favorable to the American Bank. The client has told it banker that it has ceased walk in business and has provided that banker a draft internal document. which reflects this. Thus, meeting the American Bank's requirement. The account is to be registered in the name of the Partnership - a legal entity. References to "money exchange" are being removed to conform to the facts and thus to avoid raising false issues.

We don't have the full set of information that Mr. Lewis does so there may be other documents and evidence he has which enable him to draw his conclusion. So at this point from what we have here the jury is out. But the American Bank at this point does appear to have a reasonable case.

There are a couple of other points from his testimony.

The American Bank advised that the original account opening records were lost in the 9/11 tragedy. Rather poor form in record retention and security. Certainly not in compliance with FATF Recommendations, but then as is pretty well known the US was fairly relaxed about these matters prior to 9/11.
On page 5 Mr. Lewis asserts that "Awal Bank was a creature of Al Sanea's fraud and was, further, the bank of choice for the children of a foreign head of state who appeared to be using Awal Bank to launder funds." The BD64,000 question here is whether his bank was an active conspirator. Or whether it was being taken advantage of by these third parties. I cannot think of a single major USA bank or UK bank that has not been fined by a regulator for lapses in implementing proper AML procedures. If that's the case with Awal - a lapse in procedures, then they are in the company of many household name financial institutions from the "Developed" West. If they were an active participant, the company they keep is a much much smaller circle of banks.

One last bit to cover and we're done: the presumed profitability of the account that caused the American Bank to short circuit due diligence (taking Mr. Lewis allegations at face value).

How do correspondent banks (like our American Bank) make money on an account?

Generally, it's through a combination of per item charges (debits, credits, payments, account statements, etc) plus some fixed charge for maintaining the account (a required minimum balance or a yearly fee).

Let's look at the item which drives the overwhelming bulk of the per item charges: payment charges.

The per item charge is independent of the amount of the payment. A payment for $100,000 costs the same as one for $100,00,000 - all other things being equal.

So what drives the per item price for a payment?

The manner in which the instructions are delivered to the correspondent bank. Payments delivered in machine readable form (through SWIFT or the correspondent's proprietary payment system - often PC based) are preferred because they do not require as much effort to process as those which are not in machine readable or electronic form. In the latter case, the correspondent has to employ staff to take the non machine readable instructions from the client, input them into the payment system with of course the obligatory checking of the payments by a second employee to make sure they've been entered properly. So pricing for manual payments is much higher than electronic ones.
There is a further distinction for electronic payments - whether they are straight through or need to be repaired. To go "straight through" the payment system, payments need certain codes for the receiving bank, the beneficiary etc. If the client (here Algosaibi) inputs all this information correctly, then the NY correspondent has little to no operational work. If not, then a member of the correspondent bank's operations staff has to enter this information. Note that with a straight through payment if sufficient funds are in the client's account, the payment is released without any manual intervention by the correspondent. If there are insufficient funds, a credit officer may have to make a decision whether to release the payment or not. Generally, there is no charge for credit approval. So as you'd expect, straight through payments not requiring any "repairs" are priced lower than electronic payments requiring repairs.

Let's make some assumptions and see what sort of revenue (note revenue not net profit) the American Bank may have been making on the Money Exchange account.

$20 billion in payments through the account per year. Since Algosaibi did not start out with $20 billion in the account, they'll need to arrange cover for these payments by having credits of US$20 billion.
Each payment and credit at US$25 million. That's 800 of each. We'll also look at the highly unlikely scenario where each is US$1 million. That means 20,000 of each.
US$5 per payment and per credit. We'll also look at higher levels. A not very likely US$10 per item. And a totally unrealistic US$50 per item. One further fussy note. Generally, credits are not priced the same as payments. They're priced lower because they come to the correspondent in electronic form. And if there's a problem with applying the payment, the correspondent charges fairly hefty "investigation" fees. What's the point you ask? There's a lot of excess in my pricing. Credits are probably much much less than the payment price.
Other charges of $1,000 per month. This should more than cover the miscellaneous per credit, per debit, account statement mailing, etc.
A fixed charge of US$100,000 per year. This should be well above what the American Bank required.
Since Mr. Lewis mentioned that the same bank had been fined US$7.5 million for running a Latin American account through which over US$3 billion was transferred during 4.5 years, we'll use that as the minimum fine.

What are the results?

Scenario 1: Payment and Credit Size US$25 million

Per Item Charges	$5 Per Item	$10 Per Item	$50 Per Item
800 Payments	$4,000	$8,000	$40,000
800 Credits	$4,000	$8,000	$40,000
Sub Total	$8,000	$16,000	$80,000

Fixed Charges
Account Fee	$100,000	$100,000	$100,000
Miscellaneous	$ 12,000	$ 12,000	$ 12,000
Sub Total	$112,000	$112,000	$112,000

GRAND TOTAL	$120,000	$128,000	$192,000

Comments:

Here we're using $25 million per item which is realistic for the sort of business the Money Exchange was conducting. And this certainly fits with the data in the account statements disclosed as part of Mashreqbank case.
With this assumption the accounts have fairly modest total revenues, even at the completely unrealistic price of US$50 per item.
If you think my assumptions are too low, double the results. It's still hard to see a rational businessman running the risk of a US$7.5 million fine - which might be much larger given the amounts transferred through the accounts. And not only is there the fine but also the damage to one's business reputation. The dangers to one's franchise can be very serious. Riggs Bank is a cautionary tale.

