Saturday 18 June 2016

Barclays Capital Raising 2008 Timeline

Technical Note:  For some reason the footnotes in the text don't go to the respective URLS.  So you have to go down into the Endnotes Section and click on them there.
31 October 2008
Barclays announces a GBP 5.8 billion “hard” capital raising with a potential additional GBP 1.2 billion if associated Warrants are exercised.  
Qatar Holdings and  a company representing the personal interests of HE Shaikh Hamad Bin Jassim Bin Jabr Al Thani, Chairman of Qatar Holding initially subscribe for GBP 2 billion  and HH Sh. Mansour Bin Zayed al Nahayan (Sh. Mansour) for GBP3.5 billion.[i] 
The generous deal terms suggest that Barclays is seeking to avoid participation in a UK Government rescue scheme that could impose constraints, including on executive salaries.
Sh. Mansour (UAE) Share Only
GBP 2 billion of Mandatory Convertible Notes (MCNs)[ii]
GBP1.5 billion in Reserve Capital Instruments (RCIs)[iii] Later reduced to GBP 1.25 billion.
The RCIs are accompanied by warrants (Warrants) for the purchase of 758,437,618 common shares of Barclays at 197.775 pence each[iv].    The Warrants are a “true” bargain.  They cost GBP76 pence roughly equal to $1.20.
Barclays initially identifies UAE investor as Sh. Mansour. [v]
25 November 2008 Barclays announces that Sh. Mansour will fund his investment through “an Abu Dhabi government investment vehicle which will become the indirect shareholder of the Warrants, the MCNs and the RCIs.”[vi]
This entity later identified as International Petroleum Investment Company (IPIC) Abu Dhabi (100% owned by Abu Dhabi Government) in Barclays' filings with UK and US regulators.[vii] Sh. Mansour is Chairman of IPIC.
IPIC uses special purpose companies to hold the individual investments.
PCP Gulf Invest 1 Ltd. for the MCNs. [viii]
PCP Gulf Invest 2 Ltd for the RCIs.[ix]
PCP Gulf Invest 3 Ltd for the Warrants. [x]
PCP companies are directly owned by Kadin Holdings Inc. which in turn is owned by IPIC.[xi]
This structure allows Kadin to sell off individual investment types.  
Barclays paid GBP110 million (approximately $174.9 million) in fees to Sh. Mansour on the deal.[xii]  He later pays GBP 30 million to a foreign intermediary per Euromoney.[xiii]  
The fee does not appear as income in IPIC’s 2008 or 2009 financial statements. [xiv][xv]  It does not appear to have been netted against the cost of the MCNs and RCIs. 
Thus, it appears that Sh. Mansour retained the remaining GBP 80 million.
18 November 2008
Qatar Holding and UAE agree to each sell GBP 250 million of RCIs back to Barclays.   No Warrants returned. [xvi] 
Reduction in UAE share of RCIs to GBP 1.250 billion.
The returned GBP 500 million in RCIs were placed by Barclays with institutional shareholders.[xvii] 
These investors had complained about being excluded from acquiring the richly priced 14% coupon RCIs. 
1 June 2009
As per SEC filing, KAQ Holdings (KAQH) announces 8 June 2009 that on 1 June 2009 it acquired the option to acquire 100% of Kadin Holdings Ltd any time after 5 June 2009.[xviii]  As per the same SEC filing, KAQH described as 100% owned by HE Khadem Al Qubaisi (KAQ).[xix] 
Sale price and reason for KAQH’s involvement are not disclosed.
The sale doesn’t appear to be an attempt to avoid appearance of conflict of interest because both KAQ and Sh. Mansour are members of IPIC’s Board.
5 June 2009
As per SEC filing, 8 June 2009 IPIC/Kadin announces that it has sold shares on 5 June arising from conversion of MCNs but that it still holds the Warrants.[xx]   
The MCN’s are exchangeable into 1,304,835,721 shares.  IPIC converts MCNs to common shares and sells.
IPIC’s 2008 annual report states that all Barclays investments sold after 31 December 2008.   E & Y’s audit is signed 22 June 2009 placing the sale of “all” Barclays investments prior to that date.[xxi]
