Showing posts with label KIA. Show all posts
Showing posts with label KIA. Show all posts

Sunday 7 February 2010

Kuwait National Portfolio Poised to Make Significant New Investments?


AlAnba'a Newspaper (Kuwait) reports that the Kuwait Investment Authority ("KIA") met with three Kuwaiti investment companies last week to hear their proposals for investing the remainder of the National Portfolio set up by the Government in 2008 to combat the effects of the global financial crisis on Kuwait's economy.  The NP was capitalized at KD1.5 billion, though only KD0.4 billion has been invested to date.  That has led to criticism from various parties for the need for greater speed, especially punters caught in the market downturn.  Not of course for concern for their own finances, but for the greater national self-interest, I am sure.

AlAnba'a reports that the NP earned 13% during 2009, a rather incredible return considering the overall KSE is down some 10% for the year. (More on this remarkable result below).  Furthermore the article notes that expectations are for a 30% return on the NP this year. 

For some reason, AlAnba'a expects that once a firm is chosen there will be a significant infusion of funds by the NP into the market - either all or a great portion of the remaining KD1.1 billion.  As you might guess from that comment, I have some doubts as to whether this can move forward in the next few days (" خلال الأيام القليلة المقبلة").  The Government still has to pick new managers for its portfolio and sign contracts with them.  Then funds have to be transferred.   Then one would expect a careful process of analysis and selection of stocks.    

According to the news article, the Government will apply the following criteria in selecting a new fund manager:  The firm should not have any financial weakness or be involved in any financial irregularities (an alternative translation would be crimes) and have good performance over the past five years. It's also "necessary" that it have a good reputation and possess both confidence (presumably in its abilities) and in its commitment.  That I suspect should quite smartly narrow down the list of potential new managers, though I suppose there could be local variants of some of these standards.  There is after all Australian Rules "footy".  And it works quite nicely I am told.

At the end of the article there is a precis of criticisms levied by the (Government) Audit Bureau ("ديوان المحاسبة") about the National Portfolio's performance in 2009.  The AB's report begins by listing a series of decrees by the Council of Ministers and the Finance Minister that the AB believes have not been implemented in the NP.  These have to do with maintaining conformity with certain ratios limiting the amount of the portfolio that can be invested in an industry or a single company within that industry.  What this means is that at least some the existing managers of the NP are running portfolios less diversified  than the Government regulations determined was appropriate.  The AB report also notes that the NP's goals also include improving the factors influencing trading on the KSE - to foster positive factors and eliminate negative ones.  And presumably there is a criticism implied here that the NP hasn't been doing enough in that area.

As a side note, it is a requirement of Kuwaiti law or regulations that when the Government owns 25% or more of a company that that company be subject to an audit by the Audit Bureau.  There have been some complaints raised that there are listed firms in which the Government has broken this threshhold but which have not been made subject to an AB audit.  And if you've been following the matter, some investors have raised a formal complaint with the KSE.  It is an old but wise truism to be careful what you wish for. 

Lu'lu (Pearl) Real Estate Kuwait Delaying Resumption of Trading Pending Determination of Gulf Bank Legal Position on Derviatives Trades


AlQabas quotes informed sources that Lu'lu Real Estate Company is delaying the resumption of trading in its shares pending determination of Gulf Bank Kuwait's legal position regarding those firms who traded derivatives through it and caused the major losses (which led to a change in the Board at Gulf Bank and the KIA taking a significant stake).  And that Lu'lu (=Pearl) is apparently among this group.  The report states that Lu'lu is finalizing its 30 September 2009 financials (a pre-requisite for the KSE allowing it to trade again), but doesn't want to restart trading less Gulf Bank take legal action against it and cause its shareholders losses.

