BCDR Issued USD 4.1 Million Judgment in Favor of Bahrain Middle East Bank ("BMB") Against Former Shareholders

A First Step
But Still a Long Way to Go

8 April BMB announced (somewhat belatedly) that on 1 February the BCDR had issued a judgment in its favor in its case against former shareholder AlFawares Group apparently over a loan made to Al Sawari Holding Company guaranteed by companies associated with AlFawares.

BMB has instructed its lawyers to initiate steps to enforce the judgment.

Since it appears that the AlF has fallen on very hard times, it's probable that collection will be very difficult.

Even if successful, BMB still has a "long" way to go to remedy its more than USD 116.6 million negative equity. 

Bahrain Middle East Bank - 2020 Financials and 1Q2021 Financials Still in "Limbo"

24 March BMB announced that no date had been set by its Board of Directors to review and approve the bank’s financial statements for the period ending 30 June 2020, 30 September 2020, or 31 December 2020. 

As well it announced no date had been set for Board review and approval of its 31 March 2021 financials. These cannot be approved until 2020 financials are “set”.

Clearly, there is no “good” news to report. Which suggests that the news is bad.

Not a big surprise the bank is in dire straits.

But the continued delay on the financials probably indicates that things are heading further "south".

The Even More Curious Case of Bahrain Middle East Bank - Who Owns the Bank?

Another curiosity regarding BMB.

According to the information at the Bahrain Bourse, BMB has two major shareholders:

1. AN Investment WLL Bahrain (ANI) holding some 80.77%
2. Al Fawares Construction and Development Kuwait (ALF) holding some 14.48%

According to the online commercial register of Bahrain’s Ministry of Commerce, Industry and Tourism (www.sijilat.bh), BMB is owned 100% by a “group of shareholders” who are all Bahraini.

You can look this up at Sijilat using BMB’s CR 12266-1.

Even more curious, according to Sijilat, ANI (CR 86835-1) was struck from the Commercial Register with the notation “deleted by law” on 15 September 2019. That is, by AA’s reckoning over one year ago.  

So here is the conundrum. 

1. Assuming that the MOICT information is correct and that ALF has not acquired “Bahraini corporate citizenship” which Bahraini entity or Bahraini individuals own the shares previously owned by ALF?
2. Assuming that the Bahrain Bourse information is correct, how can AN Investments WLL be a shareholder in BMB, if it no longer has a valid commercial registry? If ANI is no longer the shareholder, then who or which Bahraini entity holds the 80.77% of BMB’s shares previously owned by it?
3. Given that over one year has passed since ANI’s forced de-registration, it would seem there would be sufficient time for the MOICT and Bahrain Bourse to agree and “conform” their data.
4. Beyond that, surely BMB itself has an obligation to advise the Central Bank of Bahrain and the Bahrain Bourse of changes in its shareholding.

Is this a failure of communication? 

Or something else?  For example, a change in ownership due to a legal proceeding?

BMB Wins Judgment in BCDR: Financial Impact, if any, Likely to be Negligible

A First Step May be Important Even if It is Small

11 October BMB announced that the Bahrain Chamber for Dispute Resolution (BCDR) had ruled in its favor in a case the Bank brought against 3 of its former executive officers. English version of press release here. 

The BCDR ordered the three unnamed defendants to pay BMB USD 13,198,309 plus BHD 100 for attorney’s fees.

As per the October press release, BMB initially brought the case in 2014 but suspended it while Bahraini authorities pursued a criminal case which resulted in a November 2018 judgment of prison terms of 3 years for the defendants.

From the original date of the case, we know this case related to the 2013 scandal previously discussed here.

Recall that BMB has another BCDR case relating to its 2018-2019 scandal discussed here (suit) and here (scandal). Interestingly, in this latter case the Bank indirectly confirmed the defendants’ names by confirming the accuracy of an AlAyyam press report.

As to this case (2013 scandal), we don’t have the names of the defendants However, in early discussion of the 2013 scandal, the Bank said that it had fired the then CEO, CFO, and other senior officers. 

From a July press release dated 20 July but published on the Bahrain Bourse 21 July we know that the Bank originally filed suit at the BCDR against seven individuals including some of its former officers. The fate of the remaining four is unknown.

How do we know this? Or think that we do?

Because the October press release cited above references a 20 July 2020 disclosure.

Note that BMB also issued a press release dated 20 July published that day regarding BCDR case related to the 2018-2019 scandal.

