And Now for Something Completely Different - The Financial Times

 

AA at His Rona Rig
Sufficiently Socially Distant so no Mask Required

If you’re one of the select (few) readers of this blog, what you usually find here are posts that focus on the negative. 

Misrepresentation of financial statements, questionable business strategies, other frauds and fakes, financial and economic fairy tales and the like.

That certainly is a “field” offering multiple opportunities to comment.

As the picture above indicates, today it is time for something completely different.

Some kudos to The Financial Times and the no doubt underpaid journalists who work there.

A bit of context.

Overall journalism ain’t what it used to be. 

And since it was never perfect, that’s quite a disappointing development.

Some basic “have to’s” are often missing. 

A breathless review of an exhibition that omits what in the past would have been basic facts: where, when, cost 

Other sloppiness that misses the "meat" of the story.

More seriously is the substitution of mindless partisanship for reporting. The intrusion of the editorial page into the news columns.

The FT is welcome respite from these two frequent lapses.

Some examples to make the case: NMC UAE, Wirecard, H20.

First, there is the uncovering of the basic story. 

Second the pursuit of the story despite pressure. 

Dan McCrum’s experience on the Wirecard story is instructive – working from a windowless office at FT central on an air-gapped PC. 

It is not the only case – NMC is another -- where external pressures were ignored.

Third rigorous smart in-depth analysis.

The report doesn’t stop at the surface of the story but goes into detail. 

It seems that often the chips are allowed to fall where they should. 

Did a “hero” in the Wirecard case have a less “heroic” role in related case in Mauritius? Dan McCrum and Olaf Storbeck report it.

Or BondHack and Cynthia O’Murchu digging through filings at EMCR and discovering that NMC had pledged assets (future credit card A/R). 

Something apparently unknown to folks who might be presumed to have a more serious interest in this disclosure.

“Folks” like equity investors or providers of funds -- other than ADCB.

Fourth, a global network that allows input from journalists around the globe to round out the story with local insights. 

Simeon Kerr weighing in on Wirecard from the UAE.

Is the FT perfect?

No, but it’s very good.

Disclosures:

1. No shareholding in companies related to FT.
2. No compensation for this article.

Adieu Caracalla

Ami, entends-tu le vol noir des corbeaux sur nos plaines?

Ami, entends-tu les cris sourds du pays qu'on enchaîne?

Ohé, partisans, ouvriers et paysans, c'est l'alarme.

Ce soir l'ennemi connaîtra le prix du sang et les larmes.

 

Creditor on Creditor Violence

Annual Leveraged Loan Investors Conference

Over the millennia our ancestors have passed down important life lessons to us in the forms of proverbs and other sayings.

Sometimes the author’s name is known. Most often not.

“Measure twice cut once”. Or in one country measure seven times before cutting.

“Don’t run with scissors” (ascribed, I believe, to Plato by Aristotle).

“Tie your camel first, then trust in God. (اعقلها وتوكّل)” ascribed to the Prophet Muhammad (SAWS) by Anas Ibn Malik via Al-Tirmidhi. (2517)

A recent article by Alicia McElhaney in Institutional Investor under the above title reminded me these and other similar sayings.

She describes how some members of leveraged loan syndicates are suing other syndicate members charging that when the obligor became distressed those lenders converted their “old” loans (those under the syndicate agreement) to “new” loans (outside the syndicate). 

In the process making the old loans subordinate to the new ones.

What those lenders did was take advantage of apparent deficiencies in the loan agreements.

AA finds it hard to have much sympathy for lenders stupid enough to sign syndicated loan agreements with inadequate protective covenants.

In the case at hand failing to insist that the loan agreement contain what were once standard covenants requiring:

1. 100% lender agreement to allow material changes to the loan conditions (rate, repayment, maturity, collateral)
2. pro-rata sharing of any repayments received by one or more syndicate member among all syndicate creditors 
3. limitations on market purchases of debt, along with a careful definition of what constitutes a “market purchase” etc.

