Dana Gas Restructuring: Not So Current (Assets) Trade Receivables -- UPDATED

Not Snow Not Sugar

They say that "even Homer nods".  If a comparison is to be made with Homer and AA, it's more likely Homer Simpson not Homer. 

In my haste to release this post, I failed to include one very key detail.  

The KRG trade receivables are payable to Pearl Petroleum Limited not DG.  The use of the word "share" in DG's financials Note 17 and 28 is crystal clear. 

What does that mean?

• DG's is unable to sell the TR because it does not have title. There could be restrictions imposed by PPL's contract with the KRG on transfer of title or assignment of proceeds by PPL to a third party, here DG.  As noted elsewhere, certain unspecified actions by PPL require 100% shareholder agreement.  It is not clear if this is one of those decisions.  If it is, then another shareholder--perhaps from among the three 10% shareholders--OMV, MOL, and RWEST--might frustrate a transfer.
• As PPL is the payee/owner of the TR, any payments from the KRG go to PPL.  As such, there is the theoretical possibility that such proceeds could be trapped at PPL.  Presumably, PPL has been structured to avoid third party debt with shareholders providing any needed debt financing.  But there ae other liabilities that could interfere with the transfer of funds from PPL to DG.  For example, claims of environmental damages by the KRG, other contractual liabilities, or other third party damage, etc. 
• As I read Note 28, the aggregate KRG TR owned by PPL are some USD 2.04 billion.  What that suggests is that if the KRG pays $100 to PPL, DG's share is $35.  Meaning in effect that for DG to collect the entire USD 713 million, the KRG will have to pay PPL USD 2.04 billion.  That certainly seems to lower the probability of a prompt payment and perhaps even payment. 
• And to state the obvious, sukuk holders' do not have direct access to PPL's assets including the TR, but have access through DG's equity stake in PPL.  Not  a particularly comfortable place to be in. 

One other note and that's Note 28.  PPL is charging the KRG interest.  Contrary to an earlier erroneous statement by AA, DG is accruing interest to income but is not increasing the balance of TR.  Rather it is deducting this amount from Provisions on its balance sheet.  

DG’s ability to repay its creditors depends on the company’s ability to generate cash.  

In this post we'll look at Trade Receivables.  These are accrued amounts owed by customers that have yet to be paid, that is, converted from receivables into cash. 

DG is having a problem (first euphemism of the post) converting TR to cash.  If you bill your customers and they don't pay promptly or don't pay at all, you have a problem. 

Dana Gas Trade Receivables - USD Millions
	1Q2017	2016	2015	2014	2013	2012	2011
Total Receivables	999	982	950	992	795	599	475
KRG	712	713	727	746	515	365	247
Egypt	283	265	221	233	274	234	228
% Total Equity	36%	35%	33%	37%	31%	25%	21%
% Retained Earnings	163%	163%	137%	172%	165%	172%	216%

  Source:  DG Annual Reports.

1. DG income is dependent on two customers – the Kurdish Regional Government (“KRG”) in Iraq and Egypt.  As AA learned in business school, a successful business needs a good product and a diverse and credit worthy base of customers who actually pay.  In baseball a 50% average (for a hitter) would be outstanding.  In business, however, it isn’t good enough!
2. Recently Zora UAE has begun generating revenue but only about 5% of the total.
3. Total receivables have more than doubled since FYE 2011 largely concentrated in KRG “paper".

Dana Gas Trade Receivables - Past Due Analysis
	Total Amount	Current	Past Due Not Impaired
Year	USD Millions		<120 Days	>120 Days
1Q2017	999	7%	5%	88%
2016	982	5%	14%	81%
2015	950	8%	8%	85%
2014	992	11%	19%	70%
2013	795	16%	18%	67%
2012	599	17%	17%	66%
2011	475	23%	33%	45%

DG Annual Reports Note on Trade Receivables.

