Potential Merger of the ADX and DFM - Beginning of the End of Dubai as a Financial Center?

You've probably seen the press reports about the discussion of a potential merger of the Abu Dhabi Exchange and the Dubai Financial Market.  Those I've seen outline the compelling economic case for the merger.  There just isn't enough volume to support two markets in the UAE.  While not as dire a case as that for the merger of Nasdaq Dubai with the DFM, there is strong rationale:  consolidation will lower costs.

Not as often directly emphasized but much more important is that a merger would increase liquidity for both issuers and investors.  A robust capital market in both equity and debt will foster greater economic development.

All well and good. 

But I haven't seen any discussion of what perhaps is another key issue.  Who will control the merged entity?   And  the consequence of that control.

The old saying is that cash is king.  And the guy with the cash  is primus inter pares among royalty. 

Before its recent problems, Dubai had a constrained cashflow from resources and operations  (as opposed to borrowed funds).  That situation has been made even worse by the demands of the DW rescheduling and other likely problems already on the horizon or just below.  A merger offers Dubai the chance to monetize some of its foreign assets (LSE,  Nasdaq) to meet its cash flow needs as it deleverages.  

Abu Dhabi is flush with cash.  And its credit is sterling with bankers and investors.  It has a much stronger hand.  It can make significant new investments - acquisitions and build outs.  It can, if it wishes,  use this opportunity to accelerate a shift in the economic landscape of the UAE.  To become the financial center.

Control of the merged exchange would be more than a matter of prestige, though one shouldn't discount the ego factor as a motive in transactions.  Prior to the takeover by Chemical Bank, Chase Manhattan Bank  was in discussion with Bank of America about a merger.  The deal foundered on the "substantial" issue of where the merged entity's headquarters would be.  San Francisco or New York. Chase wound up as prey not predator.  BofA in less tender hands.

Control of the merged exchange will affect the financial landscape in the UAE.   In rather broad brush strokes we can characterize the current financial situation in the UAE as Abu Dhabi  for project finance and Dubai for more market oriented financial transactions.  

But  if the center of gravity for the  merged stock market shifts to  Sowwah Square  / Sowwah Island, then how seriously does this undermine Dubai's dream of being a full service financial center?

I think fundamentally. 

In such a situation what is the appeal of Dubai?

It's probably not going to be access to issuers at least for several years.  Access to investors?  Maybe.  But if the economy in the Emirate has a slow recovery as is anticipated and Abu Dhabi is relatively speaking booming, where will the interests of investors and bankers be focused? 

To be clear, this isn't a prediction of an immediate reversal of Dubai's role as a financial center.   A financial Armageddon.  Nor is it meant as the sole variable to explain a shift to Abu Dhabi from Dubai.  There are other factors as well.

Rather it's about a shift in emphasis and slower growth in Dubai vis a vis the financial center in Abu Dhabi.  Not the "End"  but the "Beginning of the End".

Think of  Philadelphia and New York.  Within a five minute walk in Philadelphia, you can see the impressive buildings of the first two Banks of the United States.  Once the undisputed financial and commercial capital of the USA, Philadelphia was eclipsed by New York.  Not overnight.  And it still retains its own role and stock exchange.

Nakheel Property Holders Seek Legal Help

The National reports that some 700 investors in Palm Jebel Ali are unhappy with the alternatives presented under Dubai World's restructuring plan and may hire a law firm to act as advisor.  

They seem to be looking to secure the following:

1. A firm schedule for completion to ensure a quick handover
2. Assurance that quality and design standards won't be compromised to save project costs
3. Recalibration of future installments to actual construction progress.  The article goes on to say that on average investors have paid in about 30% of the total purchase price.

Personally, I'd be concerned about the effects on maintaining project and building  quality in a stop-start project, particularly if there is a constraint to keep the costs within the original pricing.  Unless of course costs have come down significantly from then.

As well, it would seem natural that given the economic downturn some of the non residential attractions on the island might be scaled back or eliminated. 

Think I might be inclined to take my credit to an existing or almost built project, especially if the credit was against current market value instead of "rack rate".

Perhaps, The Real Nick could weigh in with a comment.

"Dubai World Property Plan Not a Quick Fix" UBS

Copyright The Truth About

Creative Commons Attribution-Share Alike 2.0 Generic License

The National has an article with the above headline and this lead paragraph.

If you thought the troubles in Dubai’s property market would be cleared up overnight if Dubai World successfully restructured its debt, you may want to think again.

Wise words indeed.  

To which AA might add, that if you did, you might want to consider turning over your financial affairs to someone more reality based.  That being said, if you do execute a power of attorney, choose your "wakil" wisely. 

In which case the following word's from the Bahraini Newspaper AlBilad may offer some helpful guidance:   لا تدع زوج ابنتك يقود سيارة عائلتك

Bahrain - Already Big Money Laundering Scandal to Get Even Bigger?

BrokenSphere /WikiCommons 

Creative Commons Attribution ShareAlike 3.0

You might wonder how the current money laundering investigation could get any bigger.  After all, a former senior member of the Government has been interrogated by the Bahraini authorities in connection with allegations of money laundering and has been removed from his ministerial duties.  Whether the latter is just for the duration of the investigation or is permanent is not clear to me.

A couple of things seem to be pointing that there's a lot more to come in this story.

Before we go too much further, this is an appropriate place to note that what follows is based on  accounts and rumors circulating in the market. So a healthy does of skepticism is warranted.

It seems the number of financial institutions and other entities alleged to be involved  in money laundering is fairly extensive. The Al-Seyassah article I quoted in an earlier post has this language:  دائرة موسعة من الجهات شاركت في غسل الاموال

A recurring theme in these accounts is that the current investigation directly resulted from the two forensic investigations that the CBB launched into TIBC and Awal Bank last year.  That in particular the investigation into Awal Bank provided the loose thread that when pulled led to larger revelations.   The nexus is supposedly a Bahraini bank with significant ownership by two banks from a country in the region through which Awal made some transfers reportedly through Azerbayjan.  If the accounts are correct (and there's no way to know for sure at this point), further checking of transfers through that bank uncovered other transactions the Bahraini Government decided to pursue.   And the current investigations concern those other transfers.

As you'll recall the Hibis Report which was filed in the Supreme Court of New York in support of the AlGosaibi's claim against Mr. AlSanea had Evidence Case File #3 redacted.  From a later exhibit which was not removed, it appears this section dealt with allegations of money laundering.

