Economist: The Collapse of TIBC - A Mystery in the Gulf

In case you missed it, an interesting post over at The Economist with some details about the alleged mechanics of the collapse of TIBC.

One question occurs to me whenever I read accounts like these.  What were the AlGosaibis doing?  Were they having Board meetings that weren't recorded?  Didn't they think that as directors they should be attending board and executive committee meetings?  That the Chairman should be signing the annual accounts?

I also love the use of the term "Potemkin Bank" - which I believe I've read somewhere else.

Finally, if anyone can make available a copy of the Ernst and Young report, I'd be most grateful.  I still haven't been able to get one.

Public Service Announcement: Maan Al Sanea NOT Arrested

19 February Update:  I was advised that it is highly likely that Mr. AlSanea may be prohibited from traveling outside of the Kingdom of Saudi Arabia.  And that this may be considered a form of "arrest".

I've gotten a couple of hits from readers using the search term "Al Sanea + Arrest".  So it seems there are rumors floating around out there.

I have seen nothing in the press (Arabic or English) about any arrest.  I have checked with someone in the area who advises that as far as he knows Mr. Al Sanea appears to be moving about as he did in the past.

Where I think this is coming from are one or more Arabic language blogs which have recently  run commentaries on Mr. Al Sanea's career. 

This one here  has the headline "Arrest of Maan AlSanea for Money Laundering" in very large letters.  Then in the second line of the headline in much smaller type is the word "previously" (سبق).  It's easy to miss this if you're reading quickly.  Here's a second - again with a headline that might be misinterpreted.

When you read the entire second article you'll see this refers to unsubstantiated allegations that he was arrested in 2007.  The blog also notes that despite the news of his being jailed  then then he turned up at a Chamber of Commerce meeting a day or so after the report and threatened to sue the newspaper for printing defamatory remarks about him.  Again just to hit the nail on the head one more time - these are unsubstantiated allegations from 2007.

It would therefore seem there's nothing to the current rumor.

Awal Bank (Maan AlSanea) 7% Stake in Global Investment House "Disappears"

Friday's AlQabas carries a summary of a weekly statistical report prepared by Noor Investments Kuwait.  The report notes that two major shareholders in GIH no longer appear:

1. Awal Bank (owned by Mr. AlSanea but under CBB Administration) no longer appears as a shareholder.  Previously, it held around 7%.
2. As does Tarek Khalid AlHumaidi and others associated with him who once held 8.9%.

GIH's shares traded at roughly US$0.29 per share today.  At today's price that would make Awal Bank's stake worth something between US$25 million to US$27 million.  And Mr. AlHumaidi's between US$32 million and US$34 million.  If I'm not mistaken AB bought shares several years ago.  In those more happier days, GIH's shares traded for roughly 10X what they do now.  You can figure out the loss both parties sustained.

If you're like me, you probably wonder what happened.  It's unclear if all the shares were sold or just enough to cause the remaining shares to fall below a reporting threshold - perhaps 5%.  It would also be interesting to know who acquired these shares.  Have one or more new major shareholders  emerged?  Or an existing shareholder dramatically increased its position? Unfortunately, I can't find Noor's report to try and answer that question.  Nor can I find any reports at what I assume the source is - Maqasa.

If anyone out there can post a link to the report or the source data for the report, I'd be most appreciative.  Arabic language is fine.  If I get something I'll post a follow-up.

AlGosaibis File New Fraud Claim Against Maan AlSanea

  

The National reports that the AlGosaibis' attorneys have filed papers with the Supreme Court of New York arguing that the case be heard in NY and not Saudi Arabia.  More importantly the filing is reported to contain a variety of third party reports which seem intended to support the AlGosaibis' contention that they were the victims of a fraud perpetrated by Mr. Al Sanea.

This goes back to the comments by a reader on one of my earlier posts.

There are three cases before the Supreme Court of the State of New York.

1. Mashreqbank psc v Ahmad Hamad AlGosaibi and Brothers  #601650/2009
2. Mashreqbank v Yousef AlGosaibi and Partners #602171/2009 and
3. Ahmad Hamad AlGosaibi and Brothers v Maan al-Sanea 590643/2009.

The International Banking Corporation Bahrain Files For Chapter 15 Protection in Manhattan

Bloomberg reports that TIBC has filed under  Chapter 15 of Title 11 (Bankruptcy) of the US Code seeking protection from creditors.