1. Over the period FYE 2011 through 1Q2107, the proportion of past due receivables has almost doubled, while the amount of current receivables has declined dramatically.
2. While DG’s presentation is technically “true”, that information does not convey the extent of the past dues. 
3. Yes, some 88% of TR are past due by more than 120 days.  But that's akin to the difference between saying “I hit Jimmy” and “I hit Jimmy and killed him”.  Both are technically true statements about the same event.  Yet, the first is misleading.  (Second euphemism of the post.)
4. Reading DG’s financials one might think that because TR are classified as “Current Assets”, the outward limit would be one accounting cycle or 1 year.  So no TR would be past due more than 365 days. That’s clearly not the case.  
5. From Slide 11 in DG’s 1Q2017 Investor Presentation, it’s clear that a good portion of TR date from 2014 and earlier.   
6. Side Note: DG charged the KRG past due interest at 9% according to its no doubt “Shari’ah” interpretation of its contract beginning in 2013.  In 2016 following an arbitration award, some USD 121 million in accrued interest for 2015 and 2016 was reversed, being the difference between the accrued amount and the Arbitration approved rate of Libor plus 2%.  If you use the amounts of billing and collections shown in the slide, you will have an unexplained difference (even when including the 2015 and 2016 interest reversals) which likely is the effect of other interest transactions.   There's only a minimum problem of USD 4 million constant difference on the Egyptian TR.
7. As per Slide 11, KRG collections over the period 2015 through 1Q2017 were USD 175 million and billings were some USD 246 million.  Note  
8. For the purpose of this analysis, we’ll apply collections on a LIFO basis (against current billings) and FIFO (against the oldest billings).  Billings are actually applied as per contract terms, which are unknown, but this exercise will give us a range of possible outcomes. 
9. If the USD 175 is applied on a LIFO basis, then some USD 700 million plus is more than 2 years past due.
10. If the USD is applied on a FIFO basis, then some USD 500 million is more than 2 years past due. 
11. Either way that’s a dismal picture.  
12. As the table immediately above indicates, at FYE 2014 there were substantial past due amounts from prior years.  Given the KRG’s share of TR, there are likely to be substantial amounts of KRG receivables past due for many years.  AA is guessing 5 or more years.  Some clear present value implications.  
13. Collections from Egypt over the same period were some USD 217 million and billings USD 267 million.  Note Egypt TR at FYE 2014 were USD 233 million.  
14. On a FIFO basis, Egypt receivables would be more current with substantial amounts close to 2 years past due. 
15. On a LIFO basis, the past due tenor would lengthen out to more years. 

The presentation of past due receivables in DG’s financials raises some interesting questions for the Company and its auditors. 

1. As per DG’s financials, TR are generally contractually due between 30 to 60 days.  At what “time” point does a receivable that is past due cease to be a current asset?  AA would think that receivables past due over 1 year would no longer be “current” assets to say nothing of those overdue for multiple years. 
2. If receivables are overdue an inordinate amount of time, when does an allowance become necessary?

Let’s turn to DG’s 2016 Annual Report for their “case”. 

1. Accounting Policies Note 2 Page 58 "Loans and Receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. The Group’s loans and receivables comprise ‘trade and other receivables’."  
2. Accounting Policies Note 2 Page 59 "Trade and Other Receivables Accounts receivable are stated at original invoice amount less a provision for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off when there is no possibility of recovery."  
3. Financial Risk Management Note 32 Page 81 "(i) Trade Receivables The trade receivables arise from its operations in UAE, Egypt and Kurdistan Region of Iraq. The requirement for impairment is analysed at each reporting date on an individual basis for major customers. As majority of the Group’s trade receivable are from Government related entities no impairment was necessitated at this point." 

