Wednesday 21 April 2010

Kuwaiti Banks to Sue Saad and AlGosaibi This May

Following up on an earlier story, AlQabas reports that the lawyers for four local banks (named earlier as Kuwait Finance House. Commercial Bank of Kuwait, Gulf Bank and Burgan Bank) are putting the finishing touches on the "files" (cases) which will be filed in London and Riyadh.  Apparently, some of the loans (which are described as being no less than US$1.5 billion) are subject to Saudi law!

According to the article, the motive for pursuing the cases in Court is that negotiations weren't fruitful.

The article also mentions the ongoing suit by AlAhli Bank of Kuwait against Saad in the New York Supreme Court.

AlKhorafi Group Moves on Oula Fuel and Gulf Bank

AlQabas reports that the AlKhorafi Group has increased its stake in two Kuwait companies.
  1. Oula Fuel (KSE Symbol 645):  A 40 unit gas and service station chain.  Shares were bought from National Investment Company by companies owned by Mahmoud Haidar (Emerald Group) in the amount of 38.2 million shares at KD0.420 per share (roughly KD16 million).  But shares were for the AlKharafi Group and other allied investors.
  2. Gulf Bank (KSE Symbol 102):  A major commercial bank in Kuwait.  Major owners are the AlGhanem Family, Behbehani, KIA and now shown on the KSE website "Emerald and others".  Reportedly, AlKharafi has been buying shares in the KSE and is one of the major shareholders.  
AlQ reports that directors at both Oula and Gulf are expected to resign shortly so that AlK and his co-investors can appoint their own candidates to the Boards.

Kuwait Court Delays Action in Boubyan Bank Case Against AlAbraj Holding

AlQabas reports that legal sources informed it that the Court decided on 20 April to postpone action in Boubyan's bankruptcy case against AlAbraj until 6 June.  This appears in part to be to allow the addition of a fifth defendant, an unnamed local bank, in the case.  The article also notes that Boubyan had filed a motion to compel other Kuwaiti banks to disclose any AlAbraj assets they held.  No doubt in an attempt to block these and eventually realize them.

Boubyan's attorney reportedly asked the Court to set the future hearing as soon as possible given the long and persistent delays so far. (Welcome to the GCC court system!).  On a closing note, AlQ comments that Boubyan's (separate) case against the Board of Directors for temporary compensation is scheduled for a hearing on 27 April.

Idiocy Knows No Borders: The Great Microchip Danger

At times of national danger, it's particularly comforting to know that there are those out there ever vigilant to manifest threats to our way of life and wise enough to develop workable solutions.

The Georgia Legislature has stepped up to take decisive action to criminalize the involuntary implanting of microchips in its citizens.

And from the testimony of the lady in the article apparently not a moment too soon.

Three troubling thoughts though:
  1. If evildoers out there (if I may be allowed to coin a term) decide to plant a microchip in the unsuspecting citizen, is a misdemeanor penalty likely to deter them?
  2. If fact since the crime is involuntary implantation, won't that just lead them (and if you have to ask who "they" are, well you may already have been implanted) to refine their mind control techniques?
  3. The two main sponsors of the bill are Majority Leader "Chip" Rogers and "Chip" Pearson.  And that is perhaps the most troubling fact of all.  And may be the only fact in relation to this bill.

Tuesday 20 April 2010

Capitalism and Bad Investments

An absolutely brilliant letter in the FT today from Mr. Peter Berchtold.

Investors know there are two opposite sides to every transaction. If you fail to understand what you are buying don't go blaming the seller. I am always amazed to see big, so-called sophisticated investors try to litigate themselves out of a bad investment.
Or sometimes look for the Shaykh up the road to bail them out.   Or request a bail-out from their governments not mind you to save their profits but out of a selfless concern for the good of their respective national economies.

Damas Elects New Board


As you've probably seen in press reports yesterday, Damas held an Extraordinary General Meeting of shareholders yesterday at which a new board was elected.  Here's the press release on NasdaqDubai with more details

As to the new board, the new members are:
  1. Abbas G. Ameeri
  2. Abdullah Fadhel Ahmed AlMazrui
  3. Anan Fakreddin
  4. Ehsan Abbas
  5. Ibrahim Belsalih
  6. Nicholas G. Hegarty
  7. Simon Copleston
  8. TN Pratap
  9. Tariq L. Ali
The EGM also approved:
  1. Dual listing of shares in both US$ and AED.  (Previously, Damas was listed only in US$ on NasdaqDubai).
  2. The resignation of the former directors.
As you'll recall the DFSA settlement required a change in the Board along with other measures outlined here.

Monday 19 April 2010

Dubai World Restructuring – Why Interest Rates Matter


You may have seen the news reports that DW and its creditors were haggling over the interest rate on the rescheduling.  DW reportedly having offered 1%.  And its creditors (or some of them) insisting on 5%. From the context it seems that this is a fixed rate and not a margin over a benchmark like Libor. I can't imagine that Reuters would confuse "margin" with "rate".

