Gulf Finance House - 1H10 Financials: Reports of a Turnaround Greatly Exaggerated

On Friday I was quite excited to see that GFH had posted its 1H10 financials and press release thereon.  That is until I printed out the 2Q10 report and found it was actually that for 1Q10.  While the First Quarter was much much better than the Second, I'm assuming this is just a technical glitch, and not a desire to focus on relatively happier days of 1Q.  Hopefully by the time you use the link  above to the financials  all will have been corrected.

In the interim, here are some preliminary observations on the summary 1H10 financials printed in the newspaper, sans as is customary the all important notes thereto.  More detailed comments will follow when the full report is released. 

Income Statement

Revenues

1. GFH doesn't really have much to report for 2Q.  Like Global, GFH's first quarter was much better.  The second for both is rather disappointing to use a charitable term.  
2. GFH had US$7.4 million in revenues during 2Q10 (28.5% of 1H10's US$25.9 million).  In 1H09 the comparable revenues were US$68 million.  A decline of 61% for 2010.
3. 77% of 2Q's revenue was due to FX earnings. I don't believe that GFH has an active Treasury function and so this is probably FX translation gains - a non cash non business revenue. 
4. The US$5.2 million in revenue from "Investment Banking Services" was earned entirely in 1Q10 and as per that Quarter's report US$5.0 million was earned from related parties (Note #11).  That's  96%.  You can tell the economy's bad when when your own "relatives" have no business for you.
5. US$5.1 million in placement, arrangement and management fees, of which 79% was earned in 1Q10.  From the Cashflow Statement it seems that GFH has only collected US$0.2 million during 1H10.

Expenses

1. Staff costs at US$8.8 million are 34% of 1H09's!  Though there is an interesting spike in staff costs in 2010.  In 1Q10 staff costs were US$3.6 million and in 2Q10 US$5.2 million.
2. GFH took a US$20 million impairment provision in 2Q10 as opposed to zero in 1Q10.  This is down from 1H09's US$80 million.
3. The bottom line is that GFH's remarkable improvement in 1H10 versus 1H09 is due primarily to the reduction in expenses from 1H09's US$160.1 million to 1H10's US$73.6 million.  Chiefly reductions in impairment provisions and staff expenses.
4. You'll recall AA's test for a real turnaround in a business is the revenue line.  There is no evidence of any turnaround in the Company's core business. In fact compared to 1H09 core businesses are doing worse.  

Balance Sheet

1. Cash Positions -  Cash increased US$7.8 million largely it seems (though money is indeed fungible) from the sale of US$29.1 million of Treasury Stock for US$7.6 million.  That's a loss of US$21.4 million.  You'll see these numbers reflected in the changes in Treasury Stock and Statutory Reserve in the Equity Account.  An interesting transaction.  I wonder if this was through the market (presumably on the KSE) or a private placement to a wise investor?  Or to a related party?
2. Placements with Banks are down to US$121.1 million at 1H10 from US$156.7 million at 1Q10 and US$455 million at FYE09.  The large drop between FYE 09 and 1Q10 is due to  largely to debt repayments during the first three months of 2010.  In any case, as noted earlier the bulk of the remaining funds are pledged to secure GFH's commitments to make investments.  And so should (unless the 1H10 financials reveal otherwise) not be considered as part of the Bank's liquidity.
3. There was an approximate US$45 million decrease in the Receivable for Investment Banking Services from 1Q10, which I cannot find in the Cashflow Statement.  This may be responsible for the increase in Other Assets by a similar amount?
4. An intriguing new category "Assets Held for Sale" ("AHAS") with a balance of US$260 million makes an appearance in 2Q10.  Apparently a shift of assets from "Investment in Associates".  It will be very interesting to see the basis on which these are carried on the balance sheet versus Investment in Associates ("IIA").  If I remember correctly, IIA are carried at Fair Value Through Profit and Loss.  A change to a different basis for AHAS could have income statement implications., e.g. fair value through equity for one.  As well if they are no longer fair valued but carried at cost, that could potentially - but not necessarily - provide some relief on the recognition of changes in value as "impairments" have a different set of rules than "fair value changes".   The reason my antennae are up on this is because GFH chose 2Q to make this change at about the same time it has signalled that it wants to slow asset sales down.  So I'll be taking a close look at the note on this category in the 2Q10 report  when it is available to see if there is any potential Accounting Magic at work here.
5. Other Liabilities have dramatically increased from 1Q10 and from FYE09.   By US$124 million!!  Hopefully, unlike 1Q10, GFH will provide a note with a breakdown of this category for 2Q10.
6. 1H10 Equity was at US$416.5 million uncomfortably close to the US$400 million net worth trigger in GFH's Sukuk.  Without the 1Q10 remarkable conversion of the Deutsche Bank Murabaha which added US$25 million to Equity, GFH would have breached the covenant.  I use the term "remarkable" because I find it hard to understand why a rational investor would be converting debt in GFH to shares at this point.  Or why there would be a market to purchase GFH's Treasury Shares for that matter.  As I've written before, this transaction's structure allows capital to be infused into the firm without the time consuming process of an Ordinary General Meeting of Shareholders, a Rights Issue, etc.   With the selection of the amount and timing discretionary.  Then again perhaps a wise investor saw and continues to see something here that I don't.

As usual, GFH's Chairman and Group CEO have many favourable things to say about their  imagined turnaround.  And I suppose one would expect them to make these statements.  

However, to attempt to blame GFH's predicament on factors outside its control or to portray GFH as being in the same condition as every other "global investment bank" is a bit much.

First, GFH is not a global investment bank.  It was and is a regional investment bank.  Just as TID, Global, or Shuaa were and are.  In the grand scheme of things looking across the world, rather modest sized shops all of them.  

Second, the list of global investment banks in serious trouble is rather shorter than the list of all global investment banks.   Even if we were to grant GFH temporary hypthetical membership in the ranks of global investment banks, the Goldmine, Morgan Stanley, JP Morgan, Deutsche Bank et al may have tinkered with their strategies.  But they are not fighting for their lives.   Make no mistake GFH is in serious trouble.  Its rating, its share price and its financial condition clearly indicate that.