As pointed out in the article, Deutsche Bank and Mashreqbank had obtained orders of attachment against TIBC assets in the USA.

Through this filing, TIBC seeks to provide legal protection against those two banks and any other creditors who might try to seize its US based assets.

Not surprising.

Two bits of news in the article.

1. First, for those who may have missed the news earlier: Ernst and Young has been engaged to investigate the business of the bank.  This relates to the allegations by AlGosaibi that Mr. AlSanea was engaged in improper transactions with the assets and companies of the AlGosaibi Group.TIBC's auditors are PwC.  Also Awal's.
2. The filing also reported assets of US$ 4 billion and liabilities of US$2.6 billion as of 31 July 2009.  At FYE 2008 (the last officially issued financials) the comparative numbers were US$3.8 billion and US$2.5 billion.  One would expect that financials would have been updated for any dimunition in value unless the nominal value of assets is being reported.
   

Kuwaiti Banks Exposure to Saad and AlGosaibi - Update

AlQabas has an article 8 December noting that despite all the other issues in the market - Dubai, the world economic crisis - this one remains a major issue for Kuwaiti banks.

Here are the main points from the article along with my commentary in blue italics.

1.  Total exposure is not less than US$1.5 billion.  AA: Maan AlSanea is Kuwaiti by birth, former KAF pilot.  He would have the sort of connections that would overcome the general "silo focus" of local banks on their home markets.
2. Roughly 50% has been reserved to date according to sources at the Central Bank of Kuwait.  AA:  You'll recall this is the general level of provisions that the Central Bank of the UAE mandated for the non bank exposure to the two Groups - saying that it represented a consensus view of both local and international regulators.
   
3. Kuwaiti banks with exposure - save one it appears -  have formed a committee which reportedly includes Gulf Bank, Kuwait Finance House, Commercial Bank, Burgan Bank to conduct negotiations with Saad and AlGosaibi.  Efforts are said to be well co-ordinated.  The banks are speaking with one voice.
4. With respect to Saad, they have written to Saudi banks asking if a separate deal has been signed with Saad.  The existence of a deal has been mooted in the press several times.  The Kuwaiti banks reportedly are threatening legal action which they note in their letter they could direct at the branches and offices of Saudi banks in the West, e.g., London or New York.   This is similar to a letter that international banks have written to Saudi banks.  The Governor of SAMA has denied any side deal.  AA:  The fact that the letter was written even after the denial is an indication of lingering concern that there is some side deal for the Saudi banks.  As I've noted before, I was told there was a  similar side deal for Saudi banks in Redec rescheduling.  Certain government receivables were reportedly assigned to Saudi banks.  The foreign banks complained to no avail and eventually quieted down. So a similar fear that history will repeat itself.   As to the basis for the lawsuit, generally each creditor is on his own.  If he can get repaid, he doesn't have to worry about others.  The one exception to that rule is syndicated loans where banks pledge to share payments pro-ratably among themselves.  The only other avenue would be a general liquidation scenario where creditors should be treated on an equal basis.  I don't think most of the local jurisdictions have a well-defined concept of fradulent conveyance - preferring one creditor over another in some set period prior to a bankruptcy.  And even if they do, there has to be bankruptcy.  If the company keeps going, then it is merely negotiating individual deals with creditors about existing loans, just as it did when it took the loans out.
   
5. With respect to AlGosaibi, the Kuwaiti banks - along with others -  rejected the Group's offer to pay 9% with the rest of the debt forgiven as "sakhiif" - ridiculous/inferior. Apparently, some dismay that AlGosaibi didn't acknowledge the debts as a first step in the negotiations.   Also an assessment that negotiations - with both AlGosaibi and Saad - would be very difficult and might take three years.  AA:  I'm told in the previous great debt crisis of the mid 80's many Saudi borrowers did not earn high marks for ethics and fair dealing in their negotiations with lenders.  One of my mentors could be set into a tirade by the mere mention of the names of Shobokshi, Baroom, and AAA - where recoveries were pennies on the dollar while the obligors managed to protect their wealth.  Some of the assets were quite well protected from creditors.  The three year timeframe may be predicated on the time taken for the "oxygen strategy" described below to take effect.  Recall that Maan AlSanea is allowed a living expense by one Western court from his blocked assets.
   
