Awal Bank Chapter 11 Filing Update - Request for Extension of Time to Provide Information

Here's an update from Bell Pottinger Middle East on the case.  BPME is the PR company used by Charles Russell for the Awal Bank engagement.

Awal Bank files request for extension of time

Bahrain, 4 November 2010: Charles Russell LLP, acting as External Administrator and Foreign Representative (the “Foreign Representative”) of and for Awal Bank BSC (“Awal Bank”) has filed a request for an extension to the deadline to file schedules of assets and liabilities and statement of financial affairs (the “Schedules”) in the Chapter 11 Case commenced on 21 October 2010.

The request follows the first day hearing that took place on 26 October 2010 at which the Foreign Representative sought an order to establish a workable protocol to administer the Chapter 11 Case in cooperation and coordination with the Bahraini administration. After hearing from both the Office of the United States Trustee and counsel for the Foreign Representative, the Bankruptcy Court directed that the Motion be further considered at a later date in order to allow more time to assess the information provided and after giving opportunity for creditors to make representations regarding the relief requested in the Motion.

The Foreign Representative has determined that additional time is required to assess, among other things, creditor views in relation to the Chapter 11 Case. Upon this assessment being undertaken, the Foreign Representative will determine whether to further pursue the Chapter 11 Case. The Office of the United States Trustee has indicated it has no objection to the Foreign Representative’s request for additional time to file the Schedules.

In October 2009 the Foreign Representative obtained “foreign main proceeding” recognition from the Bankruptcy Court under Chapter 15 of the U.S. Bankruptcy Code for Awal Bank’s administration proceedings in Bahrain.

The Bahraini administration governed by the Central Bank of Bahrain and Financial Institutions Law (“CBBFIL”), continues to be recognised as the foreign main proceeding under Chapter 15. The U.S. based legal activities form part of a multinational litigation process, with court proceedings also currently underway in Bahrain, the Cayman Islands, the Kingdom of Saudi Arabia, Switzerland and the United Kingdom.

Please contact David J. Molton, Esq. from Brown Rudnick LLP, counsel to the Foreign Representative, at 00 1 212 2094822 with any inquiries.

Gulf Finance House to Ask Sukuk Holders for Three Year Extension

Reuters is quoting an unnamed GFH spokesman that the Bank intends to ask the holders of its US$200 million Sukuk issue (US$137 million outstanding) to roll the Sukuk on its original terms for three years.  That is, to extend the maturity from 2012 to 2015.

I'm not sure if "chuzpah" is an Islamic banking term, but it would sure seem to apply here.  The Sukuk is currently trading at around just a whisker over 50% of face value.

I'd also note that earlier this week GFH formally stated that it had not issued the information the Gulf Daily News report that it intended to either (a) sell assets to  US$90 million in debt next year or (b)  reschedule debt.   If you recall the original GDN article, there was a third alternative mentioned - which was extinguishing debt via asset transfers.  Interestingly enough, what is mentioned in the GDN article is precisely what I see  on page 13 in the copy of GFH's October 2010 "Return to Growth" Presentation to investors which I recently obtained. 

It is, I suppose, indeed sad that someone is issuing presentations using GFH's highly respected name in such a fashion.

As to pricing for GFH debt, please see my soon to be issued companion post on the draft terms for GFH's proposed new Sukuk.

Awal Bank Chapter 11 Filing - Statement on Behalf of Charles Russell

In response to my request I received the following from Alisdair Haythornthwaite at Bell Pottinger Middle East (UAE).   BPME is a division of Chime Communications, a leading UK public relations firm (among other things).

Awal Bank BSC Chapter 11 Case Update

U.S. Court Delays Consideration of Awal Bank’s Proposed Chapter 11 Protocol

Bahrain, October 27, 2010:  Charles Russell LLP, acting as External Administrator and Foreign Representative (the “Foreign Representative”) of and for Awal Bank BSC (“Awal Bank”) attended a “first day” hearing on October 26, 2010.

At the hearing, the Bankruptcy Court considered the Foreign Representative’s Motion for Entry of an Order Establishing Protocol for Chapter 11 (the “Motion”).  After hearing from both the Office of the United States Trustee and counsel for the Foreign Representative, the Bankruptcy Court directed that the Motion be further considered at a later date after giving opportunity for creditors to make representations regarding the relief requested in the Motion.

The U.S. based legal activities form part of a multinational litigation process, with court proceedings also currently underway in Bahrain, the Cayman Islands, the Kingdom of Saudi Arabia, Switzerland and the United Kingdom. It is therefore necessary that any Protocol established in the U.S. works alongside the work being undertaken in Bahrain. In this regard the Foreign Representative is considering whether to further pursue the relief requested in the Motion.

