International Investment Group Kuwait - Additional Background

Given the news item about IIG's problems, let's take a closer look at IIG.

In case it wasn't clear from the details in my previous post, IIG is a finance company in Kuwait that operates "in accordance with Islamic Shari'ah principles".   To quote further from its website:

At IIG, we firmly believe that Shari'ah principles and transparent corporate governance is essential to building and maintaining public trust. We at, IIG are guided by our values to maintain the highest level of integrity, treat everyone with dignity and respect, focus on our customers and demonstrate excellence in all we do.

And I think that quote quite nicely sets the stage for what follows.

Let's start with the Sukuk.  It is listed on NasdaqDubai where you can find a variety of documents including the Offering Circular.

A few details on the US$200 million sukuk:

1. Maturity 10 July 2012.
2. Quarterly Periodic Distribution Amounts (every calendar quarter on the 10th) at 6.75 per cent per annum.
3. Mudarabah structure.
4. Principal repayment can be either in cash or IIG shares.  5,754.25 shares per US$10,000 of face value or approximately US$1.73 per share.  IIG currently trades at 44 Kuwaiti fils per share, roughly US$0.15.
5. As disclosed in IIG's 2008 annual report (the last issued), the sukuk is secured by  (a) available for sale investments (approximately KD0.4 million out of the total portfolio of KD17.5 million), composed predominantly of  unquoted shares, and (b) investments in affiliates (approximately KD54.3 million out the total portfolio of roughly KD76.6 million).
6. Kuwait Financial Centre ("Markaz") acts as security agent.
7. In the event that IIG Funding doesn't pay back, the certificateholders can call upon IIG to purchase the certificates at their nominal value plus "interest".  If IIG fails to pay, then the certificateholders can pursue the collateral through the Trustsee/Delegate.
8. Typical Dissolution Events ("Events of Default").
9. Upon the occurrence of a Dissolution Event, an early termination can be triggered by the positive vote of 25% of the certificateholders.  This accelerates the maturity of the sukuk.
10. Certificateholders have an individual right to "put" their certificates to the obligor (Section 6.5 a).  The voluntary put date is 10 July 2010.  An investor with a minimum of US$10 million can put the his certificates to IIG Funding for redemption.  So if one is an investor who wants to establish a legal right against IIG as a direct creditor but can't persuade other creditors to vote for an Early Dissolution, this could be the way out.  Of course, as noted above, the investor needs to have a minimum of US$10 million to tender.  Failure by IIG Funding to pay the put amounts would appear to trigger another Dissolution Event so certificateholders would get another vote.  The Delegate (Deutsche Bank) also has the right to take action without a vote, since the Trustee,  IIG Funding, has delegated its powers to do so to DB.

A few other things from the Offering Memorandum.

From Page 100  A Verbatim Quote on Shareholding

"IIG has been a publicly listed company since November 1997. The table below sets out information in relation to holdings of 2 per cent. or more in IIG’s shares as at 1 May 2007:

Shareholder	# of Shares	Percentage
Kuwait Clearing Company(1)	37,953,500	11.93%
Al Tawfeeq Company for  Investment Funds Ltd(3)	23,745,200	7.75%
IIG – portfolio holdings(2)	18,745,845	5.89%
Arab Banking Corporation (B.S.C.)	18,686,119	5.87%
IIG(4)	14,616,533	4.59%
Gulf Monetary Group	14,302,800	4.50%
Al Madar Finance & Investment Co.	11,721,250	3.86%
Grand (Real Estate)	7,370,680	2.32%

Notes:

(1) This company acts as a nominee for shares held on margin accounts to facilitate forward trading.

(2) These are shares held by IIG as portfolio investments for third parties, see ‘‘Businesses – Asset management’’.

(3) This company is part of the Al-Barakah Group in Saudi Arabia which was one of IIG’s founding  shareholders. IIG’s Vice Chairman also holds board and management positions with companies in this group.

(4) These are treasury shares. IIG is permitted to hold up to 10 per cent. of its paid up capital as treasury shares."

AA;  IIG owns 17.54% of Grand.

As of today, IIG lists the following as major shareholders as per the KSE.

1. Arab Banking Corporation 5.63%
2. AlBaraka Company for Development and Investment, 5.21%
3. Gulf Monetary Group Bahrain 8.2%  (Interestingly, on the BSE website it's noted that IIG owns 50.12% of GMG.  Investors Bank with 27.66% is the only other major shareholder shown).

Turning to  IIG's 2008 annual report (2009 is not yet released):

1. I didn't see IIG's investment in Gulf Monetary Group mentioned  in the 2008 financials so this must be a 2009 or 2010 event.
2. The term "related party" is used more frequently in IIG's annual report than the word "interesting" is used in this blog.   And that's not only interesting but also quite a record.  As per Note 22, some 38% of total assets are with related parties, including substantially all of the company's liquidity.  Note 6 states that IIG held KD71.2 million of collateral against the KD34.5 million in wakala and  murabaha payables. to related parties.  The nature of the collateral is not described.  As Note 22 assures, all related party transactions are approved by the shareholders at the annual general meeting.  Unclear if this is a retroactive approval.
3. There seems to be a significant amount of cross shareholding between IIG and its investments and other related parties. Grand, Gulf Monetary Group,  
4. One would expect no less in Kuwait, I suppose.  And equally one might make the argument that when you've got good business partners, whom you know and trust well, it's just natural to do more business with them.  And the same with investments.