In an earlier post today I noted that Deutsche Bank had converted another US$10 million of its US$100 million murabaha bringing the total converted to US$50 million. Since the conversion was being done at US$0.38 per share and the market price is much less, I wondered what the economic motive for such a transaction could be.
This seems to be a more complicated issue than I originally thought.
Let's rewind the video tape and go back to that magical date of "2 November/2 October 2009". GFH announced that it successfully raised US$300 million in a rights offering and would soon have announcements that it had raised "US$450 million in fresh capital in just over a month".
On 15 November 2009, it announced that it had successfully placed a US$100 million convertible murabaha with Deutsche Bank. "The announcement is the latest success in the broader GFH liquidity and capital management plan that includes rights issue subscriptions of over US$ 300 million dollars, the partial sale of Qinvest to Qatar Islamic Bank for approximately US$ 51 million and the planned placement of the first US$ 100 million convertible murabaha with Macquarie Group." While the placement with Macquarie didn't go forward, not an inconsiderable achievement for one month's work. Recall that the issuance of the convertible occurred before made its first of several downgrades of GFH. At that happy time GFH was rated investment grade.
In Note 16 to its 2009 financials GFH states that the proceeds of the US$100 million murabaha were US$80 million. Right about now if you're like me, you're wondering what happened to US$20 million from the US$100 million deal announced. That certainly was the impression I took from GFH's earlier press release. They had obtained financing of US$100 million. US$100 million of new cash from the fine people at DB.
So where is the "missing" US$20 million?
Is it the requirements of IFRS which makes one strip out the embedded option in the convertible? But then the US$20 million should be reflected somewhere else on the balance sheet. I can't find it. I do see US$1.226 as the equity component of the transaction. But that still leaves a lot unaccounted for. And one might not use the word "proceeds" in describing this transaction. The proceeds would have been US$100 million. So this probably isn't the case.
Was this a murabaha facility of up to US$100 million? That is, is the US$100 million the aggregate amount which DB can take down in several tranches? The term "proceeds" might be used in this case, but one would expect that surely if this were a partial drawdown, it would have been disclosed. كلام شريف would be the operative phrase I think.
Or did GFH issue a discounted instrument? That is, the face value of the instrument issued reflects the cash to be paid at maturity for both principal and interest. If one takes US$80 million at 8% per annum for three years, the future value is over US$100 million. But I'd note the period appears to be less than three years: the announcement was 15 November and the maturity is 12 October 2012. But then this can't be the case because wouldn't كلام شريف require that the bank say it had placed US$80 million rather than say it had placed US$100 million? Or clarify that this was a discounted instrument? After all one doesn't typically count the interest on a non discounted bond as part of the capital raising. It would seem to me that an issuer would want to be very clear as to just how much was raised, especially if iitwere in the "red zone" in terms of financial condition,
So, maybe I'm missing something here. Or maybe GFH's disclosure is a bit incomplete.
Anyone out there with the answer or an opinion, please chime in.
That leaves one more curious item: GFH's 4Q09 purchase of US$35 million in Treasury Shares. And to my mind this one is much more perplexing than the DB murabaha.
During 4Q09, GFH bought 93,806,001 of its own shares at an average cost of about US$0.37 per share. (For those of you who care, at the beginning of the year it held 8,448,808 shares purchased at an average cost of US$2.06 clearly from much happier days). GFH did not purchase any Treasury Shares in the First, Second or Third quarter of 2009.
Now this purchase is really hard to fathom:
This seems to be a more complicated issue than I originally thought.
Let's rewind the video tape and go back to that magical date of "2 November/2 October 2009". GFH announced that it successfully raised US$300 million in a rights offering and would soon have announcements that it had raised "US$450 million in fresh capital in just over a month".
On 15 November 2009, it announced that it had successfully placed a US$100 million convertible murabaha with Deutsche Bank. "The announcement is the latest success in the broader GFH liquidity and capital management plan that includes rights issue subscriptions of over US$ 300 million dollars, the partial sale of Qinvest to Qatar Islamic Bank for approximately US$ 51 million and the planned placement of the first US$ 100 million convertible murabaha with Macquarie Group." While the placement with Macquarie didn't go forward, not an inconsiderable achievement for one month's work. Recall that the issuance of the convertible occurred before made its first of several downgrades of GFH. At that happy time GFH was rated investment grade.
In Note 16 to its 2009 financials GFH states that the proceeds of the US$100 million murabaha were US$80 million. Right about now if you're like me, you're wondering what happened to US$20 million from the US$100 million deal announced. That certainly was the impression I took from GFH's earlier press release. They had obtained financing of US$100 million. US$100 million of new cash from the fine people at DB.