Of course, both parties are negotiating so it's probably safe to bet that neither side is expecting to get what it is asking for.

What do these levels mean in terms of a haircut? What's the appropriate discount rate to use for a net present value calculation?

Let's turn to the second question first.

There are two discount rates we can use. 

The creditors' proposed rate of 5%.  This rate is most likely designed to minimize/eliminate the haircut that will arise from an IAS #39 impairment test due to the new rate being lower than the contractual rate.  (Recall the assumption is that lenders are carrying their DW exposure at historical cost.  If they're not, then IAS mandates they discount estimated cashflows based on a market rate.  Also we're making a critical assumption here that the banks are estimating they will receive all their original principal back plus interset).  Why this focus on an accounting haircut as opposed to looking an economic value?  Banks will be most concerned about accounting losses as these are the most visible. 

How do we estimate the economic (real) haircut?  We can use a recent market rate. DEWA just raised a US$1 billion five-year bond at 8.5%.  Some caveats.  It's important to note it's highly likely that the DEWA bond was deliberately priced above market. Why? First of all, Dubai cannot afford to have a major transaction fail in the market. So the bond has to be priced to ensure success. Second, the issue was reportedly 11x oversubscribed. That in itself is a pretty good indication that the price could have been tighter. Of course, Dubai would not only like the deal succeed but also to have a very strong display of market appetite for its paper for this highly visible post crisis issue.  So another reason to overprice.  While the rate might not necessarily be the right market rate for DEWA credit,  the Dubai World rescheduling is not a BBB- credit like DEWA. So we can argue that 8.5%  is probably a more reflective market rate than the 5% rate and thus a better measure of economic loss.

It's important to note that neither rate is completely accurate.  But we're not after what is fundamentally elusive precision here as much as we are interested in a directional measure of the haircut.

Now that we have our discount rates, we need cashflow scenarios.

The actual proposed cashflows on the rescheduling aren't known so we'll use two proxy "worst" and "best" cases to set bounds - much as we did with the interest rates.

First, a bullet repayment at the end of the repayment term with interest at 1% being paid annually. This represents our worst case from a calculation of discount.   While this would be the ideal debt restructuring from DW's perspective, it's highly unlikely this could be sold to creditors.

Second, equal amortization of principal with interest at 1% being paid annually. This represents our best case. The ideal case from the lenders' perspective (absent of course an even better case of a generous neighboring Shaykh paying off the entire debt today).  But not very realistic and certainly not what DW would want.  It is highly likely that restructuring principal amortization will be back ended as is typical in debt restructurings. 

And finally to conform to the details of the restructuring – we'll model a 5 year and 8 year tranche.

To summarize, these two scenarios give us a reasonable approximation of the best and worst discounts. Results are rounded to the nearest percentage. The discount can be figured by subtracting the NPVs shown below from 100%.

Bullet Principal Repayment 1% Interest Rate Paid Annually in Arrears

Discount Rate5 Years8 Years
5%83%74%
8.5%70%58%

Equal Principal Amortizations 1% Interest Rate Paid Annually in Arrears

Discount Rate5 Years8 Years
5%89%85%
8.5%81%74%


On the 5 year tenor, the banks are trying to avoid an accounting "haircut" of between 11 and 17%. And on the 8 year tranche between 15% and 26%. 

From an economic perspective the haircut is even more 19% to 30% on the 5 years and 26% to 42% on the 8 years. As stated above, the banks are going to be more concerned about the visible accounting haircut. 

These are fairly crude approximations - the compound effect of uncertain cashflow patterns and inexact discount rates - but they give an idea of what is at stake here.

Global Investment House - Proposed KD100 Million Increase in Capital


Today GIH announced on the KSE that it would hold its Annual General Meeting and Extraordinary General Meeting of Shareholders on  5 May 2010.

