The Investment Dar - Creditors Warn TID Central Bank Will Not Impose Restructuring Against Our Will

Nancy Reagan

White House Photo in the Public Domain

Al Qabas, as it often does, has a different take on the story about TID proposing a 50% haircut than Al Watan.

Here the story is that the creditors have said that if Dar's request for a 50% haircut proves true, then this will give the Central Bank of Kuwait full justification for turning down its application for the FSL.  (You may as I have been struck by this formulation.  Either a deficient translation on my part.  Or maybe the story of the 50% haircut was wrong).

They also remarked that the Central Bank will never force a restructuring on them without their consent as they are the owners of the money and should decide their fate.  So a consensual plan agreed by all parties will be required.

Finally they are quoted as saying that there is an indication that the entity charged with preparing the report on Dar's ability to remain a going concern and pay its debts shares Dar's opinion that it can comply with the financial ratio set in the new Central Bank of Kuwait regulations if it can deal with approximately KD500 million of burden which will strengthen shareholders' equity in addition to bringing it in compliance with the new principles.   I'm taking Al Qabas description of the "entity" to mean E&Y.  And am not sure why the circumlocution is necessary.

As I've indicated before, I really don't understand the fixation on the new CBK principles.  Dar is in a life or death situation with the rescheduling.  It seems eminently reasonable that if it can't meet the new regulations that should be a very minor consideration in the greater scheme of creditor repayment and the continued existence of the Company.  There are many ways this can be "handled" to preserve the regulation but give Dar some breathing room.  Would one really "put down" Dar because it couldn't meet a ratio if it could repay a substantial portion or all of its debt?

All this talk of the regulations makes about as much sense to me as arguing about the  poor  quality  of the band as it plays the final songs just before the Titanic sinks.

Maybe one of my regular readers can tell me precisely what I'm missing. 

It's also unclear if this story came before or after this one.

Ah, Kuwait land of mystery and intrigue.  And also family values.

The Investment Dar - No Intent to Ask for 50% Haircut

Barbershop in the Bus Station Tirth Raj, Rajasthan
Copyright funky footage

Creative Commons Attribution 2.0 Generic

Al Watan quotes sources close to The Investment Dar as saying that the Company has no intent to ask for a 50% haircut (KD 500 million) on its existing debts .  That it intends to repay its debts in full.  Moreover it would never sue the Central Bank of Kuwait  which it respects and values.  I guess the meaning here is won't sue again as they did earlier.

You'll recall earlier that there were reports that TID had made just such a request bypassing its creditors and writing directly to the Central Bank of Kuwait.

Special Dubai World Court Orders Nakheel to Pay CDG's Legal Costs

According to Tom Arnold over at The National, Sir Anthony Evans, The Chairman of the Special Tribunal, ordered Nakheel to pay CDG's legal costs.

At this point the Court has not rendered a judgment on CDG's claim.

The Investment Dar - Rumor of Restructuring Bombshell: Request for 50% Hiarcut

Major Al-Musallam Rides to Glory

Before we go further to be very clear this is an account which neither the Company, the Central Bank or the creditors have confirmed.
Update:  TID has denied this story.

Al Qabas reports that TID has submitted a completely new restructuring plan to the Central Bank of Kuwait which calls for lenders to forgive 50% of the existing debt, i.e. KD500 million.   According to the report, lenders were not consulted or advised prior to TID sending the proposal to the CBK.

What's going on here is anyone's guess.

Mine is that the Company and the lenders are jockeying from (what I think is) the fallout from the Ernst and Young report.  As you'll see below. TID and its lenders appear to have been discussing alternatives /modifications to the original plan. From the Al Qabas account these seem predicated on the fact that the Company cannot repay all the debt.  The unpayable quantum seems around a 50% or so.

I suspect that Ernst and Young came back with a very negative assessment of  TID's ability to repay in full and, thus, case serious doubt on the Company's ability to continue as a going concern.  As you're aware, the Financial Stability Law is designed to give protection to viable companies.  It is not intended as a mechanism to provide legal cover for disguised liquidations.  If I'm right (and as Umm Arqala will tell you that's a rare occurrence), a report like this would have thrown quite a large "wrench" into things, complicating the CBK's acceptance of the already agreed restructuring.  How could the Central Bank recommend to the Court that the Company be allowed under the FSL under such circumstances?

I'm also guessing this occurred prior to the end of the first four month period the CBK had for evaluation of the suitability of the original plan and of TID to enter finally under the FSL.

