Mubadala US$2.5 Billion Refinancing

As announced yesterday, Mubadala successfully refinanced its US$2 billion loan.  Some additional details today courtesy of Gulf News.

While the margin increased from 17.5 basis points to 75, this is still a comfortable margin especially given current market conditions.  And as well the downgrade by Moodys in March to Aa3.

The facility was also well received.  US$4 billion in demand.  And it was up-sized (I just had to use that word) by US$500 million to provide a back-stop for refinancing under Mubadala's ECP program.

Cityscape to Showcase Life-Size Model of Abu Dhabi Landscape in 2030

And some cynics out there said that other Emirates hadn't learned the lesson of the Dubacle.  About overbuilding, excessive use of leverage, etc.

This article in Khaleej Times sets those nay-sayers straight!

At 23x17 metres for this life size model one can see that Abu Dhabi has not lost its careful way with a dirham.  Construction costs are likely to be low.  And it seems to me that there will be savings on land - since the plot wouldn't have to be more than twice the size.  And it could probably be constructed indoors allowing workers to continue their labors in airconditioned comfort during the summer.  Even with a project this size, costs will be controlled.  The need for debt financing small.

Exclusively here at Suq Al Mal, we've got pictures of the  life size model of the Burj Mohammad - Abu Dhabi's entry into the world's tallest building competition.  

Notice it's so big you can't see the top.   Clearly a winner.

Shaykh Hamed Appointed to ADIA Board as Managing Director

While WAM headlines it as a "reshuffle", this is just appointing the replacement for Shaykh Ahmed who recently died tragically.

Here's the list of the new board as per WAM.

1. UAE President (Shaykh Khalifa Bin Zayed Al Nahyan, Chairman)
2. His Highness Sheikh Sultan bin Zayed Al Nahyan, the representative of the UAE President,
3. His Highness Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces,
4. HH Sheikh Mansour bin Zayed Al Nahyan, Deputy Prime Minister and Minister of Presidential Affairs, 
5. Sheikh Hamed bin Zayed Al Nahyan, Chief of Crown Prince of Abu Dhabi's Court as a Managing Director, 
6. His Highness Sheikh Mohammed bin Khalifa Al Nahyan, Chairman of the Department of Finance and His Excellency 
7. Mohammed Habroosh Al Suwaidi, adviser to His Highness the UAE President, 
8. HE Joan (usually Ju'an)  Salem Al Dhahiri, 
9. HE Hamad Mohammed Al Hurr Al Suwaidi, Undersecretary of the Department of Finance and 
10. HE Khalil Mohammed Sheriff Foulazi, Chairman of the Board of the Central Bank.

Sowwah - If You Build It, Will They Come?

Copyright The National

My guess is yes.

Especially for patient capital that is also prudent in what it builds and the leverage it uses. 

Aabar Investments - Behind the 2009 Earnings Press Release

You've probably seen press reports on Aabar's 2009 performance.

1. Comprehensive income of AED2.075 billion versus AED727 million in 2008.  Roughly 2.9x.
2. Shareholders' equity up 5.5x to AED12.7 billion versus AED 2.3 billion at FYE 2008.
3. Total assets up 11.7x to AED37.3 billion from AED3.2 billion at FYE 2008.

Let's look a bit closer at Aabar's 2009 performance.   Not a full credit or investment analysis but just some points that caught my eye.

And what better place to look than its 2009 audited financial statements.

Income

1. The company's 2009 income was largely driven by non cash changes in fair value in one investment, Daimler.  That resulted (Note 8) in some AED 9.1 billion of income.  Interestingly as disclosed in Note 9 Aabar incurred an expense of AED6.8 billion from derivatives on the Daimler shares - put options and a collar.  Note 22 (i) describes the collar range.    I'm guessing that  the hedge is in place at the request of the lenders of Term Loan 1 and 2 who financed some AED10.7 billion equivalent for the purchase price.  
2. What's a collar?   Here's a simple definition.  In short a technique to reduce the cost of buying downside protection (buying a put)  by giving away some of the upside (by selling a call).
3. Aabar acquired its 9.1% stake in Daimler in March 2009.  A glance at a stock price chart for 2009 will show that this was the absolute ideal time.  During that period Daimler's shares were at their lowest - in fact at their lowest in the past five years.  Aabar got the shares at Euro 20.27.  At YE the shares were Euro 52.95 and are trading currently at about Euro 36.00. And I suppose in this context one might be tempted to remark that at least it didn't buy Chrysler or GM.
4. In essence then from an income statement perspective, Aabar is currently a "one trick" pony.   As Note 38 states a 10% change in European equity prices results in a change of AED2.04 billion in its income statement.
5. For 2008, the company's income was driven by one event, the sale of Pearl Energy Limited.
6. Of course balancing this fact is that the company adopted a completely different strategy in 2009 so one would not expect it to have fully achieved  its goals in one year. But this is definitely a point for lenders and investors to keep their eyes firmly on.

Equity Increase AED10.4 Billion

1. AED6.7 billion was from the conversion of a mandatory convertible bond issued to IPIC (Aabar's 71.23% shareholder and an Abu Dhabi Government company).  
2. AED1.6 billion from a shareholder loan - also from IPIC.
3. AED2.1 billion from income and related events.

Debt

1. Borrowings increased from AED893 million to AED 15.1 billion or AED14.2 billion.  And since we're keeping score that's 16.9x the level in 2008.
2. What's even more important to note is that on a net debt basis Aabar went from a negative debt (it actually had cash in excess of its debt at FYE 2008) to a debtor position.  Now having debt is not in itself bad.  One would expect an investment company to use leverage.  But leverage is something to watch if one is an investor or creditor.  Especially where investment values are volatile.  Or where they may prove to be illiquid.
3. On that latter point, of the company's six borrowings, five were secured by its investments (Note 22).  Some brave lenders extended a US1.6 billion short term loan facility repayable in 2010.   At a lower rate  than that on the company's secured debt!  ?  Against which Aabar had drawn USD0.6 billion.  As a general rule, it's not the wisest of ideas to be an unsecured lender when the borrower's most liquid assets are pledged to other creditors, including the asset that generated the company's income.   The unsecured creditor is the one who gets "squeezed" first and hardest if there is a problem.  