Gulf Finance House - 1H10 Losses of US$47.7 Million

Asa Fitch over at The National has an article on the subject.  Funny how GFH was able to get the news out to The National and other media outlets but unable to get the announcement on the three regional exchanges it's registered on.  Or on its website for that matter.

Once they publish their financial report, I'll comment in more detail.  For now, I'd just note that with other firms who have announced dramatic improvements in their 1H10 over 1H09 results that once you've written the assets down to realizable value there are no further write downs and income "improves".  Real improvement comes of course when your firm generates sustainable revenues and cashflow.

Gulf Finance House Apparently "Hits the Wall": Delays Publication of 2Q10 Financials Until Study on Capital Reorganisation and Capital Increase Completed. Share Trading Suspended.

The Bahrain Stock Exchange announced this morning the temporary suspension of GFH from today until 23 August.

Yesterday instead of approving the Bank's 2Q10 report, GFH's Board met and took the decision that a  capital reorganisation and capital increase were necessary.  It  advised the BSE that it would therefore delay approval/issuance of its financials until it completed studies related to both and their effects on the financials.  It also requested the one week temporary suspension of trading.

From this rather dramatic last minute announcement it certainly appears that GFH has finally "hit the wall".   It had earlier received approval for a delay in issuing its financials with the deadline today.  Since it has not issued them, the news therein must be fairly grim.

There's a trading suspension announcement on the KSE (copy below, Arabic only).   Sadly, as you might have guessed,  it misses the important "bit" why the financials are delayed.  It just suspends trading because the financials were not provided.  Confirmation, if one were needed. that the news is not material to investors?  Or perhaps more accurately to Kuwaiti investors?

[10:25:14]  ِ.وقف التداول باسهم (تمويل خليج) لحين ورود بيانات 30-06-2010 ‏
يعلن سوق الكويت للاوراق المالية بانه تم وقف التداول باسهم بيت التمويل ‏
الخليجي(تمويل خليج) لحين ورود بيانات 30-06-2010 .‏

There is also an announcement at the DFM - where the exchange simply posted a copy of GFH's letter.

As of the writing of this post, there is nothing posted on GFH's website on this topic.

Footnote:  A "capital reorganisation" need not mean a rescheduling/restructuring of debts.   As of 1Q10 GFH had accumulated losses of US$440 million versus its legal (paid in) capital of US$621 million.  Under Bahrain Commercial Companies Law (as with some other GCC jurisdictions) when a firm has losses 75% or greater of legal capital, it's obliged to take action.  Either dissolve the firm, raise new capital, or use existing capital and reserves to offset the losses.  The latter can involve reducing legal capital.   So the capital reorganisation may be this process.  It may also include a debt rescheduling though with the recent West LB deal and earlier rescheduling of its LMC facility, the Bank shouldn't have an immediate debt repayment problem.  Unless of course things have really deteriorated.  On the debt front, don't forget that GFH's sukuk indenture requires them to maintain US$400 million or more of shareholders' equity.  So it's not too hard to imagine the Bank being close or below this trip wire as of 30 June 2010.

Global Investment House 1H10 Results: Still Bleeding Not as Fast

GIH announced its results for the first six months of 2010.  The press release was three pages.  Since financial/business performance wasn't that great, a great deal of space was devoted to awards and other "lemonade from lemons" type items.

But, let's let Global speak for itself.

Key points of the results :

• Fee-based businesses (asset management, investment banking and brokerage) generated operating income amounting to KD12.0 million and a profit of KD6.8 million during H1 2010. 
• During H1 2010 losses from principal investments and treasury activities were KD41.1 million, representing a reduction of 49% compared to H1 2009
• During H1 2010 interest expense reduced by 37%
• Global made a second principal prepayment of USD50 million of its restructured debt thereby meeting 46% of the principal repayment obligations due by 10 December 2010
• Overall net loss of KD34.4 million (KD0.028 per share), a 65% reduction over H1 2009 loss of KD98.6 million (KD0.080 per share).

And now to the tafsir.

1. Global's fee based businesses won't be paying too many bills with a net profit of KD6.8 million, particularly when this probably doesn't consider their corporate overhead.
2. The Company notes elsewhere in the press release that the annualized average loss on its principal investments during 1H10 was 12.4% compared to 17.4% in 1H09.  One suspects that the other contestants for PERE Awards 2009 "Middle East and North African Firm of the Year" had records less stellar than these.
3. Interest expense came down largely from the signing of the rescheduling agreement which eliminated the additional penal default margin.
4. On the debt rescheduling front, as noted earlier, Global has a long way to go on the debt repayment front.
5. And proving that net income is truly the bottom line, net income for the period is mentioned last:  a KD34.4 million loss, 65% lower than KD98.6 million for 1H09.  Do firms really think that by burying the bad news investors will overlook it?  Or that by reciting modest and manufactured achievements they can make it look less bad?  And anyone want to bet if there were positive net income that it wouldn't be the very first item right  on the top of the list?

Some additional items:

1. Global continues its drive to rationalize its cost base, cutting general overheads by 15% 1H10 versus 1H09.  As noted these include business travel, promotion, and communication costs - essential expenditures to develop revenue.  
2. NBUQ intends to appeal the Dubai Court of First Instance's judgment in favor of Global.

As always we at Suq Al Mal are on the look out for major contributions to advancing corporate spin.  We were not disappointed today.  

So a very special tip of Abu Arqala's massive tarboush to whoever at Global came up with the phrase "impeccable track record" and used it in conjunction with Global's success in having a US$103 million in assets in its Saudi fund.   Presumably, that track record does not include Al Thouraia Project Management Company  or Saudi Mazaya - as both are now safely interred.   Or Global MENA Financial Assets.  Or maybe there's a local definition of impeccable that I've missed.

Once Global releases its 1H10 financial report expect more comments.

The Investment Dar - Musallam at Today's OGM - The Future is Bright

The following is based on AlAmir Yusri's article in the 10 August AlWatan.