What leads credence to both assumptions are reports in the article that the lenders have floated some  proposals or modifications of their own and the timing of those negotiations.  One was the conversion of  roughly half the debt to equity with some preservation of the rights of the existing shareholders.  Presumably, the lenders could quite easily make the argument that if a debt conversion were required, the old equity has been lost .  And thus the old equity holders should be wiped out.  Their proposal is reported as more generous, though it's not clear what percentage they would allow the old shareholders in the post conversion equity.  Leaving 10% or 20% might for example be considered highly generous by the lenders and an "outrage" by the existing shareholders.  Negotiations on this proposal supposedly took place between July and September.  The story goes that TID's Board went back on a tentative agreement because some of the existing major shareholders did not want their equity interests diluted.  (Unclear to me how you dilute something worth nothing.  There's also a hint here that the major shareholders are very important people.   And, if you know Al Q's politics, you might suspect they are pointing the finger at regal personages).

As a second alternative, the lenders suggested taking some assets in exchange for the debt.  The article says  that E&Y determined that this proposal was acceptable under international principles.  Dar supposedly made a counter offer that brought things back to zero. 

At this point, the two sides are in a deadlock.  I think that TID's proposal (assuming the report is accurate) is more a negotiating tactic than a viable proposal.  Rather it is an attempt to break the logjam by setting forth a maximum position.  One they probably know both the lenders and the Central Bank would have a hard time accepting.  What this proposal does, though,  is shift the parameters of the debate.  While lenders may reject a 50% discount, it may be harder to avoid some meaningful haircut - particularly, if the choice is bankruptcy.  And in order to get itself out of having to make a decision that may prove wrong or hurt its and the country's reputation, the CBK may be inclined to lean on the parties to compromise.  TID has just set one bound on the compromise.

It could be that they are trying to play for time - hoping for a miracle.  Realistically playing for time  hurts all parties - TID, the lenders, Islamic Banking, and Kuwait.  But maybe that's the goal - to maintain the status quo.

The article describes the choices in front of the Central Bank as:

1. Issue a conditional acceptance of the proposal subject to conformity with accounting principles and the agreement of the lenders.  (Or in other words neatly pass the buck.  Or is that the dinar? As Al Q elegantly puts it, getting the lenders to agree may be very difficult given the Company's breach/violation of the existing agreement.  That raises AA's first law of underwriting and due diligence "know your customer".)
2. Reject the proposal.  In which case it's expected that TID will sue the CBK in an attempt to confuse the issue and buy more time.  As Al Qabas elegantly puts it الى ما لا نهاية . (Probably not a first choice. More likely is forcing the Company and its creditors back to the negotiating table.  Or putting them in a situation where they will decide the fate of TID, if that fate is to be bankruptcy).
3. Push the lenders to bankrupt the Company - which will lead to all sorts of negatives for all parties and harm the financial sector, Islamic Banking and the reputation of Kuwait. (I'm guessing not an alternative high on the CBK's list).
4. Convert TID to a holding company.  This would remove it from Central Bank supervision so that the lenders can apply the restructuring deal agreed.  Also the CBK's June ratios would not apply.  (This seems to me to be a bit of red herring.  The CBK can grant an exemption to TID as a finance company from the regulations.  Supposedly the lenders will reject this because they don't think the administration of the company is really interested in solving the problem.  The lenders have on more than one occasion made it quite clear what they think about management's ethics.  They began by asking the CBK to place a minder in the Company.  Then they pushed for the appointment of a Chief Restructuring Officer).
5. Force TID back to the negotiating table with the lenders to find a solution and return to the original plan.  (This seems contradictory.  The original plan is probably moot at this point.  I think the lenders are going to have to accept some changes - and these will be against their interests.  From the report of the alternatives they've offered already it seems pretty clear that they've accepted this - even if it was no doubt reluctantly.  The CBK may well force the parties back to the negotiating table but there will be a new deal.  Perhaps the CBK could impose a time limit for reaching an agreement using as the deadline some date prior to the date it's required to give a recommendation to the FSL Court).
6. Give TID an exemption from the new ratios saying the old plan was devised based on Central Bank advice to the lenders and thus it's not fair to change the rules on them.  As per the article, TID has apparently been saying that the original restructuring plan doesn't conform with the CBK's  "new rules".  The implication being the plan must be modified.   (I don't think that the CBK new rules are the real issue here.  The sticking point is TID's ability to pay and to continue as a going concern.  If the new rules were the only point, then I think the CBK would have given the exemption.  This could be quite easily fudged as an agreed plan to implement the new rules. And so it could be presented not so much as an exemption but a granting of additional time to achieve the goal.  When the debt is paid in full, TID will clearly be in compliance).
7. Exit TID from the FSL and leave it to its fate.  (The CBK probably doesn't want to be the one who puts down this dog.  Better to have the lenders do so.  The "trick" is to find a way to put the parties in a situation where they either come up with a solution or fail - a way which keeps the CBK's hands pristine.  The time limit for the CBK to give its recommendation to the FSL Court is a neat escape hatch.  If the parties haven't agreed by then, the CBK can tell the Court it cannot make a recommendation.  The Court should then refuse to allow TID final entry into the FSL.  Since this is the last extension allowed, the matter is out of the CBK's hands.  Nature and the courts then take their course.  That should be quite a frightening thought for the lenders .  As they stare into the abyss  of almost a complete loss, all sorts of discounts and compromises may become possible).