And here it is appropriate to note that Mr. AlSanea has vigorously denied any wrongdoing in any of his businesses or conduct thereof.  And that as well the former Bahraini Minister also denies any wrongdoing.  The legal process in Bahrain is the proper forum in which legal determinations will be made.  At this point, we should allow this process to proceed and defer any judgments until the Court speaks.

Dubai World Rescheduling - HSBC Supports the Proposal

The National quotes Stuart Gulliver, HSBC's Chairman for the Middle East and Europe as saying that HSBC would sign the proposed debt restructuring.

He also said that each bank knew the conditions applicable to the restructuring loans. 

Perhaps, the banks who claimed to be in the dark are being represented by the same officers who made the original loans.

Kuwait Stock Exchange Warns 27 Companies of Suspension if 31 December Financials Not Submited 1 April 2010

8:30 AM is the witching hour.   Of the 27,  6 have already been suspended for earlier failures to provide financials.

[13:19:50]  ِ.ايضاح بخصوص الشركات التي لم تقدم البيانات المالية في الموعد المحدد
يعلن سوق الكويت للأوراق المالية واستنادا الى قرار لجنة السوق رقم (16)‏
لسنة 1987، والذي يلزم كافة الشركات والصناديق المدرجة بتقديم البيانات
المالية السنوية في موعد أقصاه ثلاثة أشهر من تاريخ انتهاء السنة المالية،
فان الشركات التي لم تقدم البيانات المالية السنوية في الموعد المحدد هي:‏
الشركة الاهلية القابضة (اهلية) ‏
شركة بيت الاوراق المالية (البيت)‏
شركة الاستثمارات الصناعية والمالية (ا صناعية) ‏
الشركة الدولية للتمويل(د للتمويل) ‏
المجموعة الدولية للاستثمار(المجموعة د) ‏
شركة مجموعة عارف الاستثمارية ‏(عارف)‏
شركة دار الاستثمار (الدار) (موقوفة) ‏
شركة الامان للاستثمار (الامان) ‏
شركة بيت الاستثمار الخليجي (الخليجي) ‏
شركة اعيان للاجارة والاستثمار (اعيان) ‏
شركة بيان للاستثمار (بيان)‏
الشركة الخليجية الدولية للاستثمار (غلف انفست) ‏
الشركة الكويتية للتمويل والاستثمار (كفيك)‏
الشركة الدولية للاجارة والاستثمار(د للاجارة) ‏(موقوفة) ‏
شركة المدار للتمويل والاستثمار (مدار) ‏
شركة نور للاستثمار المالي(نور)‏
الشركة الكويتية الصينية الاستثمارية (الصينية) ‏
شركة لؤلؤة الكويت العقارية (لؤلؤة) (موقوفة) ‏
شركة مجموعة المستثمرون القابضة (المستثمرون) ‏
شركة الدار الوطنية للعقارات (ادنك) ‏
شركة المشروعات الكبرى العقارية (جراند)‏
شركة الصفاة العالمية القابضة ‏(صفاة عالمي)‏(موقوفة) ‏
الشركة الوطنية للميادين(ميادين) ‏
شركة الصفاة تك القابضة (صافتك)‏
شركة فيلا مودا لايف ستايل (فيلا مودا) (موقوفة) ‏
شركة الشبكة القابضة (الشبكة) ‏(موقوفة) ‏
شركة المجموعة المتحدة للصناعات الغذائية (الغذائية) ‏
وعليه، فانه سوف يتم ايقاف أسهم تلك الشركات عن التداول، في حالة
عدم تقديم البيانات المالية السنوية في الموعد النهائي المحدد في الساعة
ِ 08:30 من صباح يوم الخميس الموافق 01-04-2010.‏

Ithmaar Bank Rights Issue - Only 52% Take Up

Ithmar Bank announced on the BSE that on 28 March it had held its Ordinary General Meeting of Shareholders.

Tucked in the announcement were the results of its recent Rights Offering. 

“The subscription period ended on Thursday, and we are pleased to report that the rights issue has raised $103 million,” said Ithmaar Bank Chief Executive Officer Mohamed Hussain.  “The Offering was an opportunity for current shareholders to further consolidate their stake in Ithmaar Bank – and the fact that it proved so successful is testimony to our shareholders’ unwavering faith in the Bank’s potential,” he said.

Sounds good.  What wasn't mentioned was that the Offering was for US$199.3 million.  That means a 52% take-up.  Not exactly a roaring success.

Ithmar was hampered by two things:

1. A US$235 million loss for Fiscal 2009.
2. The fact that Bahraini Companies Law does not allow a company to offer its shares for less than par value.  Ithmar's par value is US$0.25 per share.  It last traded at that level on 19 October 2009.  It currently trades at about US$0.19 per share.  A difficult sale indeed.

Ithmar had hoped to raise US$400 million to finance its conversion to a retail /commercial Islamic Bank from an investment bank.  The first leg has not gone so well.  

It's hard to imagine that a US$200 million or US$300 million (if they try to make up the reduced up take on the Rights Offering) mandatory convertible sukuk is going to fly off the shelves.  Unless, Deutsche has another client?

Gulf Finance House - To Sell Khaleeji Commercial Bank Stake This Year

Bloomberg has an interview with Dr. Esam Janahi, Chairman of GFH in which he made the following points:

1. GFH will sell its entire stake in KHCB this year.  High level discussions are already in process.
2. Unlike governments, GFH has been paying its debts.
3. The bank is not crazily leveraged (perhaps because it's been paying down its debts?)
4. The bank is moving away from real estate investments.  Something the bank started before the crash happened to give them credit for a prescient move.  However, their problem was their portfolio and the illiquid nature of real estate.  It's a lot easier to sell one's bonds or equities than one's real estate.

Dubai Holding to Restructure?

Quoting unnamed sources, The Financial Times reports that Dubai Holding is considering appointing a financial advisor to assist it with exploring the rescheduling of its loans which are said to be about US$20 billion.  DH declined to comment on "speculation".

It seems that if DH has an issue, it is largely with highly levered foreign investments, many of which were bought for top dollar at the top of the market.

I'd expect that in terms of priority, Cirque du Soleil would be further back in the line for cash than say Nakheel or Limitless.