6. Ahli Bank of Kuwait has chosen to pursue legal action against Saad in New York.  AA:  A court judgment is most easily used to attach assets in the jurisdiction of the court.   Otherwise the lender marches into a foreign court with his judgment and asks the local court to enforce it.   That doesn't work particularly well with the GCC.  Back in the USA, probably all of Saad's  major assets have been  identified and many banks are pursuing them.  The court appointed "administrator" for SICL (Caymans) has already been active in US courts blocking Saad assets.  Unless Ahli knows of something that others don't and can prove it belongs to Saad, it will be in a very long line.  Perhaps the suit is an attempt to pressure Saad for a settlement.
   
7. That the Central Bank of Kuwait is providing "every support" to the Kuwaiti banks.
   
8. The target will be to block the two Group's assets in Saudi Arabia first and then around the world.  An effort that is expected to be very complicated.  AA:  The idea is to cut off the borrowers' oxygen and force them to do a deal to unblock some of their assets and to be able to conduct their operations.
   

Assuming regulators are basically right about the level of provisions, creditors are in for a long and difficult process.  And probably substantial losses on these two names.

If you use the labels Maan AlSanea, AlGosaibi, Awal Bank and The International Banking Corporation, you'll be able to track back previous articles to get a more detailed picture.

Carlyle Guarantee Watch - Third and Final Day

If you've been reading this blog over the past few days, you're not only a member of a rather select group, but you've also noticed that I've been musing on why the Financial Times  hasn't called on Carlyle to provide a guarantee to holders of investments in Carlyle Capital Group as it did to Dubai and Abu Dhabi for Dubai World.  Earlier posts here and here.

Suddenly last night I had a flash of insight and realized I had overlooked two critical things. 

First, from the "free market" (yes the quotes mean the same as they when around "banker" here) doctrinal perspective it would be a direct violation of the teachings of Adam Smith for Calyle to provide a guarantee.  Market participants are supposed to exercise careful due diligence and then bear responsibility for their actions.  Interference with this sacred principle would of course undermine the very workings of the "free market" and in so doing undermine our very way of life. 

This clearly explains why Carlyle isn't going to be asked to provide a guarantee.

But what about Dubai or Abu Dhabi in the case of Dubai World?  How do we explain this apparent inconsistency?

Darwin's observation about the need for organisms to adapt to their natural environment or become extinct is also applicable to the financial world.   UK banks (home of the FT by the way) are owed some US$ 5 billion by Dubai Inc.   These banks constitute the largest foreign creditor group.  If not a potentially existential threat, at least an existential inconvenience.  Thus, the necessity - as with the BBA letter to Lord Davies in re Saad and AlGosaibi -  to adapt certain elements of Adam Smith's teaching to the new environment. 

But it would be wrong of course to ascribe purely mercenary motives.  Both initiatives would also protect the reputation of the borrowers.  One's good name is treasure.  And this kind solicitude  of lenders for the borrower is certainly evidence of purity of motives.  Isn't it?

The International Banking Corporation - Comments on 2008 Financials

Not so long ago I took a look at Awal Bank's financials, today it's TIBC's turn.

From a review of TIBC's financials, it's clear that the bank was exposed to significant risks  arising from certain legal arrangements with its holding company, Ahmad Hamad AlGosaibi and Brothers ("AHAB").   AHAB held legal title to TIBC's investment portfolio and to the collateral on its loans.  And this may be a large part of the reason for the collapse of this apparently well capitalized bank.

In both cases, under the legal agreements between AHAB and TIBC, AHAB held these assets in "trust" for the bank.   But the critical legal issue is whether such a trust structure would be recognized by a Saudi Court.  That is, would the Saudi Court look through AHAB's legal title to ascribe direct ownership of the assets to TIBC?  If it did, then these assets would be outside of AHAB's "estate" and would not be subject to  an AHAB bankruptcy, insolvency or administration.  If it did not,  then  these are AHAB's assets to be divided among  AHAB's creditors - not just TIBC.   

Update:  From the Golden Belt 1 Sukuk (Saad Group):  ""The concept of trust as deemed in common law jurisdictions does not exist in Saudi Arabian law."  Here's the link to that post.