AA’s observations: 

1. Despite stated maturity, the Trade Receivables haves whiskers on them like the old undisposed of items in your refrigerator (see picture above) that start stirring around when the door closes and the light goes out.  Including them (the TR) in current assets on the basis of dishonored contractual maturities does not seem appropriate. (Third euphemism of the post).  Any more than referring to the feral food inhabiting the dark corners of your refrigerator as “fresh”.  At the very minimum, the “time” buckets in the aging should convey more accurately the extent of past dues, e.g., past due 1 year, 2 to 3 years, 4 to five years, and over five years. 
2. DG’s non-impairment argument based on obligors being "government related" is laughable.  Assuming DG are correct, then there is no need for provisions or worry about Puerto Rico. It’s not only government-related, it’s government.  No one seriously thinks that PR is a solid credit.  
3. But there's more. No one should be mistaking the KRG or Egypt for investment grade or even BB borrowers.  Both Iraq and Egypt are rated B (non-investment grade).  There is a world of credit quality difference between say Switzerland and Iraq. 
4. When a B credit does not pay for a prolonged period, provisions are not just a good idea.  They’re required. Even if the obligor is a government related. 
5. What makes the argument even more absurd is it application to the KRG.  Not only is the KRG a sub-sovereign, but at some point in the (near) future, Baghdad is likely to reinforce that sub-sovereign status with vigor, perhaps with the help of two neighboring countries.  Then DG may face an argument similar to the one it is making about the Sukuk: that the existing contract with the KRG is illegal and unenforceable and thus the debt is void.  

AA can understands why the DG has adopted its stance on the TR: self preservation.    

But AA does not understand their external auditors’ position, though I will give them credit for noting in their 2016 FYI audit report page 41: "Considering the uncertainty around recoverability of trade receivables from KRG, we have included an emphasis of this matter in this audit report."   

AA will be taking a look at DG's ability to generate cashflow in a coming post.  

Perhaps this post and that one will suggest reasons why DG have thought it “wise” to adopt their “clever boots” maneuver on the Sukuk.

UAE Banking: Storm Signals in ADCB's 3Q2016 Financials

AA Has the Full Range of Flags, If Needed

As promised earlier, further thoughts on ADCB’s 3Q16 financial report plus an added bonus--a typical AA “get off my lawn” rant on financial reporting and regulatory environment.  The latter in a separate section at the end.

Introductory Comments

If you know your nautical flags, you will immediately see that the “storm signals” warning is at a modest level. In other words, I am not predicting an imminent serious crisis for ADCB.

The bank has reasonably robust stand-alone financials, though note the reporting  “lapses” discussed below. 

If by some low probability event, the bank were to develop life-threatening problems, it would almost certainly receive official support as it and other UAE banks have in the past, e.g., after the Great Financial Crisis of 2008.    The Abu Dhabi Government owns more than 60% of ADCB’s equity and has a special “incentive” to step up and has the resources to do so.  ADCB is a systemically important bank. Thus, the Central Bank is also likely to provide support.

If there is no imminent danger of collapse, why this analysis and why the use of the term “storm signals”? 

Free float is generally low in GCC equities (ADCB somewhere around 30%) and generally this free float is primarily in the hands of retail and not institutional investors, the latter presumed to be less susceptible to market panic.  Note I said “less susceptible” not “not susceptible”.  

In such “markets”, the price impact of investor actions—sales or purchases--is outsized relative to other markets.  A change in market sentiment and one’s return on ADCB stock could decline.  A large enough market decline and one might lose some of the initial investment, depending on one’s entry price. 

These characteristics increase risk.  If risk is higher, then the utility of a warning is greater.  

In addition as is the case here, when an issuer’s financials are deliberately opaque, the utility of a warning increases.   

“Storm signals” like the picture of the flag above provide warnings about potential problems. 

If there is a gale force typhoon in progress, one hopefully doesn’t need to see a flag to decide to keep one’s boat in port.  But if the storm is not yet fully apparent, a warning flag can prevent the sailing of boat, a change in its planned course, or alert the crew to be on the watch for the storm if they decide to leave port on the original course. 