Other Assets - Advances on Properties

1. Aabar has roughly AED7.8 billion in Advances on Investment Properties.  That's roughly 24% of assets.  There's no descriptive footnote to explain what these assets are and where they are.  I also note that the company depreciates buildings over 67 years (Note 3, page 20) on a straight line basis. 
2. There are some "banking assets" in the consolidated financials related to Falcon.  But creditors and depositors at Falcon have first claim on these.  Probably to the tune of approximately AED4 billion (Due to Banks and Customer Deposits).

Cashflow

1. You knew I'd get here eventually.
2. On a cash operating basis Aabar was negative for both cashflow from operations and cashflow after working capital changes.  Considering the latter (AED1.1 billion)
3. Investing Activities and Financing Activities were in a roughly balance at (AED21.4 billion) and AED22.2 billion. 
4. Leading to an overall decline in cash of very roughly AED300 million.

Other

1. The company has advised that its Board is recommending to the shareholders that they authorize the issuance of AED7.3 billion in convertible bonds  with a AED2.5 per share conversion price (roughly the current trading price).  The bonds would be issued to IPIC.  If the bonds are converted in full,  IPIC will own 85%.
2. Since the bonds are not mandatorily convertible, they do not appear to be legally subordinate to other creditors.  Maybe some attorney out there who practices in the UAE can say if equitable subordination is a UAE-law concept.  (Editor's Note: The mere fact this question is posed here is perhaps a fairly clear sign of a bit of manifest delusion by the writer about the readership of this blog).

Summary - Trends to Watch

1. Ability to diversify income.  Right now as described above the company is a one trick pony. Not something that realistically can be  changed overnight.  But something that should be worked on.
2. Diversification in investments.  Beyond single name concentration (Daimler), the company is heavily skewed to the auto industry and has made some additional investments in this space  - though it has also diversified since then with an investment in Virgin "Space"! 
3. What the additional AED7.3 billion in convertible bonds are used for.  Replacement of debt? Additional investments?    
4. What is the investment philosophy of Aabar?  What sort of portfolio is it building?   Does the portfolio exhibit a common theme?  Or competence resident at the company (Aabar) level?  Is Aabar merely a financial investor?  Or somehow will it be involved in developing value?  Or is it just  buying "stuff" that looks good at the time?  And which might later be discovered to be "non core" assets? There doesn't appear to be a clear statement on investment strategy on Aabar's website.  The last analyst presentation posted on the site dates from 2007.
5. How do Aabar's investments fit in with IPIC's mandate?  As per its website, "The International Petroleum Investment Company, IPIC, was formed by the Abu Dhabi government in 1984, tasked with an ambitious mandate to invest in hydrocarbons industries across the globe."  And how  might that affect its contribution of future cash to Aabar in the future?
6. Use of secured debt.  Are the key cash generating liquid assets pledged to creditors?  What does that mean for investors and unsecured creditors?
7. Cashflow, cashflow cashflow.  The life blood of companies.  "Man" does not live by capital appreciation alone.

Potential Merger of the ADX and DFM - Beginning of the End of Dubai as a Financial Center?

You've probably seen the press reports about the discussion of a potential merger of the Abu Dhabi Exchange and the Dubai Financial Market.  Those I've seen outline the compelling economic case for the merger.  There just isn't enough volume to support two markets in the UAE.  While not as dire a case as that for the merger of Nasdaq Dubai with the DFM, there is strong rationale:  consolidation will lower costs.

Not as often directly emphasized but much more important is that a merger would increase liquidity for both issuers and investors.  A robust capital market in both equity and debt will foster greater economic development.

All well and good. 

But I haven't seen any discussion of what perhaps is another key issue.  Who will control the merged entity?   And  the consequence of that control.

The old saying is that cash is king.  And the guy with the cash  is primus inter pares among royalty. 

Before its recent problems, Dubai had a constrained cashflow from resources and operations  (as opposed to borrowed funds).  That situation has been made even worse by the demands of the DW rescheduling and other likely problems already on the horizon or just below.  A merger offers Dubai the chance to monetize some of its foreign assets (LSE,  Nasdaq) to meet its cash flow needs as it deleverages.  

Abu Dhabi is flush with cash.  And its credit is sterling with bankers and investors.  It has a much stronger hand.  It can make significant new investments - acquisitions and build outs.  It can, if it wishes,  use this opportunity to accelerate a shift in the economic landscape of the UAE.  To become the financial center.

Control of the merged exchange would be more than a matter of prestige, though one shouldn't discount the ego factor as a motive in transactions.  Prior to the takeover by Chemical Bank, Chase Manhattan Bank  was in discussion with Bank of America about a merger.  The deal foundered on the "substantial" issue of where the merged entity's headquarters would be.  San Francisco or New York. Chase wound up as prey not predator.  BofA in less tender hands.

Control of the merged exchange will affect the financial landscape in the UAE.   In rather broad brush strokes we can characterize the current financial situation in the UAE as Abu Dhabi  for project finance and Dubai for more market oriented financial transactions.  

But  if the center of gravity for the  merged stock market shifts to  Sowwah Square  / Sowwah Island, then how seriously does this undermine Dubai's dream of being a full service financial center?

I think fundamentally. 

In such a situation what is the appeal of Dubai?

It's probably not going to be access to issuers at least for several years.  Access to investors?  Maybe.  But if the economy in the Emirate has a slow recovery as is anticipated and Abu Dhabi is relatively speaking booming, where will the interests of investors and bankers be focused? 

To be clear, this isn't a prediction of an immediate reversal of Dubai's role as a financial center.   A financial Armageddon.  Nor is it meant as the sole variable to explain a shift to Abu Dhabi from Dubai.  There are other factors as well.

