Gulf Finance House - Deutsche Bank Converts Another US$5 Million to Shares

GFH announced on the BSE that Deutsche Bank had converted another US$5 million to GFH shares under the convertible murabaha agreement concluded 10 September 2009.  The conversion price is US$0.38 per share. 

The last trading price on the BSE was US$0.245 per share. 

Here's an earlier post that might shed light on this transaction. 

GFH is still not showing any major shareholder on the BSE "Major Shareholders' page" and only has disclosed itself (Treasury shares) and Shamil Bank as holding more than 5% of the shares.

So what's happening to the GFH shares that Deutsche converts?

So far, if my tally is correct, US$55 million out of the US$100 million issue (for which Deutsche paid US$80 million) has been converted.  The issue must have been done for clients of Deutsche Bank since DB is not showing up as a major shareholder in any disclosures I've seen.  Either that or DB is selling the shares as soon as it gets them. 

ABC US$1.11 Billion Rights Offering: Libya Takes 70.9%

As per the announcement on the BSE today, ABC's Rights Offering was successful - the full US$1.11 billion was raised.

No surprise there.  The Libyan Central Bank underwrote the Offer.  In addition to its own entitlement under the RO of 327,738,545, it purchased an additional 376,979,361 shares - which were not taken up by other shareholders under their entitlements.

All in all the Libyan shareholders in ABC (Central Bank of Libya, LAFICO,  and LFB) purchased 70.9% of the total offer.

It would appear from that announcement that LCB took up ADIA's full 305,889,306 share entitlement plus 99.9% of the 71,180,797 offered to non founding other shareholders who are mostly retail investors.

Since ABC trades below nominal value and by Bahraini Law Rights Offerings must be at nominal value, there was little likelihood that this latter group would take up their allotments under the RO.  Why pay US$1.00 for shares trading in the market at US$0.605?

From the data presented it appears that KIA bought its full allotment of 329,534,084 shares. 

As a result

1. Libyan entities will now own roughly 48.5% of ABC versus 36.3% prior to the Rights Offering.  
2. ADIA's share will drop from 27.6% to  17.7%.   
3. KIA's shareholding remains 29.7%.

A copy of the Rights Offering Prospectus is here.  Page 12 provides details of pre RO holdings and some projections for post RO holdings - which have turned out to be essentially correct.

In terms of effective purchase price (considering the CBL's US$110,000,000 underwriting fee - to be paid from the proceeds),   the Libyan entities (considered as a group) got their 780,375,173 shares at roughly US$0.86 per share.

As noted above, ABC is currently trading at US$0.605 per share., though this is not really reflective of intrinsic value.  The BSE is not a liquid market.  Compounding that fact is that the free float on ABC was 6.4% pre Rights Offering.  So on both scores there's not much price discovery in the market.  Relatively minor transactions on either the buy or sell side can move the price dramatically.  The situation will be even worse after the Rights Offering.  The free float will drop to roughly 4.1%.

Earlier post here.

Ithmaar Bank Rights Issue - Only 52% Take Up

Ithmar Bank announced on the BSE that on 28 March it had held its Ordinary General Meeting of Shareholders.

Tucked in the announcement were the results of its recent Rights Offering. 

“The subscription period ended on Thursday, and we are pleased to report that the rights issue has raised $103 million,” said Ithmaar Bank Chief Executive Officer Mohamed Hussain.  “The Offering was an opportunity for current shareholders to further consolidate their stake in Ithmaar Bank – and the fact that it proved so successful is testimony to our shareholders’ unwavering faith in the Bank’s potential,” he said.

Sounds good.  What wasn't mentioned was that the Offering was for US$199.3 million.  That means a 52% take-up.  Not exactly a roaring success.

Ithmar was hampered by two things:

1. A US$235 million loss for Fiscal 2009.
2. The fact that Bahraini Companies Law does not allow a company to offer its shares for less than par value.  Ithmar's par value is US$0.25 per share.  It last traded at that level on 19 October 2009.  It currently trades at about US$0.19 per share.  A difficult sale indeed.