Monday (9 August) TID held an ordinary general shareholders' meeting at the request of the MOCI in the words of Badr AlShamary, the representative of the MOIC, the meeting was called "in consideration for the shareholders, to protect the national economy, and in conformity with the Commercial Companies Law."  The Company will be holding its "own" OGM on 26 August.

Some 64.88% of shareholders were present and so there was a quorum.  AlWatan notes that the meeting was a vindication of sorts for the current management and board as not a single shareholder lodged a formal complaint or objection regarding management's or the board's conduct.  One shareholder did raise an objection about the MOCI's conduct with respect to TID.

During the meeting TID's Chairman and Managing Director, Adnan AlMusallam, made the following points:

1. TID is not going to be liquidated.
2. In fact its brightest days are ahead of it, apparently by 2012 if not sooner.
3. It has no "poisoned" assets but rather its assets are real.
4. While they were affected by the crisis, they did not die.  Such assets as Bank Bubyan, Aston Martin, Bank al Bilad, Oqyana and Khabaari are solid.
5. BLOM Bank has joined the restructuring after a conversation with the Company and the CCC - even after winning its court judgment in London.  (There is a critical difference between getting a judgment and getting the cash).
6. Now 83% of the creditors have agreed the restructuring.
7. Good progress is being made with Commercial Bank to come to a friendly resolution of the Bank Boubyan shares problem.
8. The Central Bank of Kuwait handled the crisis -- that's probably the global (small "g") financial crisis -- in the most professional of manners.
9. A small thing like a lawsuit wouldn't disturb our great relationship with the Central Bank.  (You'll recall that TID sued the CBK over what it claimed was unfair treatment concerning its 2008 financials).
10. TID has four month extension of the stay on legal claims against it in Kuwait.  You'll recall the Central Bank asked for an additional four months to decide whether to recommend for or against TID's final entry under the Financial Stability Law.

All in all a very optimistic assessment.  As Adnan noted even during the Iraqi invasion he refused to be pessimistic.  And if you've read the Arabic text closely ( ان شاء الله..والله على ما اقول شهيد ) , you'll have noticed that Adnan not only swore by God but also called Him as a witness.  So it's doubly hard not to take his comments at face value.

And no doubt with good reason.

Those persuaded by his performance will have to wait to buy shares as TID remains suspended on the KSE.

International Investment Group - Releases 2009 Financials in Kuwait 11 Days After Dubai and Bahrain

As you recall, on 18 July IIG released its financials on the DFM and BSE.  Just this Thursday 29 July, it released financials on the KSE.  Announcement in Arabic below.

Perhaps this event was partially responsible for the recent AlQabas article   "Companies Disclose in Foreign Markets Prior to Kuwait Due to Weak Transparency Laws".

One hopes that Kuwaiti investors have access to the Internet or they may be second  in line to receive official announcements of rather material information.

[11:43:26]  مجلس ادارة (المجموعة د) يوصي بعدم توزيع ارباح عن عام 2009‏
يعلن سوق الكويت للأوراق المالية بان شركة المجموعة الدولية للاستثمار
ِ(المجموعة د) قد اعتمد البيانات المالية السنوية للشركة للسنة المالية
المنتهية في 31-12-2009، وفقا لما يلي:‏
ِ1) نتائج أعمال الشركة:‏
البند             السنة المنتهية في 31-12-09   السنة المنتهية في 31-12-08‏
الربح(الخسارة) (د.ك)           (36.613.067)          (21.488.623)‏
ربحية (خسارة)السهم(فلس كويتي)   (82.02)                  (49.40) ‏
اجمالي الموجودات المتداولة     35.153.190            54.615.998‏
اجمالي الموجودات              107.056.935           149.062.604‏
اجمالي المطلوبات المتداولة     83.008.705             30.258.046‏
اجمالي المطلوبات               83.624.358             84.578.526‏
اجمالي حقوق المساهمين        23.432.577             64.484.078‏
بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 6.004.401 د.ك
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 3.050.192 د.ك
علما بأن بنك الكويت المركزي قد وافق على هذه البيانات المالية بتاريخ
ِ13-07-2010.‏
ِ2) التوزيعات المقترحة:‏
قرر مجلس ادارة الشركة عدم توزيع ارباح عن السنه الماليه المنتهيه
في 31-12-2009، علما بان هذه التوصية تخضع لموافقة الجمعية ‏
العموميه و الجهات المختصه .‏
علما بان تقرير مراقبي الحسابات يحتوي على اساس عدم القدرة على ابداء الرأي
التالي :‏
اساس عدم القدرة على ابداء الرأي:‏
كما هو مبين في الايضاحات ارقام (2.1 - 12.5) من هذه البيانات المالية ‏
المجمعة فقد تخلفت المجموعة في الفترة اللاحقة عن سداد بعض ادوات الدين ‏
الاسلامية مما اسفر عن قيام بعض الاطراف الدائنة برفع قضايا ضد المجموعة
كما توقفت المجموعة عن سداد تكاليف التمويل المتعلقة بصكوك اسلامية ‏
بالاضافة الى مخالفة بعض الشروط الاخرى الواردة في اتفاقية الصكوك ، ‏
وقد ادى ما سبق الى ان اعتبرت المجموعة قد تخلفت عن سداد صكوك اسلامية ‏
وذلك وفقا للشروط المنصوص عليها في هذه الاتفاقية .‏
بالاضافة الى ذلك تعاني المجموعة من نقص في السيولة ، كما بلغت صافي ‏
خسائر المجموعة 36.6 مليون د.ك تقريبا عن السنة المنتهية في 31 ديسمبر 2009‏
ِ(21.5 مليون د.ك - 2008) كما تجاوزت الخسائر المتراكمة 75% من رأس مال
الشركة الام كما في 31 ديسمبر 2009 .‏
اقتراح مجلس ادارة الشركة الام وفقا لمتطلبات المادة 171 من قانون الشركات ‏
التجارية دعوة الجمعية العامة للمساهمين للموافقة على الاقتراح الخاص باعادة
هيكلة حقوق الملكية وذلك لاطفاء الخسائر المرحلة وتخفيض رأس المال ‏
ِ(ايضاح 22) كما تقوم المجموعة حاليا على وضع الخطط اللازمة والتفاوض
مع الممولين لاهادة هيكلة ديونها .‏
ان قدرة المجموعة على متابعى اعمالها على اساس مبدأ الاستمرارية تستند
بشكل كبير على انجاز هذه الخطط والمفاوضان بنجاح. لم نتمكن من الوصول ‏
الى ادلة تدقيق موثوق فيها وكافية لتحديد مدى قدرة المجمعة على النجاح في ‏
اعادة هيكلة حقوق الملكية والدين المستحق عليها .‏
ونظرا لجوهرية الامور المذكورة بفقرات اساس عدم القدرة على ابداء الرأي ،
فأننا لانبدي رأي على هذه البيانات المالية المجمعة المرفقة .‏
امور قانونية اخرى :‏
ما تم ذكرة في ايضاح رقم (6) فيما يتعلق بارصدة المرابحات والوكالات المدينة
مع اطراف ذات صلة والتي تتجاوز حد التركز الائتماني المسموح بة وفقا ‏
لتعليمات بنك الكويت المركزي .‏