As noted by the Bank, none of the 2013 scandal defendants currently lives in Bahrain and that uncertainly relating to enforcement of this judgment by a foreign court means the Bank is unable to estimate the ultimate financial effect.

Three comments.

First, given the “hole” that BMB is in, 100% collection is not going to materially change the Bank’s dire position. Nor would 100% of the other case. Together both total roughly 10% of BMB’s negative equity. 

But the directors are to be commended for pursuing this action. Rather then let it languish as the earlier board appears to have because every dollar does count and fraud cases need to be pursued with vigour. 

One--well at least AA--might wonder if there were reasons why some directors would have preferred to let sleeping dogs lie. 

Second, the defendants have had ample time to arrange their financial affairs to limit the Bank’s ability to collect even if a foreign court enforces the BCDR judgment.

Third, also unless the defendants were guests of the Bahrain state during the criminal proceeding with “time served” counted against their three year sentences, it’s likely they did not serve any time.

BMB Launches Suit Against Related Parties to Recover US$ 6.6 Million

Last Monday Bahrain Middle East Bank (BMB) confirmed the accuracy of Al Ayam newspaper report that the bank had instituted legal proceedings against 6 Kuwaitis and 2 Egyptian Companies in the Bahrain Center for Dispute Resolution.

The confirmation came via a public disclosure on the Bahrain Bourse website.

The bank seeks to recover US$ 6.6 million for a “financing loan” plus 10% interest from 4 June 2016 to the date of payment plus its other costs.

The defendants are the bank’s former Chairman, Mr. Wilson S. Benjamin; prior Vice Chairman Abdullah Ali Khalifa Al-Sabah; Tariq Ibrahim Al-Faris; Majeed Mansour Al-Sarraf; Al-Sawari Holding Company, and Al-Fawares Holding Company all of Kuwait. And Egyptian companies Lotus Investment and Real Estate Development , And Lotus Marketing Centers.

From what I’ve been told in addition to the Mr. Benjamin and Sh. Abdullah A.K. Al-Sabah—both of whom represented Al-F on the board, the other defendants are also associated with AlFawares.

That fact and the amount suggests that this “case” may well have to do with the Installment Sales Receivable Loan. That loan was a long standing related party transaction by virtue of the guarantee given by AlF.

And perhaps as well by other “virtues”. 

You’ll recall that in earlier posts I questioned why the guarantees hadn’t been called on the ISRL as well as how the 2017 write off in the loan of a major shareholder of the bank passed through auditor sign off and CBB approval.

In cases with Kuwaiti individuals and entities, savvy litigants know the value of locking down assets as soon as possible.  

Bahrain Middle East Bank - Successful AGM, No EGM = Future Remains Bleak

At the Third AGM, a Quorum Can Be Rather Small

BMB “successfully” held its FY 2019 AGM on 9 April after two previous unsuccessful tries. Minutes here.

But just barely.

Only one shareholder holding one share was in attendance.

That’s 0.00000025% of outstanding shares according to the AGM Minutes.

As per Bahrain’s Commercial Companies Law, there is no required minimum quorum for a third meeting.

All AGM agenda items were approved.

The EGM – which is needed to address the critical issue of continuity of BMB – failed for lack of a quorum. 

See below for the main focus of the AGM:  a discussion of the implications of failure to hold an EGM on BMB's ability to legally continue as a "going concern".

As noted in an earlier post, because AN Investments was excluded from voting in the EGM, if their shares are excluded from the total number of BMB shares, only 4.81% of shares would constitute a quorum for the EGM.

As also noted in that post, that would require AlFawares (ALF) to be present to vote its shares because in the event that AN Investments' shares are excluded a minimum of 4.81% of total outstanding BMB shares would have to be present and all other shareholders own only 4.51% of BMB. 

ALF was not in attendance for the EGM.

It’s unclear what the reason is for their failure to participate.

Earlier the Board noted that certain members of senior management and the Vice Chairman were under investigation for an alleged fraud. None of these individuals were directly associated with ALF.

Also, ALF’s two directors on the Board resigned "just before" the CBB ordered that the Board resign.

I have interpreted the timing of these events as an early warning from the CBB to the ALF directors to exit before being forced to resign.

In which case ALF should have nothing to fear from attending the EGM unless it fears (a) other legal exposure of some sort, (b) being forced to participate with new equity, or (c) the "sting" of unpleasant comments from other shareholders.