I'm guessing as with Awal that TIBC's problem is solvency not liquidity.  With  TIBC's relatively high equity to total assets ratio, there would have had to been a substantial erosion in asset values to trigger insolvency.  From the structure of TIBC's balance sheet the two areas  where this is most likely to have occurred in are loans and investments.   The loss of the assets themselves would have the most impact on the  bank's equity.

Now to the detail.

Unlike Awal, TIBC posts more financial info on its website.   At the "Publication" drop down menu, you'll find quarterly financials for 2008 and audited annual financials for 2005 through 2008.

As with Awal, let's focus on the changes from 3Q08 to 4Q08.

Total Assets declined US$498.5 million from US$4.3 billion to US$3.8 billion - roughly 11.6%.  Compared to 4Q07 the decline was a more modest 6.6%.

On the liability side, the major declines were US$268 million in due to banks, US$70.5 million in due to customers, US$30.9 million in due to related parties, and US$12 million in other liabilities.  A total of  US$381.5 million. A decline of US$117 million in equity accounted the remainder.  Declines are all fairly reasonably spread and there is no one group with a major cashflow in its favor as with Awal.

It's difficult to use TIBC's 2008 quarterly financials to analyze term loans because the bank and its auditors appear not to have been able to make their minds up about a consistent presentation of term loans on the balance sheet during 2008.  After appearing earlier in the year, these completely disappeared in 3Q08 only to re-emerge in 4Q08.  Looking at Note 10 in the fiscal year end ("FYE") 2007 financials, TIBC had US$375 million of outstanding term loans.  US$100 million was due in the next twelve months.  In  the 2Q08 financials  term loans had decreased by $100 million and US$75 million was shown as due in the next twelve months (Note 8).  This suggests that there was no prepayment of term loans.  However, if there were, it would appear to be only for US$75 million - though this amount may be included in Due to Banks as a current payment.  The presentation in TIBC's financials is confusing on this score and so it's difficult to be definitive.

On the asset side,  cash and banks were down US$429.4 million.  This funded the  reduction of US$381.5 million in liabilities plus increases in loans of US$77.2 million and other assets of $24.5 million.  The US$171 million drop in investments was largely due to  US$117 million in  (non cash)  fair value adjustments  (reflected directly in equity) plus an apparent US$54 million of cash realizations.

At 31 December 2008, equity was US$1.3 billion and total assets US$3.8 billion.  Like Awal, rather  sharp declines in asset values would have to have occurred to significantly erode capital to zero or near zero.

Let's take a closer look at the balance sheet.

1. Cash and Banks was US$1.1 billion.  Three key items from Note 4.  (a) 86% of these deposits were with banks and financial institutions in Europe. (b) 76% of deposits were with A rated counterparties.  (c) TIBC claimed a strict risk concentration limit of 10% of capital.  Also there are no related party deposits of any significance disclosed in Note 25.  Taking these comments at face value, one would not expect a major loss in this asset category.
   
2. Investments were carried at US418.1 million with negative fair value adjustments of US$426.6 million.  Earlier in the year TIBC carried its investments at fair value through profit and loss ("FVTPL").  At 31 March 2008, TIBC had recorded a net loss of US$204 million. due to investment losses taken through the income statement.  After 1Q08 TIBC engaged in an asset sale and asset purchase with related parties (presumably its parent AHAB).  Sales of US$867.2 million and purchases of US$839.1 million.  The sales would allow TIBC to dispose of the FVTPL assets - transferring them to available for sale ("AFS") would not have been possible.   However, the new investments could be booked as  AFS with no problem.  Why AFS?  Because any changes in fair value could be taken directly to equity by passing the income statement.   Through the miracle of accounting principles, TIBC was able to report a net profit of US$156.1 million for fiscal 2008.   The US$426.6 million loss on investments was recorded directly in equity.  However,  when we look at comprehensive income, we see that the bank actually had a loss for the year of US$270 million (US$156.1 million in net income minus the US$426.6 million in  negative fair value adjustments).  Another key piece of information is in Note 7 where it states that the bank's investment securities are registered in the name of the holding company (AHAB).  Use of a Saudi registered company to act as shareholder would facilitate TIBC making investments in the Kingdom.  There is no obvious legal reason/advantage to have AHAB hold shares in  the UAE, Kuwait or other GCC stockmarkets.  However, as outlined above, this arrangement could also present a danger to the bank if there were a problem at AHAB and a Saudi Court did not recognize TIBC's title.  Then the bank would be one of AHAB's creditors with a claim on AHAB's estate rather than as the legal owner of the investments.  This could be a potential area where asset values were lost.  Bolstering this view is that it appears the investments were shares traded on the Tadawwul (Saudi market).  There has not been a complete collapse in share prices on that market.
   