On DH's portfolio, just last week, Dubai International Capital filed a motion in Amsterdam Court to try and prevent Oaktree Capital (a distressed debt specialist investor) from taking control of AlMatis (which DIC acquired in November 2007) via a debt to equity conversion.  As has been noted in the press, a couple of hotels were turned back to the lenders earlier.

A financial advisor could be quite useful to DH not just for rescheduling but  perhaps more importantly for a corporate reorganization or refocusing of strategy.  One  key step could be triage of the foreign assets.  In effect deciding which ones have the better prospects and focusing resources on those and letting the less robust ones go.

Dubai World Rescheduling Proposal - Just What Did the IMF Say?

Several Gulf papers have carried headlines relaying what are described as supportive IMF comments on Dubai World's proposal.

Here The National says "IMF Says Dubai World's Debt Proposal Fair".

Here Gulf News says "IMF Back Dubai Debt Proposal".

In reading these headlines one might very well come away with the perception that the IMF had reviewed Dubai's rescheduling proposal and had given that proposal its imprimatur.  In effect recommending to the banks that they accept the proposal.

Is that what the IMF did?

I'm not sure that's the case.

We'll have to wait for the IMF to release its official statement. As of close Monday, I didn't find this on the IMF website.

Right now the only comprehensive quote I've seen is from the Gulf News (in the article cited above).

"Today's announcement by the Chairman of the Dubai Supreme Fiscal Committee for the restructuring of liabilities of Dubai World and Nakheel is a welcome step further in the debt restructuring process. We support the authorities intention to find a fair and equitable solution for all stakeholders," the IMF said in a statement issued on Thursday evening, a copy of which was obtained by Gulf News.

"A satisfactory conclusion of this process will pave the way for improving overall credit conditions, the investment climate, and economic activity in Dubai and the UAE in general.

"We encourage all parties to build on the momentum and work together in satisfactorily concluding Dubai World's debt restructuring."

What I see are the following:

1. IMF praise for the Emirate's intention to find a fair solution.  As I read this, the IMF is not saying that a fair solution has been found.  Or that the proposal just made is fair.  Equally, it is not saying that a fair solution has not. Nor that the proposal is not fair.   
2. The proposal is a step forward.  But the IMF does not say the end of the journey has been reached.
3. A call for the parties to work together to satisfactorily conclude DW's debt restructuring.  If it's a matter of the creditors' approving the fair solution, it's unclear what DW would have to do.  Wouldn't it just sit back and tally the acceptances?  Not much work in that. 
4. One might read the IMF statement to imply that the Emirate has made a positive step but that further negotiations on the details of the proposal are in order and both sides should work hard to craft a mutually acceptable deal. 

Dubai World Restructuring - Creditor Push Bank

Frank Kane and Asa Fitch have an article over at Abu Dhabi's The National "Dubai Government hits back at critics of $24.8bn debt plan".  

What I think is the interesting story within that story is that:

1. Apparently unsecured creditors are to receive their interest in pay-in-kind ("PIKs") which means instead of cash they get a note for the amount of interest. It appears the interest notes may be set to the final maturity of the loan. 
2. And, yes, if the unsecured lenders' interest rate is below market and then don't get paid until final maturity their discount is even bigger than just a below market interest rate.  As I've posted before IAS #39 is very very clear a restructured debt that carries an interest rate below the original interest rate gets marked down to the net present value of the estimated cash flow using the original rate on the unrestructured loan (if the asset were held at cost).    The estimated cash flow includes the timing of the receipt of the interest payments.
3. This raises an even more intriguing question about the principal repayment schedule.  If interest is being deferred in PIK securities, it would seem the company has a weak cashflow.  Logically, that would seem to imply that principal repayments might also be paid in PIKs as well.  I still haven't seen a detailed discussion of the amortization schedule.    
4. The unsecured creditors represent US$14.2 billion out of the US$24.8 billion in debt - or roughly 57%.  If they as a group are unhappy, DW has an issue.

What's also a bit puzzling is that with a seasoned chap like Aidan on DW's Team, there should be little surprise in Dubai that there is some criticism now.  The initial euphoria was based on a few big picture headlines - key details were missing from the announcement - the exact tenors, the interest rate, the repayment schedule.  Perhaps, what was interpreted as joy was just  relief that DW was not asking for an explicit "haircut".  But as always the devil is in the details.  As the details are released, there is bound to be some negative reaction.  And if there is still a lack of clarity in the details, then the situation is even more complicated.  It seems from this FT article that perhaps this is the case.

As well, since the Nakheel Sukuk holders are going to waltz home free - not troubled in the least by the rescheduling, only the most optimistic person could believe that this would not cause an objection or two.  While arguments may be made that this was necessary because it will be impossible to get the certificateholders to agree, regular lenders (especially those feeling potential cold winds against their unprotected backsides) have to be expected to protest.  

I posted long ago that despite wishes for a speedy conclusion that this process was going to take a while.   

The next stage is for DW to address concerns.  And perhaps tweak some terms.

The news about Dubai Holdings is going to complicate things particularly as DW's restructuring is dependent on a non inconsiderable cash infusion from the Emirate.  And having set a template with DW, the Emirate will find it difficult to negotiate a less favorable deal for Dubai Holding, if indeed a restructuring is in the cards there.

Manifest Absurdity: To Each His Own Dire Threat: Flag Burning or Sorcery

Copyright Sean McGrath from Quispamsis, NB, Canada

Creative Commons Attribution 2.0 Generic license.

Bahrain has made its choice between two clear and manifest dangers to its way of life.  And, if I may venture an opinion, it seems to me that the Legislature has clearly chosen "wisely".

No doubt after careful weighing of the relative dangers to Bahrain, the legislature gave this issue the high priority they thought it deserved.    Next session perhaps they can begin the process for a constitutional amendment on flag burning.  One never knows if a witch or wizard might burn a national flag.

Since Bahrain long ago adopted the concept of a single regulator for its financial sector, I guess the Central Bank of Bahrain will be in charge of policing the banks where as far as I can tell the majority of sorcery on the Island takes place.  

There are quite some wizards who are capable of  turning lead into gold as they create impressive financial statements and flashy press releases from thin air.  Eye of newt, blood of a bat,  an honest man's tear, a dash of balderdash and one might just conjure up a proven business model.  There is also a highly effective potion that causes the appearance of demonstrable confidence of one's bankers and clients, in one's business plan and future though I'm keeping that secret for now as I don't want to find myself on the wrong end of this law.  I will, however, risk disclosing one key ingredient - two "non core" assets.    

