International Investment Group: Draft 2009 Financials KD 36.6 Million Loss

IIG Funding Limited announced on Nasdaq Dubai this morning that the Central Bank of Kuwait had accepted IIG's 2009 financial statements, though it didn't post a copy.  I didn't see the financials at the KSE but over at the DFM there's a copy - with some of the notes provided.  Also at the BSE but without the notes.

IIG advised the Deloitte is preparing an English language version.  AA certainly hopes with a larger type than in the Arabic extracts provided so far.

If like mine your microscope is in the shop for it annual servicing, you'll  have  to join me in squinting as we review the DFM material.

Accounting/Legal/Regulatory Matters

1. No Audit Opinion:  Due to a variety of factors (including a concern over the "Going Concern" assumption), IIG's auditors have decided not to express an opinion on the financials.
2. CCL Article 171:  IIG has accumulated losses which exceed 75% of its legal capital.  It has called a shareholders' meeting to approve a plan to eliminate some KD40.7 million in accumulated losses by (a) reducing legal capital some KD25.5 million (from KD45.7 million to KD20.2 million) and  (b) using share premium (KD4.3 million) and reserves totaling KD12.1 million).  See Note 22.
3. Violation of Limit on Related Party Transactions:  As its auditors' note, IIG is in violation of the Central Bank of Kuwait's limit on exposure to related parties.  I presume this breach resulted from the collapse in IIG's capital from KD64.5 million to KD23.4 million and not from any new extensions of credit. 

As we continually hear on this blog, debts are settled with cash.  So why the initial focus on non cash matters?  Because these "events" are likely to further sap confidence in IIG.  That will have a direct impact on  the attitude of various market participants towards the Company's future.   And IIG needs all the goodwill and forbearance it can muster.

But in the final analysis cash is king.  A pocket full of money can buy a lot of goodwill and burnish the most tarnished of reputations.

So let's turn to the financials.  We'll begin with the balance sheet because repayment is unlikely to come from operating cashflow.  Rather asset realisation (sales) are the most likely (theoretical) source of the cash necessary  to reduce debt.  I'd note that all that follows is preliminary because we don't have a legible copy of the Company's full 2009 audited annual report.

Balance Sheet

1. More 50% of the Company's assets are with related parties.  And are not only in "Investments in Associates" but as well Receivables and Murabaha and Wakala Transactions (which should be a source of liquidity IIG but apparently isn't) and land acquired from an affiliate.  That can't be particularly encouraging. 
2. Investments in Associates (KD47.3 million out of KD107.1 million in total assets) are carried on the equity method (original cost plus share of net income).  Over the past two fiscal years IIG has recognized income statement losses of some KD32.6 million - which like the original profits declared were "paper" entries only.  If there are more "profits" in these firms, there may be more "air" to let out of IIG's balloon. 
3. The Murabaha and Wakala transactions are secured by collateral.  In 2008 it was worth KD71.2 million.  As of FYE 2009, it's valued at KD44.2 million.  Presumably a decline in market value.  Another perhaps disturbing trend.  And since related and other parties who gave the collateral are no doubt suffering from liquidity problems of their own, it would seem to make sense for them to liquidate the collateral and pay off their dues to IIG leaving themselves roughly half or more of the KD44.2 million.   Since that's not happened, the value and liquidity of this collateral has to be questioned.
4. And finally there's the Egyptian real estate purchase (from a related party of course) for KD10.5 million in Other Assets and Real Estate.  I can't read all of Note 21.2 but it seems the total transaction was for KD13.4 million.  IIG got the Egyptian land  (KD10.1 million) and shares worth KD3.3 million in exchange for shares in an affiliate worth KD4 million and non cash debt "settlements" of some KD9.4 million.  No doubt some very fine assets changed hands here.
5. Most of and perhaps all of the above carried on a "cost less impairment basis".
6. Turning to liabilities, there are some KD83.6 million - no question about their value.  Equity is at KD23.4 million.  If the ultimate value of assets turns out to be lower by more than 22% then creditors won't get back 100% on the dollar. 

 Income Statement

1. A glance at IIG's income statement shows that most of the income (or losses) are paper items not cashflow.  Share in earnings (for the past two years losses) of affiliates.
2. For 2009 operating results were a loss of KD15 million versus KD6.6 million in 2008.  A major driver was increased (equity method) losses from affiliates which rose to KD21.2 million from KD11.4 million the year before.
3. Operating expenses were KD21.6 million, KD6.8 million over 2008 due largely to provisions of KD6 million.
4. Net loss was KD36.6 million versus KD21.5 million the year earlier.
5. Comprehensive Income was a KD41.2 million loss resulting from KD4.5 million in fair value changes not passing through the Income Statement.

Cashflow Statement

1. None included.  
2. Perhaps there was no cashflow for 2009?  More likely IIG forgot to include.

It's hard even for an optimistic fellow like AA to take too much comfort from these financials.  With all the related party transactions, one has to question the real value of assets.  And the very real prospect for an accelerated death spiral if there is an attempt to undo the daisy chain. On top of that is the general lack of liquidity in Kuwait.