Some thoughts:
  1. As I recall the story about Gulf Bank and the derivatives, these were largely foreign currency derivatives.  Many involving the Euro.  With allegations (not yet legally proven) that a good number of them were for related parties.
  2. And that Gulf Bank's losses were caused when customers failed to settle their obligations.
  3. It would seem to me that if Pearl (Lu'lu) were one of those customers, it might be reasonable for it to expect that Gulf Bank would expect it to settle up.  Just as if Pearl had a loan from GB, it wouldn't strain belief to expect that GB would want its money plus interest back.
  4. You might be thinking as I initially did that Lu'lu's desire to pretend there wasn't a loss by delaying trading was a bit silly.   Losses don't occur when we open our eyes.  Or go away when we close them.  But, as long as no trading has occurred many parties will be valuing their Pearl stock at its last traded price.  And that could be very comforting for banks holding it as collateral for loans  who are adverse to booking provisions, for the borrowers themselves and for others ho don't want to recognize impairments in their own financials. 
  5. As to resumption of trading, last time I checked (Thursday), Lu'lu owed the KSE financials for 30 June 2009 as well as 30 September 2009.  And shortly it will be past due on the year end financials.  It's intriguing to speculate if Lu'lu's delays are strategic in the hope that something good will happen before it resumes trading.
  6. Finally, Pearl does have foreign projects at least one in Morocco and a hotel somewhere in the Eurozone - Germany or Austria.  So there would perhaps be some reason they might need an FX hedge.  One hopes that it was not among those many Kuwaiti firms who over the past few years found their core businesses less interesting than punting in the Kuwaiti Stock Market or making even wiser financial investments in markets on foreign shores.

Central Bank of Kuwait - Mandates Special Disclosure by Banks on Derivatives


This is a post from over one month ago (November 16 to be precise).  I made a small edit to it today and now it is on today's new posts lists.

About one year ago, Gulf Bank had a major loss arising from foreign currency derivatives undertaken for a customer who refused or was unable to settle.  Market speculation at the time was that the customer may have been a related party.  The loss was KD375 million requiring the recapitalization of the bank, including the Kuwaiti Government taking a 16% stake through KIA.

Today AlQabas reported that  the Central Bank of Kuwait ("CBK") issued instructions to local banks that they were to have their external auditors prepare a special audit report on their dealing in derivatives both for their own as well as customer's accounts. 

As per the press report, the CBK emphasized that the audit work and subsequent report should:
  1. Review the sufficiency of the rules/principles of the system of internal control established and followed over this activity and its effectiveness
  2. Examine extent of risks the bank might be exposed to, i.e., risk limits
  3. Disclose the (financial statement) results of the existing position (of derivatives) as of 31 December 2009
  4. Contain a statement outlining the development of the sufficiency and effectiveness of internal controls 
  5. Compare the above points to the status as of the 31 December 2008 financials
The CBK warned that failure to provide this special report would be treated as a serious matter and would result in delays in the CBK approval of a bank's 2009 annual report.  Apparently the CBK wants to ensure that there are no more unwelcome surprises in the banking sector in 2009.

AlQabas believes that since Gulf Bank's 2008 problem, many local banks have closed their derivative positions or substantially reduced both volumes and riskiness of derivatives traded.

Wednesday 13 January 2010

ABC Rights Offering: Libya to Underwrite and ADIA May Not Participate




ABC posted a "Board Circular" concerning its proposed US$1.110 billion proposed priority rights issue of 1,110,000,000 common shares.   

This document contains some highly interesting information:
  1. Central Bank of Libya will underwrite the offer at quite an attractive fee. 
  2. ADIA may not participate in the Offer, thus reducing its stake in the bank from 27.6% to 17.7%.
  3. A strong signal that ABC is in the market to acquire a regional "universal" bank to diversify away from its volatile sub par wholesale businesses.
  4. A candid assessment of ABC by SICO.
More detail on those points below, but first an introductory "tafsir" of sorts.

The Central Bank of Libya has agreed to underwrite the entire rights issue.  Under a priority rights issue, shareholders have an absolute right to subscribe for and be allotted a sufficient number of shares to maintain their percentage shareholding in the Offeror.  They may of course subscribe for less than that amount (in which case they are absolutely entitled to that amount) or more (in which case the amount allocated to them above their minimum right will depend on the action of other existing shareholders).   In a situation like this an Underwriter agrees to purchase any unsubscribed for shares.

Since there is a high likelihood that enough shareholders will not subscribe for shares,  the Central Bank of Libya ("CBL") will very likely acquire enough shares under its underwriting commitment to trigger a mandatory offer requirement under the Central Bank of Bahrain Regulations Module TMA Takeovers, Mergers, and Acquisitions  Section 3.1.  ABC's Board is soliciting shareholder approval to waive this right as the CBL is not prepared to acquire the bank.