In October 2009 the Foreign Representative obtained “foreign main proceeding” recognition from the Bankruptcy Court under Chapter 15 of the U.S. Bankruptcy Code for Awal Bank’s administration proceedings in Bahrain. The Bahraini administration governed by the Central Bank of Bahrain and Financial Institutions Law (“CBBFIL”), continues to be recognised as the foreign main proceeding under Chapter 15.

I'll keep monitoring the Bankruptcy Court of the Southern District of New York for electronic filings on the case to see if there is anything on the Court's reasoning for its decision. 

Damas - New AED 614 Million Agreement with Abdullah Brothers

Damas announced on Nasdaq Dubai that it had revised its agreement with the Abdullah Brothers regarding the amounts they owe to Damas.

One key item is the fixing of the price of the 1,840,250 grams of gold the Brothers stole from the Company at AED 256 million.

Presumably, this has been set so that Damas is not disadvantaged.

Setting the amount owed is a key step.  Collecting it may prove a bit more difficult.

Awal Bank Chapter 11 Filing

There's a report in AlQabas Thursday edition that Judge Groper denied Awal Bank's Chapter 11 petition.  At this point, there is nothing posted on the NY Southern District Bankruptcy Court website.  The last document there is the notice of 26 October for the hearing to be held today (27 October).

Gulf Finance House 3Q10 Financials: A Train Wreck

Studio Lévy & fils  1895
When You Turn the Corner Make Sure the Track Goes There

Get out your magnifying glasses and join me in reading the full 3Q10 financials that GFH submitted to the Dubai Financial Market Wednesday morning. Since I've got my soapbox out for a later tirade, I might as well take this opportunity to suggest to the  DFM that they invest a few dirhams in upgrading their electronic imaging system for faxes they receive. There really is no good reason in this day and age that the output cannot by A4 size.

Looking at the financials we see from Note 12, that GFH's US$115 million loss was primarily caused by provisions. Some US$101 million of them. But not provisions for investments. Rather US$60.5 million for an investment banking service receivable. And US$36 million from the sale of investments. I guess if one sells assets of "volatile" quality, one might expect some "volatility" in the receivables from the sales.

That being said, GFH has continued to maintain in its Other Assets the US$134 million "magical asset provision" and US$161.8 million in "Financing to Projects".

Another unfortunate trend is operating income which is running US$60.7 million negative for the first nine months of 2010 as compared to US$36.7 million for the comparable period the previous year. This is due to a collapse in revenues. On the cost side GFH has actually done quite nicely in bringing costs down.  But, if one can't pay the light bills from operations, it's hard to see a bright future.

As a result of the net loss, GFH's CAR has slipped below the 12% minimum set by the CBB. In the financials, KPMG coyly states in Note 2: 

"Further, the capital adequacy ratio of the Group as at 30 September 2010 was below the minimum required by the regulatory ratio …"

No quantification is given. We don't know if GFH just missed the ratio and has a CAR of 11.99%. Or, if it's CAR is 1.9%. You might think that the auditors would consider it important to quantify this shortfall. It certainly is a bit of "material" information that stakeholders would like to know. And more importantly should know.

If like me that's what you think, you're disappointed by KPMG's apparent lack of action on this point. They were silent on this topic. And they did not force GFH to disclose this information in a note to the financials. It's unclear if this is due to desire not to embarrass its client. Or slavish adherence to some accountant's taqlid as to the wording used for "emphasis of matter".

Note to Central Bank of Bahrain: It might be a good idea to specify in Module PD that when the CAR regulatory threshold is breached, the Licensee state the resulting ratio with details of the calculation. And if anyone from the CBB is reading this, I'd reiterate my earlier suggestion that Module PD be amended to require that Licensees report on the BSE the more detailed of (a) what Module PD requires and (b) what they are required to report on other exchanges. There is no reason that Bahraini investors should get second rate incomplete information which is available to investors in Dubai or elsewhere.

We don't have all the information required to calculate GFH's CAR at 30 September 2010. But we can make some estimates which should give a pretty good directional sense of the CAR.