3. TIBC's main business is commercial lending with US$2.3 billion out of the bank's US$3.8 billion of assets at FYE 08.  Again from Note 4, 99.9% of the loan portfolio was in the GCC/Middle East region.  TIBC also discloses that the majority of loans and advances are secured with a minimum coverage of 110%.  Describing the collateral later in the Note, TIBC says that it is land deeds, plant and machinery or cash collateral.  From the liability side of the balance sheet (customer deposits), it's clear that cash collateral is de minimis.   Usually with land or plant and machinery, most banks use a much lower borrowing base.  That is, they will lend maybe 50% or so against such assets given their illiquidity and high discounts required to sell.  If Borrower A didn't make a go with his factory, why would Buyer B believe he could unless he could get them at a steep discount a la Irridium?  And again there is the same note as with investments.  The holding company is the legal holder of the lien on a trust basis for the bank.  That implies that most of the loans were in Saudi Arabia - as there would be no advantage to using AHAB to hold collateral in another country.   There is the same problem as with the investments: if the holding company gets into trouble, all the collateral may be blocked in its estate, leaving the bank as a creditor of the holding company and with uncollateralized loans.
   

Finally, one parting comment on a recent report that creditors had tracked down some gold shipments involving AlGosaibi and Saad.

TIBC began gold trading in 2006 with sales volumes of some US$1.2 billion, followed by US$2.3 billion in 2007 and US$2.5 billion in 2008.  Profit margins were roughly 1.4% of sales.  It's unclear if TIBC were matching spot trades or whether it was taking actual possession of the gold.  The news articles suggest it was taking possession - at least for the sums mentioned in those articles.   It will be interesting to follow developments on this topic.

AlGosaibi/Saad: Gold Shipments

A couple of interesting reports on gold shipments involving the Saad and AlGosaibi Groups as well as their banks. 

Here and here.

This may be the start of the explanation where the missing money went.

British Bankers Ask UK Govt for Help on Saad and AlGosaibi

You've probably seen today's Financial Times.  

Thomas Harris, Chairman of the British Bankers Association Trade Policy Committee, reportedly wrote to the UK Minister for Trade, Lord Davies, urging him to push the Saudi authorities to help foreign banks (read "British banks".  This is the BBA after all)  resolve their problems with both Saad and AHAB.

Frank Kane has more details on the letter in Abu Dhabi's The National.  And he is a bit less gentle.  The FT has more to protect that The National.

Clearly, the leak of this letter is designed to put pressure on the Saudi Government.

First reaction.

It's fairly typical for bankers who have gotten themselves into trouble to seek  to identify those responsible for their predicament.  For some strange reason, they rarely look close to home.  Rather they blame regulators, accountants, the weatherman, and the chap standing on the corner for their misfortune.   Equally, it's typical for them to look for governments, central banks, and regulators to extricate them  - usually justified as needed to protect the good name of the country and future business. We're seeing a bit of the latter in this letter:  a  not so subtle threat that if the authorities fail to "assume responsibility", then future business will suffer.   Not a highly credible threat  as bankers  are known as a group to be congenitally pre-disposed to ADD.

But added to that normal pattern of behavior are a few other complicating factors:

1. The side deal cut to favor local banks.  A Saudi preferential tradition so it seems if the stories about Redec are correct.
2. Lenders' knowledge that the Saudi legal system presents formidable obstacles to redress through the courts, particularly for foreign lenders.  It's remarkable how laser-like the focus is on legal matters after the problem has occurred.  It's not just punters in the equity market who are  often irrationally exuberant.  Many times it's those presumedly sober pin-striped bankers.
   
3. As well, their knowledge that securing full and frank information will be difficult.
4. Both borrowers' apparent attempts to use the above and their financial difficulties to settle their obligations for pennies on the dollar.  
   

Certainly, a difficult situation, particularly when the sums involved are large.  And clearly they are.  The BBA is not writing letters to Lord Davies because the sums are modest.

One wonders (or at least AA does) how many times a person or a banker has to get hit in the head before he or she catches on.