ABC's shares are currently selling at US$0.67 a substantial discount  to par, US$1.00.  Under Bahraini law, the Offer must be at par.  There is no straightforward way to offer shares at a discount from par.  This poses a real problem.  Why would a shareholder pay more for a share through an Offering than he would pay in the secondary market?  

Since the government-related institutional shareholders are presumably not  actively trading their shares, then ABC's share price is being driven by the private sector investors.   That suggests to me that retail investors are unlikely to be enthusiastic about acquiring more shares at US$1.00 when they could potentially buy them at the BSE for US$0.67.  Assuming of course they have any interest in acquiring more shares.  If that were the case, then one would expect ABC's shares to be trading near par - especially in an illiquid market like Bahrain where just a few trades can move the price significantly.

The government related entities have a different agenda and as well more detailed inside information to inform their decisions.

Let's turn to the Board Circular:

The first bit of information that jumps off the page is the comment about expectations of participation in the offer by the existing institutional shareholders who own 93.6% of the bank.  The Circular states:  "ABC expects Kuwait Investment Authority (“KIA”) and all the Libyan entities to subscribe to the rights entitlement in full."  There is one remaining institutional shareholder, Abu Dhabi Investment Authority, with 27.6%.  It would seem that it would be quite easy for ABC's Board to ask ADIA if it intends to participate.  And equally easy for ADIA to respond.   First, it's not like this is a surprise question.  Second, ADIA can move quickly on investment decisions.  After all, it decided to plunk down the modest sum of US$7.5 billion in an investment in Citigroup with three days "due diligence" though perhaps the outcome of that transaction has lengthened and strengthened due diligence procedures.  My guess is that this silence means that there is a very strong likelihood it has decided not to open its wallet.  Hence, the need for an underwriting.  Because if it has not, what is the point of the Board engaging an underwriter to cover 6.4% of the shares?  Especially given the proposed underwriting fee is greater than 6.4?

That leads into the second bit -  the underwriting fee.  As per the draft agreement Clause 4 (page 19 in the Circular):  "In consideration of the Underwriter agreeing to underwrite the Issue pursuant to the terms of this agreement the Company shall pay to the Underwriter a flat underwriting fee of US$ 110,000,000."  That is, CBL earns the full fee regardless of how many shares  it actually acquires.   Some simple math.
  1. This amount represents 10% of the total Offer.  
  2. But surely the Libyans know if they are participating, so if we remove their shares from the "risk of purchase column", then the CBL is getting US$110 million to take risk that it might have to purchase 63.7% of the Offer.  In this case the effective underwriting fee is a whisker short of 15.7%. 
  3. If it is reasonably certain that the KIA will participate, then CBL is really taking risk on 34%  of the Offer and earning an effective fee of  29.4%
  4. If the same holds true for ADIA, then CBL is taking risk on 6.4% of the Offer and earning an effective fee of 156.3%.
  5. You will recall I said above that there was no straightforward way to offer new shares at below par.  What's interesting here is that the KIA has apparently not objected to this mechanism and is content to purchase its allotment at par.  Presumably because it does not wish to increase its shareholding.
Let's look a bit more closely at the effective discount on the shares.
  1. If every existing shareholder steps up for its shares and there is no risk of their not doing so, then the Libyan Group as a total acquires 403,395,812 shares for US$403,395,812 and receives US$110,000,000.  The effective discount is 27.3%.  This is the maximum discount.
  2. If the KIA participation is certain but the remaining shareholders' participation is not, then CBL acquires 780,465,916 shares for US$780,465,916 and the effective discount is 14.1%.  (In case you're wondering I allocated the "missing" share in the Table on Page 12 to the Libyans).  This is the minimum discount.
  3. Note in the cases mentioned above, I am assuming that if there is no risk of participation by a shareholder then the underwriting fee earning on those shares is in effect a disguised discount for CBL.
    The third item is that from the discussion of the use of proceeds and the recommendation of the independent consultant. It's clear that in addition to organic growth ABC is looking to achieve its business transformation through the purchase of a stake in a universal bank. It's a bit early to speculate on potential targets.  Or is it?  Anyone out there who wants to nominate a target, please post a comment.