Finally to close out this post, a recap from the Creditors' Committee official letter to the Central Bank rejecting TID's new plan "in whole and in detail":

1. TID's proposal makes a gift of the money of others (the lenders) to the Company and strengthens (supports) the rights of equity at the expense of the lenders who have not received a single fils since the beginning of the crisis but only promises.  (But they were some really nice promises. Perhaps, even said with one's hand on the Qur'an).
2. TID's proposal is contrary to international and global practices (customary usage) and puts the lenders in the situation of a fait accompli with the proposal being put forward without their agreement or consultation.
3. TID's management is "hitting" (harming) the interests of the creditors and shareholders.  Therefore the lenders reject the idea of a discount which is unjust.
4. The Committee considers that TID's proposal ignores the repayment schedule already agreed.  10% in Year 1, 20% Year 2, 20% Year 3, 30% Year 4 and 20% Year 5.  (There seems to be an argument of a breach of faith here.  And, yes, while the lenders may be thinking of a breach of the agreed business contract for the rescheduling, AA also is thinking that in this context the term applies as well to  religion).
5. TID's proposal prefers (in the sense of giving priority) the shareholders over the lenders contrary to what was agreed previously.
6. The Company has wasted the shareholders' money hiring financial and legal advisors and wasted the banks time negotiating the past 18 months.  

This has been a bad situation from Day #1.  The passage of time has not made things better.  It's likely to get worse.

The lenders face a real dilemma.  Do they compromise to try and get back as much as they can?  Or at some point do they just bring down the house of cards?  With 18 months of time on their hands, lenders may have built rather hefty provisions against this name.  That may give them a bit more negotiating room.

The Central Bank is in the most uncomfortable of positions.  It's got to be hoping that third parties or events are dispositive and that it doesn't have to make a difficult decision.

Dubai’s Back: CD Spreads Down But …

 Jakub Hałun
GNU Free Documentation License Version 1.2 

富士山- 5 合目

There have been numerous stories in the press how Dubai is making progress coming back. The conclusion of the Dubai World restructuring agreement and the issuance of the sovereign bond are touted as a watershed in this process.

That's not to say that there is no progress, but that it's a bit premature to declare success.

I'm planning a post on the bond later. Today I'd like to turn to the CDS spreads.

What we are told is that there has been a remarkable compression in CDS spreads which touched 650 or 660 bps, if I remember correctly, at the height of the crisis. The spreads are now down to pre-crisis levels, though pre-crisis is measured as the spread just before the announcement.

There's an apparent fallacy in that statement.  Prior to Dubai's November announcement, its spreads were not in some "golden age" except when compared to the market reaction post announcement. And a lot of that was over reaction due to the market being one-sided (a preponderance of demand for protection over the supply of protection) coupled with the fact that the CDS market is rather thin on the best of days. And even thinner the further one's obligor from the major markets.

There is a tendency among some to imagine that credit is like a light switch. It's either good (on) or bad (off). That's not the case.  There are gradations and usually (but not always) credit improvement or deterioration takes place over time.

Prior to the DW announcement, Dubai's CDS spreads had been trending larger, reflecting deterioration in its credit.

As an illustration, let's take a look at some very easily accessible data on five-year CDS spreads from Markaz. You won't need a Bloomberg for this.

Country	Spread
Germany	38.1
USA	47.1
Japan	59.1
China	62.9
UK	63.8
France	79.0
Saudi Arabia	80.2
Qatar	95.3
Abu Dhabi	106.4
Turkey	150.9
Bahrain	175.7
Oman	221.0
Egypt	227.7
Lebanon	288.7
Dubai	391.3

As indicated above, there are a lot of factors besides credit that affect the spreads. But I think this gives a relatively good idea of where the market sees Dubai's credit. And one would expect Dubai to be higher in the ranking.

So progress has been made. But … there's a longer way to go as indicated in the picture above.  And if you got to the Fifth Station on the bus as many do, your most strenuous efforts are yet to come.  Such is the case with Dubai.