Ithmar had hoped to raise US$400 million to finance its conversion to a retail /commercial Islamic Bank from an investment bank.  The first leg has not gone so well.  

It's hard to imagine that a US$200 million or US$300 million (if they try to make up the reduced up take on the Rights Offering) mandatory convertible sukuk is going to fly off the shelves.  Unless, Deutsche has another client?

Khaleeji Commercial Bank Bahrain - Pretty Joins Board

You'll remember that Esam Janahi had resigned from the Board.  Today KHCB announced that Ted Pretty had joined the Board.  GFH owns roughly 37% of KHCB.

As you know, Ted is Acting CEO at Gulf Finance House.

Gulf Finance House - Text of S&P Rating Increase to CCC-/C

 

GFH published the text of S&P's recent upgrade in its ratings today at the BSE - a scant five days after it was issued.

Apparently, it has not yet found the time to update its ratings page on its website which still shows its ratings as of 25 November 2009.  But I suppose one shouldn't demand that it update its webpage on some sort of draconian rush schedule.

Gulf Finance House - Confirmed: US$100 Million Loan Revised Repayment Agreed

 

A follow-up to my earlier post.

GFH issued a press release today that it had agreed a repayment schedule on its US$100 million Wakala facility due 3 March 2010.  

US$20 million will be paid this month and 4 equal installments of US$20 million every six months thereafter.  As I commented before, GFH must be really strapped for cash as this is a rather small amount for the first payment.  I was expecting something more in the US$30 million to US$40 million range.  

What's interesting is that the LMC syndicate has agreed to much less favorable terms than the  West LB syndicate:

1. West LB received two-thirds of the amount due it on the original maturity date.  The LMC syndicate only 20%.
2. West LB extended the remaining US$100mm for six months.  LMC extended the remaining US$80 million for two years - with an average life of one year.
3. Not hard to tell which financial institutions are looking out for its shareholders.

Some comments on the press release:

1. I don't see this announcement at the Bahrain Stock Exchange, the Kuwait Stock Exchange, the Dubai Financial Market or the London Stock Exchange.   This is information material to the trading of shares. Of course, the regional three banks in the facility may not have finalized their answer until after the markets were closed - though it's hard to imagine them working past London's close. But there was a press report on this in the press yesterday - at that point an unconfirmed rumor - which contained information which by any criteria would be material to an investor.  A responsible company would have made sure an announcement was at the stock exchanges bright and early this morning - either to confirm the press report (negotiations concluded successfully) or to state that negotiations were still in process. 
2. To call this a new facility strains credulity.  This is a rescheduling of an obligation that GFH was unable to pay. It is an attempt to make something out of a "busted play".
3. This is less a demonstration of faith "in GFH’s business model and the strategy that the Bank’s management team are following" than it is lenders restructuring a loan that the borrower cannot repay on its due date.  
4. Selling assets one has suddenly "discovered" are non core, firing staff and other cost cutting measures are not a strategy.  They are tactics designed to deal with the failure of one's strategy.
5. Talk of GFH"s business model is misplaced.  At this point, GFH is in search of a viable business model.  Its old model is precisely why it cannot pay its debts on time.  When it demonstrates that its plans for the future are more than words on a page, it can speak of its "business model".
6. The date on its press release needs to be amended.  This is like the previous "magical date" press release from 4Q09.
7. GFH has yet to update its website for the first downgrade by S&P. 

ABC Launches US$1.11 Billion Rights Offering

Details here.  Note offer price is par.  Key issue will be whether ADIA steps us to participate. 

Earlier post on Rights Offer here.

GFH Close to Deal on US$100 Million "Islamic" Loan?

 

So says The National quoting Ted Pretty, Acting CEO.   

Deal seems to be an initial partial  repayment followed by regularly scheduled amortization (repayments) over two years.

Gulf Finance House -Deutsche Bank Converts Another US$10 Million to Shares - Stealth Exit from GFH?