The Table below summarizes these:

	30-Jun-10	Case A	Case B
Regulatory Capital	US$   363,220	US$   248,220	US$   114,229
Total RWA	US$2,811,417	US$2,683,417	US$2,549,417
CAR	12.92%	9.25%	4.48%

Notes & Assumptions:

1. 30 June 2010 CAR is as per GFH's Basel II Pillar 3 Disclosure. 
2. The key assumption is that there is no real significant change in Regulatory Capital or Total Risk Weighted Assets (Credit, Market and Operational Risk) except for the adjustments specified in the two "cases". These adjustments are made from the 30 June figures reflected above. This is a simplifying assumption so the ratios derived will not be exact but should be "close enough" to get a good sense. 
3. Case A: US$115,000 (the 3Q10 loss) is deducted from Regulatory Capital and US$128,000 is deducted from Total RWA at 100%. 
4. Case B: US$134,000 (the "magical asset" provision) is deducted from both Regulatory Capital and Total RWA. And again at 100%.

And if you have any doubt about the realisable value of any of GFH's other assets, like those Project Financings which may very well be to the same firms whose financial condition caused their bankers to pull the GFH guarantee, it's not too much of a stretch before the CAR is negative.

The results are to say the least not encouraging. It's hard to see how even the "Prettiest" words could convince even the "wisest" of investors to put equity into this firm.

The Gulf Daily News is reporting that they've seen a GFH "Investor Presentation" in which GFH states it intends to sell assets to raise cash to pay back some US$90 million in debt maturing next year or restructure that debt. In further discussions with GFH, the GDN was told that other options being considered were an IPO of some of its mega projects (North Africa and India) or perhaps giving creditors land, shares or other of GFH's highly valuable assets. There is a danger with the latter for creditors. As the choice assets are stripped from GFH's balance sheet, remaining creditors are left with lesser ones to settle their debts. The only option not mentioned here was putting a brick from one of these projects under EJ's pillow in the hopes that the Real Estate Jinn would put US$500 million under his pillow.

It's hard to imagine a "wise" creditor putting funds into GFH. 

And it takes a bit of "optimism" to see a real future for GFH. 

You can find more posts on GFH by using the Label "Gulf Finance House".

More on Awal Bank Chapter 11 Filing

Updated for comments on Chapter 11.

Here are some additional details on Awal's filing.

1. The case number assigned by the Bankruptcy Court of the Southern District of Manhattan is 10-15518-alg.  Awal's previous Chapter 15 filing has case number 09-15923alg.
2. As indicated by the "alg" at the end of the case number, Justice Allan L. Gropper has been assigned this case.
3. The Bank is being represented by Brown Rudnick LLP who filed the Voluntary Petition for Bankruptcy under Chapter 11.
4. The filing was authorized by Awal's Administrator, Charles Russell, LLP.  Presumably before proceeding CR obtained the no objection of the Central Bank of Bahrain who appointed them.  I think this is a pretty strong indication that the CBB has decided to proceed with the liquidation of the Bank.  Note:  A Chapter 11 proceeding is of course a reorganization not a liquidation.  The latter is Chapter 7.  Chapter 11 allows the debtor to propose a plan for dealing with its existing obligations - either payment in full, in part, conversion to equity, etc.  Post implementation the debtor continues as a going entity (e.g., Continental Airlines).  So what I mean here is that the CBB has decided to proceed knowing it will cause the lenders some pain.  That in turn means the situation is beyond repair.  And that the Bahraini authorities have decided to "bite the bullet" and take the reputational damage that will come from such action. 

As part of its filing, Awal Bank made the following statements:

1. After the payment of various expenses including that of administration, there will be no funds available for distribution to unsecured creditors.
2. Estimated creditors are between 50 and 99. 
3. US assets are above US$50 million up to and including US$100 million.
4. Estimated debts (worldwide) are over US $1 billion.  (This is the largest amount provided on the Bankruptcy Filing Form).

As required on the Filing Form, the debtor lists its top twenty unsecured creditors.  No amounts are provided though.

Here they are in the order of appearance on the Form:

1. Abu Dhabi Commercial Bank, Abu Dhabi
2. Abu Dhabi Islamic Bank, Abu Dhabi
3. AlGosaibi Money Exchange, Saudi Arabia
4. Bank of Montreal, Canada
5. Bayerische Hypo-und Vereinsbank, United Kingdom (London Branch)
6. Bayerische Landesbank/Bayern LB Germany
7. Boubyan Bank, Kuwait
8. Calyon Corporate and Investment Bank, United Kingdom
9. Commercial Bank of Kuwait, Kuwait
10. Commercial Bank of Qatar, Qatar
11. Commerzbank Global Equities AG (formerly Dresdner Bank) Germany
12. Commonwealth Bank of Australia, United Kingdom (London Branch)
13. Fortis Bank, Belgium
14. Gulf International Bank, Bahrain
15. HSBC, Australia
16. HSBC, United States (NY Branch)
17. HSH Nordbank AG, German
18. JP Morgan, United Kingdom (London Branch)
19. Kuwait Finance House (Liquidity Management House), Kuwait
20. The International Banking Corporation, Bahrain

If you're wondering about TIBC (which also filed under Chapter 15 in 2009) taking a similar action, a  court hearing is scheduled under their case next week Tuesday (26 October).  Stay tuned.