No public information on who bought the Barclays shares.
IPIC engaged Credit Suisse to sell shares and place RCIs, as per Bloomberg.[xxii]
1 September 2009
As per SEC filing KAQH announces it has exercised an amended Option on 1 September 2009 that allowed it to acquire PCP 3 the owner of the Warrants.[xxiii]
There is a discrepancy between IPIC’s report it had sold “all” Barclays investments in June and KAQH’s 1 September date.    
Perhaps, PCP3 wasn’t sold till September and was held at its original cost carrying value ($1.20) and so considered de minimis?
Sale price is not disclosed.
Estimated fair value of the Warrants (341.79P less 197.775P) x 758 million-- about GBP1.1 billion based on 1 September5 share price.  [xxiv]   Using the 5 June share price of 263.27P, the fair value is some GPB 497 million. [xxv] 
 31 December 2009
IPIC recognizes $2,198,074 in profit on sale of its interests in MCNs, RCIs, and Warrants.[xxvi]
As per Note 20 to IPIC’s financials, profit is $2.2 billion equal to net proceeds of GBP 4.7 billion ($7 billion) less derived cost of GBP 3.2 billion ($4.8 billion).[xxvii]
The net proceeds of the MCNs are estimated to have been GBP3.4 billion based on Barclay’s closing share price of GBP 2.6327 on 5 June of 2009.[xxviii]   
The sales proceeds of the RCIs are estimated at GBP 1.25 billion given that the RCIs trading at near par in early June as per London Stock Exchange provided data.[xxix]
This suggests that the Warrants were sold at nominal cost.
12 February 2010
As per SEC filings, 12 February KAQH announces it transferred PCP 3 to Nexus Capital Investing Ltd. (NCIL). [xxx] [xxxi]
In the same SEC filing, NCIL declares its ownership of all the share capital of PCP 3.[xxxii]
Transfer of ownership of the Warrants from KAQH to NCIL.
KAQH’s name changed to Future Capital Management Ltd. [xxxiii]
NCIL.  According to SEC filing, Abdul Aziz Al Ketbi owns 100% of shares of NCIL.[xxxiv]  Fatima bint Mubarak al Ketbi is mother of key sons of Sh. Zayed
FCML is transferor of record of PCP 3 to Nexus.[xxxv]
Note transaction is “transfer” not “sale”.  Does this indicate no payment made?
Reason for KAQH’s name change and transfer not disclosed.
17 February 2010
As per SEC filing, PCP3 exercises Warrants to buy 626,835,443 shares of Barclays' common stock, leaving it Warrants to purchase an additional 131,602,175 shares.[xxxvi]
Shares were not sold so profit was not realized. [xxxvii]
Barclays' closing price per share 17 February 2010 was 279.25.[xxxviii]   Because cost of the Warrants appears to be zero or near zero, the estimated unrealized profit on exercise is (share price less Warrant price of 197.775) times number of shares.   GBP 511 million or $803 million.[xxxix]
7 July 2010
As per SEC filing, Al Ketbi “transfers” 100% of NCIL to Abu Dhabi International United Investments LLC.[xl]
As per the SEC filing, Sh. Mansour owns 100% of Abu Dhabi International United Investments LLC (ADIUI) which in turn owns NCIL.[xli]
Another “transfer” instead of sale. 
11 October 2010
As per SEC filing, NCIL exercises remaining Warrants acquiring 131,602, 175 shares of Barclays.[xlii]  NCIL (Sh. Mansour) now owns 758,437,618 shares. [xliii]
Barclays' closing price per share 11 October 2010 was 275.55.[xliv]  Estimated unrealized profit on exercise GBP102million or  $163 million.[xlv]  
Value of all shares held and thus Sh. Mansour’s total unrealized profit is estimated GBP590 million or $938 million.
20 June 2013
As per SEC filing, PCP 3 no longer holds any Barclays shares.[xlvi]
The reason given is the “closing and settlement of hedging transactions”.  The details of the hedging transactions are not public and so it’s not possible to determine the final profit realized by Sh. Mansour on the Warrants/Barclays shares.