But maybe I'm being too generous. So let's look at another scenario.

Scenario 2: Payment and Credit Size US$1 million

Per Item Charges	$5 Per Item	$10 Per Item	$50 Per Item
20,000 Payments	$100,000	$200,000	$1,000,000
20,000 Credits	$100,000	$200,000	$1,000.000
Sub Total	$200,000	$400,000	$2,000,000

Fixed Charges
Account Fee	$100,000	$100,000	$100,000
Miscellaneous	$ 12,000	$ 12,000	$ 12,000
Sub Total	$112,000	$112,000	$112,000

GRAND TOTAL	$312,000	$532,000	$2,112,000

Comments:

Frankly, this is a highly unrealistic scenario. I've included it to show that even an outlier like this does not generate sufficient revenue to take risk.
Only if one combines it with the even more improbable US$50 per item charge do we get anywhere near a risk taking point.
But the simple fact is that when the account was being used banks were fighting to get a piece of business from AHAB - then one of the Kingdom's most prestigious groups as was Mr. Al Sanea's companies. So US$5 per item is probably the high point for payments. The pricing per item may even have been lower. Hard to see this account being so lucrative that a bank would take a risk like this.

Conclusion:

Correspondent accounts just aren't that lucrative .
Many of the major correspondent banks are feeling the pressure of AML regulations and are highly sensitive not just to regulatory fines but to the risks of lawsuits by third parties (as happened to the Arab Bank's New York Branch). And so they are reducing exposure by throwing marginal customers out.
That being said, bankers often do very stupid things. And sometimes bankers don't work for the best interest of their firms.

"We're Back" - Part II: "Back to the Future"

2010-09-28T08:59:00.005-04:00

Two Unnamed Lenders Unsuccessfully Attempt to Retrieve Their Loan

We're back indeed!

Seems Limitless needs another six months.

Guess lenders should have figured out that when the borrower's name is Limitless, there could be all sorts of related problems with amounts and repayment.

I can't wait for the sequel. This plot has got at least a couple more runs.

ذكرى الرئيس الراحل

2010-09-28T08:42:00.000-04:00

زعيمنا .. حبيبنا .. قائدنا
عندي خطاب عاجل إليك
من أرض مصر الطيبة
من الملايين التي تيمها هواك
من الملايين التي تريد أن تراك
عندي خطاب عاجل إليك
لكنني لا أجد الكلام
الصبر لا صبر له
والنوم لا ينام

***

الحزن مرسوم على الغيوم .. والأشجار والستائر
وأنت سافرت ولم تسافر
فأنت في رائحة الأرض .. وفي تفتح الأزاهر
في صوت كل موجة، وصوت كل طائر
في صدر كل مؤمن، وسيف كل ثائر
عندي خطاب عاجل إليك
لكنني لا أجد الكلام
الصبر لا صبر له
والنوم لا ينام

***

يا أيها المعلم الكبير .. كم حزننا كبير
كم جرحنا كبير
لكننا نقسم بالله العلي القدير
أن تحبس الدموع في الأحداق
ونخنق العبرة

***

يا أيها المعلم الكبير .. كم حزننا كبير
كم جرحنا كبير
لكننا نقسم بالله العلي القدير
أن نحفظ الميثاق ونحفظ الثورة
وعندما يسألنا أولادنا
في أي عصر عشتم ؟
في عصر أي ملهم ؟
في أي عصر فاجر ؟
نجيبهم .. نجيبهم
في عصر عبد الناصر ..
في عصر عبد الناصر

Rumor: Hassan Al-Ammari Resigns from International Investment Group

2010-09-27T20:11:00.001-04:00

Citing an interested source (one with a connection to IIG) Al Watan reports that Hassan Salim Hassan Al-Ammari has resigned from IIG's board due to the lack of co-operation from the Chairman/MD, Dr. Abdulaziz Bader Al Jena'ai. According to Al Watan's source, Hassan has been unsuccessfully asking for financial and other information for some nine months.

Hassan represents Al Baraka Investment and Development Co (which owns about 5.21% of IIG).

IIG has been suspended from trading on the KSE for failure to provide financials for both 1Q10 and 2Q10. The last financial it did supply was FYE09 which showed a loss of KD36.5 million versus a KD21.5 million loss the year earlier.

You can read more on IIG by using the tag International Investment Group for earlier posts.

Time for a Visit to the Optometrist?

2010-09-27T19:32:00.003-04:00

Dubai is back in business and the emirate's vision is unchanged, His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, told Bloomberg Television on Sunday.

Corrective lenses may help this condition.

Begin with the top line, Your Highness.

(Being a Shaykh means you never have to admit a mistake. If you can read this from 5 meters, your Vision truly is 20:20).