How will the CBB enforce the new law?

Will it be a series of additions to existing Modules in the CBB's quite excellent Rulebook?  A specific penalty for sorcery added to Module PD ("Public Disclosure").  Another for Module BC (Business Conduct).  And so on.

Or an entirely new Module WS (Witchcraft and Sorcery)?

Just for the official record in the Kingdom, I ask this question because I'm not (definitely not) a wizard and so cannot predict the future.  Nor do I own a crystal ball.

AlGosaibi v Maan AlSanea - The Importance of Singularis

Sunday's AlSeyassah Newspaper from Kuwait has published what it claims is new information on the above case from letters that the Central Bank of Bahrain ("CBB") Governor HE Rashid al Maraj sent to the legal authorities in Bahrain as well as some additional information about the recent Cayman Islands Court ruling against Mr. AlSanea regarding what the Court deemed were violations of Order to freeze his assets.

The latter is the most important bit of "news" in the article.  Most press reports have focused on the US$60 million payment and in passing noted the attempt to liquidate Singularis, one of the companies in the Saad Group.  Not much more is said about Singularis.  The hot topic is the US$60 million.  AlSeyassah believes the US$60 million is relative "chicken feed".

According to AlSeyassah's "legal source", Singularis holds Mr. Al Sanea's 3% stake in HSBC which is worth roughly US$5.39 billion as of the close of business 29 March 2010.  This source asserts that the attempt to liquidate Singularis was an attempt to get the HSBC shares outside of the freeze order.   Singularis being one of the companies specifically named in the Caymans Freeze Order.

The Court has ordered the return of the US$ 60 million within 30 days.  More importantly, its action supposedly will put the stop on the "thawing" of the HSBC shares ensuring they remain under the Cayman Freeze Order.

What else does the AlSeyassah article state? 

As usual my comments appear in blue italics and preceded by AA.

1. First, the documents that AlSeyassah based its article upon date from approximately one year ago.  AA:  Given that time period, there may have been a refinement of earlier findings and charges as  further investigation took place and/or new data came to light. That might possibly even include a retraction or reduction of earlier charges. Or additional charges.  As is clear from other press reports, the investigative process in Bahrain continues with respect to both Awal and TIBC.  Once the process is complete, then the Kingdom's legal authorities will decide what cases, if any, to file.
2. HE Rashid Al Maraj, Governor of the Central Bank,  referred violations of law at Awal Bank to the Attorney General of Bahrain, Mr. AlSayyid Abdul Rahman Al Sayyid, and at The International Banking Corporation ("TIBC") to the Public Prosecutor, Dr. Ali Bin Fadl AlBuAynayn,  and recommended that certain individuals be prohibited from leaving the Kingdom.  I've posted on this before and here is the link.
3. With respect to Awal Bank, the preliminary results (AA:  note the word "preliminary") disclosed numerous violations ( مخالفات = as in violation of a law or rule) of CBB rules and improper actions  (تجاوزات = improprieties or exceeding boundaries) in the management of the Bank that constitute a form of deception, abuse of trust, embezzlement, and money laundering.  
4. Continuing on Awal Bank, that the management of the bank created the appearance of profits through fraud and forgery.  The bank did not apply the regulations for anti money laundering which led to the suspicion of the bank's involvement in these operations.   AA:  You'll recall that the Hibis Report submitted in the New York Supreme Court Case had Evidence Case File #3 redacted, though not completely.  Page 26 of the Report was labeled money laundering.  And if you don't, here's the link.  Allegations of money laundering may conjure up images of narcotraficantes with suitcases full of currency.  But one can launder money in one's possession just as one can launder one's own clothes. 
5. With respect to TIBC, the report is free of mention of the AlGosaibi Family.  Rather it states that the management of TIBC co-operated with an external party in the  completion of most of the operations which the bank engaged and from which this external party benefited against the interests of the bank. According to AlSeyassah, HE AlMaraj's letter names Mr. AlSanea as that external party saying he was in direct contact with TIBC's management for years to effect these schemes.
6. Continuing on TIBC, that the management conspired to take loans and deposits from local and international banks to fund a loan portfolio to imaginary and paper individuals and companies.  And that loan files were forged to give the appearance that the loans were valid.
7. That Mr. AlMaraj's letter stated that the violations at The International Banking Corporation included the forging of the signatures of the owners (AlGosaibi) in some documents.

And as usual some caveats on what was just presented.

1. First, not everything one reads in the press or on the Internet is true. 
2. Second, an allegation is just that, an allegation.  It is proof of nothing.  Even an allegation by an official government body or officer of a government.
3. Third, an official indictment for a crime is also not equal to a conviction.  It is not a proof of guilt.  It is merely the start of a process which hopefully leads to the determination of the facts of guilt or innocence.
4. Fourth, the Court makes that determination.  As of today, I'm not aware that any court has made any ruling.
5. Fifth, Mr. AlSanea and his counsel are on the record as vigorously contesting the allegations made against him and his companies.

More Details on Damas "Standstill"

As per The National, the standstill was signed with the six banks that comprise the informal Steering Committee, Standard Chartered, HSBC, Emirates NBD, Mashreqbank, Gulf International Bank and ABN AMRO.  They reportedly account for more than 50% of Damas' debt.

National Bank of Kuwait Gets Central Bank "OK" to Increase Stake in Boubyan to 60%

The National Bank of Kuwait announced on the KSE today that it had received Central Bank of Kuwait approval to increase its stake in Boubyan Bank to up to 60%.  Currently, NBK owns 39.99% of Boubyan.

The Central Bank of Kuwait's approval is for purchases during the period 22 March 2010 through 20 May 2010.

NBK has been pursuing a majority in BB for some time now.  Earlier it had tried to purchase the stake held by Commercial Bank of Kuwait of some 19.99% which CBK had acquired by taking the collateral posted by The Investment Dar for a defaulted repo.  If the lawsuits raised by TID and KFH have been resolved, then CBK may be the source of NBK's new shares.

Announcement from KSE (Arabic only) below.