Rather it's about a shift in emphasis and slower growth in Dubai vis a vis the financial center in Abu Dhabi.  Not the "End"  but the "Beginning of the End".

Think of  Philadelphia and New York.  Within a five minute walk in Philadelphia, you can see the impressive buildings of the first two Banks of the United States.  Once the undisputed financial and commercial capital of the USA, Philadelphia was eclipsed by New York.  Not overnight.  And it still retains its own role and stock exchange.

ADIA Investment in Citigroup - Time For Conversion

When looking at ADIA's new website and its first ever annual review for 2009 (no, not financials) and reading about prudent investment strategy and their good return over the past years, I was reminded of the US$7.5 billion investment in mandatory convertible Citigroup securities.   

If I'm not mistaken the conversion date is sometime this week, at least for some of the amount.  

Earlier posts here and here and here too.

And from the annual review some interesting info:

1. Page 3: 80% of assets managed by "carefully selected" external fund managers monitored by ADIA daily.
2. Page 3: 60% of assets in index replicating strategies.
3. Page 3:  Average annual returns as of 31 December 2009.  20 Years 6.5% pa. 30 Years 8.0% p.a.
4. Page 10:  Outline of Investment Strategy.
5. Page 11:  Description of Portfolio Allocations.  Note the comment about not investing in the UAE or GCC - which by the way makes perfect sense given the mission of ADIA.
6. Page 17:  Funding including supply of funds back to the Government of Abu Dhabi.

There's more: description of manager selection process, internal departments, board committees, etc. etc. .  All in all a pretty good guide to ADIA for those who don't know much about them.  And probably some "news" even for those who think they already do.

A job well done.  And good luck straightening out that Citigroup investment.

Retail Loan Exposure and NPLs: Emirates NBD Bank

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Almost all of the media coverage of loan problems in the GCC is focused on the commercial market. Scarcely a day goes by without an article on AlGosaibi, Saad, TIBC, Awal, Investment Dar or Dubai World.  It's not just the paid media but also blogs like this.  There's a natural fascination. The story of the average Joe or Abdullah is harder to follow.  The amounts are smaller.  Therefore, the drama seems less.

The major corporates give us exciting amounts with larger than life villains, once proud tycoons now humbled, disconcerted and angry bankers.  The plot lines and therefore the excuses are even more elaborate.  One doesn't excuse a mistake on granting a credit card by recounting the legend of "Big Foot" and the "implicit guarantee".  The BBA doesn't write a letter to the Shaykh to complain that Abdullah is behind on his personal loan.  Sadly, financial journals do not thunder about the irresponsibility of Sanjay in Dubai who skipped a payment or two on his car loan.  Or call on the Shaykh up the road for a bailout.

Yet, all these small loans can add up to one big headache. And the usual pattern of transmission of financial distress is that large commercial firms are hit first with the shockwaves being transmitted to smaller commercial firms and then the public.  

If this pattern repeats itself,  Gulf banks are in for a second wave of NPLs.  What's perhaps more to the point is that since much of the consumer lending in the GCC was done with manifestly weak underwriting standards, this wave may be quite high.  Since I've posted before on this topic, I think I'll just hum the first few bars. You already know this song.

Yesterday again I posted a similar comment.

Today let's look at some data.

60 second summary:   EmiratesNBD's retail NPLs have jumped to 11% of the retail portfolio from approximately half that the year before.

While EmiratesNBD has yet to release its 2009 financials (pending CB UAE approval) it has released a 26 page presentation on 2009.  Though my intent is to focus on retail loans, I will discuss commercial and "Islamic" loans as well to provide a context.

The key pages are 13 and 14.

Slide 13 Asset Quality Loans Receivables and Islamic Financing 

Absolute amounts of NPLs:

1. Aggregate NPLs have increased from AED1.976 billion to AED5.041 billion (155%).
2. Corporate NPLs from AED0.464 billion to AED1.674 billion (261%)
3. Retail NPLs from AED1.305 billion to AED2.685 billion (106%). Note that the retail portfolio is 20% of the corporate portfolio.  Yet, the absolute NPL increase here is larger than the increase in the corporate portfolio NPLs.  That is both a distressing sign and a sign of distress to come.
4. "Islamic" NPLs from AED0.207 billion to AED0.682 billion (229%).

Relative percentages NPLs/Portfolio 2009 and (2008):

1. Corporate 1.3% (0.37%)  This level seems low given the existing level of problems.  I'd guess that 5.0% might be a more realistic absolute minimum for the corporate sector.   And that is likely to be low  unless there are cosmetic "extend and pretend" adjustments or a financial miracle.
2. Retail 11% (5.3%)  - A very large jump.  Admittedly, there is some "noise" here.  During 2009 ENBD made a long overdue switch in definition of a retail NPL from an unrealistic/unbelievable 180 days past due to a more conventional 90 days.  Regardless of how much of the year on year increase is due to the accounting change, the key point is that 11% of the retail loan portfolio is non performing.
3. Islamic 3% (0.94%)

Note 2008 percentages are estimated using 2009 loan data and relative percentages as these do not appear to have materially changed from 2008.  Thus, this should give a rough approximation of the change.

Slide 14 Asset Quality Retail and Corporate Loans and Receivables

Corporate and Sovereigns

1. 96% of exposure is to UAE to "top tier" names with whom the Bank has long standing relationships.  Not sure what that means in terms of creditworthiness measured by the old fashioned yardstick of ability to pay.  I rather doubt that ENBD has a lot of exposure in Abu Dhabi.  Concentrations to obligor groups (Dubai Inc and Dubai Government for example) may be problematical.
2. Loan renegotiations in 2009 did not involve any sacrifice of interest or principal.  Apparently, only extension of payment terms.   Sometimes this is all that is required.   A bit of breathing room for the borrower and then one gets repaid.  Other times it is the first step in "extend and pretend" scenario that turns out less rosy in the end.
3. Real estate "selective financing".  With the existing exposure to Dubai World, this must refer to a  break from past underwriting standards.  Financing  is now restricted to Dubai and Abu Dhabi.  Presumably, with limits suitably scaled for risk.  
4. 55% of the real estate portfolio is due for repayment in next three years.  Given the depressed state of the real estate market, this may not be a particularly robust season for loan repayments.