3 key agenda items were listed:
  1. Shareholder agreement that no dividends be distributed for Fiscal Year 2009.
  2. Cancellation of the previous shareholder approval to issue KD150 million in new shares at 100 fils each (nominal value) with issuance expenses to be no more than 10 fils per share.  This was granted on 15 June 2009, but was never used.
  3. Shareholder agreement to issuing KD100 million in new shares at 100 files per share with issuance expenses to be no more than 5 fils per share.  This would be a priority rights offering for existing shareholders with the approval covering the entry of new shareholders for any shares not taken up by the existing shareholders.
AlQabas has an article in its 19 April issue stating that:
  1. Some local and regional banks are considering the advantages of participating in the share offering on the theory that there would be a capital gain from the entry price.
  2. Foreign banks are said not to be evidencing any interest in the participating.
  3. The article also notes that GIH needs the money.  Shareholders' equity was eroded during the crisis.  Additional capital would provide some support for the successful implementation of the restructuring.  What's interesting is the particular point made that while GIH should have no problem making the first year's debt service payment, it's expected that there will be difficulties with the second year payment.   
  4. As I've written before, the problem with the restructuring was its short tenor (three years).  The main repayment of the facility is intended to be sales from the Global Macro Fund (its holdings of listed companies).  To expect markets to recover in that short period was to be charitable optimistic.    The deal also has a step-up interest rate structure with the rate increasing 1% per year from 1.5%.  Banks do really need to be responsible - not only in underwriting but also in working out problem credits.  I'm not advocating a  100 year deal at 0% interest.  But the banks could have structured a longer deal with a mandatory cashflow sweep for prepayments with triggers for asset sales based on market recovery.  That way, if markets recover early, the banks get paid.  And, if markets don't, there isn't a potentially fatal second default.  The goal is to milk the cow not kill it.    
Here's the announcement from the KSE (Arabic only).

[9:41:29]  ِ.اجتماع الجمعية العمومية لبيت الاستثمار العالمي في 5-5-2010 لبيانات 2009‏
يعلن سوق الكويت للأوراق المالية بأن الجمعية العمومية العادية
وغير العادية لبيت الاستثمار العالمي سوف تنعقد يوم الاربعاء
الموافق 5-5-2010 في تمام الساعة 11 صباحا في مقر الشركة
حيث سيتم خلالها مناقشة ما يلي: ‏
ِ1- عدم توزيع ارباح عن السنة المالية المنتهية في 31-12-2009.‏
ِ2- الموافقة على الغاء موافقة الجمعية العامة العادية للشركة المنعقدة
في 15-06-2009 عن نهاية السنة المالية 2008 بزيادة رأس مال
الشركة بما يعادل 150.000.000 دينار كويتي موزعة ‏
على 1.500.000.000 سهم وبقيمة اسمية تعادل 100 فلس للسهم
الواحد وعلاوة اصدار 10 فلوس للسهم الواحد ومصروف اصدار 5 فلوس
للسهم الواحد
ِ3- الموافقة على زيادة رأس مال الشركة بما يعادل 100.000.000 دينار كويتي
موزعة على 1.000.000.000 سهم وبقيمة اسمية 100 فلس للسهم الواحد
وعلاوة اصدار 5 فلوس للسهم الواحد على ان لا يتجاوز مصروف الاصدار 5%‏
من القيمة الاسمية للسهم الواحد وان يتم استدعاء زيادة رأس المال على دفعة
واحدة والاولوية بالاكتتاب للمساهمين المسجلين بسجل المساهمين في اليوم
السابق على تاريخ دعوة مجلس الادارة للمساهمين للاكتتاب كما يجوز دخول
مساهمين جدد بالفائض غير المكتتب فيه من قبل المساهمين وتفويض مجلس ‏
الادارة بوضع الضوابط والشروط والقواعد لاستدعاء رأس المال
كما سيتم مناقشة بنود اخرى على جدول الاعمال.‏
علما بأن هذه التوصيات تخضع لموافقة الجمعية العمومية والجهات المختصة.‏


 

International Investment Group Appoints KPMG Advisory WLL Kuwait as Financial Advisor

Today IIG Funding (the Issuer) and Deutsche Bank (the Delegate) issued separate announcements on Nasdaq Dubai related to the payment default on IIG's US$200 million sukuk.

Basically, these are as required by the legal documentation governing the transaction.  Both parties must notify certificateholders of their right to vote for a dissolution (a minimum 25% of certificateholders must so vote) in order for the two parties to be required to take action.  They must also receive indemnification satisfactory to them from certificateholders for taking such action as well.

Deutsche Bank mentions that IIG has engaged KPMG Advisory WLL Kuwait as a financial advisor.  Here's DB's quote of an extract from a letter it received from IIG.
The Obligor has appointed KPMG Advisory W.L.L., Kuwait ("KPMG") in relation to carrying out an independent business review exercise for the Obligor, preceding a detailed financial restructuring engagement at a later date. KPMG's scope of work will include preliminary assessment of the company's present financial position and the possible options to meet its obligations.

