Gulf Finance House - 5% Margin on US$100 Million & Plans for US$400 Million in Asset. Sales

Two articles provide some additional information on GFH's situation.

The first is from Zawaya which reports that the margin on the US$100 million six month murabaha from the WestLB-led syndicate is an eye popping 5%.   How does that compare to what they were paying on the US$300 million facility that matured today? Sadly, there doesn't seem to be any disclosure in GFH's financials about the profit rate on the "old"  US$300 million WestLB facility that this "new" one partially replaces. A non Shari'ah compliant bank would be required to give that sort of disclosure in its financials, but apparently Shari'ah compliant banks follow a different, if not necessarily higher, standard.    However, we can make an estimate as to the previous margin by reference to GFH's DB-led Sukuk.  The profit margin on that facility is currently 1.75% (after the 0.5% step up due to the recent ratings downgrade).  Using the Sukuk as a proxy, the new facility is paying somewhere in the range of 2.9X to 4.0x the earlier WestLB margin.  Probably at the higher range because the WestLB facility was granted in much happier times.  When one considers that the margin is 5% for a six month facility, the effective multiple is even higher.  Ouch!

The second is from Thursday's AlQabas and deals with asset sales.  It has the headline "GFH Compelled to Relinquish Assets". 

The first paragraph quotes Acting CEO Pretty as saying that GFH hopes to raise US$400 million from sales of its shares in financial firms and real estate.  The plan is to sell 40% of its interests in a bank in Syria via an IPO within six months.   

This seems an unfortunate time to be engaged in asset sales much less IPOs.  It's not clear to me that  there is any significant demand out there.  Especially for Syrian assets given all the recent saber rattling between Israel and Syria.  As well, prices are likely to be less than stellar, particularly because  potential buyers know that GFH is a "motivated seller".  This asset sales plan is reminiscent of the  Hail Mary Pass in American football.  Throw long.  Hope someone from your team catches it.  And scores the winning points.  It works sometimes: Staubach to Pearson.

One intriguing thought that comes from AlQ's headline:  Did GFH have to commit to crash asset sales as a condition of the US$100 million loan?

The rest of the article goes on to repeat items from the press release along with the standard refrain of companies in trouble that they are selling "non core" assets.  The latter particularly caught my attention.

Whenever I read the phrase "non core assets", a series of scenes flashes in front of my eyes.  Various scenarios to explain how and why these assets were ever acquired.  Scenarios that need not be mutually exclusive I'd add.

Did they know they were "non core" assets when they bought them?   I imagine a board meeting or perhaps the risk committee of the bank getting together to approve a "non core" asset purchase program.  "We've got lenders eager to lend.  Why don't we buy some 'non core' assets?  Definitely don't have enough of them."    What's even harder to understand is that usually the purchases are for rather substantial amounts.  The kind that could bring down the firm if they went bad.   You'd think that in pursuing something "non core" you wouldn't bet the proverbial ranch.  Rather you would be spending those precious borrowed funds on your main lines of business - what you might call your "core business".

Or were they just willy nilly buying assets and then later decided that some were "core" and some "non core"?  Abundant and cheap liquidity often has the same effect on judgment as خمر.  Metaphorically, one wakes up with a splitting headache the next day,  opens one's eyes and "Oh, no, how in heck did that get here?"  Struggling for a while one remembers that one thought it looked pretty good last night and brought it home.  But not now, especially  in the daylight.

Or did the assets turn into "non core" assets?  Like the  yogurt you bought two weeks ago at Jawad's but didn't eat.  One day you open the refrigerator and there it is festering in the back.  Maybe having grown a  small beard.   If it's been in there long enough, perhaps even scurrying about a bit. Or at least stirring. One hopes not ominously.