Re the first point, it would seem that the CBB’s actions—if my assessment is correct—indicate that ALF’s hands are “clean”, though see the potentially troubling reference to the difficult situation with “majority shareholders” below.

What might be the "sticking point" is ALF's own obligation to the Bank for the Installment Sale Receivable (ISR) loan which BMB has provisioned in full.

Re the second point, I don’t think Bahraini law gives the CBB or another Bahraini authority the power to compel a shareholder to invest additional equity. Participation in rights issues is voluntary and rights entitlements may be waived and in some cases traded.

And if the good sheikhs at ALF are sensitive to criticism, they can always give a party with thicker skin their proxy. The proxy holder can turn away questions regarding new capital or any other matter, including the ISR, with a simple “I don’t know”.

Given ALF’s own financial “difficulties”, their absence seems strange as restoring value to BMB increases the assets they need to meet their own obligations.

Given that the CBB appears to have given ALF's directors advance warning so they could keep their "thoubs" clean, it seems downright ungrateful of ALF not to cooperate.

Beyond that, Kuwaiti investors often use OPM to fund their investments as a tried and true method of limiting their downside risk.

If the investment goes bad, they hand the "keys" to the investment to the lender with a smile.

One might therefore expect there could well be a lender holding the BMB shares as collateral. 

An institution one would hope would be motivated to see the value of those shares preserved, or, in this case, increased from zero.

In such a case it would seem that at a minimum that lender would demand that ALF give it a proxy,  assuming it does not already “own” the shares through realization of its collateral.

The main focus of the meeting was a discussion of the implications of the failure to hold the EGM this year, following a similar failure earlier.

Mr. Yusuf Taqi a member of the Board asked the “regulators to provide directive on this issue {continuity of the bank} given that it may not be possible to hold at EGM in the future”.

BMB’s counsel opined that failure to convene an EGM and take the legal steps to maintain continuity of the Bank could lead to the bank being wound up or placed under administration.

Mr. Isa al-Motawaj, Director of Wholesale Banking at the CBB, noted that the CBB understands that BMB is in an “abnormal situation’ vis-a-vis its majority shareholders. (Note the plural in the minutes).

Is ALF included in the phrase “majority shareholders”? 

And, if so, is their inclusion a reference to their own significant financial difficulties? 

Or is there something more here?

Or is it an inadvertent slip? A reference to the fact that AN Investments is owned by the three Turkish “amigos”?

Mr. al-Motawaj stated that the CBB had evaluated that directing the bank to liquidate or be put under administration “would not be in the best interest of the stakeholders” particularly as there are other financial institutions exposed to the same defaulted parties as BMB is trying to recover funds from.

He also went on to assure the Board that they were duly constituted and operating in line with legal requirements, noting the importance of the asset recovery efforts underway.

He also responded to a board question about the legality of the AGM, noting that the representative of the MOIC&T had vouched for compliance wiht Bahrain's Commercial Companies Law, even though only one share was in attendance.

The CBB has gone on the record that it is willing to give BMB some leeway given its unique situation.

That being said, even with a successful EGM, BMB’s future is bleak.  

Recovery is highly unlikely to be in full.  

Additional capital will be required.  

Hard to see investors rushing to commit equity.

As a wholesale bank, BMB is unlikely to benefit from rescues afforded retail banks in the Kingdom.

Finally, kudos to the one shareholder who apparently believes in exercising his or her corporate governance responsibilities.

All markets, not just those in the GCC, need more shareholders like this individual.

Bahrain Middle East Bank - Apparent Way Forward to Hold EGM

A while back I wrote that it was highly likely that ANI (BMB's Turkish-owned) major shareholder would not attend Extraordinary General Meetings (EGMs) and that given their roughly 81% shareholding there could not be a quorum for the EGM. 

This would frustrate the ability of BMB to comply with the Commercial Companies Law (CCL) requirements to enable it to continue as a “going concern” given the bank’s negative capital.

It seems that a “solution” has been found in the CCL Section 203 as outlined in BMB’s announcement on the Bahrain Bourse of its upcoming AGM and EGM.

For the purposes of discussing and passing this Resolution, AN Investment W.L.L. shall not be entitled to count in the quorum or to vote on said Resolution, on the basis that the Bank’s total outstanding exposures which has caused the said loss of capital are to one or more related parties of AN Investment W.L.L. Such shall be in accordance with Article (203) of the Commercial Companies Law No. 21 of 2001, as amended.