[10:47:38]  ِ.(الوطني)يحصل على موافقةالبنك المركزي لشراء حصة بحد أقصى60% في بنك بوبيان
يعلن سوق الكويت للأوراق المالية أنه قد ورد إليه الأن من بنك الكويت الوطني
كتاب يفيد بأن بنك الكويت المركزي قد وافق على رغبة بنك الكويت الوطني في ‏
شراء حصة بحد أقصى 60% من رأس مال بنك بوبيان ، وان اجل سريان ‏
هذه الموافقة هو ثلاثة اشهر تبدا من تاريخ 22-03-2010 وتنتهي فى ‏
ِ20-05-2010 ، علما بان البنك يتملك حاليا نسبة 39,99% من اسهم بنك ‏
بوبيان .‏

Gulf Bank Derivatives Case - Client Countersues

You'll recall that in 2008, Gulf Bank lost some KD360 million largely because of losses on FX derivatives reportedly involving the Euro and taken for the account of one of its clients who refused to settle.  There were also rumors at the time that one of the clients in question was a related party.   

AlQabas reports that Gulf Bank's client who Gulf Bank had sued has lodged a countersuit against Gulf Bank and requested that a court expert be appointed to study the derivatives and value them.  According to AlQ this is part of the client's legal strategy to tie up the case in the courts for years.  The anticipation being that the expert's review will take years.   Presumably as well once the expert rules additional experts may be brought in to challenge his findings.  With suitable opportunity for the other side to respond.

The links in this post provide a bit of further background on this story.

Damas Signs Debt Standstill with Majority of Lenders

Damas announced today on NasdaqDubai that it had signed a standstill agreement with a majority of its lenders and was currently developing a restructuring plan which would be implemented at the end of the standstill period.  The length of the standstill period is not mentioned in the announcement.

Then taking a leaf from the Dr. Esam Janahi playbook, Damas then goes on to assert how this demonstrates "the confidence of the Company’s bank lenders in the strength of the underlying business model of Damas, the leading retail jewellery company in the Middle East".

Or then again it may just demonstrate the Company's bank lenders' experience in the backward local court system whose lightning quick procedures require an inordinate amount of time and result in abysmally low recovery rates.

And, yes, if you're wondering, a standstill agreement is only effective when 100% of the creditors have signed it as the TID experience has demonstrated.

Dubai World Restructuring - Banks Need Details Before Deciding to Accept

Sometimes I think that newspapers and bankers have a soft spot for Suq Al Mal.  How else to explain this article from The National.

And in particular these absolutely "brilliant" 'quotes.

The bank creditors of Dubai World will seek further details on the US$23.5 billion (Dh86.31bn) debt restructuring plan before deciding whether to accept.

While the banks’ initial response has been positive, they will ask this week for greater clarity on certain points, such as the interest rates that will be paid to the creditors of the Dubai Government-controlled conglomerate.

There is certainly something to be said for checking the details.  As I've posted before, the more useful employment of that skill is during the decision process as to whether to grant the original or loan or not. If underwriting is properly done, one can avoid many - but not all - later "disappointments" with one's loan or investment.

“We are hoping to learn more details this week as we still don’t know exactly what the offer is on the table,” said a banker, who asked to remain anonymous.

 AA certainly hopes that this unnamed banker's hope becomes a reality before his bank makes a decision.

Deutsche Bank v The International Banking Corporation

This post reviews documents submitted in the action commenced by Deutsche Bank against The International Banking Corporation in the Supreme Court of New York (Case Index # 601471/2009). This case has been stayed following TIBC's filing of a petition under Chapter 15 of Title 11. Chapter 15 provides for USA recognition of insolvency or reorganization legal proceedings in other countries.  When that recognition is given then all legal proceedings in the USA are stopped pending the outcome of the foreign case.

As before I recommend that you review the documents yourselves. You can do this by going to the NY Supreme Court website and using the above Case Index Number to search. As you progress from page to page, look for the button for e-filed documents. This earlier post has some instructions on how to navigate the NYSC website.

While this case has been stayed, it does provide a bit of additional information, though this is more just on the existence of the debt.

Here are DB's allegations:

1. On 6 April 2009, DB and TIBC entered into two equal forward US$/Sterling foreign exchange transactions.  DB was obligated to pay TIBC US$59,762,440 and TIBC to pay DB Sterling 40,000,000 value 8 May 2009. 
2. These were not "split" value date transactions. Both parties were to settle on the same day. So there is nothing unusual. These appear to be "garden variety" forwards. 
3. DB delivered on its side of the transaction by paying the funds to TIBC's account at HSBC New York. 
4. TIBC did not pay the Sterling DB.
   

DB is claiming a total of US$74,232,440. 

1. This is equal to the US$ side of the defaulted FX forward plus termination fees estimated at US$14,470,000. 
2. There isn't a detailed explanation as to how this latter amount was calculated. I presume it refers to DB's cost of closing out other forward FX transactions with TIBC and represents the difference between the contractual rate with TIBC and the market rate at closeout. 
3. Clearly, since TIBC has defaulted on the two 8 May settlements, DB has no desire to make additional payments since it believes (and probably rightly so) that TIBC would not honor its side of these transactions. 
4. The dealing relationship between the two banks is documented by an ISDA Master Agreement which gives either party the right to terminate any outstanding deals if the other to the agreement fails to perform. The Master Agreement also provides that the defaulting party must pay the "break" or "replacement" costs of outstanding deals which the other party cancels as a result of the default as well as any legal costs related to enforcement of the MA.
   

There's not a lot more to note here.

Cayman Islands Court Declares Maan AlSanea In Contempt

The Financial Times reports that a Cayman Islands Court has declared Mr. AlSanea in contempt for violating the US$9.2 billion asset freeze it imposed.

Two violations were cited:

1. Transfer of US$60 million to the Saad Specialist Hospital last July
2. Putting one of his companies, Singularis, into voluntary liquidation.

Mr. AlSanea offered the following defenses.

Re the SSH transfer:

1. He was not aware that the freezing order applied when he made the transfer
2. His net worth is US$12.4 billion and so the transfer of US$60 million has no material impact on the freeze.

Re Singularis:

1. He was merely following legal advice and did not know that placing the company into liquidation violated the order.

The Court apparently did not buy these arguments. Here's the FT's characterization of the Court's assessment.

The judgment said it was "clear that an order for imprisonment would be futile and in any event perhaps unjustified", but the court found that "specific breaches of its orders" had "amounted to contempt

In light of the Court's reaction, I think it is really unfortunate that the FT didn't provide a bit more on Mr. AlSanea's defense regarding the requirements of the freezing order.   He certainly deserves his day in Court - including the Court of Public Opinion.