International Leasing and Investment Company - 3 Directors Reportedly Resign

Outside the KSE: They Walk Among Us But Are Forbidden to Trade

 

According to Tamir Hammad at Al Watan 3 members of ILIC's Board have resigned in the past two days.  On Sunday, Mohammed Ahmed Saad Al-Jasser, the representative of Abraj Holding (a 32.3% shareholder in ILIC).  On Tuesday Messrs. Khaled Mohamed Nasser Al-Aboude and Badr AlDeen Noyoh, representatives of the Islamic Development Bank (a 28% shareholder).

As the story goes, the three former directors refused to give a reason.  Indications are that there are sharp differences in the company which will be laid at the feet of the regulators to sort out.

And much there is to sort out.  Among the listed but suspended (from trading) companies on the KSE, ILIC and Villa Moda have the dubious distinction of having failed to issue 7 financial reports - their last being 30 September 2008.  Even poor old TID only has 6 reports past due and shares that honour with Safat Global.

You'll recall there was an earlier flap over whether Mr. Fuad Hamed Abdulqader Al-Homoud was returning in an executive role to the company.   Apparently, that rumor has surfaced again.  Supposedly, a neutral party was negotiating a debt rescheduling agreement with the lenders supported by the IDB and Mr. Al-Jasser.  The latter to take a key management role.  Then some shareholders started pushing for the return of Mr. Al-Homoud as the story goes.   Apparently, those who thought his previous stewardship exemplary.   In any case this supposedly led the 3 directors to exit.  

What's interesting here is that shareholders with more than 60% of the firm don't seem to be able to control the Board.

Anyone with an insight or opinion, please post.

For those interested in a trip down memory lane, you can access earlier posts by using the tag "International Leasing and Investment".

AlGosaibi v Maan AlSanea - Secondary Sales and the Fix

Here's an interesting article from AlQabas which reports that some international lenders have sold a part of their debts to the two troubled family groups to hedge funds and distressed debt funds at between 20 and 40 cents on the dollar.

The motive of the selling banks is given as concern that collection of any amounts will take a long time given the complicated affairs of the companies as well as lawsuits from every side.   Or as the Arabic has it more poetically  دعاوى قضائية من كل حدب وصوب .  Even if there is a settlement between the two groups and their creditors.

This raises an intriguing question.  Why are the buyers buying?  Particularly in such a distressed scenario as this where the amounts are so very very large.  And at prices up to 40 cents????

There are a few possibilities here:

1. Al Qabas' informed banking sources may not be so well informed.  
2. The funds have lost their minds.  
3. Or they know (or think they do) something that the wider creditor group doesn't.  One answer would be that there's some sort of "fix" going on to settle the debts.   

The only thing mitigating against this last explanation is the price range.  In a case like this secondary prices should be in the teens, if that. 

So why is presumably "smart" money paying more?

Without knowing the volumes, the identities of the buyers (which may show whether the money is inherently smart or not), and if the buying is focused on particular loans, it's hard to say.

But if the upper bound to the price given is right, I'm betting it's irrational exuberance.

DIC Restructuring: Difficult Discussions Over Margin and Covenants?

Asa Fitch over at The National reports that discussions between DIC and its creditors over the proposed five-year rescheduling are focused on:

1. The margin. DIC would like 85 bp.  The lenders appear to be sensibly asking for more.  Though the precedent set by Dubai World's rescheduling is not in the lenders' favor.
2. The lenders would like covenants triggering default if certain levels of asset sales aren't met in the second and fourth years of the restructured facility.

While Asa's sources describe the proceedings as "fierce", the Company itself sees things proceeding smoothly.  

I suspect this will end up with a cosmetic change in the margin.  Hopefully, the banks have their eyes firmly on the prize (the more important point):  covenants to force asset sales.  An extra 100 or 200 bps is going to be cold comfort, if the banks can't force the return of their principal.  

There's nothing like the reluctance of an investor who bought at the top of the market to sell when markets are depressed.  He knows there's real additional value there and he has the loans to prove it.  Plus do I need to add The Vision.

Reuters: How Dubai Got Serious?

An interesting report from Reuters:  How Dubai Got Serious.

A deliberate choice of headline?  Or perhaps an unintended indication that at one point Dubai was not serious?

To whet your appetite some quotes.  My comments follow each quote.

The auditors' task is to investigate exactly where the money went, who lined whose pockets, and what other financial landmines might lie in store. Forensic audits at state-linked firms, such as Dubai Holding, are part of a wider corruption probe that has targeted senior figures from Dubai's boom years.

Lots of commissions to track down to say nothing of more simple misappropriations.

Abu Dhabi's ascendancy began in the wake of 2008's global credit crunch. Reports about debt trouble in Dubai's flagship companies had been circulating within government from as early as 2005, though most people seemed happy to ignore them. In 2008, the end of a six-year oil-fueled boom burst Dubai's real estate bubble while the global financial crisis left the emirate unable to refinance looming debt obligations.