This will involve:
  • a study of the cash position, debt obligations (servicing and repayments) and cash flow requirements (short to medium term); 
  • understanding of the timing and extent of expected cash inflows; 
  • analysing the Obligor's cost structure and investment portfolio and understanding the management's strategy and intent regarding the same;  
  • carrying out a high-level desktop valuation analysis of the Obligor's significant group  companies/investments as at 31 March 2010 or as at any other agreed cut-off date;  
  • performing sensitivity analysis on the base forecasts provided by the management;  discussing actions (if any) taken/planned by the management; and  
  • identifying the key gaps and issues the business faces and recommending alternative options and next steps.
The intention is that an interim report will be provided by 31 May 2010 with a final report available by 30 June 2010.
Some comments.
  1. First of all the scope of work is typical "accounting firm" speak.  All the major steps are set forth, including the initial understanding of the company's position. 
  2. Right now what the above describes is the first stage in a two stage process with the second stage involving detailed advice on the formal restructuring. 
  3. Since the sukuk is secured by certain investments (investments in affiliates and available for sale investments) more than a desk top study will need to be done at some point as these are a key source of cashflow to IIG.  

    Saturday 17 April 2010

    Bin Sulaiman NOT Released on Bail

    17 April 2010 Update:  The Attorney General of Dubai has issued a statement that Dr. Bin Sulaiman has not been released.

    Below is the original post which is erroneous.

    According to the Gulf News, Dr. Omar Bin Sulaiman, Former Governor of the DIFC, has been released on AED 50 million bail.  This amount is equivalent to the amount he is being investigated over.

    As you'll recall earlier Dubai had passed an anti corruption law, which among other things provided  for immediate release in the case of full restitution. 

    Of course, according to the press article, the amount involved here is "bail" and not a return of the disputed funds.

    Friday 16 April 2010

    Cityscape to Showcase Life-Size Model of Abu Dhabi Landscape in 2030

    And some cynics out there said that other Emirates hadn't learned the lesson of the Dubacle.  About overbuilding, excessive use of leverage, etc.

    This article in Khaleej Times sets those nay-sayers straight!

    At 23x17 metres for this life size model one can see that Abu Dhabi has not lost its careful way with a dirham.  Construction costs are likely to be low.  And it seems to me that there will be savings on land - since the plot wouldn't have to be more than twice the size.  And it could probably be constructed indoors allowing workers to continue their labors in airconditioned comfort during the summer.  Even with a project this size, costs will be controlled.  The need for debt financing small.

    Exclusively here at Suq Al Mal, we've got pictures of the  life size model of the Burj Mohammad - Abu Dhabi's entry into the world's tallest building competition.  




    Notice it's so big you can't see the top.   Clearly a winner.

    Thursday 15 April 2010

    Kuwait Introduces Minimum Private Sector Wage

    The princely sum of KD60 per month.

    Initially one might think that this was just yet another of those problems arising from poor translation.  In translating the concept of a "minimum wage" someone used the wrong Arabic words.  There was confusion over the meaning of minimum between (a) the smallest amount one can get away with paying and (b) the lowest amount that allows a person to live without undue hardship or want and with a small portion of dignity.

    Of course, we know that mistranslation is not the cause.  The cause is nothing  more than stark rapacious greed.  The sort of vice that a very noble religion counsels against.

    The remarkable thing is that this happened in a country where the majority of members of the Majlis AlUmma are self-styled religious people.   They're constantly on guard to protect Muslims from the manifest dangers of music lessons, girl's soccer, hijab-less members of the parliament. 

    In any case, let's turn to some sound authorities on that particular religion as opposed to the delusions of these منافقين.

    First, Hadith Qudsi #21




    Second, Surah al Baqara Ayat 8.



    صدق الله العظيم
    The need for the  دعوة  in Kuwait is abundantly manifest and clearly urgent.  With devotion and hard work (lots of hard work) reversion might be successful. 

    1-2

    A loss is always an unwelcome event. 

    A loss to the Spurs most unwelcome.

    Red and White forever!

    The Investment Dar - 2008 Results English Language Version



    Director ([in Japanese, to the interpreter): "The translation is very important, O.K.? The translation."
    Interpreter (in Japanese, to the director): "Yes, of course. I understand."
    Director (in Japanese, to Bob):  "Mr. Bob. You are sitting quietly in your study. And then there is a bottle of Suntory whisky on top of the table. You understand, right? With wholehearted feeling, slowly, look at the camera, tenderly, and as if you are meeting old friends, say the words. As if you are Bogie in Casablanca, saying, "Here's looking at you, kid," -- Suntory time!"
    Interpreter (In English, to Bob): "He wants you to turn, look in camera. O.K.?"
    Bob:  "Is that all he said?"

    TID released an English language press release on its 2008 performance on NasdaqDubai today.

    In  reading  last night's Arabic press release, we at Suq al Mal had been so impressed that we relegated Gulf Finance House and Dr. Esam Janahi to second place behind TID and Mr. AlMusallam for their unbelievable performance.  Post and analysis here.  

    In reading today's English version, we're disappointed.  Like the translator's poor effort in the quote above, TID's English language press release has come up a bit short in critical areas.  Frankly, if this sort of effort appeared in Arabic, it wouldn't even qualify for the finals.  The very soul of yesterday's performance has been lost in translation.

