Damas - Looks To Sign Standstill With Lenders

The National reports that Damas is on the verge of signing a formal standstill agreement with its creditors, noting that an informal standstill had been in place since last November.   As per the article, the plan is to freeze principal repayments until 31 May though to continue to accrue interest.  Clearly, this is just the first step.  A revised repayment plan will have to be devised.  For that purpose and probably to give creditors some comfort, there are rumors that the company will hire a partner from PricewaterhouseCoopers to act as chief restructuring advisor.  It is unclear if this will be an advisory assignment in which Damas engages the firm.  Or whether a partner will be engaged to work at Damas in a capacity similar to that used by The Investment Dar (Mike Grant) or Dubai World (Aidan Birkett).

Assuming The National's sources have the correct story, what's revealing in the article are two comments which go to the heart of corporate governance as well as raise issues of defalcation.

First, that the conversion of Damas' loan to Dubai Ventures to a managed investment account was not authorized by the Board.  What is even more relevant is the authorization of the loan in the first place.  What on earth was a jewelry company doing in the loan business?  A reasonable guess would be that the loan like the conversion was not authorized by the Board.

Second, that the funds that Mr. Abdullah borrowed from Damas and which he and his brothers have agreed to pay back were used for real estate speculation in Dubai.   No doubt the belief was that the investments were a "sure thing" and that the profit could be realized and the original funds returned without problem.  The Brothers now are faced with trying to sell these assets in a depressed market.  I believe that the Board should resist any attempt to have them accept these assets as satisfaction for the obligation.  The risk on the assets should remain with those who purchased them.

Also as I've noted before, it's always very wise idea when investing in a business with a dominant shareholder to make sure the boundaries are very clearly set between that shareholder's money and the company's and that there are adequate controls in place to minimize "crossover" transactions (via signing authorities, etc) and robust mechanisms to monitor the company to detect any violations.