Showing posts with label Noor Investment Company. Show all posts
Showing posts with label Noor Investment Company. Show all posts

Monday 27 September 2010

Markaz: Review of Kuwait Investment Sector

 Renovation of Yet Another Proven Business Model In Progress
(Or, Perhaps, A Half Built Mega Project)

Markaz has issued “Kuwaiti Investment Firm Sector Taking Stock Two Years After the Crisis”. The report is an update to one they issued in June 2009.

As usual, good analysis and commentary.

You can obtain a full copy of the report by sending an email to info@markaz.com referring to the title above.

In the interim, some key points from the report.

Let’s start with Markaz’s Conclusion:
“The investment sector in Kuwait has a long way to go on its path towards health especially in light of the Central Bank’s increased oversight on the sector, which may lead to reduced activity among some firms that need to clean house. Given how unpredictable and difficult the sector’s assets are to value, it is difficult to predict the future performance of the sector, especially given the wide variance in case-by-case health.

We are optimistic that 2010 will show a further narrowing in bottom line losses, though we remain skeptical of a return to profit. Not only will companies be looking to offload more of their investments, booking impairment losses in the process, but regional/global equity markets have shown lackluster performance for the year, which may have an adverse impact on both the firm’s quoted investments in addition to the AUMs (thereby reducing fee income), all of which will put downward pressure on the bottom line.”

Historical Performance

I’ll start by noting that the report does not cover all investment companies in Kuwait. It is based on a set of 34 listed companies of which only 28 have reported for 2009. The missing reports include The Investment Dar – which hasn’t issued a financial since 31 December 2008. Nonetheless as with many such studies, it gives a good macro picture.

Earnings in KD millions.

20052006200720082009
945281846(810)(778)
  1. The graph in Markaz’s report gives a good pictorial sense of the variance.
  2. In lieu of a graph, let’s look at statistical measures. All of which are rounded to the nearest integer. The Mean Income over the five-year period is KD97 million. The Standard Deviation (Sample) is 852 and the Standard Deviation Population (762). The SD is between 8x and 9x the Mean. That gives an idea of the variability of income. 
  3. During the first three heady years of hefty profits, no doubt equally hefty bonuses and dividends were paid based on reported income -- largely non cash capital appreciation. Many of these payments also no doubt financed by “wise” lenders - who are now left holding the proverbial bag.
Asset Classification

IFRS 7 requires that companies disclose the basis for the valuation of assets held for sale (similar to FASB 157).
  1. Level 1: Based on quoted market prices in active markets for identical or similar securities. 
  2. Level 2: Based on observable market data – either direct or derived. 
  3. Level 3: Inputs into valuation models are not observable market data.
Markaz’s set of companies assets are distributed as follows. Amounts in KD millions.


FVTPLFVTETOTAL% TOTAL
Level 1264   535   799  34%
Level 2213   365   578  25%
Level 3236   708   944  41%
TOTAL7131,6072,321100%
% Total Investments31%  69%100%  ----

As Markaz notes, the IASB allowed companies to “move” assets from the then inconvenient FVTPL (Fair Value Through Profit and Loss) classification to FVTE (Fair Value Through Equity) which neatly “solved” earnings problems in a time of decline in values.  And, no doubt, achieved its goal of fooling more than a few "wise" investors and lenders.

It would be interesting to see how many Kuwaiti firms availed themselves of this exception to manage their apparent earnings.

It’s not surprising that overall there is a concentration in Level 3 assets given business models. And one could point to firms in the “Developed West” with similar concentrations. But out of national chauvinism I won’t point but merely link.

Appendix 1 lists the ratio for some 32 firms. There’s wide variance.
  1. Gulfinvest International and Al Qurain have 100% of their assets in Level 1.   Noor 85%.  Bayan 84%. Coast 72%. 
  2. On the other hand, National International Holding has Level 3 assets at 87%, First Investment at 70%, Al Safat and Al Mal at 67% and Global at 55%.
The Kuwait Investment Firm Sector in the GCC

Markaz notes that the KIFS dominates the rest of the GCC. No one is bigger. No one fell with a larger thud except two Bahraini-based firms in 2009. Markaz provides some income statement data for Fiscal 2008 and 2009 plus 1H10. What would be even more illuminating would be sector balance sheet size.

Leverage

The new Central Bank of Kuwait regulations impose a maximum 2x leverage ratio on the sector. Even after the debacles in 2008 and 2009, the KIFS’ leverage ratio (Total Liabilities/Total Equity) is a “comfortable” 1.84. It’s only when one starts drilling down into the details that one sees the variance.

Below my calculations based on FYE 2009 financials as in Appendix 2.

FIRMLEVERAGE (TL/TE)
Kuwait Finance and Investment8.32x
Aayan Leasing and Investment5.96x
The International Investor5.88x
Global Investment House4.12x
International Investment Group3.57x
IFA3.29x
Aref Investment Group2.78x

Note: I have not adjusted the above for minority interests – so these are not strictly speaking Central Bank leverage ratios as will become apparent later when we review Markaz’s calculations, though the number of firms with significant minority interests is limited.