Financial storm signals serve the same function for investors.  Warnings can be used to trigger action to prevent losses or in some cases to gain profit. 

One final note:  warnings about potential problems are not infallible.  Sometimes no storm appears. Sometimes the storm is much different from that predicted. 

Some Technical “Notes”

I used NBAD and FGB to provide some comparisons to ADCB’s financial reporting.  NBAD’s business is different from ADCB’s in many respects so I acknowledge there are limitations to that comparison.  

Abbreviations:   3Q16 = Third Quarter 2016.  FYE15 = Fiscal Year End 31 December 2015.

Financials: 

1. ADCB:  3Q16, 2Q16, 1Q16, FYE15  
2. FGB Annual Financial Reports Access Page,  FGB Quarterly Financial Reports Access Page
3. NBAD Financial Reports Access Page

Summary

During my review of ADCB’s 3Q16 financials I noticed two significant developments which occurred primarily in a single quarter—3Q16— and which may be signs of distress in the loan portfolio. 

1. Accrued Interest Receivable (AIR) jumped some 50% from FYE15 (31 December 2015) with more than 70% of the increase during 3Q16. 
2. Overdrafts increased some 84% from FYE15 with all the change occurring in 3Q16.    

My concerns were exacerbated by a major deficiency in ADCB’s financials – a failure to report renegotiated loans.  The absence of this rather critical piece of information prevents a deeper analysis of the bank’s condition and raises questions why it isn’t provided.      

Are these 2016 “developments” and the reporting deficiency signs of problems in the loan portfolio?  Does the failure to disclose renegotiated loans indicate that the bank is “actively managing” (AA euphemism of the post) non-performing loans (NPLs)?   That is, hiding problems?  Or are there other more “innocent” explanations?  

There isn’t enough information to make a conclusive call.  On the one hand, it’s hard to build a case for a trend based on a single data point (3Q16 financials).  But the failure (which predates 2016) to disclose required information, the significant “divergence” from past financials, and the fact that these apparently occurred in a single quarter suggest that not everything is “right”.

We won’t get more financial information until FYE16 financials are released and more likely than not the same reporting or non-reporting standards will be used.  A lot can happen until then.

ADCB isn’t “going down” but its share price can.  That’s important for equity investors because by their nature share prices are more volatile than debt prices.  The limited free float and the composition of the investor base for ADCB stock exacerbate that natural characteristic for this stock.

Accrued Interest Receivable (AIR)

Problems in the loan portfolio often show up in increases in AIR before NPLs are formally acknowledged in the financials.  AIR on NPLs often turns out to be as substantial as the air we breathe.

ADCB’s AIR (included in Other Assets) was AED 1.6 billion at 3Q16, AED 1.2 billion at 2Q16, AED 1.3 billion at 1Q16, AED 1.1 billion at FYE15, and AED 1 billion at FYE14.

A couple of things jump out of those numbers.

1. The increase from FYE15 to 3Q16 was approximately 50%.  That’s larger than the 11% growth in loans. 
2. More than 70% the increase from FYE15 occurred in a single quarter--the third quarter. 

If ADCB is accruing interest on a time proportion basis, then it would seem that increase would be gradual unless loans ballooned between 2Q16 and 3Q16. 

That doesn’t appear to be the case. Net loan outstandings were AED 162 billion (3Q16), AED 155 billion (2Q16), AED 157 billion (1Q16) and AED 146 billion (FYE15).  An increase of only 11% since the beginning of the year.

If volume isn’t driving the increase, then it could be pricing.  A higher rate on newly extended loan(s) in 3Q16.  If we assume rates were higher just on the AED 7 billion increase in loans between 2Q16 and 3Q16, the rate would have to be around 23%.  That doesn’t seem likely.

It might also be an overall rate increase on the total portfolio or at least an increase on those loans that reprice quarterly. In such a case, it’s more likely that an increase of this sort would come from an increase in the base rate not an overall increase in credit margins. 