I would like to know if Mr. Al Sanea's is asserting that:

1. The legal draftsmanship skills of the Cayman Islands' Court are so poor that the Order was unclear.
2. The Order was clear but the Court delayed in communicating it to Mr. Al Sanea and his counsel.
3. The Order was clear and promptly delivered to his counsel, but they failed to notify him in time, i.e. before he took these actions.
4. Or the Order was clear, delivered to his counsel promptly and they relayed it to him promptly with sound legal advice, but the chap in the mail room forgot to bring it to him in time.
5. Or the Order was clear, delivered to his counsel promptly, relayed to him promptly and delivered by  that mail room chap the same day, but his counsel misinterpreted the Court Order.  And thus gave him what turned out to be faulty legal advice.
6. Or the Order was clear, delivered to his counsel promptly, relayed to him promptly with sound legal advice, delivered the same day by the mail room chap, but that he  simply forgot.  This is perhaps the most tragic explanation of all:  senior manager syndrome.  Or "SMS" as it's known to corporate lawyers.  It's as pernicious as Alzheimers, though it appears to be work related, not genetic. 

I have seen the most senior levels of my home country government or senior executives at major multinational firms  forced by relentless questioning in Congress to admit the terrible toll their office has taken on them.  That is, they are under such pressure from the volume and highly stressful critical nature of their work that their memories are affected.  Not only can they not remember what was discussed at a meeting, they may not even recall the meeting took place.  They don't  appear to remember much of what they do or why they did it.  Entire days or issues disappear from recollection.  I recall seeing one Harvard JD holding the most senior legal position in my country being forced by heartless Congressman to reveal that he really couldn't remember much of anything.  A rather pathetic sight, though luckily, he apparently still knew his own name.  Perhaps a sign that there is a hope for reversal. 

What's even sadder is the lack of public concern or compassion.  During the entire health care reform debate, I did not hear a single politician - conservative or liberal - raise the plight of this group - many struck down by SMS in the prime of their careers.  I believe that Aristotle said something on how one could judge a civilization by how it treated a certain group. I'm sure this is the group he was thinking of.

BLOM Case Against Investment Dar Undermines Islamic Finance

You may recall reading this here on 5 March 2010.

Today my favorite financial newspaper, The Financial Times, ran an article entitled "Court concession raises Islamic finance risk".

I think I may have scooped the FT.

Mashreqbank v AlGosaibi - Motion by Mashreqbank to Consolidate Its Two Legal Cases

Mashreqbank's original legal strategy was to pursue two cases:  one against the partnership and a separate case against the heirs.

 

You'll recall earlier that earlier this month Judge Lowe ruled against Mashreqbank in its case against the heirs of Ahmad Hamad Al Gosaibi.  And if you don't remember this, here's the link to an earlier post.

Judge Lowe had stated that since Mashreqbank (a) had not joined the general partners to the suit against the partnership and (b) had not alleged  alleged that the partnership was insolvent or otherwise unable to pay its debts, it had no legal basis for pursuing a judicial order against AHAB's general partners.  

His ruling was "without prejudice" meaning that Mashreq's lawyers had the opportunity to attempt to remedy the legal shortcoming.

On 24 March Mashreq's lawyers, Cleary Gottlieb, filed a motion for consolidation of NYSC Case 601650/2009 (against AHAB) and 602171/2009 (against the general partners of AHAB).   If accepted this will apparently neatly resolve the legal issues cited in Judge Lowe's ruling.  The documents are filed at the NYSC website.  For Case 601650, it is Document  117.  For Case 601171, it's Document 47.

You'll find instructions on how to access the Supreme Court of New York's website in the earlier post linked above.

More Coverage of Hissa Hilal

This from The National Abu Dhabi.

Sort of breaks the Western stereotype about Muslim women.

I particularly like this quote.

Covering my face is not because I am afraid of people. We live in a tribal society and otherwise my husband, my brother will be criticised by other men,” she said.

“I know they love me and they support me. It’s a big sacrifice for them in such a society to let me go to the TV and talk to the media. I am hoping my daughters won’t have to cover their faces and they’ll live a better life.”

Sister Hissa nailed it.

The niqab is tribal taqlid from the Jahiliyya.

All posts on Hissa now have the label "Hissa Hilal". 

Hissa Hilal: Update from 25 March Final in Million's Poet

So how did Hissa do in yesterday's competition?

Here's Bader Asman's report on the Million's Poet website.   The article is worth a read as it gives some background on the competition, the judges' analysis of the poems, and some additional information, including a trip the contestants took to Abu Tinah Island - which Abu Dhabi is promoting as one of the wonders of the world..  

This show is fairly popular.   Imagine, if you can,  an "American Idol style show"  except in this one the contestants recite classical poetry.  Nabati poetry.  Here's a webpage of a rather prolific Nabati poet from the UAE with an explanation of the genre as well as some of his poems..

Some background on scoring.  The judges will award 60 points and the public's vote will be translated into another 40 points.  

The judge's points are awarded in two stages.  30 yesterday and 30 next week Wednesday at the final session when the winner will be announced.  Public voting continues until the end of next week's final program.

The five finalist poets will then be ranked according to their total scores with the first place winner receiving AED 5 million, the second place winner AED 4 million and so on.

Here are the results for Wednesday's program:

1. Hissa Hilal (Saudi Arabia) - 28 out of 30 points for her poem on the media.  She described it as a device which spreads both good and bad news, praised the "enlightened" press for battling censorship and evil, and commended those journalists who gave their lives to achieve these ends.
2. Sultan AlAsaymar (Kuwait) - 28 out of 30 for his poem on terrorism.  Reportedly the images were powerful and direct.  The terrorist is ready to act even if it means destroying the smile of a child.  The terrorist has a cancer of the mind and no real homeland. 
3. Fallah AlMoragi (Kuwait) - 27 out of 30 for his poem on the Arabian Gulf (peoples, history, geography).
4. Jazaa al Boqami (Saudi Arabia) - 26 out of 30 for his poem on women.  Woman, a magical creature who though she faces ignorance and oppression, does not lose her inner essence.
5. Nasser al Ajmi (Kuwait) - 26 out of 30 for his poem praising the bravery and loyalty of soldiers defending their country. 

 At this point, Hissa is in the lead though I think the outcome is still far from certain. 