Awal Bank FIles for Chapter 11 Bankruptcy in US

In terms of recovery all venues are likely to be highly inconvenient.

Update:  See subsequent post.

According to news reports on Bloomberg, on 21 October Awal Bank filed for Chapter 11 bankruptcy in the Southern District Court of Manhattan listing assets of between US$50 million to US$100 million and liabilities of  more than US$1 billion. 

That would not seem to augur well for creditors.  Though it should come as no surprise. 

Earlier Awal had filed under Chapter 15 of the US Bankruptcy Code.  That Chapter is used when a company asserts its proceedings are taking place under a foreign jurisdictions laws and procedures broadly equivalent (in fairness) to US procedures.   It will be interesting to see what arguments were advanced for moving the proceedings to the USA.  Forum non conveniens?

Global Investment House Pays Another US$72.5 Million on its Restructured Debt

Global announced that value 21 October 2010 it had paid down another US$72.5 million of principal on its restructured debt.

With that payment it will have paid down 8.8% of its total debt.  It has nine quarters to pay the rest.  A journey of one thousand miles begins with a single step.

Gulf Bank Kuwait - On the Mend. No More Loans to Saudis.

A banker's memory is a wonderful thing.  
Even the most painful experiences can be forgotten. 

Michel Accad gave an interview at the Reuters Middle East Investment Summit in which he made the following points:

1. 3Q10 is the turning point in GB's two year strategy to rebuild.  
2. Each subsequent quarter will be a relative improvement over the previous.  
3. By 3Q11 the rebuilding will be done (apparently one quarter ahead of time) and the bank will move to strengthen its income generation or its geographic coverage.
4. The goal is to increase local market share from today's 12% to some 16% in five years.
5. After 3Q10, the Bank will not need to provision as much but will continue to do so for precautionary reasons (rather than need).
6. The Bank has decided not to make any loans to Saudi clients for at least 3 years.  No doubt a reaction to its troubles with AlGosaibi and Saad Groups.  
7. Instead it will, however, make loans to foreign investors for their projects in Kuwait. And no doubt concentrate on its high quality Kuwaiti clients.
8. As of 3Q10, the Bank has successfully reduced its non performing loans below 20% of the total portfolio.  That's a lot of "Saudi" clients, it appears.

International Investment Group - Update from Delegate on IIG Funding Sukuk (Hint: No Good News)

Deutsche Bank as the Delegate on the above transaction issued an announcement on Nasdaq Dubai advising that:

1. IIG had advised that it was awaiting ministerial approval of its new board so that they could vote to release the KPMG study to certificateholders who had signed a confidentiality agreement.
2. The Paying Agent advised it had not received the funds for the 12 October payment.
3. Certificateholders reminder of Dissolution Events and that they need to vote to accelerate.
4. That IIG has not honored the claim served under the Purchase Undertaking.
5. That the Delegate is not obliged to take actions unless indemnified to its satisfaction.  Apparently, it has not been.

Dubai Sovereign Bond: "Pay to Play"

An article in the FT today reports that bankers were told that lead underwriters on Dubai's recent US$1.25 billion sovereign bond were told that in order to be considered they needed to make loans to the Emirate.  Supposedly a two-year loan for some US$300 million priced at Libor +300 bps.

A couple of observations.

First, this is a pretty standard request, particularly from a client having a bit of a problem.  Just as the good banker is taught to seek to increase his "share of a customer's wallet" in good times, borrowers especially those currently out of favor in the market look for their bankers to be understanding in more difficult times.  In both cases there's a lot of talk about the importance of relationships.  How strong they are.  Sentiments said with no doubt more sincerity than the average politician's promise.  But just as meaningful for that.

Second, Dubai's Sovereign Bond was "priced to place".   Dubai could not afford to have this transaction fail. With a bond, a low price means the interest rate was set higher than it needed to be.   Pretty much the same rationale as IPO pricing.  Under price the security by a bit so that the offer is successful.  And then  as the share rises in initial trading, you've got a good story for the company and the investors.    

I've seen estimates that Dubai's pricing may have been as much as 0.75% to 1.0% higher than required.  The underwriters who "sat" on a substantial portion of their allocations may not too far in the future have large capital gains - though probably not until after issuance of the DEWA bond.  If they've placed it with clients,  as some will have, then they will derive some relationship benefits there and can use those to secure additional business from those clients.    Just as the investment firm that can allocate IPOs to its customers gets something back.