Assuming that were the case, an approximate 1% increase on the entire portfolio for three months would be required to boost AIR by AED 0.4 billion. Looking at FYE 15 Financials Note 44 “Interest Rate Risk, some 70% of ADCB’s loans are priced off base interest rates three months or less.  That would make the required base rate increase about 1.45%, assuming that the other 30% could not be repriced.   According to CBUAE data, EIBOR has not risen by that amount during this period. 

But we don’t have to look at external rates.  We can look at ADCB’s financials where an increase in the rate on loans would have to show up in gross interest revenue.  A back of the envelope analysis of quarterly interest revenue on loans to customers divided by the average of the total balance of customer loans and advances (computed using beginning and end of the period totals divided by two) shows an average 4.3% annualized yield on the loan portfolio for the three quarters of 2016 roughly consistent with full year 2015's annualized yield, though on an individual quarter basis the yield is declining:  4.44% (1Q16), 4.27% (2Q16) and 4.22% (3Q16).  2016 gross interest income on customer loans is roughly AED 1.9 billion a quarter which would put it AED 0.4 billion over 2015 but for the entire year.  However, if interest repayments are quarterly as argued above, AIR shouldn’t increase this much because clients should be paying roughly quarterly.   

A cursory inspection of other components of interest income doesn’t show any other asset types likely to be responsible for the increase –these are much more modest in amount and are fairly consistent across 2016 and comparable to the 2015 total performance (divided by four).   

So it seems an interest rate increase is unlikely for the AIR jump as well.

What are other explanations? 

1. A “catch-up” accrual – correcting a mistake(s) made earlier in 2016.  Would have been a whale of a mistake, though as we know “whales” are not that uncommon even in the Thames.  
2. A write back of previously “uncollectable” interest.  Both 1 and 2 should appear in the financials.  I didn’t see anything to indicate this. 
3. A failure by a borrower or borrowers to make an interest payment.  As noted above, Note 44 states that more than 70% of the bank’s loans were priced off interest rates three months or less at FYE15.  This probably hasn’t changed much in 2016, though we won’t know until FYE16 financials are released and then we’ll only have end of period information. Standard banking convention would be that interest is due at each repricing.  So it is possible (but not conclusively proven) that non-payment could explain a spike in the AIR.  If you’re wondering, details like those in Note 44 are not mandatory for interim financials.

Overdrafts

Increases in overdrafts are often a sign of problems. 

[AA side comment:  Another reason for looking here is historical not necessarily analytical.  Those who know their UAE banking history know that the UAE banking system floundered on “perpetual” overdrafts with capitalization of interest (to add insult to injury). ADCB was formed from the wreckage of Emirates Commercial, Federal Commercial, and Khalij Commercial Banks back some 30 or so years ago.]

At 3Q16 OD’s stood at AED 8.3 billion compared to AED 4.5 billion (FYE15) and AED 3.7 billion (FYE14), roughly an 84% increase since FYE15 and 124% since FYE14.  Note that even with the increase ODs are roughly 5% of the loan portfolio, not a large amount unless you compare them to total equity at 30 September 2016.  In that case the figure is 28%. 

OD’s increased rather dramatically in 3Q.  ODs were AED 8.3 billion (3Q16), AED 4.5 billion (2Q16), and AED 5.0 billion (1Q16).  Like AIR, the increase was concentrated in 3Q16.  Unlike AIR, the entire increase took place in the third quarter.   

By contrast NBAD’s comparative figures are AED 10 billion (3Q16), AED 12 billion (FYE15), and AED 14 billion (FYE14).   A 17% decrease since FYE15 and 29% since FYE14.   

FGB doesn’t provide this information, probably based on “materiality” compared to the aggregate amount of the loan portfolio.  ODs at both NBAD and ADCB were about 5% of total loans well under the traditional 10% materiality standard.  A similar level is likely at FGB.