 Retail Loans

1. Delinquencies are stabilizing across categories and only trending downwards on 33% of portfolio (personal loans).  While it's good they are not increasing, the issue is whether they are stabilizing at high levels.  I suspect this is the case as typically distress in the consumer sector lags that in the corporate sector.  If a business recovery is protracted in Dubai (my  view), then  consumer difficulties are likely to persist and may not yet have hit bottom.  If so, the retail NPLs will continue to increase in absolute and percentage terms.
2. 44% of value of retail loans to UAE nationals and greater than 60% to government employees.  It would be interesting to see the breakdown of NPLs between these categories and "all other" to see if the problem is concentrated in one customer segment.  If government employees (which presumably includes almost all of the nationals) are having financial problems, that would be a sign of very wide distress.
3. The bank is controlling unutilized limits on credit cards.  Not sure I follow this.  Isn't the point of a credit card to have an unused limit?  Is this a reduction in limits not frequently used?  That is,  underutilized limits?  If so, then it would seem the bank is expecting more consumer distress as it is trying to prevent cash strapped consumers from using their credit cards as "last resort" financing.   Though to be fair bankers are usually pretty good at figuring out they should close the corral gate after the horses have bolted.  So it may be a bit of retroactive underwriting - which usually hits largely the good customers.  It would also be interesting to see how many cards were either max-ed out or nearly so.  That could be a sign of more potential bad loans.
4. Like firms who "downsize" instead of 'fire" workers, ENBD has "de-grown" its car loan portfolio.  A good de-offensive move.
5. Mortgages have an average 75% loan to original value.  With the decline real estate prices, it would seem highly likely there are a lot of "under water" mortgages on the books.  Offsetting this ENBD claims that  90% of its customers are "high income"  though I wonder if US$82,000 or thereabouts is really high income in high cost Dubai.  Expect more mortgage problems.

  Other Information

1. Slide 10 with an analysis of the net interest margin.  An 89 basis increase in loan spreads (primarily corporate) and a 25 basis point increase in treasury profits (I'm guessing primarily from loan  benchmark pricing definitions and some gapping) offset partially by an increased cost of funding -  roughly 50 basis points. 
2. Slide 16 with some funding data.  Debt maturity profile: over the next three years the bank has to refinance 79% of its AED24.1 billion debt with 30% due this year.  Offsetting that the bank states it has AED18.5 billion in unused liquidity facilities.
3. Slide 36 has a quarterly review of 2008 and 2009 with asset quality credit metrics. Here you can track the quarterly movements.

There's probably no ultimate credit worry here.  The UAE is not going to let a bank the size or importance of ENBD fail (Oh, did I just glimpse the shadow of an "implicit guarantee"?  Perhaps just an imagined "keepwell").  Probably the major concern is stock performance.  And for term lenders, credit re-rating risk.  It would be unfortunate to prematurely lock in a margin which suddenly becomes too low for the risk.  

Aldar AED 9.1 Billion Sale of Yas Island Assets = Bailout

In its press release on 2009 performance, Aldar noted it had sold some infrastructure and land assets on Yas Island.  Apparently, as the sale was for only a small amount no further details were felt  necessary.  

A week later when it released its 2009 financial report, Aldar noted the sale had been to the Government of Abu Dhabi for AED9.138 billion (US$2.49 billion).  At that point Aldar did not provide any discussion of the profit on the transaction.  Either they spell الشفافية with a capital ش   in Abu Dhabi.   Or the company and the Government were still figuring how to structure the sale.

Today Aldar responded to a letter from the Abu Dhabi Stock Exchange to advise that the sale had been at cost.

Clearly, the Government of Abu Dhabi is bailing out Aldar - either with some additional cash or loan forgiveness.  It appears we'll have to wait for the release of Aldar's 1Q10 financials or the ADX to send another letter to the company to learn how the bailout was structured.

Yas Island website here. 

NBAD Requests Cancellation of Approval to Buy Back Shares

 

A rather curious announcement over at the ADX.  The UAE SCA agreed to NBAD's request to cancel its previously granted permission to buy back up to 10% of its shares.

Why is this strange?

NBAD had obtained permission earlier from the SCA to re-purchase its own shares.  The decision whether to purchase shares or not was entirely in NBAD's hands. 

In other words, it needed no official sanction not to purchase it shares.  And therefore did not need to obtain cancellation of the authorization.

As you'll recall, the IMF had expressed some concern about the capital levels of UAE banks.  Also when the government has given you "rescue" capital, it would be a bit ungrateful if you were to buy out your existing shareholders.  I suspect that the Central Bank had a quiet word with NBAD to encourage them to get the cancellation.  In that way the CBUAE does not have to rely on the discretion of NBAD not to repurchase its shares.

Since NBAD is one of the more conservative local banks, if I'm correct other banks with similar permissions may suddenly develop a CBUAE-sparked desire to cancel them.

Major UAE Banks Have Rengotiated AED15 Billion (US$4.1 Bn) in Loans - Signs of Writeoffs to Come?

The National reports that three of the UAE's largest banks have renegotiated some AED15 billion in loans.  To be clear this is the stock of renegotiated loans as of 31 December 2009.

1. EmiratesNBD - AED7.8 billion in 2009 on top of an existing AED2.5 billion.
2. NBAD - AED3.2 billion
3. First Gulf Bank - AED2.5 billion

Some comments.