Lenders merrily rolling over loans and pretending everything was OK.

 "The announcement was a disaster for Dubai. They were told 'don't worry, Argentina has done this, Venezuela has done it. People forget and they start lending again.' But what they didn't take into account was that those are real economies. This is not a country.

Ouch!  But right on target.  Not a country in several ways. 

"Nakheel's books were so screwed up it wasn't even funny."

"No-one knew the magnitude of what was owed, then the complexity of it," the former adviser to Dubai World says. "A lack of experience -- and ego -- made it hard to admit defeat."

And still make it so for the "Dubai's back" crowd.

Almost two-thirds of Dubai World's debt is held by six banks, four of them British: HSBC, Lloyds, Royal Bank of Scotland, Standard Chartered, and local lenders Emirates NBD and Abu Dhabi Commercial Bank.

Another great moment in banking!  There's no fool like and old fool.  And then there are bankers.

"They believe that now the problem is solved," says the former Dubai World adviser, who is critical of creeping complacency just a year after the crisis. "The problem is not solved, they still owe the same amount of money. They will have to pay the same amount, only a little later."

See above "We're back".

The Investment Dar - Changes to Restructuring Plan?

Al Qabas reports that this Wednesday, TID held a meeting in Dubai with the Creditors Co-ordinating Committee and Ernst & Young.  This is the first meeting between the CCC and E&Y.  Earlier the CCC had submitted a letter to E&Y asking that it look out for the interests of lenders as well as the owners of the Company.   

As you'll recall, E&Y has been tasked by the Central Bank to perform the technical study required under the FSL as part of the CBK's determination of whether to recommend that the Special Court make the final decision to either allow TID the protection of the FSL or deny it.  So E&Y is working for the CBK and not the lenders or the owners/borrower.

What's intriguing is that the article also mentions that the CCC has been pressuring the Company to inform it of changes and amendments in the restructuring plan which were made without the knowledge of the lenders.  If you've read earlier posts here, you'll recall that I mentioned in March that the FSL gave the CBK the right to impose additional conditions on the borrower and amend the plan in order to improve the probability of the borrower's performance.  

In this situation, the CBK holds the trump card.  It's "yes" vote is necessary for obtaining entry under the FSL.  Given that a liquidation under local laws would be messy and greatly reduce recovery prospects, both TID and the lenders are going to find it difficult to say "no" - though I suppose they can try to negotiate.   The CBK can counter by citing the report of E&Y - the independent experts asked to assess TID's financial condition and the plan.

It's also important to note that Al Qabas' account is only as good as its sources.  Last July the newspaper reported that E&Y was submitting a "final" report.   Though I suppose one possibility is that E&Y's report at that time said that the Company's  financial condition meant the original plan wouldn't "work" and needed to be modified. 

Absent a direct link into the creditor group, we'll have to wait to see what develops.  If any creditor out there reads this as an invitation to comment, he'd be right. Or, if the creditor prefers, make contact outside the blog via our contact form.

The article also mentions that during the  meeting Brother Adnan, TID's Chairman/CEO, reportedly advised the lenders that he had consulted God before founding the company.  «استخار الله ثم اصدر اوامره في تأسيس شركة تحوي بعض الاصول» .  Subsequent events would appear to confirm that he failed to maintain subsequent contact for management advice.  Or perhaps ignored what advice he did receive. Or perhaps he got a "wrong number" in his original contact

Some of the creditors expressed their disapproval over some of the decisions that Mr. Al Musallam had taken.  After a closed debate, he left the meeting and did not return, leaving the CCC and creditors with an advisor.  Some creditors are reported to have objected that the advisor had no legal status. He was not an officer of TID.  He retorted that he had a position in one of the external entities (whatever that means).

Things aren't going well.  

It seems that relations between TID and its lenders are difficult.  Mr. Al Musallam should remember that during the rescheduling the lenders will be poking their noses into his business.  While the restructuring covenants are no doubt "arranged with the greatest of care in the hopes that the cashflow soon would be there", there will be times when interpretations of meaning will arise.  Disgruntled creditors can read things more strictly if their backs are up.

Damas - Standstill Extension Signed

Damas announced another remarkable bit of progress and as well yet another "vote of confidence" from its lenders in its proven business model.

Here's the PR from Nasdaq Dubai this morning.

Following the announcement by Damas International Limited (the "Company") on 19 September 2010 that the steering committee of the Company's lenders had, in principle, approved an extension of the standstill agreement to 30 November 2010, the Company announces today that the Company has signed an amendment agreement dated 30 September 2010 to the standstill agreement dated 24 March 2010 (as amended pursuant to two amendment agreements dated 27 April 2010 and 13 July 2010 respectively) between the Company and the steering committee so as to formally extend the standstill to 30 November 2010.