So why is AA making a “federal” case (pun intended) on this issue? 

ODs are one of the trickier forms of credit for banks to manage. 

When extending loans with a defined drawdown period and defined repayments (triggered off the end of that drawdown period and specified by date and amount), banks perform a detailed analysis or should. Monitoring of the status of the loan has well defined milestones in the form of amount and date certain contractual repayments. 

Overdrafts don’t have the same clearly defined signposts as these other loans do.  Typically, the test for non-performance of an OD is an absence of adequate turnover (drawdown and repayment transactions) which has led to a persistent level of debt.  This test is based on the concept that ODs are revolving facilities that should track the borrower’s business/cashflow cycle, increasing when expenditures exceed cash collections and then reversing as collections exceed expenditures. 

This test makes monitoring more difficult and allows more discretion in the timing of classifying a loan as non-performing.  What is an adequate “turnover” of transactions in the account?  What time period should be used to determine that a persistent level of debt has been reached? Does a slowdown in economic activity justify new norms and how should these be calibrated?  Beyond conceptual issues like these, there is also the practical matter of conducting effective monitoring, keeping one’s eye on the ball.

Non-Disclosure of Renegotiated Loans

ADCB does NOT disclose data on renegotiated loans.

AA understands that IFRS #7 (I believe paras 36 and 44, though I am not a hafiz of IFRS) require that this information be disclosed.  Both FGB and NBAD disclose this information. NBAD takes the prize for disclosure.  Let’s hope the merged entity follows NBAD reporting standards. 

NBAD’s FYE 2015 Annual Report Note 4a provides aggregate totals and a reconciliation of the movement in renegotiated loans.  As per that information, during 2015 NBAD’s renegotiated loans doubled to AED 2.6 billion.

By contrast ADCB has a “bland”  “philosophical rumination” defining renegotiated loans but no numbers.  Not really of much analytic utility.  

But it could be worse, here’s a quote from ENBD’s 2015 Annual Report.

Loans with renegotiated terms are loans, the repayment plan of which have been revised as part of ongoing customer relationship to align with the changed cash flows of the borrower with no other concessions by way of reduction in the amount or interest, but in some instances with improved security. These loans are treated as standard loans and continue to be reported as normal loans.

ADCB almost certainly has renegotiated loans.  See the Fitch quote below. 

The bank also has a concentrated portfolio with large individual and aggregate exposures to government related enterprises (GREs) and “private” companies connected to the shaykhly but hopefully not shaky elite.  By some estimates (see Fitch report linked to below) the latter is twice the GRE related exposure.  Ample “opportunities” for problem loans.   

Failure to disclose renegotiated loan data--amounts and other IFRS required information--indicate to AA  that the bank thinks it needs to hide this information.  Why?  Presumably not because it has so few but rather because it has so many.  IFRS-required disclosures would enable a reader to determine when renegotiation took place –giving an indication of whether NPL problems were increasing or decreasing.  That is precisely one of the reasons that IFRS #7 imposes this requirement.

What could be another reason for not reporting this information?

Renegotiating loans typically gives the borrower less onerous terms – lower interest rates, a revised repayment schedule, a longer average life of the loan.  In some cases payments can be reprofiled to push substantial amounts of principal payments well into the future – “ballooning” as one banker I know calls it. 

Take an extreme example: a loan maturity is extended from 5 to 20 years with 80% of principal due during the last three years.  For the first 17 years of the renegotiated loan period, maintaining a “performing” status is much easier than if the loan were extended for a shorter tenor with equal semi-annual principal installments.    

If a bank takes pre-emptive action (before a loan has missed a payment) it can avoid declaring the loan non-performing, thus, “hiding” NPLs and making the bank’s loan portfolio look more robust than it actually is.   If it doesn’t report renegotiated loan data, pre-emptive NPL management might not be noticed by the market.