1. It's common practice for a bank to renegotiate a loan with a client if the client cannot fulfill the original terms.  This is often the smartest thing to do.  Court windups are costly - both in terms of time and ultimate recovery.  No more so that in the UAE which has one of the worst insolvency regimes in the region.  The goal of any banker is to get back as much of the contractual amount due as is possible.
2. Under IFRS loans are included in the "renegotiated" category if a material change has been made that is a concession the Bank would normally not make or terms of the loan have been amended.  So for example if the interest rate has been reduced.  Or if changes have been made in repayment schedules - extension of maturities.   So some changes may not reflect fundamental credit weakness in terms of ultimate repayment but a bit of slack - a lower interest rate, an extra six months for repayment.
3. That being said, can renegotiations be used to push problems into the future?  Yes.  Do banks sometimes do this?  Yes.   
4. Looking at NBAD's 2009 financials (Note 4), they have classified roughly AED557 million of the AED3.183 billion of renegotiated loans as "OLEM"  which means weak  or watch credits.  Those monitoring  the health of NBAD would want to keep an eye on the OLEM category which has gone from AED454 million at FYE08 to AED3.3 billion.  "Non Pass" loans were AED3.0 billion at FYE 2008 and AED2.3 billion at FYE 2009.  An improvement not only in amount but as well in allocation among the classifications.
5. Looking at FGB's financials (Note 32.2), renegotiated loans were AED836 million at FYE08 increasing to AED2.456 billion at FYE 09.  FGB's watch loans increased to AED1.2 billion from AED0.8billion.  There has also been a fairly dramatic rise in the amount of "non pass" loans (= weaker credits) from roughly AED3.5 billion to AED6.3 billion. 
6. Therefore, I think that when looking for potential future problems, the OLEM or "Watch" category  is probably the best early warning indicator, followed by a close eye on the movement in renegotiated credits.

International Petroleum Investments Abu Dhabi Refinances US$2.5 Billion Loan

 

Gulf News reports that IPIC has refinanced a US$2.5 billion loan maturing this June with a three year term loan of the same amount.

The original loan was part of a US$5 billion financing announced 4 August 2009.  Two tranches each of US$2.5 billion.  Tranche A was a one-year facility designed to be refinanced with a capital markets issue.  At the time the market reported that pricing was 250 basis points for the first six months, then 350 basis points for the next six months.  And if extended beyond that date, 400 basis points.  Tranche B was a two year term loan, which at the time was reported to carry a 350 basis points margin.  Each lender had the right to agree a one year extension on its portion of the loan.

According to Gulf News the new loan is at 150 basis points margin with commitment fees of 150 basis points for commitments of US$200 million with lower fees for lower amounts.  

As described this doesn't sound like a traditional "commitment fee" but more an upfront underwriting/participation fee.  A one time "up front" flat fee.  Such a fee would vary directly with the size of the lenders' underwriting in the loan and final take.     

A traditional commitment fee (on undrawn balances) would be the same percentage for each lender but applied to the respective undrawn amounts of their commitments during some period, e.g., semi-annually usually.

Assuming a US$200 million take and that this is a underwriting/participation fee, a bank making a US$200 million commitment to the loan and holding that amount as a final "take" would have an asset with an effective margin of 202 basis points per annum - or 52 basis points over the stated margin.

Taking this story at face value, it shows that:

1. Unlike Dubai, Abu Dhabi has access to the market and to term funds.  It has raised a three year loan to refinance a maturing one year loan.  
2. The margin on the new loan appears to be much lower than on the previous loan.  Without knowing the front end fees on both loans, it's not possible to calculate the exact differential, but it appears to be substantially less on the refinancing - perhaps as much as 200 or more basis points.
3. Capital markets are not offering an alternative for a take-out or not offering as attractive pricing as the loan market.  So IPIC has refinanced in the bank market.

Abu Dhabi Islamic Bank - A Tale of Two Press Releases

Let's look at two press releases on ADIB's 2009 financial performance.  One reflects well on the professionalism of the institution.  The other frankly does not.  

Let's start with the offending press release.

First, at WAM the headline reads "ADIB Reports An Operating Profit of AED 1,527 mn for the 2009 Financial Year."

This approach illustrates another of Abu Arqala's 8 Simple Rules of Financial Analysis.  When the earnings headline doesn't mention net income, you know there's an earnings problem.  And a corollary:  the further down in the press release the net income line is buried the more serious the problem.  There were a couple of egregious examples of this in Bahrain a while back, despite a very clear statement in the Central Bank of Bahrain's Rulebook Module PD about burying bad information.

In the second paragraph, after being regaled with the year's numerous achievements we get the bad news:

After a year of multiple achievements, including: increasing total customer numbers by 27.2% to 342,097; the opening of the 50th branch in the UAE; an increase of 25.1% in total assets to AED 64.1 billion; the strengthening in both capital adequacy (to 16.96% under Basel II) and liquidity ratios (financing to deposits ratio improved to 83.9%); and a top three year-on-year improvement in customer service ratings, the Bank has taken a preemptive decision to set aside a year's earnings to enhance its total provisions and secure future growth.

You'll notice that the provisions aren't described as being necessary to cover duff loans and investments that the bank has made.  They are actually a pre-emptive decision to "enhance total provisions and secure future growth".  Right.

Equally amusing is the later statement "while the growth in customer financing comes on the back of a robust credit process that ensured the booking of quality assets."  If the credit process is so robust, why then is there a need for provisions of this magnitude?  Or are these the sins of the past? 

In regard to credit quality asset growth of  25% during the year is touted as though this were some great accomplishment.  It is really not that hard to make loans to people.  The trick is of course collecting the loans you've made.  That raises a second of AA's 8 Simple Rules of Financial Analysis.  When a bank has explosive growth in assets, look for a spike in bad loans to follow in the next 18 to 24 months.

If things are just fine, I suppose there is also an intriguing question why the Federal Government and the Emirate of Abu Dhabi had to put in additional capital in the form of Tier 2 instruments.  If I'm not mistaken the amounts are not trivial:   AED4.2 billion compared to shareholders' equity of AED5.9 billion as of 30 September 2009.