For HSBC and Standard Chartered with major domestic operations in the UAE, being seen as a good friend is a useful thing.  If indeed SC's threat to move its corporate headquarters to the more tax and regulation friendly shores of Dubai is more than mere posturing, another good reason.

Finally, there's probably also a very hard headed calculation here - that it's going to be some time before Dubai regains full market access.  Amounts are likely to remain limited  and increasing only slowly.  Pricing will probably improve even slower.  As the thinking goes, there are opportunities for profit here.

And of course, there is one other factor in play:  banker and investor ADD.

Do bankers have short memories?

Excuse me, could you repeat that, I've forgotten what you asked. 

Gulf Finance House - Capital Reorganization and Raising - A Look "Behind the Curtain"

"Pay No Attention to the Man Behind the Curtain"

GFH published the agenda for its shareholders' general meeting on the capital reorganization/raising to be held 31 October.  So far only in Arabic on the DFM and on the KSE (copy below so you can follow along).  Strangely not yet on the BSE.

As the picture above suggests, by looking behind curtain we can get a real understanding of what's going on.

In brief the key points are:

1. The capital reorganization and US$500 murabaha are being structured to make them as attractive as possible to new investors.  That means that existing shareholders are being substantially diluted through a variety of clever means - which might not be apparent to most readers of the agenda for the shareholders' meeting. 
2. A share swap transaction between Mr. Janahi and GFH which seems designed to strengthen GFH's creditworthiness as well as provide some much needed "relief" on the CAR both in terms of risk weighted assets and potentially equity.

First, let's look at what's immediately visible:  the agenda for the shareholders meeting.   Shareholders are being asked to:

1. Approve a share swap between GFH and its Chairman/Executive CEO, Mr. Esam Janahi.  In return for his 104,923,734 shares in Khaleeji Commercial Bank ("KHCB"), GFH will give him 100% of its shares in AlAreen Company for Leisure and Tourism (whose main asset is the Lost Paradise of Dilmun Water Park in Bahrain) plus US$3 million.  The latter either in cash or Treasury Shares of GFH. 
2. Reduce the number of GFH's issued shares from 1,896,332,565 to 474,083,141 in a reverse 4:1 share split.
3. Reduce the paid in capital from US$625,789,746.45 to US$142,224,942.375.  A difference of US$483,564,804.075. 
4. Reduce the par value of shares to US$0.3075 from US$1.32.
5. Approve the issuance of up to US$500 million in a privately placed convertible murabaha through a special purpose company set up by the bank or established at its request.  (That is, the SPV will lend to GFH.  It will obtain its funding from various investors.)
6. The profit rate ("interest rate") on the murabaha to be the "market rate" according to the rate and formula established by the Board of Directors shortly before issuance.  Such profit rate to be payable in cash or additional GFH shares.
7. The conversion price to be between US$0.31 and US$0.40 per share - with the rate of discount not less than 20% to 40% of the market price of the shares - but not below the nominal share price.  The conversion price to be set by the Board shortly before issuance.
8. A tenor of 3.5 years.
9. Conversion at investors' option with right of Board to offer an early conversion "incentive" according to conditions the Board will set.  Note that means that the murabaha does not count as equity for either regulatory (CAR) or accounting purposes until it is converted.  For the latter, only the embedded equity option is counted as equity under IFRS.
10. Waiver of pre-emptive right of shareholders to new equity.
11. Authorization for Board or whoever it appoints to take necessary legal steps to implement and for Chairman or whoever he appoints to sign the necessary legal documents.
12. Conversion of GFH's share register to electronic form according to the rules of the Central Bank of Bahrain and the BSE.

Now a look behind the curtain via some hopefully informed analysis:

A.  Share Swap - KHCB for GFH

1. GFH gets several benefits from this transaction.
2. Immediate strengthening of GFH's creditstanding.  KHCB is a better asset than the Water Park, which is why the West LB syndicate asked for the former.  Probably better earnings and better future.  The Water Park like the Riffa Golf Course, no doubt, looked like a very "wise" idea on paper.  In the real world, it's probably not.
3. Regulatory relief on the CAR - a matter of great importance to GFH who sit right on the edge.  The first way this comes is by moving this "puppy" (the water park, which is risk weighted in the GFH's CAR calculation) to someone else's kennel (balance sheet).  In return GFH gets KHCB, increasing ts holding from 36.99% to 46.99%.  Currently, GFH partially consolidates  KHBC, and, thus,  it doesn't have to worry for CAR purposes about fluctuations in KHCB's share price - which has dropped by roughly 50% since last year this time.  Since KHCB's CAR is roughly 31% as at 30 June 2010, the impact on GFH's Risk Weighted Assets and thus its CAR should be positive.
4. As you'll notice, the US$3 million owed to Mr. Janahi can be paid in cash or GFH shares.  So there's a potential boost to equity if the latter can be used to settle this amount.  Treasury Shares are deducted from Shareholders' Equity at their cost. What this means is that if GFH gets more than zero in proceeds from the sale or conversion of Treasury Shares, the amount of its Shareholders' Equity will go up by the amount of the proceeds received.  This happened in 2Q10 where GFH sold US$29.1 million (original cost) of Treasury Shares for US$7.6 million and recognized a US$7.6 million consequent increase in Shareholders' Equity.  While admittedly a small card in the scheme of things, this could be just the thing that helps GFH keeps its head about the 12% threshold in a close situation.   As I suspect the 2Q10 Treasury Share sale was.
5. And, to round things out, a footnote on KHCB.  Without qualifying my opinion about the  credit benefit of acquiring KHCB, I call your attention to Note 3.4 in KHCB's Basel II Pillar 3 Disclosures as of 30 June 2010, which shows that some 24% of its Islamic Financing Assets are past due.  According to that information, some 42% of the past dues (BD47,385 - which is the total amount of the past due loans not just the past due installments which  are BD10,487) are up to 30 days late.  Proceeding cumulatively, 51% up to 60 days, and 72% up to 90 days.  According to KHCB's risk classification system, some 59% of the past dues are rated Credit Grades 1-6.  Personally, I would have thought a past due loan  would automatically go on the "watch list" (Credit Grades 7-8) but then I don't have the details of KHCB's loan portfolio including collateral.  In any  case those concerned with KHCB should keep an eye on this area to see if there is deterioration or improvement in the future.

B.  Capital Reorganization

1. Under the Bahraini Commercial Companies Law of 2001, GFH is obliged to take action now that accumulated losses are 75% or more of paid in capital. Approved methods for rectifying this situation are:  (a) reducing paid in capital by an amount sufficient to offset the losses and/or using other equity reserves (share premium, statutory or voluntary reserves), (b) raising additional capital and (c) a combination of (a) and (b).  Generally, financial institutions use Method (c).  In some cases a bank might get away with merely offsetting the losses against existing capital - assuming its pre-reorganization CAR were robust.  GFH's is not so it must do both.
2. As you'll notice, GFH is not using its reserves.  Why? Very simply put:  the path it has chosen is designed to make the murabaha more attractive to investors.  Under GFH's plan, they will get more of the total shareholding of the Bank for each dollar they contribute.  
3. 1H10 financials  provide the details of the components of GFH's capital.   If GFH were to use its US$206 million share premium and US$85 million statutory reserve  (total US$291 million), it would only have to "use" US$192 million of paid-in-capital.  Thus, leaving original shareholders holding US$433 million in common equity instead of US$142 million. 
4. To take control, the new money would have to put in US$433 million plus $1.  Under GFH's reorganization plan it only needs to put in US$142 million plus $1. 
5. Similarly, if the new investors put in the full US$500 million, under GFH's plan they get 78% of the total equity.  If the reserves were used as outlined above, they would only get 54%.
6. Clearly, there is a conflict here.  Existing shareholders want to be diluted as little as possible.  New shareholders want the most value for their new dollar.  Sadly for the existing shareholders, including the even "wiser" ones who invested in late 2009, their money is already spent.  The new and presumably much wiser investors need to be persuaded to part with their money.  GFH has set  the reorganization and the terms of the murabaha to make it as easy as possible to get the money that it desperately needs.

C.  US$500 Million Murabaha

1. Use of an SPV as the lender can be quite a useful device in shielding the identity of the new lenders/shareholders, particularly if the SPV is not incorporated in Bahrain.  It will depend on how much transparency the CBB wants to demand here and how far it can push this Bank which has an important and powerful friend in Bahrain.
2. One would expect the market rate for unsecured GFH debt to be rather hefty.  And the value ascribed to the option on GFH shares much less so.  The Board will price "at market" - which will mean in effect what investors demand. 
3. The approval also provides for a discount from market price of between 20% to 40%.   This is where the reverse split comes to play.  There is nothing in the Bahrain CCL that requires this as part of the capital reorganization.  I suspect GFH is hoping that  the reverse split will work a bit of magic on their market price.  Over the past two weeks, GFH has traded at KD0.033 (roughly US$0.11) per share.  A 4:1 reverse split should bring the price to say US$0.44 per share - allowing the Board to discount the conversion price to say just a whisker over par to make the transaction even more attractive. 
4. "But wait there's more" as they say on the late night TV ads for the ShamWOW!  The Board is allowed to offer an incentive (terms unspecified in the approval) for an early exercise.  That allows an even greater discount to attract new investors.  So, if the conversion price is set at a whisker over par, can the Board issue shares below par through this device? 
5. You ask about the hapless existing shareholders?  Well, GFH already has their money and needs more.  So they are out of luck.