 

GFH announced on the Bahrain Stock Exchange today that Deutsche Bank had converted another US$10 million of the murabaha to shares in GFH.  That's another 26,315,789.

Since the conversion was done at US$0.38 per share and GFH's shares are trading at  US$0.25 on the BSE and about US$0.01 to US$0.02 more per share on the KSE, it's seems logical that this conversion is a way for DB to exit its exposure to GFH.  

That's at a 28% to 32% discount.   And that frankly conversion doesn't make much sense.  If one wanted to make a "wise" investment in GFH shares, one could buy them on the open market now and when one got repaid from the murabaha have roughly 30% more shares.

I'll be waiting to see the 31 March 2010 financials to see if GFH has increased its Treasury shares in 1Q2010.

At this point based on previous announcements I've seen, DB has converted US$50 million in total for 131,578,946 shares which would give them just a whisker less than 7% in the bank which should require they be disclosed as a major shareholder.  Earlier post here.  As of today they are not shown as a major shareholder on the BSE website.  But then neither is the 26 November downgrade of GFH by S&P (the first of several downgrades) yet reflected on GFH's website.

And on that basis assuming that DB is still holding all the shares it converted it would have a paper loss of US$13,815,790 (assuming a current share price of US$0.275).   Hard to believe that DB would keep piling on loss upon loss.  This has to be a way to get out of the credit for them.

Gulf Finance House - Clarification on News Report Regarding Qatar Energy City Project

 

Gulf Finance House issued a clarification on a news item appearing in the aptly named Kuwaiti Newspaper "AlJarida" today on the Bahrain Stock Exchange.  AlJarida apparently stated that the Government of Qatar was studying withdrawing the Qatar Energy City Project from the Developer, Gulf Finance House.  

(This press release also appears at the Dubai Financial Market but not at the Kuwait Stock Exchange.  It appears that when one is listed on so many financial markets and has so many clarifications to issue it's quite a logistical feat to get them all out at the same time).

GFH noted that it had not been notified officially in this regard (i.e., that the Qatar Government was studying whether to remove GFH as Developer on QEC).  It also noted that because there was a court case involving GFH and a Qatari businessman (AA:  That would be AlSuwaidi) before the Courts of Bahrain it was not able to comment out of consideration of the rights of the parties to the case.

You've probably noticed as I have that when issuing a response to a question or a clarification GFH seems to be very precise in its wording.  You'll recall the day before they announced the rollover of US$100 million of their West LB syndicate, they issued a denial that they were discussing a US$50 million Sukuk with West LB.  The next day they announced they had concluded a US$100 million murabaha with West LB. 

So maybe you're wondering as I am if they have received "unofficial" word from the Qatar Government that it is considering removing them as Developer on QEC?

Gulf Finance House Issues Small "Clarification" on Its Earnings Announcement - "Going Concern" Emphasis of Matter from Auditors

Gulf Finance House noticed that it had omitted one trivial detail from its 15 February press release on its financials and in the spirit of disclosure announced on both the Kuwaiti and Bahrain stock exchanges today that without qualifying their audit opinion, GFH's auditors had called attention to the fact that a lack of liquidity and insufficient capital might raise issues with GFH's ability to continue as a going concern.  As of yet, this press release is not posted at the website of the Dubai Financial Market, where GFH is also listed.

The Kuwaiti press release is below and it is apparently a verbatim quote of the auditors' "emphasis of matter".  The Bahraini press release is a description of the auditors' statement and points out that the auditors have not cast any doubt on the accuracy of the financials and have described GFH's plan to deal with both issues.

You'll recall that GFH's Chairman committed himself to greater transparency on 17 February.   And that is clearly not only a regulatory requirement but as well a moral imperative, especially if one is upholding the good name of Islamic financial institutions.  From where I sit the next step perhaps should be a commitment to timeliness.  And then perhaps one for comprehensiveness to make sure that the announcement gets to all Stock Exchanges where GFH is listed.

And, yes, if you're wondering, GFH still has not updated its website with its current rating.  In fact it hasn't yet updated its website for the downgrade last 26 November 2009.  You may recall that was the first of several that resulted in it being downgraded to "SD". 