The press release then goes on to recount a variety of peripheral and not particularly important issues related to 2009's financial performance.  It seems in the hope that the bad news will be buried in so much prose that the reader will miss it or forget it by the time he finishes.

A couple of comments:

1. Provisions generally are the result of past mistakes and/or to be fair as well bad luck.  There's no real banker who's never made a bad loan unless it's someone who works in administration. That being said, precisely how booking a provision leads to further growth isn't clear.  In fact, when a bank has to take a provision this size, it might be a good occasion for it to consider whether a bit more moderation in growth (booking assets) is advisable.
2. Does whoever wrote this press release actually believe that this sort of announcement isn't perfectly transparent?  And doesn't elicit a snicker or two from just about everyone who reads it?  And leave the impression of less than kalaam sharif? 

Turning to the press release at the ADX, this is much more professional and deals with the provisioning issue in its headline:  "To Provide A Solid Base for Future Growth, Abu Dhabi Islamic Bank Sets Aside A Year's Earnings As Provisions".   

There the hard news is dealt with up front.  Some of my same quibbles would apply to the sugar coating of the need for the provisions, but at least the thorny issue is raised.   

BTW  provisions are now 4.2% of gross financings up from 1.69% the previous year.  Simply put, bankers don't take provisions for fun.  Taking provisions is one of the hardest things for a banker to do because it directly impacts his or her career and bonus.  Also it is very hard to get unneeded provisions past competent, diligent auditors particularly given the current constraints under IFRS for recognition of impairments.

So we're left with a question.  Did WAM take ADIB's reasonable press release and cut and paste to create what we saw above?  I'm guessing this is the case.  If so, then ADIB and others would be well advised to have a word with WAM to avoid "Gulf News journalism standards" in the future.

The National Newspaper Abu Dhabi "Beauty Queen Dazzles the Judges"

 Copyright The National Abu Dhabi

A long, slender neck, full lips, a well-shaped nose and long legs – Ruwayda had all that, and then some.

Sporting long, curly lashes, a full hump and even spacing between her toes, the one-year-old purebred Omani Asayel finished first in the beauty pageant at the Al Dhafra Camel Festival which began yesterday.

I just couldn't resist.  The article not the camel.

Abu Dhabi Commercial Bank AED 9 Billion (US$2.45 Billion) Exposure to Dubai World

Alaa Eraikat, CEO of ADCB, has disclosed that the bank has about AED 9 billion (US$2.45 billion) in exposure to Dubai World "about half of which are supported by collateral and income streams from infrastructure and other projects".

As of yet, ADCB has not taken any provisions on Dubai World because the loans are still performing.

He also noted:  “This is what I tell you makes a big difference [and explains] why we feel comfortable here [with our Dubai World exposure] rather than the lending to Saad and Gosaibi.”  Wise words indeed.

And that of the AED2.1 billion (US$572 million) in 4Q09 provisions, roughly one half were for Saad and AlGosaibi leaving about AED900 million (US$245 million) of exposure to these two companies still on the books.

The bank also provided AED700 million (US$190.7 million) against its AED 1billion (US$    million) of "foreign investments in special investment vehicles and credit default swaps in the US".  Mr. Eraikat said that the remaining AED300 million might also "potentially turn toxic".

Two comments:

1. At 30 September 2009, ADCB had roughly AED20.1 billion in equity.  It's exposure to Dubai World is roughly 45% of equity.  That seems a rather high percentage. 
2. Ambition unaccompanied by intellect is a recipe for disaster.

Dubai: Abu Dhabi Support - US$5 Billion Less Than Meets the Eye

Very interesting news item in Monday's The National.

Probably, most observers out there including me assumed that the US$10 billion committed to by Abu Dhabi in December for the last minute payment of the Nakheel bonds was in addition to the November US$5 billion sale of bonds by Dubai to National Bank of Abu Dhabi and AlHilal Bank.  That is, that Abu Dhabi had provided US$10 billion in additional aid on top of the  US$5billion committed to by these two banks.  US$15 billion, which when considered alongside the US$10 billion purchase by the Central Bank of the UAE in February 2009 (fronting for Abu Dhabi) meant US$25 billion in assistance.

As to the actual payment of funds, in an analysis of the Government of Dubai's 14 December press release, I noted that the language used suggested that the entire US$10 billion had not been disbursed.

The first of these beliefs was wrong.  The second appears to have been right.

Instead of providing new money of US$10 billion, Abu Dhabi has apparently purchased the US$5 billion commitments of NBAD and AlHilal.   That means that the  December net commitment was only US$5 billion.  In other words the total  amount from Abu Dhabi Inc in November and December was US$10 billion not US$15 billion.  And, thus, the total aid to date is only US$20 billion not US$25 billion.

But there's more to the story:  the disbursement of funds.  Two points.  The quantum of funds disbursed so far.  The method of disbursement.  Both of which I think show that Abu Dhabi is keeping Dubai on a rather short leash.

As I commented in an earlier post, these two banks gave a commitment to buy the bonds over one year with a modest immediate cash payment. And, as I noted at the time, this gave Abu Dhabi continuing leverage over Dubai.  It seems that this pattern continues with the December US$10 billion.   Instead of cash disbursements of US$11 billion in November/December, the amount is roughly half that, leaving approximately US$5 billion to be drawn down over some unspecified period.

What's also intriguing is the comment attributed to unnamed bankers that the Abu Dhabi Department of Finance made the payment to settle Nakheel's bonds directly.  That sounds as though DOF paid the agent and did not remit the funds to Dubai to then pay the agent.  In this modern age there's no reason why the DOF couldn't have transferred the funds to Dubai and let Dubai make the payment.  There are really only two reasons why something like this would be done.  Either (and I think this is highly doubtful), Abu Dhabi was concerned that the funds would be diverted by Dubai.  Or to make the point of Dubai's dependence very clear to everyone.