KSE announcement below.

[12:17:53]  ِ.اجتماع الجمعية العمومية العادية و غير العادية لبيت التمويل الخليجي
يعلن سوق الكويت للأوراق الماليه بأن بيت التمويل الخليجي أفاده بأنه
سوف يتم عقد جمعية عمومية عادية و غير عادية للبنك في الساعه 9 من
صباح يوم الاحد الموافق 31-10-2010 في فندق منتجع و قصر العرين
وقد طلب البنك ايقاف التداول على اسهمه في السوق اعتبارا من اليوم
الاحد الموافق 17-10-2010 وحتى اشعار اخر حيث حصل على موافقة ‏
مصرف البحرين المركزي على ذلك .‏
هذا وسوف يتم خلال الجمعية العمومية مناقشة ما يلي
أولا : جدول اعمال الجمعية العامة العادية
ِ1- المصادقة على محضر الاجتماع السابق .‏
ِ2- المصادقه على معاملة استبدال الاسهم بين بيت التمويل الخليجي و رئيس
مجلس ادارته السيد /عصام جناحي و التى سيتم بموجبها تحويل حصته في المصرف
الخليجي التجاري ش.م.ب بالكامل (104.923.734 سهم ) الى بيت التمويل الخليجي
مقابل الحصول على حصه البنك في شركة العرين للترفيه و السياحه ش.غ.خ و ‏
البالغه 100% (جنة دلمون المفقودة) بالاضافه الى مبلغ 3 ملايين دولار تدفع
اما نقدا و / او بواسطة اسهم خزانه بيت التمويل الخليجي .‏
ِ3- الموافقة على تغيير سجل مساهمي البنك من سجل عادي الى الكتروني ‏
وفقا لاحكام مصرف البحرين المركزي و سوق البحرين للأوراق الماليه .‏
ثانيا : جدول اعمال الجمعيه العامه الغير عاديه ‏
ِ1- المصادقه على محضر الاجتماع السابق .‏
ِ2- التباحث في والمصادقه على دمج الاسهم الصادرة لبيت التمويل الخليجي ‏
بمعدل 4:1 لينتج عن ذلك تخفيض عدد الاسهم الصادرة من 1.896.332.565 سهم
الى 474.083.141 سهم .‏
ِ3- التباحث في والمصادقه على تخفيض راس المال المدفوع من 625,789,746.45 ‏
دولار امريكي الى 142,224,942.375 دولار امريكي بسبب الخسائر المتراكمه ‏
ِ(سيقدم المدقق الخارجي السادة كي بي ام جي بيانا مستقلا يتعلق بتاييدهم لهذا
التخفيض ) .‏
ِ4- التباحث في والمصادقه على خفض القيمة الاسمية الجديدة للاسهم والتي ‏
ستبلغ 1.32 دولار امريكي بعد الدمج و تخفيض راس المال المدفوع المشار اليه
في البندين 2 و 3 من بنود جدول الاعمال الى 0.3075 دولار امريكي .‏
ِ5- التباحث والمصادقه على قيام بيت التمويل الخليجي من خلال اية شركة
غرض خاص يؤسسها البنك او تؤسس بناء على طلبه لاقتراض ما يصل ‏
الى 500,000,000 دولار امريكي من خلال مرابحة تمويليه قابلة للتحويل
الى اسهم بناء على البنود و الشروط التاليه :‏
ِ- معدل ارباح يحدد وفقا لسعرالسوق ووفقا للمعدل والصيغه المحددة من قبل مجلس
الادارة قبل وقت قصير من تاريخ السحب . يمكن دفع  هذا الربح نقدا او في صورة
اسهم عينية في بيت التمويل الخليجي .‏
ِ- سعر تحويل يتراوح من (0.31 دولار امريكي الى 0.40 دولار امريكي) ‏
ِ(بمعدل خصم لا يقل عن 20% الى 40% من القيمة السوقيه في اعقاب
الدمج بحيث لا تقل عن القيمة الاسمية للسهم) فيما سيتم تحديد السعر النهائي ‏
من قبل مجلس الادارة قبل فترة قصيره من تاريخ السحب .‏
ِ- مدة تصل الى ثلاثة سنوات و نصف .‏
ِ- غير مضمونه و لكن قابله للتحويل بمحض خيار المستثمر الى اسهم في بيت
التمويل الخليجي قبل انتهاء المدة ووفقا للشروط التى يحددها مجلس الادارة.‏
ِ- حافز التحويل المبكر لتشجيع المستثمرين على التحويل الى اسهم قبل
نهاية المدة وفقا للشروط التى يحددها مجلس الادارة .‏
ِ6- منح التنازل عن حق الاولوية الخاص بمساهمي بيت التمويل الخليجي ‏
فيما يتعلق باصدار اسهم عادية جديده سيتم اصدارها عند تحويل تمويل المرابحه
وفقا لبنود الفقرة 5 من جدول الاعمال .‏
ِ7- تخويل مجلس الادارة و/او من ينوب عنه للقيام بجميع الاجرءات الرسمية ‏
المطلوبه و الصحيحه لتفعيل تمويل المرابحه بما في ذلك دون حصر تحديد و/او
تعديل شروط المرابحه والمستندات الاخرى ذات العلاقه .‏
ِ8- تخويل رئيس مجلس الادارة او من ينوب عنه بالتوقيع على تعديل عقد
التأسيس و النظام الاساسي نيابة عن المساهمين امام كاتب العدل فيما يتعلق ‏
بالتغييرات في راس المال لتعكس ما تقدم .‏
علما بأنه في حالة عدم اكتمال النصاب القانوني لهذه الجمعية سيكون الاجتماع ‏
الثاني يوم الاحد الموافق7-11-2010 في نفس الزمان والمكان وفي هذه الحاله ‏
ستسري احكام الماده 57 من النظام الاساسي للبنك. وفي حالة عدم اكتمال النصاب
القانوني في الاجتماع الثاني ، سيتم عقد اجتماع ثالث يوم الاحد الموافق ‏
ِ14-نوفمبر-2010 في نفس المكان و ذلك بسريان احكام المادة 57 من النظام
الاساسي للبنك . ‏