    Luckily for TID and Mr. Al Musallam, our awards are based on the performance in Arabic.  However,  in the interest of fairness, in light of GFH's good showing in English our  Board  has added another category to Suq Al Mal's Academy Awards for Best Performance in a Private Sector Financial Comedy.  And the winners are!
    1. Best Performance:  The Investment Dar starring Adnan Al Musallam
    2. Best Foreign Language Performance:  Gulf Finance House starring Dr. Esam Janahi
    We'll be holding the formal award ceremony at the Burj Khalifa  later this year.  Timing is currently uncertain pending the resolution of two issues.  

    First, the selection process for other awards is proceeding slowly.  Competition  over the 2008 - 2009 period was particularly intense.

    With two strong candidates from Saudi Arabia, Suq Al Mal's distinguished panel of judge (AA) is having a hard time coming up with a winner for Best Performance in a Financial Drama.

    And how to choose from the equally strong cadre of qualified contestants for Most Embarrassed National Regulator?  If our current plans come to fruition, Alan Greenspan will personally present that award. Right now I'm about 70% sure he'll be there.  And, frankly, it's hard to do better than that.  Just ask the Maestro.

    Or Outstanding Kuwaiti Investment Bank of the Year?  And how does one weight the factors?  The size of the loss.  The absolute amount looted from the shareholders.  The refusal to recognize reality.  The most absurd press release.

    Best Supporting Performance in a Financial Looting? 

    Most Urnrealistically Optimistic Financial Analyst?  Most Fawning Journalist?

    And two new categories this year.  Most Absurd Investment.  And  Most Compelling Performance by a Non Core Asset.

    And we have the usual awards to recognize overall contributions made to the industry like the Bernie Madoff Lifetime Achievement Award.  The Parmalat Creative Accounting Award.   The Arthur Anderson Professional Accounting Medal.  The Enron Board Corporate Governance Award.

    Nominations are still open so send in the names of your favorite candidates by way of a post here.

    Second, funding.

    An event like this requires spending if it's to be done right.  We'll need to charter an A380. (AA always travels in style when someone else pays).  Then there's the staff accommodations at the Burj AlArab (We'll want suites in the new wing!  Last time I stayed the main flat screen TV didn't work properly.  And the toilet made an awful noise).  The media   -  a live broadcast on MBC or LBC?  Perhaps both?  I definitely want Amr Adeeb as the celebrity host along with Ahmad.  For presenters,  I've already sent a formal request to the authorities in Bahrain and Saudi to ask if they can temporarily lift the travel ban on certain individuals who may be contestants or even presenters.  Or both.  For entertainment - Muhammad Abdo, Fairouz, perhaps Kathem AlSaher.  And since we're an international competition - Britney Spears to lip synch the Kawkab's "AlAtlal" which is the internationally recognized theme song of the pageant. 

    You're probably wondering how we'll raise the money.  I've already sent out the RFP to local and international banks for a zero coupon perpetual bond.   And an Islamic tranche - Qard Hassan - for those with a preference for Shari'ah compliant financing. While the structure is designed to eliminate the risk of non payment, I'd note that Shaykh Khalifa has not formally announced that he isn't standing behind this security.  So there is a guarantee of sorts as well on the transaction.  And an automatic entry for the successful lender in next year's "Wise Lender/Investor" competition. 

    The Investment Dar - 2008 Results KD80.3 Million Loss


    TID has issued a press release on its 2008 financials (Arabic only).  The actual financial report or extracts from it (balance sheet, income statement, etc) don't appear to have been released yet.   So this is a preliminary review.

    What are the major financial headlines?
    1. 2008 net loss of KD80.3 million.
    2. Total assets of KD1,200 million.
    3. Total liabilities of KD1,000 million.
    4. Shareholders' Equity of KD168.5 million.  A quick look at the above numbers suggests that this does not include minority interests.
    Once the financial reports are issued, I post again with an analysis of the numbers.  

    The announcement had some other important information:
    1. First, we (that is TID) were able to pass through this crisis of asset valuation (definitely nothing to do with our business model) through patience, deliberateness and sound planning.  I'm going to pause for a moment or two while I compose myself.  Luckily at this hour there is no Turkish coffee to spill.  There is apparently plenty of praise to go around and it's only fair to mention all those who deserve it, including oneself.  
    2. Elsewhere in the press release TID thanks the Central Bank and the Governor again, the Central Bank's "man" at TID, investors, banks, the Co-Ordinating Committee, TID's advisors, the creditors' advisors.
    3. We confirm the soundness of the financial position of TID the improvement in the value of the assets with the recovery in markets  will enable us to discharge all of our obligations.
    4. We are committed to implementing the terms of the restructuring which more than two-thirds of our creditors and investors approved as the best solution to exit from the crisis.
    5. A significant component of all our assets have values much higher than their accounting values.
    6. The provisions and write-downs are both unrealized and temporary.
    7. A couple of times elsewhere in the release it's mentioned that more than 80% of creditors and investors approved the restructuring plan as the best way forward.
    Now fair is fair (and AA is nothing if not fair).  Earlier I had granted an award of sorts to Dr. Esam Janahi and Gulf Finance House for creative thinking in press releases about their own financial difficulties.  Private sector competition of course. 