While not the case here, this failure to “tie one’s camel” is similar to covenant lite loans that impose no real controls on the borrower. That is, no real triggers for creditors to call a default and accelerate the loan.

Both are “sins” in every kind of loan.

But more so for much riskier leveraged loans.

This asset class is supposedly where sophisticated investors—those able to analyze and bear the risks--”play”.

One might forgive a retail investor on the Robin Hood platform a “wise” investment in Tesla as a rookie mistake.

But “sophisticated” institutional investors with access to high-priced “elite strike force” legal teams?

I think not.

This is yet another cautionary tale--like that of Golden Belt Sukuk, Bernie Madoff, Abraaj, Wirecard, etc--for those who cling to unfounded myths about the innate wisdom of markets.

Kamkars - Rubayyat // کامکاران // رباعيات عمر الخيام

 

GFH Bahrain - Less to 3Q2020 Reported Income than Meets the Eye

For the first nine months of 2020, GFH reported net income of roughly USD 30.3 million down roughly 50% from the comparable period last year.

That’s not surprising. COVID-19 is casting a pall over many firms’ financial results.

But, neither is the full story.

That’s why one has to read the entire financial report and not just the Income Statement.

By my calculation the true economic performance of GFH over the period was a loss of roughly USD 66 million.PPA “swing” of some USD 96 million from the reported number!

Where does AA’s performance number come from?

The Consolidated Statement of Changes in Owners’ Equity page 4 in GFH’s Third Quarter 2020 interim financials.

The Retained Earnings column is the appropriate locus of focus for our attention.

Why?

Because it’s where economic gains and losses that are not required to be included in the Income Statement appear.

Despite their being excluded from the Income Statement, they are as real a loss as the charges that appear in the Income Statement. And, at times, gains are recorded here that are not included in the Income Statement.

To be very clear there is nothing inherently wrong with these entries.

Equally at times company management may use the discretion allowed under accounting principles to shift a “loss” from the Income Statement to the Statement of Changes in Shareholders’ Equity in order to present a “better” picture of performance.

Motives might be the desire to pay dividends, particularly for a regulated firm like a bank. Management bonus. Share price.

That’s why looking a comprehensive income or loss over a period is a better measure of the firm’s performance. 

Let’s review the pertinent charges to Retained Earnings.

There are three significant “losses” disclosed here.

First up is a USD 59.9 million charge arising from GFH’s underwriting of the entire BD 72 million (equivalent to USD 191 million) AT1 capital increase at Khaleeji Commercial bank. Note 1 on page 9 contains a detailed explanation if you’re interested.  GFH's carrying value of equity in KHCB is based on its share in the net assets of KHCB.  Not the purchase price.     

Next USD 13.9 million arising from “modification of terms” of financiing GFH has provided. That is, an easement of repayment terms on the debtor which decreases the amount GFH will ultimately receive (assuming the debtor pays) and thus the value of the related asset. Think of this as the recognition of a likely loss on the related financing.

Following that USD 22 million which represents the difference between the cost of Treasury Shares GFH sold (USD 108.7 million) and the amount it received (USD 86.7 million).

I’ve heard of “buy low sell high”, but not the opposite. Perhaps, an alternative investment strategy?

These transactions result from what GFH calls “market making” and AA calls a failed attempt to prop up its share price.

Not much evidence of a positive prop for the price of GFH’s shares. They began the year at USD 0.23 per share and were at USD 16.0 as of end of 3Q. As of 16 November trading at USD 14.9.

Of course, COVID has depressed markets.

But a look at previous posts analyzing this activity over several years suggest that GFH shareholders receive scant benefit from these “market making” activities.  

You'll find these using the search tool on the right hand side of the page and the words "treasury shares".

As noted above, if we adjust GFH’s reported Net Income for these three items, GFH had an economic loss for the period of some USD 66 million.