International Investment Group - Sets the Record Straight - It's Business as Usual

Apparently some easily excitable rookie investors panicked when they read IIG's earlier announcement that it was unable to pay some US$152.5 million on its US$200 million sukuk.

So today IIG set the record straight with announcements on the KSE, BSE, and Dubai markets.

"Notwithstanding this announcement IIG wishes to confirm that it and its businesses are continuing to trade normally."

AA certainly hopes that investors will come to their senses and recognize IIG for what it is.  And as well to place the comments in context: apparently "trading normally" up North has a different meaning than in some other markets.  

After all when you claim to follow Shari'ah principles and have the highest ethical standards, who on Earth would doubt your word?  Certainly, not AA.

AlGosaibi v Maan AlSanea - Fortis Bank v ADIB - Fortis Drops "Structured" Bombshell

 

 Warning:  Ethics Depicted in Picture May be Smaller Than They Appear

In  my earlier post analyzing the Awal Bank L/C I spent a bit of time speculating on the transaction as a disguised money on money loan and the potential role of Bunge in the second leg, the purchase on a spot basis of the commodity back from from AlGosaibi/Awal Bank.  The necessary step to get funds to AlGosaibi for the loan.

As they say (and they are right), reading is fundamental.   I could have saved a bit of time by looking a bit closer at two documents I had printed out.  

Today having posted on the BNPP lawsuit against ADIB, I decided to finish off the ADIB topic by commenting on the two latest submissions by ADIB and Fortis' counsel in the Fortis Case (NY Supreme Court Reference #601948/2009) - Documents #78 and #79.   Documents I had printed out on 9 July!

Right there on the first page of the 9 June 2010 letter from George O. Richardson, III, Esq.  of Sullivan & Worcester, Fortis' counsel, was the revelation that Bunge had informed ADIB of the precise nature of the transaction via an email prior dated 7 April 2008 - that is, prior to the date  ADIB agreed to confirm Awal Bank's letter of credit.  ADIB's SWIFT confirmation to Fortis was sent 16 June 2008  as per Document #24 Exhibit #2.  Some two or so months later.   By the way, that document (not the Bunge 7 April email but the copy of  SWIFT confirmation of the LC) was submitted by ADIB as part of Nuhad Saliba's Declaration.  Ms. Saliba is Head of the New Countries and Global Wholesale Banking Department at ADIB.

The Bunge email was sent by Rachel Wong of Bunge SA Geneva to Naeem Ishaque, Manager Financial Institutions at ADIB.  There are a variety of copy parties but their affiliations are not clear from the message.  The email is Exhibit #1 to Exhibit A in the Richardson Letter (Document #79).

So what did the Bunge email say?

"Section 15. Structure  This is a structured transaction whereby Discounting Bank [AA:  Fortis though at this point Fortis name is not mentioned, perhaps because Bunge was still shopping the second confirmation] is required to discount or fund the Instrument in favor of the Beneficiary once the documents are deemed in compliance at its counter, Applicant [AA:  AlGosaibi Trading] will on-sell the Goods to another Bunge affiliated company ("Bunge Buyer").  Once Beneficiary receives the discounted proceeds under the Instrument, Bunge Buyer will effect sight payment to the Applicant immediately.  Applicant will enjoy the cash financing during the Tenor [AA:  the 360 days from acceptance of documents until payment] before repaying the Issuing Bank [AA:  Awal Bank] on maturity of the Instrument."

This effectively demolishes ADIB's argument that it thought this was a trade transaction and that somehow it was tricked and so inadvertently and innocently defrauded.   ADIB is clearly an active and knowing participant in the transaction which equally clearly is a "money on money" loan.  Some might say that transactions like this are  a fraud against the Shari'ah. (With respect to AA's position please see the last sentence).

It also raises a very fundamental question about ADIB's earlier legal arguments in which it and its counsel claim that the bank did not see this was a structured transaction and had no inkling that it was participating in a money on money financing.   

ADIB's learned counsel at Dewey & LeBoeuf have set a high standard of knowledge in their previous pleadings.  They asserted that because Fortis Singapore advised a L/C for the same goods and in fact the same documents, Fortis Netherlands - half way across the world - was deemed to know this with respect to the Awal LC  it confirmed. 

Therefore, it seems highly appropriate and fair to apply D&LB's standard to ADIB with even more rigor because ADIB operates from a single country.  Thus with the greater proximity one would no doubt expect that the knowledge at ADIB permeated every level of that firm, including the chap who makes the tea.

Some might also be tempted to remark that there is a repetitive pattern here with "Islamic" banks of much less than كلام شريف  in their legal pleadings as in the case of TID v BLOM.

Heeding the admonition of Imam AlGhazali, AA will remain silent on all these points.

Gulf Finance House - Press Release on S&P Downgrade

Pass the smelling salts!