    Tonight I'm going to have to re-award that honor to Adnan Mussalam and  his team at TID.  Dr. Janahi and his team are going to have to settle for the silver.

    How was TID able to pull off this last minute sprint for the Gold?

    The three primary factors in their victory were (in order of importance).  
    1. Their trumpeting that their losses are not just unrealized.  But are also temporary. 
    2. The self-praise. While the entire phrase "with patience, deliberateness and sound planning" was especially well crafted, it was the bit about sound planning.  That's sort of like the chap who  doesn't know how to swim, jumps in the English Channel, gets pulled out just before he goes down for the third and final time and then credits his athletic training and foresight for not drowning.  It takes a special sort of competitor to pat himself so vigorously on the back after falling into such a self-made disaster.
    3. Presenting recourse to the Financial Stability Law as a major positive instead of the last recourse to prevent the restructuring from unwinding. 
    Of course there were some negative marks for not mentioning the soundness of TID's business model.  Not having a reference to non core assets also cost a few points, though not that many since TID probably has to sell off most or all of its assets to repay its creditors.  It's difficult to use that last expression if one doesn't have a reasonable amount of core assets.

    But in the game of life one doesn't have to be perfect, just a bit better than the other contestants.

    Wednesday 14 April 2010

    Dubai - Repost from Rupert Bumfrey's GCC and UAE Finance and Investment News

    Rupert Bumfrey has an interesting article today linking to Ian Fraser's blog which links to four articles by a former consultant for Boston Consulting Group in the UAE.

    A $16,000 bribe sounds like pocket change for BCG. 

    It's hard to imagine.  Did they think that a mere $16,000 was sufficient to keep this "explosive story" under wraps?  Was that a judgment of Mr. Yost's intelligence?  Or perhaps an evaluation of the content of his story?  It just doesn't add up.

    So, as natural, I delved into Mr. Yost's articles for more details.

    First, on the alleged bribe, what he describes is a fairly standard agreement used when staff are separated involuntarily.  Enhanced non disclosure agreements are included since it is highly likely that someone who is fired might have a bad attitude about their former employer and bad mouth him publicly.  So it's time to reinforce the obligation of confidentiality and extend it if possible.    

    As evidenced by the less than princely payout, Yost was perceived as a relative small fish in the BCG pool.   Perhaps, it's the current economic situation but I've never seen a one month separation payment.  Generally, it's three to four months at least from US firms.  

    If BCG felt that Yost had some sort of smoking gun,  when he refused to sign, they would have had someone from corporate legal have a "sit down" with him and "politely explain" how that first non disclosure agreement he signed earlier covered any sort of disclosure.  And how he didn't want to tangle with a firm with the resources of BCG.  It probably also would have been pointed out to him that as someone looking for a job,  especially in tough times, he'd probably like a good recommendation from a former employer.   And that it would be wise to take no action which might raise doubts about his loyalty in the mind of a prospective employer.  

    The existence of the agreement is kept secret because the firm doesn't want other staff knowing the payouts.  That enables the firm to pay different levels of compensation to departing employees.  Secrecy also provides some additional legal defenses for the firm.

    So, was it a bribe?  No.  The story just doesn't hold water.  It also raises questions whether Mr. Yost has (a)  a penchant for exaggeration or (b) an analytical skill issue.  Either of which might lead the uncharitable out there to question the rest of his analysis.

    Second, it's not just in Dubai that consultants are hired to tell the client what it wants to hear.   In fact that is an old saw about the consulting business.  

    In some cases consultants are hired to cut through internal politics.  We all know what we should do, but can't say it because of politics.   We all know what we should do, but having a consultant confirm it is a good form of CYA.  McKinsey said.  Bain agrees.  BCG confirms.  Booz is on board.   No different than a board getting a "fairness opinion" on a takeover offer - either as prey or predator.    

    But, and a very big but, I've never heard of a firm cooking the analysis or the numbers to come up with  it believes in its professional judgment is a wrong answer.  That's not smart.  It is a franchise killer.  This business is about giving good advice.

    Do consultants bend a bit?  Of course, they do.  Generally, life isn't black and white.  There are often grey areas.  Will this project result in a NPV of $15 million or $13 million?  Can I run my corporate reorganization with x+1 resources instead of x and still be successful?  (As an aside, if you think a consultant can give you an precise answer to either of the two former questions, I think you need to hire a consultant to brief you on uncertainty and the flaws in all valuation or other financial techniques).