Next week Wednesday each of the five remaining contestants is to recite a poem they believe is the most beautiful written (outside of this contest).  The only constraint is that it cannot exceed 20 "bayts" (verses).  It can be an old poem or a new poem.  And apparently must be by someone other than the contestant.

The winner of the previous year's contest (Million's Poet 2009) has the right to defend his title as Million's Poet against this year's winner.  Ziyad Bin Hijab Bin Nahayt from Saudi Arabia who won the honors in 2009 has decided not to.  So one of the five contestants will be the Million's Poet for 2010.

All posts on Hissa now have the label "Hissa Hilal". 

Dubai World Debt Rescheduling Proposal: US$9.5 Bn Govt Cash & "100%" Repayment

DW has finally released its debt restructuring proposal.  The creditors have the details.  We have  somewhat less in the form of press releases and media commentary.

Here is the WAM press release.  And  Nakheel's announcement.  Here are accounts from  The National and Gulf News.

At this point, several key questions are unanswered.   Is there a margin on the financial creditors' debt?  What is the tenor of the maturity pushout? What are the principal and interest repayment terms?  

So what follows is a preliminary assessment.

Certainly, at first glance this looks less onerous that some of the earlier proposals which  were floating around in the media.  But in part that may have been the plan. Often creditors "float" harsh plans which are designed to frame the expectation of creditors.  Then the desired "final offer" can look quite good.   Also  a well timed leak or two is a way to informally test creditor and market reaction.  There's plausible deniability if the market reacts negatively, because a formal offer wasn't made.   And sometimes such reports are result from misinformed sources.

No doubt there was some of the former at play, though I suspect that the final offer was shaped by outside pressure.  Plenty has been applied particularly from the UK.  And so I suspect Dubai was "moved' off its  own plan to something more favorable to creditors.    

The first dramatic headline is about support from the Emirate - contrary to its earlier assertion that these were commercial companies and lenders had to look to the companies themselves for repayment.

Government of Dubai Support:  US$9.5 Billion in New Cash and US$10.1 Billion Debt to Equity Conversion  

1. Three introductory comments before we get into the details about DW and Nakheel.  
2. First, the funds are being sourced US$5.7 billion from those committed to by Abu Dhabi and US$3.8 billion from the Government of Dubai.  The Abu Dhabi portion is coming from the undrawn amounts on its earlier commitment.
3. Does this mean a wavering of support by Abu Dhabi for the restructuring?  After all it's not pledging new money.  I don't think so. In November when Abu Dhabi made its commitment, it did not disburse all the funds at once.  At that time I posted that it appeared Dubai had to justify future drawdowns to Abu Dhabi before the latter would fund.   If that interpretation is correct, then Abu Dhabi is committed to the rescheduling with roughly 60% of the new cash outlay.  Equally the Government of Dubai is putting significant new cash on the table now.  And,  unless Abu Dhabi forgives its previous loans, Dubai is obligated to repay Abu Dhabi for its financing, including this amount.
4. Second, the debt to equity conversion benefits creditors in two ways: cashflow preservation and balance sheet protection.  It reduces the debtor's cash outflow for interest and  principal, leaving more funds for the non governmental creditors.  It also provides an additional legal buffer  to absorb any decline in value of assets or investments held by the companies.
5. Third, given DW's past tendency to employ fuzzy math in its press releases, some of you out there might wonder if some of the numbers being bandied around this time are rock solid.  For example, does the equity conversion  of US$8.9 billion (mentioned in the WAM release) at the DW level also include the US$1.2 billion mentioned later with reference to Nakheel?  Or might  Dubai Inc inadvertently double counted again?  For this analysis, I've  assumed it is not.  That with Aidan in charge things are a bit more professional these days.      

Dubai World

1. New cash US$1.5 billion.
2. Conversion of existing US$8.9 billion of debt to equity.

Nakheel

1. US$8 billion for Nakheel 
2. The cash at Nakheel will be used to fund operations and settle certain liabilities.
3. While support is contingent upon reaching agreement with creditors, US$1.5 billion of the cash will be made available immediately to fund contractors building near term projects. More on that topic below.
4. Conversion of US$1.2 billion of government debt to equity.

Nakheel Debt Restructuring Proposal

Projects

1. It may seem a bit strange that Nakheel's press release on its restructuring gives emphasis to its projects by mentioning them first.  Why don't they lead with the proposal we're all interested in?  What happens to the creditors?  Good question.
2. Looking at Nakheel's 30 June 2009 financials, we get the answer.  Property Under Construction is some 77% of total assets.  Realization of this value is key to two things.  Nakheel's ability to pay its creditors.  Preservation of Nakheel as an ongoing business.  On the latter point, this is a restructuring not a liquidation.  Or at least that's what we're being told now.  Also the company already owes the contractors and suppliers for the work done to date.  Abandoning a  half finished project is a dead cash drag especially given the advance payments received from purchasers which would have to be refunded.  Completing as many projects as possible is therefore warranted as long as they don't result in a large cash loss.
3. Another good reason for this is on the liability side of the balance sheet.  Those AED27.9 billion (US$7.6 billion) in Advances represent client prepayments for purchases.  If the property isn't handed over, Nakheel owes the money back.  If clients lose hope that their villa is going to be built. they may walk away and stop paying their remaining commitments.  Nakheel then needs to replace that funding.  And if enough walk away a project may be uneconomical.  So it's a question of leverage.  Spend a dollar and save having to refund two or more.  Spend a dollar today and complete the project and get some additional cash.  Net net then the company is better off.  So then are its lenders.
4. The focus as you'd expect is on the near term projects.  Those projects further out are not of immediate concern in preventing a cash outflow.
5. And there is another reason to keep working:  the economy.  Continuation of these projects provides support for the entire economy in a period of stress.  The sudden stop of the property merry-go-round in Dubai is going to have some rather serious economic effects.  Better to mute them as much as possible.  And if Nakheel were to stop work, existing clients might decide to throw in the towel on their commitments.  Certainly, new clients would be hard to attract.