My sense is that both of these tactics are intended as ways of keeping Dubai on a short leash.  A very short leash. The remaining US$4.9 billion will probably be disbursed on an "as needed" basis.  At each disbursement Dubai will have to ask for funds, probably provide some sort of justification/explanation and thus be reminded of its dependence.  As well, Abu Dhabi will be able to condition disbursement on compliance with previously agreed deliverables.   Or, if it wishes, to extract a new quid pro quo.

On that topic, I still think that Abu Dhabi's goal is primarily political, though I expect that Shaykh Khalifa is also keeping a sober eye on the absolute amount of spending devoted to Dubai.  It is the Abu Dhabi way.  And to be clear, I don't think Abu Dhabi intends to be vindictive with Dubai or needlessly embarrass the Emirate or Shaykh Mohammed.

A bit more on the article's explanation for the reason for buying out NBAD and AlHilal's commitments. As banks both institutions would have had to  reflect diminution in  value in Dubai bonds in their financials.   If held as trading assets through their income statements.  If as available for sale, through the fair value reserve.  And, if as held to maturity, by disclosing in a footnote current market price versus historical cost carrying value.  Any of these steps could potentially impact their credit ratings as well as their Basel II capital adequacy ratios.  As a government, Abu Dhabi is immune from the requirements of IFRS as well as  detailed disclosure of its financial affairs.

One final comment, I think it would be a very good idea for Dubai to reflect carefully on the handling of the December announcement of Abu Dhabi's support.  If the market finds out now that in effect only US$5 billion in additional aid was given instead of US$10 billion, then it may conclude that an attempt to mislead was made.  Or that there is some fairly basic skill lacking.  Neither of which will be helpful at this critical juncture - especially since so much confidence has already been eroded.

Burj Khalifa

AlphaDinar has an interesting article on the surprise naming of the Burj and the economics of the new building.  Well worth a look.

This is similar to donors to universities having buildings named after them.  And in some cases a big enough contribution gets the donor's name attached to a school. 

Shaykh Khalifa is only lending US$ 25 billion to Dubai so it's just his name on the Burj.   At least for now.

Moody's Downgrades Abu Dhabi Commercial Bank

Here's a news item with some quotes from Moody's press release on the downgrade.   And another here.

You can register for "free" to read the original press release at www.moodys.com.  

After the downgrade, ADCB's ratings are still respectably within "investment grade".

Dubacle: More Delusion

There's a commentary in The National on the relative negotiating positions of the banks and Dubai Inc which is to put it mildly a bit unbalanced.  It seems much of this is based on comments from the borrower.

It's unclear if this article is meant as propaganda to raise morale on the home front.  Or it reflects the  thinking of decision makers at Dubai Inc - that they really believe they are in the driver's seat.  If it does, a very dangerous delusion.

Certainly, Dubai Inc is not without leverage.  The sheer quantum of debt and the government connection give Dubai a good deal of negotiating power.  But that power is not unlimited.  It cannot serve up whatever dish it wants.  The Banks too have power.

Let's go through the article's contentions.

1. Unless The National is applying Gulf News' new reporting standards for the Dubacle or there is a relatively low local bar for competence, it's a bit of a stretch to think of Dubai's recent actions as being even remotely "shrewd".  Dubai's "clever" play here has caused a real setback not only in Dubai, but the wider world of the Emirates, the GCC and beyond.   A coach whose team has a propensity for "own goals"  should be very careful about imagining himself another Arsene Wenger, particularly if he's called those plays.   Equally such a team needs to be very careful, especially in front of its own "net".  There is a significant difference between the state of play at Emirates Stadium and in the Emirates.
   
2. The "set of incentives and penalties" is less the result of the work of "brilliant" advisors than the simple situation described above.  Dubai Inc owes the banks a shipload of money.  Many of them will be looking for a way to avoid taking a big hit (but note that incentive is not opened ended) and so will be inclined to "extend and pretend" on the loans if need be.  As well, since the borrower is government related, some of the banks (but not all) will want to maintain as good a relationship as possible on the presumption that there will be future profitable business.  
3. It's important to remember that lending is a very low margin business.  Gross interest margins are rarely over 2.5% - and that is before all other costs.  It doesn't take much of  loss of interest or a haircut on capital to undo many prior years' slim margins.  Thus, a "small loss" may be much larger than it appears.
   
4. The payment of interest is a major carrot, but the failure to pay interest also has four very negative impacts on Dubai.  First, it lessens the incentive of banks to play along.   Non accrual is  painful. Why play nice if you're going to take a hit?   Second, many local banks are significant lenders.  Non accrual will be at least as painful, if not more, for them.  Therefore, it is not just "foreign firms" who find interest "especially" important.  And many of the largest local lenders happen to be government owned banks in Abu Dhabi and Dubai.  So non payment of interest is not without some very direct and visible consequences.  Third, non payment of interest is not only going to set back efforts to repair the harm already done to the reputation/status of the DIFC, the local stock market, the good Shaykh himself, etc but also will aggravate it.  As well, it's likely to cause additional damage elsewhere in the region.  Fourth, non payment of interest is going to increase pricing on any new loans and dramatically diminish their volume  - not only to Dubai but to other regional borrowers.  Clearly, withholding interest is not without very serious risks for Dubai.
   
5. The imposition of the DIFC insolvency/reorganization law is a double edged sword.  Yes, it gives Dubai Inc a way to get a legally enforceable standstill in the UAE and probably other jurisdictions without bank agreement.  It also means that 100% creditor agreement isn't necessary to close a refinancing.  However, it takes the case out of the inadequate local legal system and gives the creditors important rights and a very visible "Western style" legal forum.   The borrower cannot hide behind local courts nor use the excuse that local law won't let it do something.  Or simply shrug its sholders and say "Well, that's the local court system for you".   With the case in the DIFC court and under the DIFC law, should Dubai Inc attempt to game this forum or ignore its decisions, then the very basis of the DIFC is profoundly undermined as is any pretension to a transparent fair system in the Emirate.  Thus, the banks can use or threaten to use this forum to upset those pretensions if Dubai does not play "nice".   If Dubai Inc fails to pay interest, the banks can make a case that the company is truly insolvent and should be wound up.  And filing such a case does not require that a majority of creditors agree.  Chapter 5 Paragraph 51 of the DIFC Insolvency Law states that one of the tests of insolvency is that a company be past due on an amount over US$2,000  for three weeks without agreement of creditors.  A standstill of course legally stays this route.  But how long could the DIFC Court allow a standstill to remain, if creditors cannot agree a rescheduling?  And at what point do creditors claim the court process is rigged if the court refuses to end the standstill? Could Shaykhly pride accept either of these two developments as both entail the very visible ending of the Dubai dream?  Wouldn't a disguised unwinding be more palatable just as an "extend and pretend" for the banks would be?  If, of course, such is needed.
   
