Showing posts with label Ahlia Holding Company. Show all posts
Showing posts with label Ahlia Holding Company. Show all posts

Sunday 9 May 2010

AlJoman - Why the Kuwait Stock Exchange Needs Strong Regulation

Earlier this month AlQabas published a lengthy summary of a recent report by AlJoman Center for Economic Consultancy.  Here's the full report from AlJoman's website.  

You'll notice that AlQ has reordered the topics.  We'll work with AlQ's order in this post.  

The article is a blistering attack on market manipulation and regulatory failures. 
  1. Al Joman says that there are about 15 main "investment blocs" that each control from 2 to more than 10 companies that are active in the KSE.  According to its analysis only a very few of them engage in professional or responsible behavior. 
  2. Three of the groups have fallen and AlJ expects at least one other to this year.
  3. The first group mentioned is the Abraj Bloc (Abraj Holdings, Shabka Holdings, and International Leasing and Investment).
  4. The second is the Ahlia Bloc (AlAhlia Holding Company and Gulf Invest).
  5. The third the International Group Bloc (PetroGulf, Grand, Investors Bank, Usul, and International Investment Group.)
  6.  It then turns to a discussion of large and unjustified losses to the shareholders of the companies comprising these groups - which it notes shake confidence in the KSE as well as harm its foreign reputation stating that they consider that removing these distressed companies from the list of traded companies (presumably an expulsion from the KSE) would be considered a positive step. even if only partially (meaning this step by itself is not sufficient).  And that it is possible to lighten the harm caused shareholders and the economy by  removing  these long notorious companies instead of having let them continue to exhausting shareholder money for a long time and in a clear open fashion visible to all.  Clear responsibility for this state of affairs is laid upon the management of the KSE.
I've sort of given away the plot here.  The original research report by Al Joman begins "innocently" enough with a discussion of  the decline in KSE trading in April compared to May.   After presenting some comparative statistics, AlJ begins to describe the reasons.  The first hint is the comment that negligent traders have discovered there are more paper companies and so have become more selective in trading.  Turning to its list of factors, the first item is the lessening of manufactured or imaginary trades or trades agreed beforehand.  Which have come to everyone's attention through increased complaints.  The impact of the new capital market law which criminalizes these wrong practices.  The second is exceptional "feverish"  trading in transport or logistic company  as shares as part of an organized propaganda and scheduled effort to to spread rumors.  Manipulated volumes and prices.

Not too far into the report and it's pretty clear that this is not your normal market analysis.

It only gets better.  Comments on those responsible for cheating numerous innocent traders.  Management from the companies themselves, media circulating lies - print, satellite television, internet sites (heavens an attack on bloggers!).   Than an absolutely blistering attack on the KSE.

Some discussion of the Commercial Bank of Kuwait 11 April Board meeting and the responsibility of directors under the title "Commissioning Not Entitling" (my loose translation).  Calling for independent investigations of board conduct at troubled companies to find out the real reasons for losses and the decline in asset values along with steps to recover funds if board members are guilty of wrongdoing.

The end of the article deals with a review of 2009 earnings predictions by 4 newspapers in Kuwait along with AlJoman's.  And some comments that so far (not all firms have reported results yet!) net income for the two year period 2008-2009 is approximately zero.

An interesting factoid - as of the date of AlJ's report only 25% of Kuwait's 333 companies had reported 1Q10 earnings.  One suspects the delay is not due to needing a lot of time to add up the profits.

Monday 5 April 2010

Shuaa Capital on Gulfinvest Kuwait and Ahlia Holding Company


Since I posted on this topic yesterday, it's only fair to note that Shuaa has made an announcement on the DFM today.

PRESS RELEASE

SHUAA says no impact from Gulfinvest default

Dubai, 5 April 2010 – SHUAA Capital expects no major financial impact resulting from the statement by Gulfinvest to the Kuwait Stock Exchange regarding its default on a AED 200 million loan to Abu Dhabi Commercial Bank. SHUAA had entered into a guarantee in respect of this loan in 2007, and confirms that it will fulfill its obligations as they become due. As part of SHUAA's diligent risk management process, the Firm took prudent action and made a provision for the loan guarantee at the end of the year 2009. This information has been made available to the market in the financial statements which are available on SHUAA's website.
Since September last year, SHUAA's new management has taken decisive steps to reduce risk exposures emanating from non-core businesses and expects no further material impact or downside risks arising from legacy issues of the Firm. SHUAA has a clear focus on maintaining and developing its leadership positions in its core fee generating businesses.

- ENDS-

The last paragraph is of course true.  

However, I'd like to give a tip of AA's virtual tarboush to the term "legacy issues".  Like "legacy assets" and "non-core" assets, it's one of my favorite financial terms. 

Shuaa Capital Gulfinvest Kuwait and Ahlia Investment Company


You've probably seen the press reports that Gulfinvest had defaulted on a AED 200 million loan extended to it by Abu Dhabi Commercial Bank which Shuaa Capital had guaranteed. The loan was to partially finance Gulfinvest's purchase of  19.2% of Ahlia Investment Company (since 2007 Ahlia Holding Company) from Shuaa.  As a result of the default, Shuaa is now obligated to pay ADCB AED 200 million.

How did Shuaa get in this situation and what are the consequences?