However, there is no evidence in ADCB’s financials of a massive increase in loan maturity as per Note 45 “Liquidity Risk” in FYE15 financials.  The relative percentages in less than one year and the other two maturity “buckets” for 2015 are almost spot on with 2014. 

But the bank’s reporting is also opaque here as well.  

ADCB uses a maximum maturity “bucket” of “over three years”.  FGB and NBAD use maximum maturity “buckets” of periods of “over five years”.    ADCB therefore has more room to maneuver. If a loan with a three year maturity were extended two years, this would not show up in the Maturity Risk note at ADCB.  It would at FGB or NBAD.    

Dramatically lengthening maturities is one but not the only way to avoid NPL status.  One could back end principal payments (making later repayments higher than nearer repayments) with much shorter extensions of maturity.  If a bank were pro-actively managing problem loans to prevent the appearance of NPLs and did not disclose renegotiations, it could use future renegotiations to manage the problem on a rolling basis. 

But we can’t tell from ADCB’s financials what , if anything, might be going on.

With no evidence in the financials, let’s turn to a quote from Fitch’s August 2016 ratings report (which by the way confirmed an A+ rating for the bank).  Boldface courtesy of AA.

ADCB does not disclose the volume of renegotiated loans, but Fitch understands that it has done a lot of corporate loan renegotiations since the crisis and has reclassified most of these exposures back to performing over this time as they demonstrated normal performance.  ADCB renegotiated some of its 20 largest exposures during 2015.  Fitch understands that these loans would be overdue if they had not been renegotiated.

We don’t know for certain if ADCB is pre-emptively renegotiating troubled loans to avoid having to declare them non-performing, but that’s clearly one way to read the Fitch quote.  Non-disclosure of renegotiated loan information certainly provides cover for such activities, if they are occurring.  AA can’t think of a single “benign” reason why ADCB would withhold this information. One final comment on the Fitch quote: if the terms of the renegotiated loan are generous enough, the bar for “normal performance” may be set low indeed.

AA was also troubled by ADCB’s new external auditor signing off on the financials as being in compliance with IFRS.   As AA understands it, IFRS compliance is all or nothing.  One can’t be partially compliant.

Troubled as well by the CBUAE’s apparent acquiescence.  That being said, though there is both historic precedent elsewhere in the GCC, what wags refer to as IRS (Investcorp Reporting Standards), and closer to home and time, CBUAE “Dubai Inc” renegotiated loan treatment rules.   

Another Warning But This Time About Something That Definitely Will Happen

Accounting and Regulatory “Rant”

Cashflow Statements: 

Accrued but uncollected interest is not a “use of funds” that “increases” Other Assets as seems to be common reporting practice for ADCB, FGB, and NBAD.  Until interest is paid by the borrower, it is uncollected revenue and not cash. 

There are two consequences. 

1. Since it wasn't collected, it is properly a deduction from net income on the cashflow statement. 
2. Since it isn't cash, it can't be used to fund an increase in Other Assets. 

If one insists on treating AIR as a “use” of funds, then the statement issuer and its auditor have the duty to disclose the components of Other Assets so that financial statement users can determine what is happening with collection of AIR.  Financial statement users should not have to wait for annual reports to get this information.

Investors/Creditors: 

When issuers shy away from disclosure, it’s usually because they have or think they have something to hide. 

1. Lack of disclosure limits an investor’s ability to monitor and thus protect its investment. 
2. More importantly it offers an important insight into the business ethics of an issuer. 

Should you invest with an issuer that withholds basic information from you? And may be withholding that information so it can “manage” its financials?  

Standard financial theory holds that when risk is higher, investors should demand a higher risk premium.  But a key wrinkle to the successful implementation of this theory is that realized returns are often much lower than earlier anticipated or promised returns.  A problem more acute with equity than debt because with equity there are no contractual “promises” and equity prices are more volatile.