    But as a long time consumer of consultant services and an occasional consultant myself (though not for one of the household 4), there was a line that was never crossed.   You don't give the client a NPV of $13 million if you think the project is a dead loss.  If the client needs to do something, you tell him.   I've personally told clients things they didn't want to hear.  And, more importantly, made them do things they didn't want to.  In some cases being told, if you insist on this, we will fire you.   And as a consumer have faced the same things.  

    If Mr. Yost's accusations are accurate, this is a damning indictment of BCG.

    Third, it's always good to reflect on the wider context when leveling criticism.   I think one could have a pretty good case that those in charge of running Dubai Inc have done as credible and competent a job as many of our own home grown and highly educated and skilled titans of finance and captains of industry.  There is a well demonstrated inverse relationship between the amount of excess liquidity in a system and the intelligence of the decisions made.  A rule which knows no borders. 

    Fourth, is there a caste system in the GCC?  You betcha to quote one of our popular political figures.  Interestingly enough, often, the most ardent practitioners are expats themselves.  There is an elaborate and rigid "pecking order" among one large subcontinental expat group in Oman.  Even those from the sophisticated West are not above participating in such practices.  And like all generalizations there are exceptions to the rule.

    The Investment Dar - More on the "Thanks"



    The Arabic language version of TID's press release is on their site this AM.   I'm looking forward to the English language translation.

    On the same topic, AlQabas (whose site I couldn't reach last night) ran the press release with a screen shot of TID's website with its headlines about 2007 results with the caption "The remembrance/reminiscence of 2007 profits continues".

    Shaykh Hamed Appointed to ADIA Board as Managing Director

    While WAM headlines it as a "reshuffle", this is just appointing the replacement for Shaykh Ahmed who recently died tragically.

    Here's the list of the new board as per WAM.
    1. UAE President (Shaykh Khalifa Bin Zayed Al Nahyan, Chairman)
    2. His Highness Sheikh Sultan bin Zayed Al Nahyan, the representative of the UAE President,
    3. His Highness Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces,
    4. HH Sheikh Mansour bin Zayed Al Nahyan, Deputy Prime Minister and Minister of Presidential Affairs, 
    5. Sheikh Hamed bin Zayed Al Nahyan, Chief of Crown Prince of Abu Dhabi's Court as a Managing Director, 
    6. His Highness Sheikh Mohammed bin Khalifa Al Nahyan, Chairman of the Department of Finance and His Excellency 
    7. Mohammed Habroosh Al Suwaidi, adviser to His Highness the UAE President, 
    8. HE Joan (usually Ju'an)  Salem Al Dhahiri, 
    9. HE Hamad Mohammed Al Hurr Al Suwaidi, Undersecretary of the Department of Finance and 
    10. HE Khalil Mohammed Sheriff Foulazi, Chairman of the Board of the Central Bank.

    The Investment Dar - Central Bank Approves 2008 Financials


    AlWatan (Kuwait) carries a press release issued by TID announcing that the Central Bank of Kuwait had approved its 2008 audited fiscal report.

    What a difference a day makes!  From a bitter lawsuit against the Central Bank to what might charitably be described even by local standards (and AA is a very charitable guy) as fawning praise.  

    After thanking HE Shaykh Salim Abdul Aziz Al Sabah, Governor of the Central Bank of Kuwait for approving its 2008 financials, TID takes this apparent first opportunity to launch into an encomium which occupies the major part of the press release.  TID praises the wisdom,  high level of professionalism, advanced technical proficiency, and hard work of the Central Bank in preserving not only the financial sector but the entire economy of Kuwait from the thick clouds of the global financial crisis which affected all parts of the globe.

    The press release also notes that TID's assets have improved with the turn in the market, its financial position is strong, and it will meet its obligations.

    The press release ends with thanks to Ahmed AlWunyan of the Special FSL Court who accepted TID's restructuring after studying it with the Central Bank of Kuwait.

    Tuesday 13 April 2010

    International Investment Group Kuwait - Additional Background

    Given the news item about IIG's problems, let's take a closer look at IIG.

    In case it wasn't clear from the details in my previous post, IIG is a finance company in Kuwait that operates "in accordance with Islamic Shari'ah principles".   To quote further from its website:

    At IIG, we firmly believe that Shari'ah principles and transparent corporate governance is essential to building and maintaining public trust. We at, IIG are guided by our values to maintain the highest level of integrity, treat everyone with dignity and respect, focus on our customers and demonstrate excellence in all we do.
    And I think that quote quite nicely sets the stage for what follows.

    Let's start with the Sukuk.  It is listed on NasdaqDubai where you can find a variety of documents including the Offering Circular.