There it was today an announcement on the BSE.  None so far on the DFM or on the KSE - but it's still early in the day only 08:12 EDT here.  And Dubai and Kuwait are a lot further from GFH's HQ in Manama than the BSE.  

Oh, wait, I see.  

GFH is responding to a letter from the BSE asking about the downgrade. 

According to the press release, GFH's Board decided last week to terminate the ratings relationship but to allow Executive Management the discretion as to when to terminate.  

The press release clarifies:

"In the meantime the Executive management would like to focus on the recovery plan and the restructuring then will decide to implement the withdrawal".

Since GFH seems to have decided to implement the withdrawal on or before  the day the rating was released, less charitable souls than AA might infer some lack of communication within the firm about critical events.  

Perhaps, certain information is shared on a "need to know" basis.  As with the shareholders?  A key issue may be in the determination of "need".  

As always AA stands ready to provide a public service.  

Here's the link to the Central Bank of Bahrain's Capital Markets Regulation "Disclosure Standards".   The appropriate "chapter and verse" is Article 32 "Ongoing Obligations Immediate Disclosure".    It does quite a nice job of defining "need to know". And the timing of "letting them know".

Gulf Finance House - S&P Downgrades GFH Terminates Ratings Services

5 July S&P downgraded GFH to CC.   This should come as no surprise as they had said that if GFH needed to restructure again they would do so.

More importantly, GFH requested that S&P no longer rate them.  S&P has complied.  It's website  shows NR for the rating. To add insult to injury - but not without cause - S&P expressed a negative view at this ratings action. 

GFH's termination of the ratings relationship is more telling than the rating action itself.   It is clear  that  they do not see near term potential for an upgrade.

Asa Fitch over at The National observes:

The move may mark a reversal for what has been one of the region’s most remarkable turnaround stories during the financial crisis. Since being brought in last year, Ted Pretty, GFH’s Australian chief executive, has aggressively marked down the company’s assets, restructured debts and announced plans to sell stakes in property projects and banking subsidiaries to raise cash. Under Mr Pretty, GFH posted $728m of losses for last year and revealed plans to raise $250m this year from asset sales.

In my view the story of any "turnaround" at GFH was largely a work of fiction.  And remarkable only because some believed it.

1. The cold hard fact is that debts are repaid by cold hard cash.  Not "pretty" words or unrealistic scenarios.   GFH's recovery, if any, will come when it is able to generate sufficient cash to service its debt and pay operating expenses.  
2. On that score it does not have a functioning business model and there has been no real cash generation from operations for over a year now.  It's also unclear whether the new model - at this point only an undeveloped plot - is any more viable.
3. That leaves asset realisations, largely sales to repay debt.   But make no mistake asset sales - particularly at the levels required in this particular case - do not build businesses.  They dismantle them.  Few if any companies have shrunk their way to greatness. Not more than a few months ago, GFH told quite a "fish" story of US$420 million in asset sales.  And often as happens in such stories the "big one" got away.  That reflects not only the state of the markets as well the quality of the assets on offer.  
4. As a case in point, you may also remember the "remarkable story" of GFH's US$262 million asset "sale" of its interests in Bahrain Financial Harbour Company to Emar Bahrain.  A sale which garnered only US$40 million in cash.  The remainder of the sale proceeds were land in the neighborhood of the BFH which will be "sold later" or so the story goes.  Interesting to speculate whether the land was owned by BFHC or perhaps by a local royal personage. 
5. A close scrutiny of other assets reveals the majority of the Company's liquidity is pledged for stalled projects.  Perhaps, itself less than a happy indication of GFH's ability to sell the project related "assets".   Besides the blocked liquidity,  there is the real danger that GFH will have to recognize some rather substantial losses when and if it extricates itself from these projects.  Not a cash drain, but something that would definitely cripple its balance sheet.  Possibly cause a breach of its Sukuk covenant to maintain a minimum US$400 million in equity and, thus,  a potential acceleration of  US$138 million.  Drive its Capital Adequacy Ratio below 12%.
6. Liabilities are in little better shape.  GFH's talent for rescheduling also appears to be another work of "remarkable" fiction.  The US$100 million stub on the US$300 million West LB syndicate was "rescheduled" for the lengthy period of six months.  Either because GFH's creditors wanted to keep it on a short leash.  Or because someone believed in an asset sales story which in light of asset quality and market conditions may make Dotcom irrational exuberance look like sober thinking.  Last February it was clear that barring a miracle there was no way that GFH was going to be able to make that payment.  Yet, quite a different story was spun.  And one has to really wonder about the use of precious liquidity to buy treasury shares and buyback portions of the Sukuk whose maturity is in terms of GFH's life span the equivalent of a decade away.

Credibility is a very key asset at any time for a financial institution.  During a restructuring it is even more so.  A cardinal rule of the restructuring process is for the debtor to never promise more than it can deliver as its credibility with creditors, shareholders, regulators and other market participants is eroded.

At some point even the most credulous audience will see through repeated tale tales and yarns.  When that day comes the debtor is in a much worse position that if it had stuck to reality. 

As always, we'll be up bright and early to read GFH's disclosure of this piece of  material information to its shareholders and other market parties via its website and announcements on the various exchanges it is listed on.  Based on past performance, I'm sure we won't be disappointed.

Gulf Finance House - Finally Issues Official Statement to Stock Exchange on US$100 Million Rescheduling

When the interests of investors are at stake, you can always count on GFH to take the same prompt action it always does to make sure they are fully informed.  In this case even working over the 4 July holiday!

You'll recall that on 30 June Ted Pretty was quoted in the press that GFH had agreed a rescheduling with the West LB syndicate and that it was in the final stages of documentation.

Today a formal announcement appeared on the Bahrain Stock Exchange.  I didn't see announcements on the DFM or the KSE, but then again the 4 July holidays in those jurisdictions may be responsible.

GFH's 1 July reply to the Bahrain Stock Exchange's letter of 30 June apparently was not sufficiently comprehensive and so this additional message apparently was required.

As Ted Pretty has stated previously, there are serious responsibilities for an institution like GFH.  Responsibilities matched by GFH's commitment. 