Sixty second summary:
  1. Shuaa has already taken an AED156.6 million provision (in its 2009 annual report) so the financial pain is already felt.
  2. Recovery prospects are probably best characterized as difficult given that Ahlia represents roughly 73% of Gulfinvest's assets. 
  3. The story of the sale is complicated.  Shuaa seems to have been motivated to provide the guarantee so that it could close the sale.  The profit on which was 26% of 2006 net income.
  4. Gulfinvest appears to have paid a significant premium over "market" price for the acquisition.  Almost twice market!
Now the details.

Those with long memories will recall that Shuaa's 2005 acquisition of Ahlia had been controversial in some quarters.  As far as I know, no regulatory action was taken against Shuaa for the transaction.  Here's one article about the ESCA.  And there is nothing on file against Shuaa at the DFSA for this transaction.

In 2006 it sold all of its shares in Ahlia to Gulfinvest, in whom Ahlia was a significant shareholder.

As the below press release from the KSE 29 July 2006 discloses Gulfinvest bought 100% of Emirates Company for Opportunities Ltd #3 which owned 115,730 shares of Ahlia for KD51.9 million.   This is what the press release states but it's clear from Ahlia's 2006 financials that the purchase must have been for 115.73 million shares. As an unrelated (to this story) comment, you might find Note 27 (Related Party Transactions) and 32  (Regulatory Violations)  in Ahlia's report interesting reading.

Here's Gulfinvest's 29 July 2006 press release on the transaction.

[7/29/2006-7:58:14]  ِ(غلف انفست) تشتري "شركة الامارات للفرص المحدودة 3" بمبلغ 51,9 مليون د.ك
يعلن سوق الكويت للأوراق المالية أن الشركة الخليجية الدولية للاستثمار
ِ(غلف انفست) قد قامت بشراء "شركة الامارات للفرص المحدودة 3" بالكامل،
وذلك بمبلغ قدره 51,9 مليون د.ك (واحد وخمسون مليونا وتسعمائة ألف
دينار كويتي).‏
علما بأن "شركة الامارات للفرص المحدودة" تمتلك عدد 115,370 سهم
من أسهم الشركة الأهلية للاستثمار.‏
وعليه، تصبح ملكية (غلف انفست) في الشركة الأهلية للاستثمار 30,17%‏
بشكل مباشر وغير مباشر، وذلك بدل ملكيتها السابقة البالغة 11,03%.‏

If we look at the 2006 annual audited 2006 financials for Shuaa Capital Note 8, we get more details. The sale price was AED 656.744 million and Shuaa recognized a gain of AED 67.821 million.  This represents roughly 26% of Shuaa's 2006 net income of AED 262,43 million.   Strong incentive to "close the deal"!  And maybe take a bit of credit risk.  And maybe in retrospect a bit too much.

What motivated Gulfinvest is less clear.  In the period around the end of July 2006, Ahlia was trading at KD0.240 or so.  A glance above shows that Gulfinvest paid almost twice market price for the shares!!!

Let's go a bit deeper.

In Gulfinvest's 2006 Annual Report Note 2, we see that it actually only paid cash of KD37.9 million.  It financed the remaining KD 14 million by using KD1.7 million in dividends from AIC to pay Shuaa and KD12.3 million though a note payable (presumably to Shuaa) which carried interest of 7.75% p.a.   It also recognized some KD15 million in goodwill on the purchase.

In its 2007 Annual Report, Gulfinvest disclosed in Note 8 that this receivable was settled during 2007 by utilizing a portion of the term loan "availed from a bank in the UAE".  The term loan is for KD14.96 million.  The term loan appears to be some KD2.697 million larger than required.  

Could the difference be interest?  And how can we put a boundary on the interest calculation?  The convenient thing is that Shuaa's fiscal year 2006 ended  31 March 2007.  At that point as per  Note  33 in its 2006 annual financials it is showing an AED 207 million guarantee.   It's a safe bet that this is this loan.  So the maximum period for interest is from August 2006 through March 2007 or 8 months.  At 7.75% that's KD0.634 million.  In rough numbers leaving KD2 million or AED 26 million of apparently extra  (note the qualifier "apparently") debt which Shuaa has guaranteed.

The press reports that Shuaa helped Gulfinvest get the loan from Abu Dhabi Commerical Bank.  The loan was secured by  the pledge of the 19.2% stake in  Ahlia bought by Gulfinvest.  But ADCB also wanted and got Shuaa Capital's guarantee.  Perhaps a sign to Shuaa that it was taking on more credit risk that it bargained for.

With the default and the legal obligation of Shuaa to pay ADCB, some press articles have remarked that this is yet another headache for Samir Ansari, Shuaa's CEO.  However, a glance at Note 33 in Shuaa's 2009 financials (now a December Fiscal year end) shows that it already took an AED 156.643 million provision.   So the headache was recognized long ago and preparations made.  The financial pain has been taken.  Or largely taken.  If the provision proves later to be insufficient, the likely additional amount seems clearly manageable - and not life threatening to Shuaa.

Once it pays off the ADCB loan, Shuaa will step into the shoes of ADCB  with Gulfinvest's  other creditors  to negotiate the debt rescheduling.  

From a quick glance, recovery looks difficult.

As per Gulfinvest's 30 September 2009 financials (the latest I can find) Gulfinvest has KD63.4 million of assets.  Of this total KD46.1 million is represented by Ahlia.   It's now trading at roughly one-tenth of its value on 29 July 2006.  And roughly KD20 million of that now belong to Shuaa.  Other creditors (excluding Shuaa) are some KD34.6 million.