[8:31:30]  ِ.بيت التمويل الخليجي ‏
يعلن سوق الكويت للاوراق المالية عطفا على اعلانه السابق بتاريخ 15-02-2010 ‏
والخاص بالبيانات المالية السنوية لبيت التمويل الخليجي ،افاد البنك بان ‏
تقرير مراقبي الحسابات يحتوي على الفقرة التوضيحية الاتية :‏
دون التحفظ فى راينا،نلفت الانتباه الى الايضاح رقم2(ب)فى البيانات المالية ‏
المجمعة الذي يناقش عدم تاكد جوهري يتعلق بحاجة المجموعة للسيولة وكفاية ‏
الراسمال القانوني والذي قد يشير الى شك حول صلاحية مبدا الاستمرارية ‏
المستعمل فى اعداد البيانات المالية المجمعة .ان خطة الادارة للتعامل مع هذا
الموضوع مبين فى الايضاحات رقم 40(ب) و 41 فى البيانات المالية المجمعة .‏

Gulf Finance House - Pretty Interview on Asset Sales

Reuters has an interview with Ted Pretty.  

Here are my comments.

1. Sorry to keep singing the same old tune, but I think the matters discussed in this interview are such that there should be a formal announcement on the BSE.  Not all of GFH's shareholders have access to Reuters.  Articles 42.1 and 42.5 of the CBB's Disclosure Rules seem the relevant chapter and verse.  After all I do remember reading somewhere earlier today about the need for transparency. This doesn't mean of course that management shouldn't give interviews, but that significant matters be disclosed promptly at the BSE - in my opinion.  The Reuters interview is from Tuesday.  Ample time to prepare a release for today.
2. With respect to the US$100 million facility (of which US$50 million matures 3 March), earlier I had understood from a press release that LMC had been engaged as an advisor.  It seems they are the arranger of the facility as well.  That doesn't appear to have been mentioned before.  
3. US$420 million of assets have been identified for sale (excluding the Bahrain Financial Harbor) with US$250 million to be sold.  US$250 million of asset sales are targeted for 1Q10.
4. Salim Rahimi, the long serving head of Real Estate, has left GFH.  A total of 35 staff members have been released.
5. The venture in Syria is still pending Central Bank of Syria approval and GFH is still in talks with investors about the bank.  You'll recall that this was mentioned earlier as a source of cash via an IPO within the next six months.  It's unclear to me if six months is a realistic time frame.

Esam Janahi Resigns from Khaleeji Commercial Bank Bahrain Board

Here's the announcement.  Resignation was effective 8 February 2009.  

Unclear why it took seven calendar days to report this to the BSE.  One (at least this one) is reminded of Article 42.5 of the CBB's Dislcosure Standards.  

It all I suppose turns on one's definition of "prompt". 

KHCB shareholding:

1. Gulf Finance House owns 36.99%
2. AlImtiaz Kuwait 14.01%
3. Dr. Esam Janahi 10%.
4. Emirates Islamic Bank 9%

Gulf Finance House - US$728 Million Loss for 2009 Does This Equal A Critical Covenant Breach in US$1 Billion Sukuk Program? APPARENTLY NOT

Update:  The US$728 million loss in 2009 apparently does not result in a breach of the US$1 Billion Sukuk program covenant because GFH issued shares during 4Q09.  Resulting year end shareholders' equity is US$433 million as per financials released.   At 30 September 2009, GFH had only US$17 million in Goodwill which would take them to US$416 million - unless of course this number changed.  This post has been accordingly amended to reflect this new information.

GFH has issued a press release on its 2009 results stating that it had a loss of US$728 million for 2009 and pointing out that a major cause of the losses was due to non cash provisions of US$656 million as if that somehow made the loss less onerous.  

Some quotes and then some comments.