    Those who know their ABC history know that this was the strategy at one point.  Under Abdulla Saudi, ABC bought significant shares in Banco Atlantico (Spain),  International Bank of Asia (Hong Kong)  ABC Brazil and Daus (Germany).   These were acquired I believe largely because at that time it was not possible for ABC to acquire MENA banks.  As well, Abdulla's strategy was to build a truly global Arab bank "champion".  According to my analysis, some of these (Atlantico , IBA) were disposed of  later (early part of this century) or stakes reduced (Brazil) to raise cash to help ABC over a rough patch so that it would not have to raise capital.

    The final item is the review of ABC by SICO which discusses subpar performance relative to peers 6%. to 10% ROE versus to its peer's 15% to 30%.  Well worth a look.

    The fundamental strategic issue that any of the commercial banking oriented wholesale banks (former offshore banks) in Bahrain face is that they do not have the solid foundation of a domestic business.  That affects both sides of the balance sheet.

    They do not have a natural "home" market to develop assets.  They must go abroad to develop these.   (Note:  Since the Bahrain market is relatively small, even a domestic bank cannot develop a very large domestic business platform).  Usually, the foreign lender who rides into town has a set of unpalatable choices to develop any sizeable business.  It can be the "stufee" on loans underwritten by the local banks.  Then it gets a participation in a loan but very little or none of the ancilliary business that the home banks get.  Such loans will be priced at razor thin margins over a domestic base rate.  Foreign lenders like Bahraini banks (as opposed to say foreign banks from Europe with a strong domestic base) don't have access to the same funding at the same price so the miniscule margins are compressed even more.

    If that is not palatable, the foreign bank can go downmarket to chase yield.  But here as a foreigner usually operating out of an office in New York City, it is hard put to understand such credits or to monitor them.   Thus, it winds up making a lot of bad underwriting decisions.

    Another option is to load up on bonds instead of loans.  Both Gulf International Bank and ABC did that, relying on ratings and professionalism of the investment banking firms who sold them investment grade (at least nominally) sub prime securities.  Both lost $1 billion in 2008 with GIB's losses apparently even more (hence the sale of some US$5 billion of assets to shareholders).

    The one potentially attractive business line is specializing in banking services for foreign customers in one's "home" market.  But here there is another disability, an offshore or wholesale bank in Bahrain cannot provide the same service as a retail or onshore bank in Bahrain.  And of course competing against a National Bank of Kuwait or Samba for business in Kuwait or Saudi is even more difficult.

    The picture is not much better on the liability side.  Instead of a core of very stable and generally lower cost retail deposits, the foreign wholesale bank is dependent on bought money (interbank deposits) and placements by its shareholders (a form of disguised or quasi equity which of course earns very low returns relative to its equity like risk).  This means that funding costs are higher and more volatile.

    Finally as offshore banks, generally there is no assurance of support from the Central Bank of the country.  This is true with wholesale banks in Bahrain whose size dwarfs the local banking sector.  Simply put, Bahrain does not have the resources to stand behind these banks.  Now, when there are governmental shareholders, the bank does not suffer as much in terms of ratings and funding costs as say those banks which do not have such shareholders.  But it still operates at a disadvantage.

    This was the reason that Abdulla Saudi, a much under appreciated banker in some quarters, embarked on his acquisitions of Atlantico, IBA, etc. as discussed above.  

    Tuesday 5 January 2010

    Global Investment House - Denies Deal With Arab African International Bank

    GIH issued a press release on the Kuwait Stock Exchange to deny reports in the local press that it had concluded a deal with Arab African International Bank Egypt (in which the KIA owns roughly 50%) to sell its Egyptian real estate subsidiary to AAIB.

    First, it rejected the idea that the sale was part of a "quid pro quo" for AAIB agreeing to join the rescheduling.  It also noted that AAIB had told one of the Egyptian newspapers that the transaction was not related.

    Second, it noted that discussions were in a preliminary stage and that no deal had been concluded.

    As part of the restructuring, GIH is selling assets to repay its debt so this transaction is expected.  What would be interesting to know is whether these negotiations are the result of a bidding process that AAIB won or AAIB is the only interested bidder.  Or if AAIB is a preferred bidder.  If the latter, then there may be something to the "quid pro quo" story.

