Gulf Holding KSC (Closed) – Financial and Legal Problems – Part 1

He's Got A Dossier Too.  That's Why He's Smiling.

As the “Part 1” above indicates, I have a lot of material to cover. 

The principal sources for this post are the FY 2017 AGM and FY 2016 AGM packages (available only in Arabic).  If these links don’t work, go to the investors relations page at www.gfholding.com.  

While this dossier makes lamentable reading indeed, the first thing to note is that it reflects the state of the company prior to GFH’s efforts to right the situation at GH sufficiently to minimize risk to itself  of acquiring the Villamar Sukuk and increasing its shareholding above 50% in GH. Clearly, if GFH had not been successful in its efforts, it would be foolhardy to take these steps.  

When discussing matters financial, where better to begin than with a review of financials?  

The FY 2017 AGM package includes a complete 2017 annual report for GH in Arabic.  AA has transcribed the information into the tables below following the format in the Arabic version and provided USD equivalents. 

Note the financials are unaudited because the local member of Ernst and Young (Al Aiban Al Osaimi and Partners) the auditor refused to give an opinion which it also did for the 2016 annual financials.

Gulf Holdings Unaudited Financial Statements
Assets - Amounts in Millions
	KWD			USD
ASSETS	2017	2016		2017	2016
Non-Current Assets
Real Estate	14.5	12.9		$48.1	$42.8
RE Development	131	123		$433.8	$408.3
Other LT Assets	0.0	1.4		$0.0	$4.6
Total LT Assets	145.4	137.5		$481.9	$455.7
Current Assets
Invest Held for Sale	0.0	0.1		$0.0	$0.3
Other Assets	1.8	1.8		$6.0	$6.0
Cash and Banks	0.5	0.0		$1.7	$0.0
Total Current Assets	2.3	1.9		$7.6	$6.3
TOTAL ASSETS	147.7	139.4		$489.5	$462.0

Source:  GH FY 2017 AGM Package.

1. No real liquidity. 
2. Current Assets are less than 2% of total assets. 
3. Almost no cash. 
4. Over 99% of Other Assets are advance payments to contractors and consultants.  No real liquidity there.

Gulf Holdings Unaudited Financial Statements
Liabilities and Equity - Amounts in Millions
LIABILITIES	2017	2016		2017	2016
Non Current Liabilities
Work in Progress	0.2	0.0		$0.7	$0.0
Sukuk (LT Portion)	58.1	62.1		$192.5	$205.8
Customer Advances	27.1	3.1		$89.8	$10.3
Accrued Expenses  Other Payables	4.8	11.6		$15.9	$38.4
Leaving Indemnity	0.0	0.0		$0.0	$0.0
Total NC Liabilities	90.2	76.8		$298.9	$254.5
Current Liabilities
Due to Related Party	3.0	2.8		$9.9	$9.3
Sukuk (Current Portion)	3.0	1.5		$9.9	$5.0
Accounts Payable	12.9	11.2		$42.8	$37.1
Customer Advances	13.5	18.4		$44.7	$61.0
Accrued Expenses Other Payables	3.0	6.5		$9.9	$21.5
Total Current Liabilities	35.4	40.4		$117.3	$133.9
TOTAL LIABILITIES	125.6	117.2		$416.2	$388.4
EQUITY
Paid in Capital	84.7	84.7		$280.7	$280.7
Reserves	6.7	7.1		$22.2	$23.5
Accumulated Losses	-69.3	-69.6		($229.7)	($230.7)
Shareholders’ Equity	22.1	22.2		$73.2	$73.6
TOTAL LIAB & EQUITY	147.7	139.4		$489.5	$462.0

Source:  GH FY 2017 AGM Package

1. As of FYE 2017, GH has “lost” roughly 82% of its paid in capital.  As is common in the GCC, local law requires the company to take action.  Options are: raise capital, capitalize losses by reducing paid in capital, or wind up the firm.  
2. Current Liabilities dwarf Current Assets. 
3. Roughly 92% of the 2017 Due to Related Parties is due to GFH.  
4. The 2008 Villamar Sukuk (original maturity 2013) was restructured 13 December 2016 (effective 22 March 2017 after finalization of documentation) with the following terms: 
5. Extend maturity to 7 May 2022. 
6. Capitalize KD 5.1 million in unpaid interest (1 May 2008 through 13 May 2013) in the principal of the sukuk.  
7. Commence periodic interest payments starting from 30 June 2018.  I didn’t see a direct statement that interest was not due between 13 May 2013 and 30 June 2018.  But there is recovery of interest paid on the sukuk for  KD6.6 million  in FY 2016 (note 16) which suggests this might be the case.  
8. 1% margin plus 6 month Libor but in any event total rate not to exceed 1.5%.  
9. The notes describe two USD 5 million payments to be made as part of the restructuring.  GH made the first but missed the second due 31 December 2017. The Sukuk holders agreed to an extension while further negotiations took place which appear to have involved GFH.  
10. Villamar Sukuk was structured as a musharakah.  There has been debate if it actually was in conformity with Shari’ah because there are no fixed payments in a musharakah.  Investors in the sukuk share in profit and loss.  The first is from a scholar in Jeddah.  The second from two scholars in Malaysia.  Note that at the time VS was issued this was a common structure until Shaykh Muhammad Taqi Usmani issued his famous opinion.  
11. I have not prepared income statements from the material in the AGM package because income is miniscule.  When an income statement opens with a one line “Other Income” and then goes directly to expenses, you don’t need a CPA to figure out revenue streams are limited.  

Creating income statements is left as an exercise for the student. 

As well those interested may use the 2016 AGM package to create FY 2015 annual financials for GH. 

All in all a dismal picture.   

But this was not the end of GH’s woes. 

Post 2 takes a look at the auditors’ refusal to provide an opinion on the financials as well as legal and other problems that the company faced.