Gulf Finance House Chairman Dr. Esam Janahi commented today saying “While 2009 proved challenging, it is important to view our results in the context of what prudently managed banks must do in tough economic times. We have closely reviewed all of our assets, made provisions where appropriate and have also begun to dispose of those which are non-core. We have asked management to review our cost base and also to ensure that we have a strategy to grow revenues. It is my strong view that as we achieve these objectives GFH will return to profitability and I am personally focused on this objective.”

Acting CEO Mr. Ted Pretty added “2009 was a year which presented unprecedented challenges to banks in both the global and GCC markets. All institutions have been impacted by declining asset values and by the tightness in liquidity.

And now for the comments.

1. The comment about non cash provisions is quite amusing.  Generally that's the way the provisions work.  The money for the assets is already gone.  It was spent when they were acquired.  So when the assets turn out to be worth less than one paid for them or worthless one takes a non cash charge.  In fact if a firm takes a cash charge for assets already paid for, it's probably a very clear sign that you need to engage forensic accountants.
2. This focus on the non cash character of provisions is also remarkable in another sense.  How many of you out there have seen a company make the statement "We earned $1 billion this year but only 60% was realized in cash"?  This reminds me of the comment attributed to Mr. Abbas who apparently only sees rating agency mistakes occurring when they downgrade an obligor. 
3. Come to think of it.  This announcement rather neatly demolishes the argument that S&P didn't know what it was doing when it downgraded GFH.  And in a remarkable coincidence was released on the same day that S&P was chastised for its lack of skill and understanding.
4. Sorry, Mr. Janahi, but it's hard to understand how one can call a company that starts the year with US$967 million in equity and loses US$728 million "prudently managed".  That's a loss of 75% of equity.  Wouldn't the "prudently managed" bank have much lesser or no losses?  The National Bank of Kuwait would fit the "prudently managed" description.   Note:  To be fair a 75% loss of equity is my estimate. GFH has not released its financial statements.  There may  well be some positive offsets to the  2009 net loss of which I am not aware. Though I note that starting with 30 September 2009 equity and allocating the 4Q09 loss of US$607 million, the decline in equity is 80%.
5. Yes, indeed all banks were affected by the Global downturn, but, Mr. Pretty, not all lost 75% of their capital.  So I'm afraid I'm finding it hard to see GFH's performance as the result of global or other external factors.  I'm presuming that if GFH made US$728 million this year management would not be crediting the market as being responsible.  But rather we'd be hearing about the vision, hard work and leadership of management. Selective responsibility where problems are the fault of others are about as credible as Mr. Abbas' apparent belief that rating agencies only make mistakes when they downgrade an obligor.
6. GFH's US$1 billion Sukuk Program requires that GFH maintain Consolidated Tangible Net Worth of no less than US$400 million. Otherwise 25% of its Sukuk certificate holders may accelerate repayment of the transaction.  And thus trigger GFH's Purchase Agreement.  The quotes below are from Page 112 of the Offering Circular.

Consolidated Tangible Net Worth Covenant
GFH irrevocably and unconditionally agrees and undertakes that until the Sukuk Certificates  have been redeemed in full in accordance with the Conditions, it will at all times maintain a  minimum of Consolidated Tangible Net Worth of not less than US$ 400,000,000 (or its  equivalent in Bahraini Dinars).

"Consolidated Tangible Net Worth” means, the aggregate of the amount for the time being  fully paid up or credited as fully paid up on GFH’s issued share capital, advance towards  share capital, share premium, any subsidiary company share grant, statutory reserves,  investment fair value reserves, and retained earnings, of the Group, but deducting any treasury shares, and deducting any amounts attributable to goodwill or other intangible assets.

Central Bank of Bahrain Regulations: Disclosure Standards

A new feature here at Suq al Mal.  We'll look at various CBB Regulations and see how the banking community is implementing them.

Back in October 2007, the CBB issued "Disclosure Standards" - a comprehensive and well thought out set of regulations which set forth requirements for listed companies and for the offering of securities in the Kingdom of Bahrain.  The full text of the regulations is here.

The particular text I'd like to focus on today is the following:

42.1 Immediate disclosure should be made of any information regarding an issuer's affairs, or about events or conditions in the market that will affect the issuer's securities, which meets either of the following standards:

Where the information is likely to have a significant effect on the price of any of the issuer's securities.