Commercial banking is a fairly simple business.  A key element is understanding the market one is doing business or proposes to do business in - well before one looks at the credit of an individual obligor.  If there are  fundamental problems with the law itself, the enforcement mechanism, business practices, transparency etc,   there is a problem with the market.  If that is the case, one adjusts one's lending strategy - amounts, terms, collateral (offshore of course) - or simply does not lend. 

Three Kuwaiti Banks Take Legal Action in Saudi Against Saad and AlGosaibi

AlQabas reports that three Kuwaiti banks have engaged Saudi legal counsel to commence legal action in Saudi Arabia against AHAB (AlGosaibi) and Saad (Maan AlSanea).

This was after negotiations in which the borrowers demanded "exorbitant" reductions in debt.  The banks felt they have a strong legal position and were unwilling to settle their debts for less than the deal given the Saudi banks especially since they believe that the borrowers can repay more than what they have offered.  (AlQabas did not identify the three banks).

You'll recall the earlier press reports that Saad and AlGosaibi were offering to settle for 8.6% of their debts.   Here's an earlier post.  

I suspect this is the first reaction to that offer.  And a way to ratchet up the negotiating heat on the two borrowers.

As for the favorable side deal cut for the Saudi banks, a similar thing was done long ago during the Redec rescheduling (Ghaith Pharaon) - where some Saudi Government receivables were used to reduce Saudi bank loans.

Awal Bank - Analysis of 3Q08 and 4Q08 Financials

Summary

Based on limited financial information available, it appears that there was a severe reduction of the liquidity in Awal's balance sheet in 4Q08.  Without more financial reports (only 3Q08 and 4Q08 are available on Awal's website) and a full set of financials including the notes (only summaries are posted in public area of the website), it's impossible to determine what caused this reduction in liquidity.  

It's also equally difficult to determine if Awal's problems in 2009 (leading to Administration) were the result of illiquidity (reasonably good assets but illiquid so they could not be converted to pay off short term creditors) or insolvency (a decline in asset values significantly below carrying value).  As outlined below, my initial view is that it was the latter.    

Background

On 30 July 2009 the Central Bank of Bahrain announced that pursuant to Article 136 of the Central Bank Law, it had placed Awal Bank under administration.  Later on 9 August it announced the appointment of Charles Russell LLP as Administrator.

The Central Bank of Bahrain and Financial Institutions Law of 2006  ("CBBFIL") provides that three cases under which the CBB may place a licensee under Administration.:

1. "If the Licensee becomes insolvent or appears most likely to be insolvent.  
2.  If the license is amended or cancelled pursuant to the provisions of items (1) and (3) of paragraph (c) of Article (48) of this law.  
3. If the Licensee continued to provide regulated services which resulted in inflicting damages to financial services industry in the Kingdom." 

Presumably, the reason for the CBB's action was the first.  But note that Article 133 of the CBBFIL of 2006 defines insolvency as "A Licensee is deemed to be insolvent if his financial position becomes unstable and he stops paying his due debts other than administrative fines and whatever type of tax."

Financial Analysis

Since Awal was not traded on any exchange, it is not required to publish its full financials.  It did, however, release financial highlights: balance sheet, income statement, cashflow statement and statement of changes in equity - all consolidated.  3Q08 and 4Q08 reports are here.

Without detailed footnotes, the following analysis is somewhat limited.  Admittedly, it raises more questions than it answers.

Let's focus on the balance sheet changes between 30 September 2008 and 31 December 2008.  This would be the first critical period after the financial crisis hit but before the full force was felt.

1. Between these two periods, total assets declined US$1.8 billion dollars. 
2. Equity is only US$25 million lower between 3Q and 4Q08 (the change in YTD net income between the two periods). Therefore, we can say that in effect liabilities accounted for the entire change.
   
3. Every liability category declined:  long term debt US$779 million, due to non banks US$605 million, repos US$227 million (probably greater haircuts by counterparties), due to banks US$141 million, and other liabilities US$46 million. 
   
4. This reduction of liabilities (a negative cashflow) was funded by reductions in assets.   Cash and cash equivalents decreased US$1.429 billion  (from US$2.2 billion to US$785 million).  loans US$630 million, equities and options US$366 million, Funds US$315 million, and interest bearing securities US$49 million.  Partially offsetting these were increases of  US$841 million in Investment Properties and US$125 million Other Assets.

What does this all mean?