A Company spokesman commented that "the agreement of the steering committee to the standstill extension shows once again the confidence that the bank lenders have in the restructuring process and the strength of the underlying business model of the Company".

If you believe the press release, and I hope you don't, Damas has scored yet another vote of confidence from its lenders.

 

Actually, it has not.

 

If there was a vote of confidence from its lenders, it is when they agreed the extension not when they signed the agreement.  Not when they signed to document that agreement.  Sorry, Damas, you only get one vote from this.

 

But more importantly this is actually a vote of no confidence in the local legal system. 

 

Rather than say no and refuse an extension.  Lenders realized that recourse to local courts would greatly diminish their already worrisome recovery prospects.  So they went along with another extension on the 19th and signed it today.

"We're Back" - Part II: "Back to the Future"

Two Unnamed Lenders Unsuccessfully Attempt to Retrieve Their Loan

We're back indeed!

Seems Limitless needs another six months. 

Guess lenders should have figured out that when the borrower's name is Limitless, there could be all sorts of related problems with amounts and repayment.

I can't wait for the sequel.  This plot has got at least a couple more runs.

HSBC: Restrictions on Global under its Restructuring

The Short Fuse on Global's Restructuring

Al Qabas has a summary of a recent HSBC report on Global's restructuring.

The main point and the reason for the picture above is the repayment schedule:  10% of the principal in Year 1, 20% in Year 2 and a crushing 70% in Year 3.  The result of the unrealistic short three tenor. 

I've commented on this before, but that won't stop me from saying it again.  It's highly unlikely that Global is going to be able to meet the repayment schedule even with one or two small miracles coming its way.   With the short fuse and the extensive trip wires (by way of covenants below), the spectre of a second default has to be haunting Global's management and shareholders.   It will probably also give pause to clients being solicited by the firm for new business.  

The banks should be worried as well.  One can argue that a short leash increases their protection.  But too short a leash is not good either  - particularly when you want the dog to hunt.  A bit more breathing room - say two more years - and their potential headaches may be much much less.

Restrictions include the customary limits on distributions (dividends), taking new loans, making capital expenditures as well as a requirement that at a minimum the value of assets must be 0.75 times the amount of the loan.  Global is required as well to maintain capital adequacy at 5% until June 2011 at which point the ratio increases to 7%.

Just rounding out the article.  As has been mentioned earlier, the lenders got a 1% flat restructuring fee.  And a 0.25% extension fee from the date of default to the date of the agreement.  Both fees capitalized into the existing pre restructuring loan amounts.  The lenders also have the right to convert their debt to equity if Global doesn't repay 40% of the debt in the next two years.    That last condition coupled with a restriction on dividends seems to me to pretty much make the raising of any new capital a moot point.  Unless of course they're irrationally exuberant investors.

Gulf Finance House - Ted Pretty Sees Pretty Good Times Coming

Al Watan has an interview with GFH"s Group CEO Ted Pretty.  They noted that he was a bit more optimistic with them than with the Western media he had met with.  Perhaps, things have improved.  Perhaps, it's a bit of market segmentation.

Here are the main points. My comments are in italics and contained within parentheses.

1. GFH faces difficulties but will regain health at the beginning of 2011.
2. In the past we bit off more than we could chew.
3. The current strategy is to focus on existing investments and projects, complete these and realize value. (AA:  More on strategy later this is not the complete picture).
4. GFH took action early and is starting to see the benefits.  Our 1H10 loss is smaller than 2009's.  Because of its wise actions, the bank is well positioned for profitability and growth in 2011.
5. GFH's 2010 priorities are:  restoring its operating model, reestablishing sources of income, cost control and rescheduling debt.
6. Going forward business activities will comprise as well raising financing, providing consulting services, managing assets, and the development of private capital (private equity), particularly in forming Islamic financial institutions.  He then noted that GFH had raised some US$2.5 billion in capital for a variety of firms:  First Energy Bank, Khaleej Commercial Bank, Bank Q Invest, First Leasing Bank, Asian Finance House, Arab Finance House and others.
7. He said that new capital is not required for and  will not be used to repay debts.   There's no need because the WestLB syndicate and LMC syndicate have been rescheduled.  (AA:  No doubt wishing to reassure investors.  The proceeds of the 2009 new capital were used to repay debt).

He also commented that fear was depressing economic and market activity.  However, he noted that several countries had proven that they were able to restart their economies without being dependent on recovery of the US economy.  And called for SWFs to do more to support and develop economic activity in the region noting that the average investor had a predilection to invest in Europe or the USA.

If you believe his pitch, this would be an excellent time to buy GFH shares.  They're selling below par.  Way below par.  US$0.125 on the BSE versus a par value of US$0.33.  The upside potential is unlimited as they say.