"GFH is a flagship institution in Bahrain and the Islamic financial sector and we are committed to working hard to set a better example as a model participant."

And for those who may still be prone to misinterpret this sequence of events, I'll requote the remarks of GFH's Chairman upon the issuance of 1Q10 financials which should set the record straight.

"The Board has taken a very prudent approach in declaring this result and is committed to continuing transparency in the way we do business."

Comforting words indeed.  The flag flies high.  Despite the fact that Arabic has no capital letters, that is I believe how one spells  شفافية  with a capital  ش .

Another remarkable though ultimately saddening disclosure was the implicit confirmation that GFH has been forced to abandon its "proven business model" for another.  As the press release notes, the new maturity on the West LB syndicate will give GFH time to "double its current efforts to transform to a new business model".   

Unspoken by GFH was the reason for need for that change.  

Here at Suq Al Mal we're not shy about confronting issues and speaking truth to power.  And so we'd note that as per the analysis of many experienced market experts (GFH, TID, GIH, a wise Southern Shaykh to name just a handful), it was the global financial crisis.  And, as always, we take this most appropriate occasion to point out that this expression is most properly in lower case lest it be confused with any specific institution.

Suq Al Mal Contact Form Launched

 HMG Now in Public Domain

In response to unprecedented demand  (well, there was one reader and she asked twice), earlier today Suq Al Mal announced the launch of its Contact Form to its readership.

Pictured above, the reaction of the obviously delighted crowds as imagined by Abu Arqala (third on left).  Yet another demonstration, as if one were needed, of Suq Al Mal's proven business model and the confidence of the market in this site and its management. 

So, if you want to send a side message, you now have a way.

However, my strong preference remains that you add a public comment directly to one of my posts.  This fosters dialogue and debate.  And, as can be seen from the instances when it  has happened, dramatically improves the quality of what's on this blog.

You'll find the link on Suq Al Mal's elegant Home Page near the top of the right hand sidebar under the aptly named heading "Pages".  There's always a constant creative tension here at SAM between subtlety and the obvious!

Gulf Finance House - Comments on 1Q10 Financials

GFH has posted its 1Q10 financial on its website.  That has to be a record.

Let's take a quick look.

Going Concern/Matter of Emphasis

Here's what KPMG had to say in its Review Report.

"Without qualifying our conclusion, we draw attention to note 1 in the interim financial information which discusses material uncertainties relating to the Group's liquidity position and regulatory capital adequacy, which, may cast doubt about the appropriateness of the going concern assumption used in the preparation of the interim financial information."

And here's the relevant portion of note 1.

"As at 31 March 2010, the Group's had accumulated losses of US$ 440.173 million and, as of that date, its current contractual obligations exceed its liquid assets.  As a result, the ability of the Group to meet its obligations when due depends on its ability to achieve a timely disposal of assets.  Further, the regulatory capital adequacy ratio of the Group as at 31 March 2010 stood at 13.97%, which restricts the Group's ability to absorb further losses or undertake additional exposures.  These factors indicates the existence of material uncertainties which may cast significant doubt about the Group's ability to continue as a going concern."

Comments on Financials

I've already made some comments.  So rather than repeat them here, I'd invite you to first take a look here and then follow below - where the comments elaborate on that earlier post.

Capital and Liquidity

KPMG had a similar "matter of emphasis" in the company's 31 December 2009 audited financials at which time it should be noted that GFH's CAR was 12.91%.  So, clearly, some improvement on that score.

Unfortunately, as is pretty common practice, there is no note in the interims on CAR.  And note 41 in GFH's audited FYE 2009 financials does not provide a lot of detail on the components of risk weighted assets ("RWA").  One particular issue is understanding why at 2009 they are almost twice total assets as per the balance sheet.  Also the determination of Tier 1 capital isn't clear.  It's shown as US$381.5 million as compared to nominal capital of US$433 million.  Deductions for subsidiaries?

What we know is that CAR was 13.97% as of 31 March 2010.  If we assume that we can use the changes in equity since then to compute a new regulatory capital, then we come up with roughly US$392 million. Which gives RWA of US$2.8 billion.  Or some 2.15X nominal assets.  More detail would be very useful in sorting this out.   I suspect that's not going to be forthcoming.

Also as I commented earlier, it's hard to understand why any rational investor would be converting the Deutsche Bank murabaha into equity given GFH's situation and the market price of its share.  It occurs to me that this could be a convenient device for capital infusions.  There is no need to call an OGM to issue additional shares and the holder can decide when and how much capital to "contribute".  Perhaps just enough to keep the CAR out of the CBB's "red zone" and to avoid tripping covenants.  At this point, only about US$28.3 million remains.  And as I hope you'll recall (who says optimism is dead) from one of my much earlier posts, the DB transaction was issued at a discount.

As to liquidity as I pointed out in my earlier post, GFH's 31 March 2010 cash of US$21.5 million gives scant margin to cover operating expenses and interest, much less the US$100 million in principal due in August and the US$20 million in principal due in September for the debts rescheduled earlier this year.   Note that roughly US$140 million of "Placements" are blocked to support potential contributions by GFH to fund projects.  So a first glance at the balance sheet might suggest a more robust liquidity position than actually exists.

Asset sales are likely therefore to be critical over the next 12 to 18 months.  GFH is unlikely to develop sufficient cash flow from operations to repay US$120 million this year and pay roughly an additional US$30 million to US$45 million in operating expenses.  And I am low balling those expenses.

But what is even more perplexing is note 7 where we learn that  during the first three months of 2010 GFH has bought back US$15 million of its sukuk maturing in 2011.   Given the near term demands on cash, it boggles the mind to think that they would be using precious limited liquidity for such a purchase.  Even if it is at a discount.  Also when one looks at the relative cost of GFH's debt, this debt is the cheapest by far.  The US$100 million is Libor plus 5%.  The LMC rescheduled facility an eye popping 8% flat.  While the 2011 sukuk is at Libor plus 1.75%.  Perhaps, GFH is helping a friend exit?  I have a similar  question on the rational reason why a company in GFH's position would purchase US$35 million in Treasury Shares during 2009.   And one cannot help but wonder did GFH's lenders not impose any conditions on prepayment or purchase of debt?  Could they have missed so obvious a covenant, especially since GFH has shown a penchant for buying this particular debt back?