    The KSE announcement (Arabic text only) is below.

    [9:0:57]  ِ. ايضاح من (جلوبل) بخصوص ما نشر في احدى الصحف المحليه ‏امس
    يعلن سوق الكويت للأوراق الماليه انه قد ورد اليه الان من شركة
    بيت الاستثمار العالمي (جلوبل) انها تود أن توضح بخصوص ما نشر في ‏
    احدى الصحف المحليه امس حول تخارج بيت الاستثمار العالمي (جلوبل) من ‏
    حصته في بيت التمويل للتمويل العقاري المصري تود الشركة ان توضح ما يلي:‏
    ِ1- ان تخارج (جلوبل) من شركة بيت التمويل للتمويل العقاري لصالح البنك ‏
    العربي الافريقي الدولي ضمن تسوية ديون هو خبر غير صحيح .‏
    ِ2- ان المفاوضات مازالت في مراحلها الاوليه .‏
    ِ3- في تصريح لجريده مصريه نفت مصادر بالبنك العربي الافريقي الدولي وجود
    اى علاقه بين عملية الاستحواذ و تسويه المديونيات المستحقه للبنك على
    شركة (جلوبل) .‏

    Tuesday 22 December 2009

    Warba Bank - Delay in Founding General Meeting to February 2010 - Rationale and Consequences

    AlQabas reports that the KIA has decided to postpone the founding general meeting of Warba until February 2010 for a variety of reasons.
    1. First, apparently all the requirements for the general meeting and agenda are not yet decided or completed.   The most important of these include the final announcement of the establishment of the bank though a decision of the founding shareholders, appointment of the board of directors, appointment of (financial) auditors as well as Shari'ah supervision committee, delegation of authority to the board to issue fractional shares resulting from the allotment of shares.
    2. Second, the delay to February 2010 will mean that WB will not have a full 12 month fiscal year in 2010.  Therefore, that it will not be eligible to be listed on the KSE until 2012. since  a new listee must have at least one profitable fiscal year. During this almost two year period, it's expected  that the stock market will recover and the price of the shares will trade at an appropriate level.  Not being listed will also mean that the shares cannot be easily traded, thus, forcing Kuwaiti citizens to hold on to their allocated shares.
    3. Third, the additional period will allow the new management time to establish the bank -- it will take several long months just to properly set up  the internal organization of the bank.  And as well to  establish a solid track record in line with a boost from the anticipated improvement in the economy the economy.

    Monday 21 December 2009

    Warba Bank Kuwait - Update

    AlQabas reports that there is great excitement in the Islamic banking community in Kuwait and an apparent rush to the doors of Warba to secure positions, ascribed to the belief that given the KIA ownership stake the bank will have a favored position compared to other banks.

    As a keen student of Islamic and other banking, AA personally thinks that many see a position in the new bank as a way to step up the career ladder. 

    As one old teacher of AA's once put it:  "It's pretty much an undisputed scientific fact that the most sensitive human organ is the pocketbook".  I don't think he meant that as a complimentary statement though.

    Friday 18 December 2009

    KFH Lawsuit Against Commercial Bank of Kuwait - Re Bank Boubyan Shares

    AlQabas has an article on the above topic today.

    Kuwait Finance House ("KFH") has filed suit to keep Commercial Bank of Kuwait ("CBK") from disposing of shares in Boubyan Bank that it acquired because of a failed "repo" agreement with The Investment Dar ("TID").

    KFH which has KD 44 million of exposure to TID apparently is arguing that CBK should not be allowed to sell the shares but rather that these should be placed at the disposal of TID's creditors.  As I understand it (and note that caveat), KFH is arguing that CBK is just another creditor of  TID and should share the collateral with other lenders.  The amount involved is significant.  At the last closing price, some US$387.5 million.  If you'll recall the estimate of assets versus liabilities, the creditors believed there was likely to be a shortfall in TID's repayment.  So including these shares in  TID's "estate" would improve the overall payback rate roughly 9 to 10%.

    In any case, as per the article, the High Court has transferred the case to the Experts Department.