Without notes to the financials it's hard to tell, but here are a few observations.

1. A substantial outflow of cash --19.25% of the entire balance sheet -- occurred during the last quarter of 2008.
2. Investment properties (illiquid) increased while more liquid instruments (at least presumably more liquid) equities and options as well as funds declined.
3. Due to non banks declined roughly 45%.  Due to banks only 6%.  Were these contractual maturities?  Or did non banks have a greater insight into credit?  Or inside information?
   
4. Long term debt declined 43%.   It would be very interesting to see the notes to the financials to confirm this was a scheduled payment and not a prepayment.  LTD decreased over the year from US$2.373 billion (31 December 2007) to US$0.867 million (31 December 2008).

Conclusion

As far as the public reports I've seen, there was no payment default.  Rather Awal announced its decision to initiate debt rescheduling with its creditors.  One might expect that if there had been any sort of significant payment default, it would have become public fairly quickly.  Here's the CI downgrade and withdrawal of ratings report.  It does not mention a payment default.

That leaves a more classical balance sheet insolvency as the likely cause of Awal's problems: assets worth less than liabilities.

At 31 December 2008, Awal had US$7.6 billion in total assets supported by US$4.9 billion in liabilities and US$2.7 billion in equity.

That means a drop of at least 35% in the value of assets to reach insolvency.

The recent instruction by the Central Bank of the UAE to its banks to provide 100% for their exposure to Awal supports that view. 

As you'll recall from my earlier post on this topic, the CB UAE Governor is reported to have said that the provision requirements were in line with regional and international supervisors.  A 100% provision implies no recovery - which implies that Awal's assets are worth zero or close to zero (administrators, lawyers, and accountants always feast first on the estate of the bankrupt).

UAE Central Bank: US$2.9 Billion in Exposure by UAE Banks to Saad and AlGosaibi

The Gulf News (Dubai) reports that CB UAE has disclosed that 13 national banks and 7 foreign bank branches in the UAE (20 banks in total) have exposure of US$2.9 billion to the AHAB and Saad Groups.

The article also reveals the identity of the bank that asked for and received a court freeze on Saad Group assets in the UAE:  Abu Dhabi Commercial Bank, which has reported exposure to both AHAB and Saad at some US$609 million.

Central Bank of UAE Weighs in on Al Gosaibi and Saad Restructurings - Establishes Mandatory 50% & 100% Provisions

The Board of Directors the Central Bank of the UAE officially mandated that all local banks and branches of foreign banks operating in the UAE  take certain prescribed provisions against their exposure to the Saad Group and to Ahmad Hamad AlGosaibi and Brothers ("AHAB") Group.  Provisions apply to both funded and unfunded exposure (e.g., letters of credit, etc) - that is to all exposure to the two Groups.

Yesterday, the Governor of the Central Bank issued an official circular setting forth the provision requirements which are to be implemented no later than 31 December 2009:

1. 100% of all exposure to Awal Bank Bahrain (owned by Maan AlSanea)
2. 100% of all exposure to The International Banking Corporation Bahrain (owned by AHAB and partially by Maan AlSanea)
3. 50% of all other exposure to AHAB 
4. 50% of all other exposure to Saad Group companies.

Governor AlSuwaidi emphasized in his circular two further points:

1. The level of provisions is consistent with that deemed appropriate by regional and international supervisors.  The reference to other supervisors' assessment is particularly telling.  This is not simply the CB UAE's view.  Nor apparently is it only a regional view.
   
2. The CB UAE will revert in 2010 if additional provisions are required.

This announcement is noteworthy because Central Banks generally do not get involved in publicly  mandating specific loan loss provisions.  This is only done exceptionally for cases  involving large amounts where the Central Bank has made a determination that the prospects for recovery are low.

As such then, this announcement represents a highly negative assessment of both Groups' prospects.

1. Failure of and no recovery at all on the two banks, Awal and The International Banking Corporation.
   
2. At least a 50% loss on other exposure to the AHAB Group and Saad Group - though there is a hint that additional provisions may be required.

For those who don't read Arabic, a much shorter English language press account.

UAE Court Freezes Saad Assets (Maan Al Sanea)

12 November was not a good day for Maan Al Sanea.

Not in the UAE where a court place a protective order on the assets of Saad Group and Saad Trading Contracting and Financial Services in an amount of US$151 million at the request of an unnamed Abu Dhabi Bank.  Article here.   More coverage here and here.