When Aayan’s substantial minority interests of KD42 million are eliminated from the calculation the Leverage Ratio jumps to an eye popping 14x (using the financials reported on the KSE).

Asset/Liability Mismatch

Details are on page 7 of the report. Briefly, conventional firms are more balanced than “Islamic” ones. The former with S/T debt of 40% versus S/T assets of 49%. The latter with S/T debt at 79% versus S/T assets at 36%. But this is largely due to the greater progress made in restructuring conventional firms. (Also note this data excludes The Investment Dar).

Review of the Top Five

Markaz then reviews the top five firms: Global, Aref, IFA, TID (using 2008 data) and Aayan.

Here in tabular form are the results of Markaz’s review of these firms’ compliance with the newly imposed Central Bank of Kuwait regulations.

FIRMLEVERAGE RATIO"QUICK" RATIO
Global Investment House  4.11x17%
Aref Investment Group  2.78x16%
IFA  3.28x  9%
The Investment Dar*  4.97x   2%
Aayan Leasing and Investment13.90x  7%
CBK Regulations  2.00x10%

*TID calculated using 2008 financials.

Markaz then discusses these five firms’ financial position.  If you want a quick insight into them and the investment firm sector in general, this report is a must read.

Sunday 26 September 2010

Central Bank of Kuwait Denies Noor and Gulf Investment House Extension on Treasury Share Purchase


I don't remember seeing this sort of refusal before. But I may have missed it.

In any case today, the Central Bank of Kuwait announced that it had refused to extend its earlier approval to both GIH and Noor to purchase or sell up to 10% of their own stock.   Announcements below.

Also anyone out there who can help with tafsir on the legal references please do.  I don't understand the reference to the Commercial Companies Law.  Article 115 has to do with the issuance of "redeemed shares".  Could this be a reference to Article 114?  Nor am I familiar with Ministerial Order (sometimes Ministerial Resolution) #10 of 1987 nor that of #11 of 1988 which amended it, nor #273 of 1999. 

In any case, it would seem a prudent regulatory move to restrain investment companies from buying treasury shares until their financial conditions had shown robust improvement.  Certainly, at this time companies have better uses for their limited liquidity than punting in their own shares.  You'll note in both cases the two firms asked permission to buy their own shares.

GIH
[9:13:26]  ِ.عدم موافقة المركزي لبيت الاستثمار الخليجي بشراء مالايتجاوز 10% من اسهمها
يعلن سوق الكويت للاوراق المالية بأن بنك الكويت المركزي افاد بعدم الموافقة
على طلب تجديد سريان الموافقة لشركة بيت الاستثمار الخليجي (الخليجي) بشراء ‏
ما لا يتجاوز 10% من اسهمها المصدرة ويمكن للشركة فقط القيام بالبيع من رصيد
الاسهم المشتراة المتوافرة لديها وذلك لمدة ستة اشهر تنتهي في 17-3-2011.‏
حيث ان ذلك الامر يتطلب ضرورة الالتزام بما وضعه البنك المركزي من ضوابط
وشروط في شأن تملك الشركة المساهمة لاسهمها اضافة الى ضرورة الالتزام ‏
بأحكام المادة 115 مكرر من قانون الشركات التجارية واحكام القرار الوزاري
رقم 10 لسنة 1987 وتعديلاته بموجب القرارين الوزاريين رقم 11 لسنة 1988‏
ورقم 273 لسنة 1999.‏
Noor
[8:50:52]  ِ.عدم موافقة المركزي لنور للاستثمار (نور) بشراء مالايتجاوز 10% من اسهمها
يعلن سوق الكويت للاوراق المالية بأن بنك الكويت المركزي افاد بعدم الموافقة
على طلب تجديد سريان الموافقة لشركة نور للاستثمار (نور) بشراء ما لا
يتجاوز 10% من اسهمها المصدرة ويمكن للشركة فقط القيام بالبيع من رصيد
الاسهم المشتراة المتوافرة لديها وذلك لمدة ستة اشهر تنتهي في 28-3-2011.‏
حيث ان ذلك الامر يتطلب ضرورة الالتزام بما وضعه البنك المركزي من ضوابط
وشروط في شأن تملك الشركة المساهمة لاسهمها اضافة الى ضرورة الالتزام ‏
بأحكام المادة 115 مكرر من قانون الشركات التجارية واحكام القرار الوزاري
رقم 10 لسنة 1987 وتعديلاته بموجب القرارين الوزاريين رقم 11 لسنة 1988‏
ورقم 273 لسنة 1999.‏
 

Sunday 5 September 2010

Noor Investment to Reschedule KD187 Million

Al Watan reports that Noor Investment Company is ready to sign a KD187 million restructuring with KFH, the lead bank.  