Balance Sheet

Other than the comments above regarding the 2011 sukuk and the "Placements", some additional points.

1. No movement on the US$85 million Investment Banking Services Receivable.  You'll recall that GFH wrote down roughly half of this in 2009.
2. Other assets Financing Projects is up a US$1.5 million.  Seems small to be additional funding.  Is this interest?  And if so, it would be very interesting to know how much of this amount is accrued unpaid interest.  As I noted earlier, it's unlikely that FP are going to be a source of cash in the near term.
3. Investors' Funds declined by US$50 million though I only see US$29 million in the Cashflow statement. 

Income Statement

1. Roughly US$5 million of investment banking income was from related parties.  The comparative figure for 1Q09 was US$46.5 million.  With related party business a firm can enjoy dramatic savings on marketing costs.  Sometimes even on underwriting and due diligence.  Well, at least initially.
2. As I noted in my earlier post, cash is going to pay GFH's running bills and its debt repayment.  So far cash generated as a percentage of income is relatively low.  Of course, this is early going.  But then the US$120 million in debt maturities is "early" as well.

All in all GFH is in a tough spot.  Let's hope that management's apparent optimism isn't misplaced.

Gulf Finance House Responds on Auditors' Matter of Emphasis on "Going Concern"

Update:  GFH denies issuing this statement.  Let's see if AlQ replies.

According to AlQabas GFH has issued a statement on its auditors' matter of emphasis on management's assumption of GFH as a going concern.

GFH's well reasoned argument is reported to consist of the following:

1. This sort of thing is a part of internationally accepted auditing principles.  Unspoken apparently is the idea that auditors are always doing this sort of thing - making a mountain out of a mole hill because of some silly "principle".
2. 1Q10 results demonstrate clear improvement.  
3. And the results are really "distinguished"  ( نتيجة مميزة )  given the difficult times.
4. The improvement reflects the hard work of executive management who have reorganized operations without the need for additional provisions.

I glad that GFH has taken the time to set the record straight.  

After hearing these powerful arguments, I'm sure many of you will have a hard time taking the auditors'  apparent "box-ticking" quibble about lack of liquidity or weak capital adequacy seriously.  I know I don't.

In any case, in the interest of fairness, I'll be looking for additional commentary from GFH tomorrow on this topic - though I don't know how much piling on of logical firepower GFH's poor auditors are going to be able to withstand.

Gulf Finance House - 1Q10 Results Continuing "Transparency"

In GFH's announcement of 1Q10 results, Mr. Essam Janahi, Chairman, stated:

"The Board has taken a very prudent approach in declaring this result and is committed to continuing transparency in the way we do business."

This wouldn't be the first time that Mr. Janahi has publicly recognized the virtues of transparency.  Nor do I suspect it will be the last.  And if you were reading my post of yesterday carefully, you will notice that I highlighted this continuing commitment to transparency.  Or as we like call it here on SAM  كلام شريف

A noble goal.  One which of course an Islamic bank would have no trouble keeping.

I believe that GFH will be announcing tomorrow one small matter - almost too trivial to mention.  Oh, well, let me mention this since I've already typed this much of the post.

Seems that GFH's accountants added a matter of emphasis to their review report noting that while they did not qualify their opinion they called attention to Note 1 which discusses the lack of fundamental certainty about management basing preparation of the 1Q10 financials on the assumption that GFH is a going concern.  The auditors cited concerns about liquidity and the adequacy of the company's capital.

Now, I am sure that many of you out there are probably saying that I am being overly harsh.  This is not the sort of thing that need be disclosed in the press release.  After all, the company releases its financials and a seasoned investor will go first to the auditors' report.  So disclosure is made.  Indeed.

But, it seems when getting ready to send in its 1Q10  financials to the BSE, GFH inadvertently forgot to  include page 1 with the auditors' report.  As you might expect from the time it took to update GFH's ratings page on its website,  they haven't yet gotten around to loading the financials on the website yet.  All that's there is a copy of the newspaper ad.

We'll see tomorrow whether the disclosure of the matter of emphasis is in response to a letter from one of the exchanges.  Or whether GFH belatedly realized the small oversight and is releasing the info unprompted.

However, rather than leave on a negative note, I'll close with this quote from Group CEO, Ted Pretty:

“GFH is a flagship institution in Bahrain and the Islamic financial sector and we are committed to working hard to set a better example as a model participant. Islamic finance has excellent growth prospects and GFH is well placed to take advantage of this growth.”

 The commitment to set a better example as the flag bearer of Islamic finance is admirable.

The Investment Dar - Analysis of 2008 Financials - Auditors' Report

Earlier today TID released its 2008 financials on NasdaqDubai (in connection with TID's Sukuk).  Apparently, it's not yet had the opportunity to release them on its website.  Nor do they appear yet on the KSE website, but then again it does take quite a bit of work to accomplish a task like this.

Let's start with the audit report - which should be the careful investor's first stop in reading any financial report.

There are a couple of new bits of news here - previously not reported:

1. A change in auditors - or at least one of them.  PwC has exited.
2. A report of a material violation of Central Bank of Kuwait exposure limits in (you guessed it) a related party transaction.

First the change of auditors. While KPMG is still engaged, Deloitte now appears in place of PricewaterhouseCoopers.  (By Kuwait regulations a Kuwaiti company must engage two auditing firms).  No reason given why PwC left.  Unclear whether they excused themselves or were excused.  I'm guessing the former for both risk management reasons (not just here but related to other troubled auditing clients) as well perhaps disagreements over the application of some accounting principles. I'm sure that all of these are theoretically in line with the letter of IFRS,  though I suspect they may have been a bit aggressive for PwC's taste.  Having said that I'd acknowledge that I tend to be a bit "high church" on this topic so I may be projecting my own feelings onto PwC.  See the comments section for some discussion of the shuffling of local partners among PwC, E&Y, and Deloitte.  There may be other factors in play here than the ones I mentioned above.