6. The writer seems to presume that Aidan can decide "how big a haircut" he wants to give creditors, dictate the terms to them, and they will meekly accept.   Sadly, this is a typical regional debtor approach in many cases - to try to skin the banks for more than is needed.  But the writer's belief to the contrary, any haircut will have to be justified by economics.  A great deal of the incentive of the banks to play along is to minimize the amount of loss taken.  The first element is the  absolute amount.  Banks will not take whatever Aidan decides.  The second element is the timing.  Banks will want to minimize any immediate loss.  Many a rescheduling has shifted known problems into the future - hoping for a miracle.  And the personnel involved prefer that any serious damage occur on someone else's watch.  And even, if writer is correct and banks may have to sit still for Aidan's haircut, they do not have to come to the Dubai or UAE barbershop again. That is, they can withhold new loans.  Any haircut justified or not will have an impact on new extensions of credit.  A large  haircut or one that is seen as unjustified will act as a potent drug against bankers' anmesia (future loans and future pricing).  Since Dubai on its own cannot execute its economic plans without new loans., this seems a rather dangerous thought much less a strategy.  That is, unless Shaykh Khalifa is going to fund all new projects.
7. As well, while the old saying that it is easiest to forgive oneself is no doubt true.  A haircut for creditors also affects local banks.  Many of whom are owned by either Abu Dhabi or Dubai.  Both Emirates would have to provide additional capital to their banks.  One might argue that on a net basis Dubai would gain (the Emirate would benefit from a net reduction in loans), but that would be to ignore the very real negatives mentioned in Point #6.
   
8. It's likely that many original creditors have sold their positions.  The new creditors bought at a discount and are looking for a quick turn on their money.  They have no interest in a relationship with Dubai World, Dubai Inc, Dubai, the UAE, the GCC etc.  They will not go gentle into the night.  They are likely to play very hard ball as QVT did on the Nakheel Sukuk.
   
9. Failure to agree a debt rescheduling within an artificial deadline also harms Dubai and the region for the reasons mentioned above.   So Dubai has an incentive to work towards a deal as well.  Many a bank group has told a debtor that it has to make a concession because it's impossible to "herd the creditor cats".  In fact, that is a well known creditor strategy in a rescheduling.  There will numerous small "cats" among the creditors refusing to go along on the hopes that they can be bought out if they cause enough trouble.  The DIFC law requiring just over 75% of creditors' agreement to impose a refinancing is a bit of an antidote, but it's not a miracle cure.  QVT had no trouble assembling by some accounts 40% of the Nakheel bondholders to oppose any payment delay.
10. From a technical aspect, the creditor group involves a variety of diverse groups - traditional lenders, "Islamic" lenders, syndicated loans, bi-lateral loans, bonds, sukuks, etc.  All with different interests, legal positions, etc.  A large and very diverse group of cats to herd.  The thought that this will be all neatly packaged by April is a bit optimistic.  And the onus will be on Dubai to continue paying interest to avoid upsetting the banks.  And note that most syndicated loan agreements contain a clause that requires 100% creditor consent for an extension of maturity, change in interest rate or any serious change in creditor rights.   A "haircut" would certainly fall under these clauses.  And so one bank out of 100 in a syndicate can hold up the entire syndicate's agreement to a rescheduling as the DIFC law does not apply within syndicates.
    
11. Finally while it may come as a shock to the writer at The National, most rescheduling negotiations take place after a debtor has actually defaulted.  History would suggest that default does not convey any special power to the debtor.  It merely reflects the reality of the simple fact that the debtor cannot pay its debts.  The terms of the restructuring of Global Investment House and the failure of The Investment Dar to close its own restructuring should be ample caution to those who feel defaults place overwhelming power in the hands of borrowers.
    
12. Probably, the biggest omission in the article is the position of Abu Dhabi.  Abu Dhabi has "invested'' US$25 billion of its own funds in Dubai for debt support - US$10 billion through the Central Bank, US$5 billion through AlHilal and NBAD and US$10 billion itself.  Not to mention other charitable works it has undertaken in the Emirate.  A financial Armageddon in Dubai could cost it a pretty penny.  So it's unlikely that Shaykh Khalifa has given his "brother" Shaykh Mohammed a blank check to engage in silly power games with creditors - given the potential impact on those financial subventions as well as the larger interests of Abu Dhabi and the UAE.

While Dubai has a good hand in this card game, I think the creditors have a better hand.

For the foreign banks by and large Dubai is a samak saghir in the context of their overall business.  And regional titans of finance - both governmental and otherwise - should realize that in the context of these firms' global business, the region is no larger a fish.   A painful loss in Dubai will not be life threatening.

Local banks bear more risk though no doubt the government would lend a helping hand if need be. 

That is not the case for Dubai.  And Dubai has as well to deal with Shaykhly pride.  The Queen will not lose any face over a failure to resolve the Dubacle. The good Shaykh may. 

What is the critical issue now is that both sides put away any juvenile attitudes.  The rescheduling will require very hard work.  Both sides should approach it on that basis with decisions founded in economic reality.   This is not the time for bragging and schoolyard attitudes.  It is time for professionalism.

Woman First in Abu Dhabi Chamber of Commerce and Industry Elections

Mabruka ya Fatima!

Details here.