So where is the "missing" US$20 million?
Is it the requirements of IFRS which makes one strip out the embedded option in the convertible? But then the US$20 million should be reflected somewhere else on the balance sheet. I can't find it. I do see US$1.226 as the equity component of the transaction. But that still leaves a lot unaccounted for. And one might not use the word "proceeds" in describing this transaction. The proceeds would have been US$100 million. So this probably isn't the case.
Was this a murabaha facility of up to US$100 million? That is, is the US$100 million the aggregate amount which DB can take down in several tranches? The term "proceeds" might be used in this case, but one would expect that surely if this were a partial drawdown, it would have been disclosed. كلام شريف would be the operative phrase I think.
Or did GFH issue a discounted instrument? That is, the face value of the instrument issued reflects the cash to be paid at maturity for both principal and interest. If one takes US$80 million at 8% per annum for three years, the future value is over US$100 million. But I'd note the period appears to be less than three years: the announcement was 15 November and the maturity is 12 October 2012. But then this can't be the case because wouldn't كلام شريف require that the bank say it had placed US$80 million rather than say it had placed US$100 million? Or clarify that this was a discounted instrument? After all one doesn't typically count the interest on a non discounted bond as part of the capital raising. It would seem to me that an issuer would want to be very clear as to just how much was raised, especially if iitwere in the "red zone" in terms of financial condition,
So, maybe I'm missing something here. Or maybe GFH's disclosure is a bit incomplete.
Anyone out there with the answer or an opinion, please chime in.
That leaves one more curious item: GFH's 4Q09 purchase of US$35 million in Treasury Shares. And to my mind this one is much more perplexing than the DB murabaha.
During 4Q09, GFH bought 93,806,001 of its own shares at an average cost of about US$0.37 per share. (For those of you who care, at the beginning of the year it held 8,448,808 shares purchased at an average cost of US$2.06 clearly from much happier days). GFH did not purchase any Treasury Shares in the First, Second or Third quarter of 2009.
Now this purchase is really hard to fathom:
- GFH acknowledges it has a liquidity problem - revenues are way down and upcoming debt maturities loom. And this problem is at its highest point of intensity during 4Q09 - a time when no doubt GFH either has decided or has some inklings of the massive provisions it is going to take and the rather severe loss it is about to report.
- GFH is required under its US$1 Billion Sukuk Program to maintain US$400 million in consolidated tangible net worth. GFH wound up at year end 2009 with roughly US$433 million in consolidated tangible net worth. (The US$17 million in good will at year end 2008 was written off in 2009.) US$433 million doesn't appear to leave GFH with much breathing space relative to this covenant. And a breach of this covenant could trigger an event of default and a potentially life t threatening acceleration of the maturity of the Sukuk (US$302 million outstanding at year end 2009).
- At the end of 2009 GFH had Basel II Capital Adequacy ratio of 12.91% dangerously close to the Central Bank of Bahrain 12% threshhold. A fact that caused its auditor to raise an "emphasis of matter" in its audit opinion on the year. Note a very rough calculation indicates that if GFH had not purchased these Treasury Shares, its CAR would be close to a very much more comfortable level of 14%. A low CAR attracts all sorts of perhaps unwelcome attention from the Central Bank of Bahrain. Potential restrictions on new business. As well as demands for immediate remedial action.
So considering all these factors, what could be the possible motive for GFH to buy Treasury Shares?
This act weakens liquidity. It weakens its Basel II Capital Adequacy ratio. And it leaves it potentially close to a breach of a covenant on a US$302 million outstanding Sukuk at a time when it is struggling to reschedule 2010 maturities. All the more surprising because the Sukuk matures in 2011 and has a relatively benign profit or interest rate on it - when compared to the market price for GFH debt.
And that's why I wonder if somehow these two curious cases are connected. It's hard to understand why one would decapitalize the bank at the very time that capital and liquidity are required.
This act weakens liquidity. It weakens its Basel II Capital Adequacy ratio. And it leaves it potentially close to a breach of a covenant on a US$302 million outstanding Sukuk at a time when it is struggling to reschedule 2010 maturities. All the more surprising because the Sukuk matures in 2011 and has a relatively benign profit or interest rate on it - when compared to the market price for GFH debt.
And that's why I wonder if somehow these two curious cases are connected. It's hard to understand why one would decapitalize the bank at the very time that capital and liquidity are required.
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