Nor in the USA where the court-appointed liquidator for Saad Investments Company Ltd (Caymans)  ("SICL") made a Chapter 15 filing in Delaware to protect the assets of Saad Investments Finance  (owned by SICL) against third party attachments as per this  report.    

Some details on exposure disclosed so far to Gulf Banks.

Some links to previous SAM posts here and here.

Ahmad Hamad AlGosaibi and Brothers / Saad Restructurings

A very interesting news article at The National newspaper in Abu Dhabi on work being done by investigative accountants at Grant Thorton who have been appointed liquidator for Saad Investment Company Ltd. ("SICL") Cayman Islands.

It's important to note up front that this is a newspaper's account of the contents of Grant Thorton's report and not the report itself.  And equally the Grant Thorton report is a report not a judicial finding. So at this point, this is speculation.

Some "technical" comments on the article.

1. Awal Bank is owned 100% by Maan AlSanea.  48% through SICL.  47% directly in his name.  And 5% by Saad Trading Contracting and Financial Services.
2. The name of the AlGosaibi-owned bank in Bahrain is The International Banking Corporation.
3. Assets that are unlikely to be realized are not a "cash pile".   From the article it sounds like the cash may be in Swiss banks.   And the "pile" in the Caymans or at least owned by entities in the Caymans.
   
4. The Saudi Arabian Monetary Agency ("SAMA") froze Mr. AlSanea's accounts in the Kingdom earlier this year.  If the account that received the $60 million is known to be his and the funds  are still in it, the $60 million may be recoverable by creditors. 
   
5. A Cayman Islands court has frozen his assets in that country.  
6. To the extent that entities in either Saudi or the Caymans have effective control of assets registered in their names but located in other reputable jurisdictions those assets are also frozen.

If indeed records are missing and there is a complex web of intercompany transactions, cross financings and cross guarantees, it is going to take quite a long time to sort all this out. The fact that there is inter linkage between Saad Group and AlGosaibi is going to exponentially complicate the resolution of each of these cases.

Bankers don't like uncertainty.  Bankers also don't like to take losses.  A very tricky situation.

Painful But Manageable Stress in the Saudi Banking System

All eleven Saudi banks have  now issued financials for 3Q09 so it's possible to get an insight into  the state of the banking market.

For the first nine months of 2009, Saudi banks' provisions were SAR 5.78 billion (US$1.54 billion) versus SAR 1.51 billion (US$403 million) in the comparable period in 2008.

Most of the provisions are believed to be related to exposure to  two Saudi borrowers:  Ahmad Hamad AlGosaibi Brothers ("AHAB") and the Saad Group.   Estimates are that Saudi banks hold approximately US$5 billion out of the aggregate US$22 billion to these two groups.

A closer look at individual banks may give some idea where the problems are.

On that topic, it's important to note that SAMA (the central bank) does not set mandatory provisioning guidelines.  Individual banks make their own determination.  Banks may  therefore have different provisioning percentages for the same credit.     

Two banks accounted for 54% of the provisions:

1. National Commercial Bank ("NCB"), the largest in the country, with SAR 1.876 billion 
   
2. AlRajhi Bank ("ARB"), the third largest, with SAR 1.237 billion.  

NCB's provisions were 9x those in 2008.  ARB's a more modest 1.9x. 

Among the other majors:

1. Samba,  the old Citibank joint venture and the second largest,with SAR 377 million - just shy of 3x. 
   
2. Riyad Bank, the fourth largest, SAR 434 million - 3.7x 2008.

Two banks had larger percentage increases than NCB:

1. Banque Saudi Fransi, the sixth largest, at 15x with SAR 224 million and 
2. Saudi Hollandi (the eighth largest) at 10.7X  with SAR 415 million.

Both reflect rather rapid buildups and are due either to provisioning for Saad and AHAB (more likely) or severe deterioration in other borrowers.

No one expects Saudi bank failures.

Even with the dramatic rise in provisions, NCB's profit was only down 28% from 2008.

The banks are relatively well capitalized.

The Saudi Arabian Monetary Agency has a tradition of engineering bank rescues when needed.

But the increase in provisions says something about the pain being felt.

More details for those who read Arabic from AlRiyadh newspaper. 

(Exchange rate:  SAR 3.75 = US$1.00)