The rescheduling:
  1. Converts short term to medium term debt
  2. Carries an interest rate of 3.5% p.a. down from 5.5% - a savings of roughly KD4 million.  (I make it more like KD3.50 million the first year assuming that payments the first year are modest).
  3. Will be repaid from cash profits and not from asset sales
  4. Will commence with the first repayment in early 2011
As per Noor's 30 March 2010 financials (the latest posted on their or the KSE website), total bank debt was some KD184.5 million - with interest at 5.5%, the amount would be KD187 at 30 June.  Note that total bank debt appears in two places:  KD181 million shown in Note 11 and KD3.5 in Note 7.   All of the bank debt was due within one year.

Noor is owned 50.8% by National Industries Group.

Previous posts can be accessed using the tag "Noor Investment Company".

Sunday 13 December 2009

The Investment Dar Restructuring - Push to Secure Creditor Agreement

AlQabas reports that the Creditors Co-Ordinating Committee ("CCC") is undertaking a series of urgent visits on creditors in an attempt to convince them to quickly sign on to the proposed restructuring before the 23 December deadline.

Their two major concerns.
  1. The impact of another missed deadline.  
  2. The desire to have the restructuring implemented by February 2010.
Of the two, the first has to be the major concern.  If there is another disappointment, could it break the existing group in favor of doing a deal?  And for TID itself, another delay could mean even less chance (and I think the probability is quite low now) of ever emerging from the restructuring as a going concern.

A major focus appears to be Noor Investment Company.  You'll recall that Noor had lodged a lawsuit against TID, which it lost.  However, it seems it has another legal action planned - a new case which will enable it continue its "legal pursuit" of TID.  The CCC is trying to convince Noor that its "best choice" is to agree the restructuring because the affairs of the company have been put in order, the assets blocked and evaluated, and the financials sent to the Central Bank for its approval.

Apparently, Noor is able to pursue its case whether or not it agrees to the restructuring.

A recap of the current situation and some conclusions:
  1. As per the last account, some  66% (by amount) of creditors reportedly had signed on to the restructuring. 
  2. The Investment Dar Bank Bahrain ("IDBB") was identified as the  major holdout with some 27%  by amount of the outstanding debt. Sources at TID expressed confidence that IDBB would shortly agree. 
  3. Since there is no equivalent to Chapter 11 in Kuwait, 100% agreement needs to be obtained. in order to "close the deal".   Dissenting creditors cannot be "crammed down". Hence the CCC's recent actions with non responding creditors.
  4. It seems pretty clear that there is difficulty in getting the remaining creditors on board.   Perhaps some are waiting to see if the CBK will approve the financials though one would expect that  creditors would have already been given a sense of the contents.  There is also the perennial problem with deadlines:  many will wait until the last possible minute to make up their minds. 
  5. It's unclear if IDBB has agreed.  One would expect if it had that the CCC and TID would be trumpeting this as a way of creating a bandwagon effect.  In such a case it should be fairly easy  (that's a relative term) to sweep up the remaining 7%.  
  6. If IDBB has not yet agreed, TID could be in real difficulty. 
  7. The news about visits and a last minute push with non responding creditors implies that things are not going as planned.  Or not going as fast as planned. 
As outlined in my previous post, I view the restructuring as a controlled liquidation.   In such a case it's hard to understand why a creditor wouldn't sign up.   The mere fact that the deal is structured as a liquidation means the borrower's situation is dire and there is a risk of less than full discharge of the debt.  Having a legally enforceable charge over the assets and control over their disposal seems to me  a more attractive option for creditors than fighting over the carcass.

The only reason a creditor wouldn't sign up is if he thought he could get a higher recovery by going alone or could somehow force the terms of the restructuring to be revised. Hard to see how the latter would apply so more likely than not it's the first motive at play.  Perhaps, a hope that as a small creditor, the larger ones will buy out one's claim to close the deal.

One counter strategy is to treat dissenting creditors as having agreed.  Under this tactic, payments are made to them in line with the restructuring.  The hope is that while they have a legal right to payment as per the terms of their original contract and a right to sue to enforce that contract, the borrower can tie them up in court for a prolonged period.  Ideally the period of the restructuring or close to it.  And that the court will consider the payments as the borrower's attempt to satisfy the debt.  At some point if enough progress is made in repayment, the dissident creditor may just "give up" pursuit as not being worth the  cost -both direct (legal and other expenses) as well as indirect (time and effort).  Not without risks,  But a potential alternative.

Wednesday 25 November 2009

The Investment Dar - Apparent Good News in the Noor Investment Co Lawsuit

AlQabas also reports that TID has issued a press release (not yet on their website) that they Court of Appeals has ruled in TID's favor.

Noor had earlier filed a case charging TID's chief executive  (Adnan Musallam) and executive management with criminal behavior.  The Appeals Court has reportedly upheld the judgment of the lower court which rejected Noor's case.

It seems that now TID will return the favor by suing Noor's management for raising ibelous and untrue  accusations and sue for damages to their reputation.