Offer to Clients 

1. As outlined above, complete the near term projects and give those clients updates on new completion dates.  The idea of the latter is probably to keep them "on the ranch" and reasonably quiet.  New handover dates will eliminate uncertainty.  A client might not like being pushed out but at least he's got a better idea of when his property will be ready.
2. Clients with projects further out are given options.  They can take a credit for what they've paid and  transfer it to a closer-in project.   A smart move.  This enables Nakheel to fill out those near term projects by shifting demand.  And, of course, if enough clients apply their existing payments to current projects, one can postpone, shrink or cancel future projects - as a response to "market demand" not its own financial condition.  If you're a client, do you wait for five more years for your project to be finished?  Or do you grab something being finished in the next 12 months? 
3. For those who don't want to wait or transfer, they can get their cash without interest after five years.  This is structured to give clients an incentive to either wait or take the transferable credit.  Assume that 5% is a fair rate for waiting.  This payment scheme results in a 22% discount.  Apply a 10% rate and you get a 38% discount.  Powerful incentives to take the alternative offers.

Offer to Trade Creditors and Suppliers

1. We still haven't gotten to the financial creditors yet.  Why?  Nahkeel needs these parties to continue its operations so they're mentioned next.  And showing that it is going to continue operations should have a positive effect on clients' belief that there purchases will actually be built and handed over.
2. What's on offer?  40% cash (based on agreed claims) and 60% (on estimated claims) in a publicly tradeable security at a "commercial interest rate".  Each creditor to receive up to an immediate AED500,000 cash payment or its full receivable.  Apparently, by number some 50% of contractors have amounts equal or less than this amount.  This will help out a lot of small businesses less able to cope with the terms being proposed.  Presumably, most or all of them are local companies - so another shot in the arm for the local economy.  And hopefully a way to prevent tipping these companies into distress and affecting local banks.
3. Let's dissect this a bit.  
4. Note the cash payment is on agreed claims.  If you look at Nakheel's 31 December 2008 financials, you'll see that there were some AED10.4 billion out of the AED28.6 billion in Accounts Payable and Accruals that represent billed but not yet agreed/certified claims.  While that was one year ago and there's been plenty of time to certify those claims, there is probably a significant amount of yet not agreed claims.  And some from 2009 work.  So the initial cash outlay has been muted.
5. 60% of estimated claims will be paid via a tradeable security.  Since it's tradeable, a contractor or supplier can cash out.  Of course, being tradeable does not guarantee there will be a market.  Or the price in that market, i.e., discount if any.  It does, however, make the transfer of a clear title (presumably unencumbered by any warranties for the services performed) a lot easier.  
6. The company is giving the contractor the benefit of the doubt that its yet unagreed claims will prove to be valid.   What's not clear is what happens with the unagreed claims on the cash payment.  If these are later accepted, I'm guessing that they become a new receivable from Nakheel.
7. It's also unclear what the term "commercial" interest rate means.   Does this mean a market rate of interest?  Or does it mean the sort of incentive terms that a contractor might give - which could include an element of discount from market rates?

Financial Creditors

1. Sukuk Holders get a preferential repayment:  100% of principal and periodic distribution/profit amounts ("interest") on scheduled maturity dates.  Two Sukuks.  Sukuk III AED 3.6 billion (US$981 million) due 13 May 2010.  Sukuk II US$750 million due 16 January 2011.  Presumably, being paid because it's thought too hard to get acceptance of any restructuring.  This may reflect the company's analysis of holders and which ones are likely to be hostile.  Looks like a victory for HF and distressed investors.  This is the best deal for financial creditors.
2. Secured creditors also to receive 100% of their principal and accrued interest.  And to keep their security.  Nothing remarkable here.  That's why lenders get security and register it to have priority over those who didn't.  Once they get it, they don't easily give it up - until they're repaid.  Unclear about the interest.  Does this mean at Libor/Eibor flat?  Or do the old margins stay intact? Is there a new margin?  I'm guessing (but note that word) there's no margin.  Existing facilities will be maintained and just extended or rolled over.  Two key points not disclosed:  What is the new maturity? And what are the terms of repayment of principal and interest?  These will determine the extent of the discount.  Some earlier musings on discounts via interest rate reductions.
3. Unsecured creditors a similar deal with respect to 100% receipt of principal and accrued interest/profit margin.  Note all such facilities will be rolled over into a new debt facility.  Since the structure is Ijara, I think this is necessary to keep Shari'ah boards happy that the facility  remains "Islamic". 

Great Moments in Democracy

I don't know whether to laugh or cry.
 

Gulf Finance House - Financial Delusions

GFH held its Ordinary General Shareholders' Meeting 24 March.  

Or as GFH described it: "successfully conducted and concluded its Annual General Meeting (AGM) and has secured its shareholders’ support and agreement to the Bank’s strategy to return to profitability."

There were some press reports that the shareholders' had not voted for the customary discharge of the board of directors for their conduct during 2009.  This is not correct.  Apparently, one shareholder refused to vote "yes" on this agenda item.  Under Bahraini Company Law, such a shareholder needs to ensure that his objection is formally recorded in the minutes for it to have legal standing.  Failure to do so means that later he cannot take any action against the Board.  Registering his objection provides him a theoretical legal "base" for any subsequent action he wishes to take in the courts or with regulators.   However, if only one shareholder has so objected, it's unlikely this will result in anything threatening to GFH.

One quote did catch my eye.  

The Gulf Daily News quoted Dr. Janahi on the difference between real and and what I guess he considers imaginary losses.

He said that while last year was particularly difficult across the globe, and particularly for GFH, the bank had in fact only suffered real losses of $72 million if you stripped out asset right downs.

Those who read GFH's 2009 Annual Report will recall that the net loss for 2009 was some US$728 million.   With a bit of financial engineering, Dr.Janahi has transformed this loss into just a mere US$ 72 million.

I thought I'd highlight this quote because there are a lot of people out there who think that non cash write downs of assets are losses.  And without the benefit of Dr. Janahi's theory of corporate finance these people may be needlessly suffering.

So you really didn't take a loss if you took a non cash charge on:

1. That Lehman Brothers or Bear Stearns stock you bought.
2. Those "AAA" related mortgage backed securities you bought.  This will I believe be particularly comforting to shareholders of GIB and ABC.
3. That apartment or house you bought which isn't worth what you paid for it.
4. Or those GFH shares you bought for KD1.000 in February 2008 which now trade at KD0.068.  (That's right 6.8% of what your cash outlay was).  Especially these.  Under Dr. Janahi's new corporate finance theory, you really haven't lost at all because the decline in value was non cash.

At least that's what the good Doctor would have you believe.   It's an application to matters financial of the theory that if you don't recognize a problem it doesn't exist. 

Not sure I'd buy any investments from a firm that believes this.