Where such information (after any necessary interpretation by securities analysts or other experts) is likely to be considered important, by a reasonable investor, in determining his choice of action.

Now, it would seem to me as a casual observer that if a firm were listed on the Bahrain Stock Exchange and it was say downgraded to below investment grade or perhaps even to Selective Default a reasonable person would expect that such a development would have a "significant effect" on the price of the issuer's securities.  And as an investor, AA would certainly like to have such information in "determining my choice of action".  That is, if a company's debt were considered highly risky, and given that debt has priority of repayment over equity, then it would seem that the equity was even more risky.  And riskier equity should have a higher return and therefore sell cheaper.

One might argue that the best course of action was a formal announcement on the Bahrain Stock Exchange where all might see it.  Second best would of course be posting such information on its website, though that approach assumes that investors will search for information.

With that as background, what are we to make of the following facts:

1. GFH has not published any such announcement at the BSE except in response to a BSE request as happened today.  And you will note that the BSE has been actively pursuing GFH for additional information on a regular and timely basis.
2. GFH has apparently not yet had the opportunity to update the ratings information on its website, though to be fair only a scant 80 days has passed since it was downgraded to BB+.  Currently, the rating is SD.

Gulf Finance House - A Deconstruction of Its 14 February 2009 Press Release

GFH issued a press release today on the Bahrain Stock Exchange titled "GFH Announces Further Liquidity Initiatives".

Sometimes when I read things in the financial press, I wonder what were they thinking?   In many cases more precisely were they thinking?

Today is a prime example so let's take a closer look at GFH's press release.

First, in the opening paragraph we're told that GFH is "the leading Islamic investment bank".  Not "a leading Islamic investment bank" but rather "the leading" one.  For an institution whose business model has proven inadequate, that has been downgraded by rating agencies to below sub-zero status, whose last GM resigned after a scant stay, which has no discernible operating earnings, I would have expected a bit of humility.   Unless of course this is a rather adverse assessment on the state of the "Islamic" investment banking industry? Perhaps, not that unreasonable an assumption.

Second, the Chairman of GFH continues by highlighting the strength of "our innovative business model" and the "continued support" from "our investors and partners".   Again one might question how GFH's admittedly innovative business model is a strength since it is precisely the major factor responsible for its current predicament.  And until the LMC syndicate agrees to a rescheduling it is a bit premature to speak of "their confidence and support".   And, if like the West LB syndicate, the LMC syndicate's only choice is between an extension and a default, it may also be a bit of a stretch to speak of "confidence and support".  A decision taken with a gun to one's head is usually not considered a "free will" decision.

 

Third, Acting CEO Ted Pretty refers to the "support received from the Central Bank of Bahrain on our new product initiatives and also their advice on strengthening our position".   Clearly, the CBB doesn't want GFH to fail.  No reasonable person or firm does.  But this seems to be another stretch.  I'll bet that the support the CBB is giving GFH in terms of "advice" on strengthening its position is to get its house in order.  Not sure that strictly speaking that qualifies as "support".  Cynics might refer to it as a "warning".

With respect to new products, one would expect that any CBB approval would be subject to two very important conditions.  

1. That GFH resolve its liquidity issues prior to any such sale to ensure that it is a going concern able to manage the investments to be made and to look after the interests of its customers.
2. And probably more importantly that if GFH is taking investor funds today for disbursements in the future that those funds are legally segregated from GFH.  That is, investor deposits are placed with another financial institution and not with GFH so that investors do not become trapped as creditors at GFH should something untoward happen.

Fourth, and perhaps the most striking quote is that by the CEO of LMC:  "We are in an era where ratings and rating agencies sometimes have not comprehensively and adequately reflected the true standing of entities specifically the positive outcomes of GFH’s strategy and capital management program."  As I read this Mr. Abbas' view is that rating agencies really aren't capable of doing their jobs with at least sufficient frequency that we can rely on them.   