[xxxii] http://www.sec.gov/Archives/edgar/data/312069/000094787110000108/ss84563_sc13g.htm                                                                
Posted by Abu 'Arqala at 6/18/2016 03:17:00 pm 0 comments
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Sunday 12 June 2016

Department of Technical Quibbles: The Arabtec Liquidity Crisis and Basic Accounting

Last Conference:  Abu Arqala's Name Tage


A 1 June Gulf News article on liquidity problems at Arabtec caught Abu Arqala’s lately reopened eye last week. 
http://gulfnews.com/business/sectors/construction/arabtec-running-out-of-options-for-liquidity-1.1839055 
I don’t have an issue with the contention that Arabtec’s liquidity is strained.  Nor that the company is struggling.
The firm’s financials show it is indeed having financial difficulties.  The auditors’ qualified opinion for 2015 made even “less pretty” by the “matter of emphasis” comments and the income and cash flow statements paint a rather unhappy picture.   
But I do have a beef with two statements in the article. 

These appear to be based on less than a solid knowledge of accounting or UAE laws.  Because they are coming from “experts” I think they could well mislead readers.  Those concerns prompted this post and the start of a new feature on this blog “The Department of Technical Quibbles” or DOTQ for short.  
       Here are the two “offending” quotes.
  • “Analysts questioned whether Arabtec would be able to break even this year after the company held a general assembly on Wednesday to get shareholder approval to pull Dh1 billion out of its statutory reserve.” [This may sound like the company can lay its hands on AED 1 billion in “cash”. It also seems to infer that accounting entries about past events can affect the future].
  • “He said that having such massive losses also makes banks more reluctant to give out loans, which leaves the statutory reserve as the only resort for immediate liquidity.” [The “found cash” theme again.]
Let's drill a bit deeper into what Arabtec is doing.
First, what Arabtec is proposing is an accounting entry.   
  1. If shareholders approve, Arabtec will debit the statutory reserves by 1 billion AED and credit retained (accumulated) losses with the same amount.   
  2. This accounting entry will take place solely on the liability side of Arabtec’s balance sheet.  Assets will be unaffected.  Keep this in mind as it will be a central idea in the "fourth" main point below.    
Second, a glance at the shareholders’ equity account as of 31 March 2016 shows that the statutory reserve is included in shareholders’ equity along with other equity accounts resulting in total shareholders’ equity of 3.2 billion AED.   
  1. What that means is that after the entry, the balance sheet total shareholder’s equity will not change. In effect the statutory reserve has already been netted against the accumulated losses on an economic basis.   
  2. If bankers and financial analysts do not understand this, may God protect them from their lack of knowledge and from making duff loans or investments.  
  3. http://www.arabtecholding.com/FinancialReports/FY16Q1_English.pdf
Third, if there isn’t a cash benefit, why is Arabtec taking this step?  For legal reasons.  
  1. Like other GCC states, the UAE requires (Article 285 Commercial Companies Law 1984, as amended) that companies take action when accumulated losses are greater than 50% of statutory or legal capital.  At that point, companies have two choices:  dissolve the company or continue.  In the latter case the situation must be rectified. 
      • Reducing legal capital raises a host of inconvenient issues, e.g., redenomination of nominal share price/par value, reduction in the number of shares, etc.  Raising new capital is expensive and difficult at such times, though perhaps not when one has a motivated government shareholder. Using existing reserves is relatively painless.
  2. As of 31 March 2016, Arabtec’s legal capital was 4,615,065,000 AED.  Its accumulated losses at that point were 2,273,762,000 AED.  A further 33,770,501 AED—a relatively small amount--would trigger the operation of Article 285.  
  3. By acting now, Arabtec “buys” itself legal breathing room by pushing the 50% trigger further out.  It’s also much easier to take this step at an AGM than at an EGM.  
  4. Does Arabtec need breathing room?  Sure looks like it.
  • A modest 34 million AED will trigger Article 285.
  • 1Q 16 losses were 48 million AED. 
  • There is no evidence of dramatic turnaround in the last few months. 
  • The company’s management is privy to to-date undisclosed 2Q16 performance. 
  • Perhaps, the limit has been breached already, but since the AGM voted 1 June to use the reserves, the problem is solved.  For now at least.  

Fourth, but what about the liquidity the second quote refers to? 
  1. Liquidity generally refers to two things. 
    • The ability to convert assets to “cash” quickly and at or very close to their carrying values on the balance sheet. 
    • The ability of a firm to pay its current debts and obligations as they come due. This is different than “solvency” which deals with long term obligations and debt.  
    • The more quality current assets one has and the fewer current liabilities the more liquid the firm. 
    • But Arabtec’s proposed action has no effect on non-equity liabilities or on assets.  When the entry is made, the same assets and non-equity liabilities will be on the books after the entry as were there before.  The entry will not change their characteristics or values. 
  2. Often individuals not familiar with accounting believe that if there is a “reserve” on the liability side—particularly one called a “statutory” or “legal” reserve--there is an account with “cash” of an equivalent amount on the asset side in a proverbial “lock box” that can’t be touched. That is not the case.  Liabilities merely show how assets were funded.  
  3. As the company’s financials show there is no “pot” of “cash” sitting on the balance sheet that is equivalent to the statutory reserve amount and that will be freed up by accounting entry proposed by the company.  http://www.arabtecholding.com/FinancialReports/ARTC_FS_Ann_E_2016.pdf      
Fifth, how would the company’s accounting entries regarding past accumulated losses and accumulated statutory reserves affect its ability to turn a profit or generate cash in the future?  The entry doesn’t provide additional cash.  It doesn’t change the value of assets or non-equity liabilities. It doesn’t change current economic conditions.  In short, it doesn’t.
Posted by Abu 'Arqala at 6/12/2016 01:21:00 am 0 comments
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Friday 10 June 2016

إعادة فتح "باب الاجتهاد" المالي - قريبا





بعد تقريبا ستة سنوات الصمت

سنفتح من جديد "باب الاجتهاد" المالي  - -- قريبا

نفس مقالات طويلة 

نفس كتابة غامضة

باذن الله افكار مفيدة 


Posted by Abu 'Arqala at 6/10/2016 09:57:00 am 2 comments
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Saturday 9 August 2014

Comment Moderation Enabled

Regretably, persistent posting of rubbish advertisements on the site has compelled me to enable comment moderation.