And since GFH has yet to publish its Basel II Pillar 3 disclosures as of 30 June 2010 as mandated by the Central Bank of Bahrain, many of you may be forgiven for assuming this means the bank has no risks to report - which, if true, could be a very positive "buy" signal.

HSBC: “No Provision Relief for Kuwaiti Banks Until 2012”

AlQabas published a summary of a recent HSBC research report in its Sunday issue.

Here's a quick summary of the main points:

1. HSBC notes the dramatic growth in distressed loans at Kuwaiti banks – from 5.3% in 2008 to 9.7% in 2009. 
2. And predicts that the banks will continue to make substantial provisions this year and next only reaching a normal level of provisions in 2012. 
3. That being said, there should be a recovery in ROE for 2010.
4. Banks in Abu Dhabi and Kuwait were the worst affected among GCC banks. However, Kuwait has average provisions equal to 10% of total loans while Abu Dhabi only 4%. 
5. A concentration on loans to real estate, construction, and investment companies is responsible for the decline in the value of Kuwaiti bank assets. 
6. Real estate exposure:  Given the absence of Kuwaiti government spending on infrastructure or development projects during the boom years (2005-2008) credit was to the private sector largely to individuals and unlisted companies. The focus was on commercial, residential and investment real estate. Listed real estate companies only account for 13% of the total of such loans. 
7. Investment firm exposure:  Loans to investment companies were KD2.8 billion with KD1.2 billion to conventional firms and KD1.5 billion to "Islamic" firms.  The loans granted were largely used to fund investments in real estate and regional stock markets (thus increasing the lenders' total exposure to these sectors). 85% of investment companies' assets are in the GCC as per the IMF. Since the crisis hit, banks have seen their loan security drop by at least 50% as per HSBC's estimates, though it does note that in the absence of transparency the true impact is not known. 
8. Consumer loans:  These extensions of credit are believed to be of better quality because  they are secured by rentals and salaries. HSBC notes that most Kuwaitis are employed by the Government, the implicit presumption being that their incomes are secure.
   

There were two interesting tables accompanying the article, which I've reproduced below.

First, Kuwaiti bank exposure to real estate as a percentage of shareholders' equity.

Amounts in KD millions.

Bank	Real Estate & Construction ("REE")	Shareholders Equity	REE % of Equity
NBK	1,450	1,871	78%
CBK	733	440	167%
Burgan	976	422	232%
KFH	1,591	1,537	194%
Gulf	1,495	391	382%

Second, Kuwaiti bank exposure to investment companies.

Amounts in KD millions.

Bank	Exposure	% of Total	Shareholders' Equity	Exposure as % of Equity
Gulf	486	18%	391	80%
Burgan	190	7%	422	45%
CBK	269	10%	440	61%
NBK	216	5%	1,871	12%
KFH	944	34%	1,537	61%
Others	658	26%	----	----
Total	2,763	100%	----	----

 

From the above one can draw some conclusions on relative business models and underwriting standards.  

Of course without knowing the details of the loans and in particular the security obtained, these can be only preliminary. 


As usual, the pattern seems to be repeating itself.  One bank is distinguished by its prudence.  And some of the same names seem to be pushing the envelope. 

Nakheel: CDG Lawsuit Will Not Delay Deal with Trade Creditors

Nakheel has issued a press release (to Reuters) stating that CDG's lawsuit will not delay its reaching a settlement with trade creditors.  It also said that it expected to prevail against CDG noting that it disputed the entire claim and had counterclaims of its own against CDG.

Nakheel said it has approximately 85 percent of acceptances, by value, for its restructuring deal and is "well on target to achieve its 95 percent acceptance of all payables and claims within the near future," according to the statement sent to Reuters late Tuesday

Mashreqbank v AlGosaibi - Al Sanea's Forum Non Conveniens Motion Successful

Above Main Entrance to NY Supreme Court

Looks like Mr. Al Sanea is continuing his run of victories in the NY Courts.  

As you'll recall when Mashreqbank filed suit against AHAB in the NY Supreme Court, AHAB had Mr. Al Sanea added as a third party defendant.

July 29 Judge Lowe of the NY Supreme Court ruled in favor of Mr. Al Sanea's request that due to forum non conveniens he and Awal Bank be removed as third party defendants. 

While Mashreqbank is appealing, based on the pattern of judgments in the NY Supreme Court, their chances of obtaining a reversal of the ruling would appear to be somewhere between slim and none.   Wonder if AHAB will now find NY an inconvenient forum and file a motion.  There seems to be lots of precedents for this.

(As before, the email notification from the NY Supreme Court is a bit late in arriving.)

You can find earlier posts on this topic by using the label "Mashreqbank".

