KHCB 2020 Financials - A Look at the New AT1 Capital and Capital Reorganization

 

Link to KHCB FY2020 Audited Financials.

As you will remember, following losses in FY 2019, KHCB needed to raise additional capital to comply with the CBB’s requirement that it have BD 100 million in equity.

KHCB decided to issue AT1 (Additional Tier One) capital rather than additional common equity. Presumably, because there was little appetite for the latter. This would also prevent dilution of existing shareholders.

It also decided to “regularize” some 15.788 million in accumulated negative retained earnings by writing these losses against Paid in Capital. 

This is essentially an accounting entry. 

No cash is involved except for the legal work to amend the bank’s articles and memorandum of association and for the share registrar to amend its records of individual shareholders’ number of shares, issue stock certificates where required, etc.

BD 72 Million AT1 Issue (Subordinated Murabaha)

The issue was “successfully” raised, due to GFH “buying” the entire issue.

Let’s look at the details as outlined note 35 of KHCB’s 2020 audited financials.

The issue was for a nominal BD 60 million plus a BD 12 million premium. Total BD 72 million.

GFH “underwrote” the issue for an underwriting fee of BD 12.1 million and then subsequently “bought” the entire issue. IN GFH’s FYE 2020 financials, this fee is referred to as a “subscription fee”.

Whatever it’s called it is an extremely high fee: 16.67% of the total proceeds of BD 72 million.

GFH paid cash of BD 23.6 million (roughly 35% of the BD 72).

It contributed the remaining BD 48.4 million as follows:

1. BD 24.5 million in the form of 50% of the interests in the AlAreen Hotels WLL (note 13)
2. BD 5.5 million in property
3. BD 18.4 million in financing assets.

Some additional  comments.

First, the issue was primarily in kind (76%) not in cash. The real value of the issue depends on the value of these assets.

Second, while we see these entries in KHCB’s financials, we don’t see them in GFH’s consolidated report because of the "exigencies" of consolidation. There are some adjustments (to GFH’s financials) which I’ll discuss in a forthcoming post on GFH's 2020 financials.

Third, given the BD 12.1 million underwriting/subscription fee KHCB owed to GFH, the actual net cash contribution by GFH to KHCB was BD11.5 million.  

You will see BD 11.477 million in KHCB's Consolidated Statement of Cashflows as "AT1 Proceeds".  That's the net of BD 23.6 million contributed in cash by GFH less then BD 12.1 million "subscription"/"underwriting" fee paid by KHCB to GFH.

That’s the firm to firm transfer. 

But GFH owns 55.41% of KHCB so its share of the fee paid to GFH is roughly BD 6.7 million so one can say it paid a BD 12 million premium for the issue and received back BD 5.4 million (the NCIs share). 

You'll see this amount USD 13.311 million attributed to the NCIs in GFH's annual report in the Consolidated Statement of Shareholders' Equity.

In  KHCB’s financials the AT1 instrument is carried at BD 47.22 million. Not BD 60 million.

How did that happen?

First, the BD 12 million premium was “booked” to KHCB's retained earnings.

Second, the BD 12 million underwriting fee plus an additional BD 778 thousand of other issue expenses were deducted from the AT1 proceeds of BD 60 million ex premium reducing it to BD 47.22 million.

Write-off of Accumulated Losses Against Paid in Capital

KHCB reduced its issued shares from 1,050,000,000 (par value BD0.10) to 892,481,190.

Each shareholder’s number of shares was accordingly reduced by roughly -15%.

During the period 11 August 2020 through 9 November and following the 15% reduction in the number of its shares, Goldilocks sold 1,945,547 shares reducing its holding in KHCB from 9.96% to 9.78%.

One final observation.

KHCB has been showing Emirates Islamic Bank (EIsB) as shareholder with some 8.41% of shares and GFH with 47%.  

In its FYE 2020 annual report, KHCB shows GFH holding 55.41%. EIsB doesn’t appear as a shareholder. 

There is no explanation of the change.

By contrast GFH has been showing its holding in KHCB as 55.41% since FY 2017 (note 18).

Back in 2016 GFH had floated the idea of acquiring 100% of KHCB.

Later it decided not to, but got a special exemption from the tender offer rules in Bahrain to allow it to only acquire Emirates Islamic Bank’s stake. 

Normally tender rules require that over a certain threshold, the acquirer has to tender for all shares it does not own. This to ensure that all shareholders are treated equally.

Unclear why GFH's acquisition of EIsB's shares wasn’t reflected in KHCB’s financials until FY 2020.