Second, as noted earlier, the auditors have disclaimed an opinion.  That is, they did not express an opinion on the financials.  Their position is based on (a) uncertainty about ability to agree the restructuring and (b) the fate of the Boubyan Bank shares.  If there's an adverse judgment against TID on the latter it could lead to an approximate KD67 million or so loss - a major impact on its KD201 million in shareholders' equity.

On the former - the restructuring - TID's auditors state:  "We have not been able to obtain sufficient, reliable audit evidence to determine whether the Group will be able to reach an agreement to restructure its debt obligations."

What's particularly interesting is they are making this statement not as of 31 December 2008 but as of 13 April 2010 the date they signed their audit report.  A date after the FSL Court had granted  at least initial protection under the FSL to the company.

No doubt, the auditors are being careful.  They can't be 100% sure and so prudence would dictate such an approach. A completely rational response not only given the situation (a restructuring) but also the company's reputation.  

Finally, there is a bit of new news in the last paragraph in the section on legal and other regulatory requirements where the auditors note that they have not become aware of any material violations except relating to Murabaha and Wakala placements with a related party, "which exceeds the credit concentration limit stipulated by the Central Bank of Kuwait" as disclosed in Note 7.   Apparently, not a sufficiently important item to be mentioned in TID's earlier announcement on the KSE of its 2008 summary financial results, where it mentioned the two reasons for the auditors' disclaimer of an opinion.  Sitting here it seems to me that a material violation of a CBK regulation would be a bit of material information that an investor would want to know to enable him to make an informed decision.  

As an aside I'd note there is also an apparent similar issue for The Investment Dar Bank Bahrain which seems to have placed KD253 million with TID as disclosed in Note 16.  While TIDBB's website is no longer password protected, it has no content (though to be fair it has some really nice pictures) so it's a bit difficult to see what percentage this amount represents of its capital.

I'll go out on a limb here and guess well over 25%.

TID's report (Note 2 page 9) informs that TIDBB's auditors have modified  their earlier 2008 audit report to include an "emphasis of matter" item that if TIDBB can't recover the placements with TID it might not be able to continue as a going concern.  Not having seen the original audit report for TIDBB, it's unclear why this sort of eminently reasonable comment wasn't made before, particularly given the rather large "bet" TIDBB had placed on TID.

Comments on the body of the financials will follow.

The Investment Dar - 2008 Financials Released

TID Global Sukuk  released TID's 2008 financials on NasdaqDubai this morning.  I haven't seen them yet on TID's website, but as we all know it can be such a bother transcribing all those numbers and then posting them. A burden made even more difficult by the nature of the numbers to report - a loss.

Once I've taken a look I'll post a comment if anything catches my eye.

Gulf Finance House - Deutsche Bank Converts Another US$5 Million to Shares

GFH announced on the BSE that Deutsche Bank had converted another US$5 million to GFH shares under the convertible murabaha agreement concluded 10 September 2009.  The conversion price is US$0.38 per share. 

The last trading price on the BSE was US$0.245 per share. 

Here's an earlier post that might shed light on this transaction. 

GFH is still not showing any major shareholder on the BSE "Major Shareholders' page" and only has disclosed itself (Treasury shares) and Shamil Bank as holding more than 5% of the shares.

So what's happening to the GFH shares that Deutsche converts?

So far, if my tally is correct, US$55 million out of the US$100 million issue (for which Deutsche paid US$80 million) has been converted.  The issue must have been done for clients of Deutsche Bank since DB is not showing up as a major shareholder in any disclosures I've seen.  Either that or DB is selling the shares as soon as it gets them. 

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.

Gulf Finance House - Confirmed: US$100 Million Loan Revised Repayment Agreed

 

A follow-up to my earlier post.

GFH issued a press release today that it had agreed a repayment schedule on its US$100 million Wakala facility due 3 March 2010.  

US$20 million will be paid this month and 4 equal installments of US$20 million every six months thereafter.  As I commented before, GFH must be really strapped for cash as this is a rather small amount for the first payment.  I was expecting something more in the US$30 million to US$40 million range.  

What's interesting is that the LMC syndicate has agreed to much less favorable terms than the  West LB syndicate:

1. West LB received two-thirds of the amount due it on the original maturity date.  The LMC syndicate only 20%.
2. West LB extended the remaining US$100mm for six months.  LMC extended the remaining US$80 million for two years - with an average life of one year.
3. Not hard to tell which financial institutions are looking out for its shareholders.

Some comments on the press release:

1. I don't see this announcement at the Bahrain Stock Exchange, the Kuwait Stock Exchange, the Dubai Financial Market or the London Stock Exchange.   This is information material to the trading of shares. Of course, the regional three banks in the facility may not have finalized their answer until after the markets were closed - though it's hard to imagine them working past London's close. But there was a press report on this in the press yesterday - at that point an unconfirmed rumor - which contained information which by any criteria would be material to an investor.  A responsible company would have made sure an announcement was at the stock exchanges bright and early this morning - either to confirm the press report (negotiations concluded successfully) or to state that negotiations were still in process. 
2. To call this a new facility strains credulity.  This is a rescheduling of an obligation that GFH was unable to pay. It is an attempt to make something out of a "busted play".
3. This is less a demonstration of faith "in GFH’s business model and the strategy that the Bank’s management team are following" than it is lenders restructuring a loan that the borrower cannot repay on its due date.  
4. Selling assets one has suddenly "discovered" are non core, firing staff and other cost cutting measures are not a strategy.  They are tactics designed to deal with the failure of one's strategy.
5. Talk of GFH"s business model is misplaced.  At this point, GFH is in search of a viable business model.  Its old model is precisely why it cannot pay its debts on time.  When it demonstrates that its plans for the future are more than words on a page, it can speak of its "business model".
6. The date on its press release needs to be amended.  This is like the previous "magical date" press release from 4Q09.
7. GFH has yet to update its website for the first downgrade by S&P.