    Some background:
    1. Boubyan Bank ("BB")  was formed in 2004 as an Islamic Bank.  
    2. In December 2008 TID sold CBK its BB shares (19.16% of BB) with an option to repurchase.  In effect what appears to be a form of "repo".
    3. Around this time NBK received approval from Kuwait Central Bank to purchase up to 40%  of BB.  NBK is interested in BB in order to expand its franchise into Islamic banking.  For those who don't know, NBK is the premier non Shari'ah bank in Kuwait and a very strong contender for that position throughout the Arab world.
    4. In May 2009 CBK announced that TID had failed to buy back the shares within the agreed time frame. And therefore it was taking control of the shares.
    5. June 14 NBK announced it had agreed to buy the shares from CBK. The price  was roughly $420 million.
    6. On 16 June responding to a motion from TID,  the Kuwaiti Court stopped the sale pending determination of ownership.
    7. In July/August 2009, KIA auctioned its 19.8% share in BB.  National Bank of Kuwait  won 13.2% and Securities Group 6.6%.  NBK previously held 14.3% or so.  After the auction, it held 27.5% of BB and was the largest shareholder. 
    8. NBK acquired Securities Group's shares plus some additional shares.   It is now the largest single shareholder in BB with some 40%.   And at the limit of shares it may own without further approval from the Central Bank of Kuwait.

    Monday 7 December 2009

    The Tail of Two Investments: Citibank and ADIA and KIA

    No, AA's spell checker isn't off this morning, though it may take one more cup of Cafe Najjar to bring all the lights fully on.

    Tail is a deliberate choice: 
    1. Barring a miracle or a negotiated settlement with Citi, one is facing a substantial loss beginning next March.  
    2. Another has just exited an from investment in Citibank at a hefty profit.   So we are at the tail of the investments.

    The first is ADIA who back in November 2007 invested US$7.5 billion in Citibank mandatory convertible bond with an 11% coupon and conversion to take place between US$31.83 to US$37.24.  Around the time the deal was struck Citigroup was trading at $32 to $33 per share.  ADIA in effect sold Citi a put option (the right to sell Citi shares to ADIA at a fixed price).  As well  ADIA also gave Citi the first 17% of the upside (the movement in share price from $31.83 to $37.24).   ADIA only gets the upside  if the share price goes higher when for example say it would get Citi shares trading at $41 for $37.24.   An investor would do a deal like this if  its expectations for volatility in Citi's stock was low for  the option period. Or if it believed that volatility was all one way -- the upside.  ADIA recently was cashed out by Citi at the lower $31.83 price.  Citi's stock price is roughly US$4.00 now.  You can do the math on the  impending loss based on market price.   Here's an article from The National.  Recall AA's earlier post on the AED 1 billion camel.

    The second are KIA who bought US$ 3billion  (I think Series B 1) from the US$12.5 billion convertible issue in January 2008 - roughly two months after ADIA's investment  The conversion price  was US$31.62 per share.  KIA has recently claimed a profit of US$1.1 billion.  Just in time for the interpellation sessions with the Majlis Al Umma.  You'll recall that earlier the MPs objected to the investment.   They say timing is everything! And that's not just investments but also politics.

    Here's the WSJ article on KIA's US$1.1 billion profit.

    So what happened?

    As you'll recall, Citibank had an exchange offer mid year in connection with an "investment" by the US Government in its stock via the conversion of preferred shares.  Other preferred security holders were given the option of joining the deal. In fact it was a condition.  Uncle Sam agreed to match US$ for US$ any private sector conversions on these terms.  Some background here and here  and here.  In summary,  preferred securities could be exchanged for common shares at US$3.25 per share.  Citi was trading at approximately half that price at the time.

    ADIA didn't participate in the exchange.  KIA did.

    For the nominal value of its US$ 3billion of preferred stock, KIA would have gotten 923 million shares.   To reach the US$4.1 billion in sales proceeds mentioned in the articles, KIA would have had to sell at higher than the current US$4.06 per share.  Or  sell something over 1 million shares.  Perhaps it had an additional 86.8 million shares from capitalized preferred dividends?

    Two questions remain:
    1. Who bought KIA's stock?  At what price?
    2. Can ADIA renegotiate its deal with Citi?  (It's unlikely the Citi's price is going to $31 in four months).