    A few details on the US$200 million sukuk:
    1. Maturity 10 July 2012.
    2. Quarterly Periodic Distribution Amounts (every calendar quarter on the 10th) at 6.75 per cent per annum.
    3. Mudarabah structure.
    4. Principal repayment can be either in cash or IIG shares.  5,754.25 shares per US$10,000 of face value or approximately US$1.73 per share.  IIG currently trades at 44 Kuwaiti fils per share, roughly US$0.15.
    5. As disclosed in IIG's 2008 annual report (the last issued), the sukuk is secured by  (a) available for sale investments (approximately KD0.4 million out of the total portfolio of KD17.5 million), composed predominantly of  unquoted shares, and (b) investments in affiliates (approximately KD54.3 million out the total portfolio of roughly KD76.6 million).
    6. Kuwait Financial Centre ("Markaz") acts as security agent.
    7. In the event that IIG Funding doesn't pay back, the certificateholders can call upon IIG to purchase the certificates at their nominal value plus "interest".  If IIG fails to pay, then the certificateholders can pursue the collateral through the Trustsee/Delegate.
    8. Typical Dissolution Events ("Events of Default").
    9. Upon the occurrence of a Dissolution Event, an early termination can be triggered by the positive vote of 25% of the certificateholders.  This accelerates the maturity of the sukuk.
    10. Certificateholders have an individual right to "put" their certificates to the obligor (Section 6.5 a).  The voluntary put date is 10 July 2010.  An investor with a minimum of US$10 million can put the his certificates to IIG Funding for redemption.  So if one is an investor who wants to establish a legal right against IIG as a direct creditor but can't persuade other creditors to vote for an Early Dissolution, this could be the way out.  Of course, as noted above, the investor needs to have a minimum of US$10 million to tender.  Failure by IIG Funding to pay the put amounts would appear to trigger another Dissolution Event so certificateholders would get another vote.  The Delegate (Deutsche Bank) also has the right to take action without a vote, since the Trustee,  IIG Funding, has delegated its powers to do so to DB.
    A few other things from the Offering Memorandum.

    From Page 100  A Verbatim Quote on Shareholding
    "IIG has been a publicly listed company since November 1997. The table below sets out information in relation to holdings of 2 per cent. or more in IIG’s shares as at 1 May 2007:

    Shareholder
    # of Shares
    Percentage
    Kuwait Clearing Company(1)
    37,953,500
    11.93%
    Al Tawfeeq Company for 
    Investment Funds Ltd(3)  

    23,745,200

    7.75%
    IIG – portfolio holdings(2)
    18,745,845
    5.89%
    Arab Banking Corporation (B.S.C.)
    18,686,119
    5.87%
    IIG(4)
    14,616,533
    4.59%
    Gulf Monetary Group
    14,302,800
    4.50%
    Al Madar Finance & Investment Co.
    11,721,250
    3.86%
    Grand (Real Estate)
    7,370,680
    2.32%

    Notes:
    (1) This company acts as a nominee for shares held on margin accounts to facilitate forward trading.
    (2) These are shares held by IIG as portfolio investments for third parties, see ‘‘Businesses – Asset management’’.
    (3) This company is part of the Al-Barakah Group in Saudi Arabia which was one of IIG’s founding  shareholders. IIG’s Vice Chairman also holds board and management positions with companies in this group.
    (4) These are treasury shares. IIG is permitted to hold up to 10 per cent. of its paid up capital as treasury shares."

    AA;  IIG owns 17.54% of Grand.

    As of today, IIG lists the following as major shareholders as per the KSE.
    1. Arab Banking Corporation 5.63%
    2. AlBaraka Company for Development and Investment, 5.21%
    3. Gulf Monetary Group Bahrain 8.2%  (Interestingly, on the BSE website it's noted that IIG owns 50.12% of GMG.  Investors Bank with 27.66% is the only other major shareholder shown).
    Turning to  IIG's 2008 annual report (2009 is not yet released):
    1. I didn't see IIG's investment in Gulf Monetary Group mentioned  in the 2008 financials so this must be a 2009 or 2010 event.
    2. The term "related party" is used more frequently in IIG's annual report than the word "interesting" is used in this blog.   And that's not only interesting but also quite a record.  As per Note 22, some 38% of total assets are with related parties, including substantially all of the company's liquidity.  Note 6 states that IIG held KD71.2 million of collateral against the KD34.5 million in wakala and  murabaha payables. to related parties.  The nature of the collateral is not described.  As Note 22 assures, all related party transactions are approved by the shareholders at the annual general meeting.  Unclear if this is a retroactive approval.
    3. There seems to be a significant amount of cross shareholding between IIG and its investments and other related parties. Grand, Gulf Monetary Group,  
    4. One would expect no less in Kuwait, I suppose.  And equally one might make the argument that when you've got good business partners, whom you know and trust well, it's just natural to do more business with them.  And the same with investments.