The NY Supreme Court Case Reference # is 601650/2009.

Al Ahli Bank of Kuwait v AlSanea & Saad Trading - NY Case Dismissed Forum Non Conveniens

A Rather Inconvenient Place After All

Judge Richard Love III of the Supreme Court of the State of New York decided last July that New York was indeed a forum non conveniens and so dismissed ABK's suit against Mr. Al Sanea and Saad Trading, Contracting and Financial Services Company.

(In case you're wondering why the delayed posting, while the judgment was electronically filed 11 August, I didn't get an email until today).

I suspect the new venue will turn out to be much much more convenient for Mr. Al Sanea.  Under AA's law of the conversation of legal energy, that may make it much much less convenient for ABK.  Such is life.

You can find the judgment as Document #28 at the NY Supreme Court's website under Case # 602487/2009.

If you use the tag "Al Ahli Bank of Kuwait" you will find earlier posts on this topic.

The Investment Dar - Dubai Creditor Meeting

TID held a creditors' meeting in Dubai 21 September.  Both Al Watan and Al Qabas have accounts.

The Al Watan (Taamir Hamaad) article is fairly bland - no fireworks.  Adnan Al Musallam  is quoted as reiterating TID's firm desire to repay its debts, adding that the reality of the financial crisis made it incumbent  on everyone the obligation to work together to reach the restructuring.   

He also proposed the formation of a holding company capitalized at between KD300 million to KD400 million - to be administered by the banks and investors - as the vehicle to settle TID's debts.  The rationale appears to be to ensure compliance with the Central Bank of Kuwait's new rules on investment companies.  Apparently to shift the debts off TID's balance sheet along with the assets - thus  improving TID's performance under the CBK's  three ratio tests.  He said that he had requested the executive and legal management of the Company to study this matter.

On the other hand Al Qabas (Mohammad Sha'baan) has a more fiery story (not unexpected) of creditor "anger".  In the Al Qabas version, some creditors are on the verge of a confrontation with TID and its Board over the following:

1. A belief that parties outside the formal management/Board structure of TID are really making the decisions
2. That the Company is deliberately stalling progress
3. That the creditors have been overly patient during the past two years but have gotten nothing from the Company
4. Board Members are deliberately missing meetings with creditors and provoking confrontations in order to evade responding to creditor requests.  A central point is the creditors' demand that they be kept fully in the picture as to what is going on at TID, including efforts to comply with the Central Bank's new regulations for investment companies
5. That some creditors are prepared to bring legal action against all parties - including against the Creditors' Coordinating Committee,  if there is an attempt to impose the restructuring plan without 100% creditor acceptance or acceptance by an absolute majority of creditors.   AA:  This is a puzzling statement.  It's pretty clear by now that all creditors are not going to accept the plan.  And equally that the whole point of recourse to the FSL is to cram down dissident creditors.  Al Qabas' informed sources may be less informed than they claim.
6. That TID has apparently stopped its program of salary reduction for senior management and that the salary scale has reverted to what it was in the boom years.  AA:  This is similar to the earlier theme about creditor anger over a raise and bonus for a member of senior management.  A neat way of attempting to finesse this is to eliminate a reduction and say that technically the fellow is not getting a raise but rather his salary is being restored to what it was prior to the reduction.  Unclear if this is what is going on. 
7. That some Board Members through related companies they control, companies which are partners with TID in certain assets, are gaming the realization of assets.  AA:  This is the fundamental creditor fear - that asset disposals will be gamed to reduce the banks' realization proceeds.  Not an unreasonable fear in the land of egregious related party transactions.

Two quite different accounts, though it should be noted that Al Qabas is speaking about creditor discontent which might manifest itself in the future not battles raging at present.

There's a creditors meeting today in Kuwait for those creditors who missed Dubai.  Hopefully, more detail will be forthcoming.

It's no surprise that creditors' patience is wearing thin.  It's been over two years.  The Central Bank is still reviewing whether to allow TID to use the FSL as cover for its rescheduling.  TID has yet to release any 2009 financials - either quarterly or fiscal year 2009.

Lenders Selling Saad Group Loans

Remedial Lending Class

Asa Fitch at The National reports on some loan sales by Saad lenders.

This makes perfect sense. 

It's highly unlikely that Saad or AHAB, for that matter, are suddenly going to settle their debts.  It's likely that there will be considerable more time before a deal is struck.  And then repayment is likely to be painfully slow over a long period.

It makes perfect sense for lenders with modest sized tickets to exit now.  End the uncertainty.  Devote resources to other more productive efforts than negotiating a rescheduling and then tracking the performance of a weak credit.

The sad thing is that bankers have ADD so that any lessons learned are remembered for only a short period making the cost of tuition not effective.