If you have a legitimate post, be patient. 

It may take a few or more days before it appears.
Posted by Abu 'Arqala at 8/09/2014 11:51:00 pm 3 comments

Friday 5 November 2010

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

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

Awal Bank files request for extension of time

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

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

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

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

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

Please contact David J. Molton, Esq. from Brown Rudnick LLP, counsel to the Foreign Representative, at 00 1 212 2094822 with any inquiries.
Posted by Abu 'Arqala at 11/05/2010 01:03:00 am 12 comments
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Monday 1 November 2010

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

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

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

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

First, a recitation of the terms:
  1. Type - Convertible Murabaha Facility
  2. Status - Senior Unsecured Debt
  3. Maturity - 3.5 years
  4. Profit Payment (aka Interest Rate) - Indicative 12% per annum!
  5. Conversion Price - US$0.31 per share
  6. Incentive Structure - If conversion election made before 31 December 2010, last 2.5 years Profit Payment in shares at US$0.31 conversion price.
Before the commentary, two very important caveats:
  1. GFH's shareholders have not approved the issuance.  GFH's first OGM and EGM failed for lack of a quorum.  
  2. The terms sheet is marked "indicative" meaning it's not binding, but rather serves as a basis for discussion/negotiation with potential investors. 
  3. Nonetheless, these terms provide a window into what GFH's board and management believe will be necessary to secure investor interest.  In that regard, I'd note that the accompanying investor presentation (a future post will comment on that) states:  "Some commitments already received from Chairman, strategic investors, and related parties".  So you can be pretty sure that GFH has drawn on these disinterested parties to set market-based terms.
Now to the commentary.
  1. Assuming a take and hold investor who does not elect conversion until after 31 December 2010, the promised return (IRR basis) is roughly 23% per annum. 
  2. 12% of that return composed of cash (the "interest payments").   It's hard to see GFH earning sufficient returns to have much left for shareholders after the interest payment is made.
  3. 11% of that from the discount on the shares (assuming the shareholders approve the 1:4  reverse split and GFH trades at 4 times its current US$0.125 per share.  A rather substantial dilution of existing shareholders.
  4. The total promised return reflects the weak financial condition of the company when it has to offer essentially private equity like returns for its debt.  Of course, the actual return will depend on GFH's performance which may indicate a market judgment on the probability of such performance.
  5. It also establishes what might be considered an "unfortunate" benchmark for GFH's debt issues. Particularly, when one considers this is apparently an early offer to potential investors.  And as we all know the first price in the suq is not the last.
Posted by Abu 'Arqala at 11/01/2010 11:50:00 pm 4 comments
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Gulf Finance House to Ask Sukuk Holders for Three Year Extension

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

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

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

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

As to pricing for GFH debt, please see my soon to be issued companion post on the draft terms for GFH's proposed new Sukuk.
Posted by Abu 'Arqala at 11/01/2010 11:00:00 pm 0 comments
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National Bank of Kuwait – Related Parties’ Loans Analysis


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

An intriguing comment.

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

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

Related Party Information

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


QuarterRP LoansCollateral% Cover
1Q07215.1519.7242%
2Q07262.2608.4232%
3Q07294.9634.3215%
4Q07307.3672.6219%
1Q08285.5728.2255%
2Q08295.2742.0251%
3Q08316.6719.1227%
4Q08350.6494.4141%
1Q09278.8451.5162%
2Q09310.4544.9176%
3Q09189.7363.8192%
4Q09219.3343.8157%
1Q10210.7380.2180%
2Q10186.5350.7188%
3Q10183.7413.1225%

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

Another place to look is for the IFRS #7 Note on renegotiated loans. 
  1. Note 28.1.4 to NBK's 2009 financials state that only KD8.4 million of loans were renegotiated in that fiscal year and nil the year before. I didn't seem similar disclosure in the 2007 financials.
  2. If NBK were having problems with MAK exposure, one might expect to see larger "renegotiated" amounts, though it is possible in this sort of situation for a bank to extend a new loan to repay another short term loan and treat it as a new loan. One would expect that interest would have to be paid in full for the auditors to sign off. I'd note that one's expectations are not always fulfilled.
Conclusion

The financials don't disclose any problems, though as mentioned above this analysis is based on an external diagnosis without benefit of x-rays (details of NBK's exposure to the AlKhorafi Group).
Posted by Abu 'Arqala at 11/01/2010 10:53:00 pm 14 comments
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