This appears to be based on a broad reading of the last sentence in Section 203.

No member may vote for himself or on behalf of whoever he represents on issues in which he has personal interest or on a dispute existing between him and the company.

As outlined here, the minimum acceptable quorum for a BMB EGM (third meeting) is 25% of shareholders.

Eliminating ANI’s 80.77% from the base, means that to get a quorum at a third meeting, shareholders with 4.81% of BMB’s shares would have to attend. 

AlFawares is the registered owner of 14.48%.

If AA has done his sums right, always a concern, then unless ALF participates, an EGM cannot proceed.

Why?

Netting out ALF’s shareholding, all other shareholders comprise 4.75% short of the 4.81% required.

It’s almost certain that all of them will not attend as attested by past history. As well the substantial unclaimed dividends indicate many are sleeping, perhaps eternally. Note 27 in BMB’s FY2019 Audited Report.

If ALF or its proxy participates, then it’s likely the call for the first EGM will be successful because ALF’s 14.48% would be over 75% of BMB outstanding shareholding after exclusion of ANI’s shares.

What this means is that it is likely BMB will cross one hurdle to remain a going concern.

One step forward.

However, the key issue is finding new capital. And that will be a journey of more than 999 li.

Probably at least 200 million li.

The proverb cited above gives no guidance on the success of so long a journey.

Bahrain Middle East Bank FY 2019 Review and Suggested Shareholder Questions for the AGM

Lots of Tunnel Little Evidence of Light

A quick review of BMB’s FY 2019 financials provide no real reason for optimism.  

Based on that review, I’ve included some suggested questions for shareholders attending the upcoming AGM.

FY 2019 Performance Review

As might be expected given the problems BMB is facing, its business activities were adversely affected. For the year net income was a loss of USD 3.6 million.

Other information of note.

1. Non performing bank obligation: BMB identified a USD 13.1 million non performing obligation from a “locally incorporated” financial institution. I did not see an explicit reference to this in the FY 2018 report. 
2. Non performing Assets Under Management: As per Note 28 some USD 32.897 million of Assets Under Management as of FYE 2019 (91.5% of total AUM) are placed with related parties. These assets are non-performing. I missed this in the FY 2018 report which shows it pays to read all the notes.
3. Focus on recovery means little to no focus on income generation: The Board has identified recovery of related party exposures as its primary mission. The Central Bank of Bahrain has also placed restrictions on the bank’s activities. A sensible step given its financial condition.

Questions for the AGM

Shareholders will rightly be focused on the progress and prospects for recovery of related party exposure.

Below are some suggested additional questions.

Recapitalization

1. The long term future of BMB depends on getting new capital. Otherwise the bank will be liquidated. 
2. Liquidations generally result in less recovery than ongoing concerns. 
3. Recapitalization is key to a long term future for BMB.
4. As per BMB’s Articles of Association-which mirror the Bahrain Commercial Companies Law-, the minimum acceptable quorum for an Extraordinary General Meeting requires attendance by shareholders holding 25% of the bank’s shares.
5. Since ANI owns just under 81% of the bank, it appears that an EGM cannot be held without their active participation. That seems unlikely given the risks such participation would expose them to.
6. How, if at all, can a recapitalization take place if an EGM can’t be held?

USD 32.897 Million in Non Performing Assets Under Management

1. Are the assets non-performing because of underlying economics of the investments?
2. Or was there fraud?
3. Are the related parties the same entities as with the credit exposure, i.e., the Turkish Three Amigos?
4. Does the bank have any legal liability to make its customers whole? Note this particular question is likely to be one that the bank may prefer not to answer.

USD 13.1 Million Non Performing Bank Obligation

1. Is the bank unable to pay BMB?
2. Or is the bank unwilling to pay BMB perhaps because this is entwined with related party transactions?
3. The bank appears to be located in Bahrain. Is the Central Bank helping BMB with collection, assuming this is not a case of general insolvency of that bank.

If AA were to attend, you can bet he’d have questions about the single regional financial institution to which BMB owes some USD 127.6 million.

As per the financials (Note 2 and Note 12), it seems clear that that bank is constrained from removing its deposits from BMB.

AA would want to know why this is the case? And of course the identity.  Another question that the bank and its regulator may prefer to avoid.  

Link to earlier post here.