That raises quite an interesting question. GFH mentions the possibility of a ratings upgrade twice in its press release as though this were a good thing.

But if, Mr. Abbas is right and the rating agencies in effect don't know what they're doing, why should we trust them if they upgraded GFH?  Or is his position that they only make mistakes when downgrading issuers?

BTW, if like me, you're watching GFH's disclosure of its ratings, you'll notice they have yet to update their website for the first downgrade 26 November 2009 a scant eighty days ago.   More on that topic in another post.  Until then, we'll add the label كلام شريف  to this post.

GFH In Another Round of Debt Restructuring Negotiations - US$100 Million

The Gulf Daily News reports (presumably based on an announcement we'll see published Sunday when the Bahrain Stock Exchange opens) that GFH is involved in negotiations with the holders of its US$100 million facility to push forward next month's US$50 million maturity - presumably again the request is for at least six months.

GFH has engaged the Bahrain-based Liquidity Management Centre to help it in negotiations with the lenders, who are reported to be four regional Islamic banks.  

LMC is an Islamic financial institution whose mission is to help Islamic banks manage their liquidity in a Shari'ah compliant way.  It's  equally owned by four major Islamic financing institutions:  Dubai Islamic Bank, The Islamic Development Bank, Bahrain Islamic Bank and Kuwait Finance House.   Wonder if any of them are creditors?

Gulf Finance House: S&P Downgrade More Info Than Just the Downgrade

You've probably seen the news that Standard and Poors has downgraded GFH to SD (Selective Default) based on its failure to pay the full US$300 million due on 10 February.

Interestingly, GFH's website still shows it with an investment grade rating (BBB-) from Standard and Poors.  You may recall that S&P downgraded GFH on 26 November to BB+, 14 January to B+ and 3 February to CC prior to the very recent downgrade to SD.  That's what we in the "Islamic" banking game call an example of  كلام شريف

The rationale for the downgrade?  S&P considers the US$100 million for six months to be a distressed debt exchange and not a voluntary new facility.  

But there are three other items in the press release worthy of comment.

First, that GFH is in discussions with other lenders for a similar partial payment extension on another  US$100 million facility.  I think this is due in two equal tranches in 2010 and 2011.   Unfortunately, GFH's 3Q09 interim financial is silent on the pattern of upcoming maturities of debt. 

Second, the US$100 million announced 10 February was apparently not a new facility but the extension of maturity of part of the amount of  the existing facility. S&P comments that  GFH achieved the partial extension by executing the facility's "deed of extension" clause.  

Yet in its 10 February press release GFH said: "GFH has replaced its $300m syndicated facility with a maturity date of 10th of February with a new $100m murabaha which has a tenor of six months, having repaid $200m on the initial due date."  

Referring to this as a "new facility" sounds much better than an extension of maturity.   A refinancing always has much better connotations than a rescheduling.  If S&P is correct (and for some strange reason they have more credibility at SAM than GFH does), this is what it was - a rescheduling.   كلام شريف

Calling it a rescheduling may also sound better from an Islamic standpoint, though one presumes the Shari'ah Board will look closely at the "new" and/or "extended" facility.  

Third, S&P said that after the second rescheduling is accomplished, it will look at GFH's credit again and anticipates that it could upgrade them to CCC.  That I suppose is comfort.  It will represent an increase over the CC level assigned them on 3 February.  It will, however, leave them in "high yield" territory.

Gulf Finance House Denies AlQabas Article

In response to a letter from the Bahrain Stock Exchange, GFH has replied with with this letter published on the BSE.

Two things from this exchange:

1. GFH is clearly still on the "watch list".  The BSE wrote to them immediately this morning.  Maybe I have  reader at the exchange?  
2. Interestingly enough most of the article was a repeat of GFH's press release.  The only item that diverged was the bit about asset sales.  GFH has publicly announced that it would be selling "non core" assets.  So is the denial that it will be selling assets, hopes to sell up to US$400 million, hopes to sell 40% of its Syrian bank, hopes to do that by an IPO.  Or is this like its earlier denial that it was in discussion with WestLB for a new Sukuk of US$50 million to partially fund the 10 February repayment.  You'll recall that it received a US$100 million sukuk from the syndicate.  All of which goes to prove that many (but not all)  "Islamic" banks play by different rules than conventional banks.  As we say, "God knows".

Gulf Finance House - 5% Margin on US$100 Million & Plans for US$400 Million in Asset. Sales

Two articles provide some additional information on GFH's situation.

The first is from Zawaya which reports that the margin on the US$100 million six month murabaha from the WestLB-led syndicate is an eye popping 5%.   How does that compare to what they were paying on the US$300 million facility that matured today? Sadly, there doesn't seem to be any disclosure in GFH's financials about the profit rate on the "old"  US$300 million WestLB facility that this "new" one partially replaces. A non Shari'ah compliant bank would be required to give that sort of disclosure in its financials, but apparently Shari'ah compliant banks follow a different, if not necessarily higher, standard.    However, we can make an estimate as to the previous margin by reference to GFH's DB-led Sukuk.  The profit margin on that facility is currently 1.75% (after the 0.5% step up due to the recent ratings downgrade).  Using the Sukuk as a proxy, the new facility is paying somewhere in the range of 2.9X to 4.0x the earlier WestLB margin.  Probably at the higher range because the WestLB facility was granted in much happier times.  When one considers that the margin is 5% for a six month facility, the effective multiple is even higher.  Ouch!

The second is from Thursday's AlQabas and deals with asset sales.  It has the headline "GFH Compelled to Relinquish Assets". 

The first paragraph quotes Acting CEO Pretty as saying that GFH hopes to raise US$400 million from sales of its shares in financial firms and real estate.  The plan is to sell 40% of its interests in a bank in Syria via an IPO within six months.   

This seems an unfortunate time to be engaged in asset sales much less IPOs.  It's not clear to me that  there is any significant demand out there.  Especially for Syrian assets given all the recent saber rattling between Israel and Syria.  As well, prices are likely to be less than stellar, particularly because  potential buyers know that GFH is a "motivated seller".  This asset sales plan is reminiscent of the  Hail Mary Pass in American football.  Throw long.  Hope someone from your team catches it.  And scores the winning points.  It works sometimes: Staubach to Pearson.

One intriguing thought that comes from AlQ's headline:  Did GFH have to commit to crash asset sales as a condition of the US$100 million loan?

The rest of the article goes on to repeat items from the press release along with the standard refrain of companies in trouble that they are selling "non core" assets.  The latter particularly caught my attention.

Whenever I read the phrase "non core assets", a series of scenes flashes in front of my eyes.  Various scenarios to explain how and why these assets were ever acquired.  Scenarios that need not be mutually exclusive I'd add.

Did they know they were "non core" assets when they bought them?   I imagine a board meeting or perhaps the risk committee of the bank getting together to approve a "non core" asset purchase program.  "We've got lenders eager to lend.  Why don't we buy some 'non core' assets?  Definitely don't have enough of them."    What's even harder to understand is that usually the purchases are for rather substantial amounts.  The kind that could bring down the firm if they went bad.   You'd think that in pursuing something "non core" you wouldn't bet the proverbial ranch.  Rather you would be spending those precious borrowed funds on your main lines of business - what you might call your "core business".

Or were they just willy nilly buying assets and then later decided that some were "core" and some "non core"?  Abundant and cheap liquidity often has the same effect on judgment as خمر.  Metaphorically, one wakes up with a splitting headache the next day,  opens one's eyes and "Oh, no, how in heck did that get here?"  Struggling for a while one remembers that one thought it looked pretty good last night and brought it home.  But not now, especially  in the daylight.

Or did the assets turn into "non core" assets?  Like the  yogurt you bought two weeks ago at Jawad's but didn't eat.  One day you open the refrigerator and there it is festering in the back.  Maybe having grown a  small beard.   If it's been in there long enough, perhaps even scurrying about a bit. Or at least stirring. One hopes not ominously.