Abyaar Real Estate KD50 Million Asset for Debt Swap?

Citing informed sources, Al Watan reports that Abyaar will sign an asset for debt swap of KD50 million with a group of lenders.  The amount represents 35% of FYE 2009 debt.

The article also claims that additional debt settlement/restructuring agreements are near to signing and will follow in train.

Earlier post on Abyaar here.

Gulf Finance House to Seek US$500 Million in Additional Equity

SWI (Search for "Wise" Investors) Project 

The Large Array at Jabal Dukhan Bahrain

Asa Fitch over at The National reports that GFH has issued a press release in which it advises that it intends to call a shareholders' general meeting to approve:

1. A reduction in paid in capital (4 old shares for one new) in order to absorb accumulated losses in retained earnings.  Like other GCC states, Bahrain has a law that when a company's accumulated losses reach 75% of paid-in-capital, it must take action to eliminate those losses.  That can be done by raising new capital.  Or by reducing paid in capital and using reserves (if available) to offset the losses.  As a financial institution, GFH, has to maintain a minimum 12% CAR and so unless it could reduce assets (which it cannot without incurring more losses), the bank has to raise new capital.
2. The issuance of US$500 million in new equity.  This is up from the US$300 million originally mooted by GFH.  It's unclear why the increase.  It may have found that there is substantial demand for its new shares.  I find that hard to believe.  It seems to me that with its track record and current market conditions, raising even US$300 million would have been a very hard sell.  Hence the picture above.  Alternatively, it may be that the additional amount is designed to cover the US$137 million in 2Q10 provisions that GFH magically turned into an asset. 

At 30 June 2010, GFH's capital structure was composed of:

1. Paid in Capital US$626 million
2. Share Premium US$206 million
3. Treasury Shares (US$23 million)
4. Reserves US$88 million
5. Accumulated Losses (US$480 million)  Equal to 77% of PIC.
6. Total Equity of US$417 million.  
7. If the "magic" provision assets of US$137 million are factored in, Accumulated Losses are (US$617 million), resulting in Total Equity of US$280 million.

GFH are savvy enough to know that a failed rights offering would be an extremely unhelpful event.  So either this is an act of desperation (perhaps motivated by its auditors awakening to the US$137 million charade) or GFH has found some wise investors to carry the issue.   And that may become evident if the Board proposes that shareholders approve a structure under which any shares unsubscribed for in the Rights Offering be placed by the Board with "strategic" investors.

One tactic the Bank can use is to mitigate its deal failure risk is to obtain shareholder approval to issue up to US$500 million over a period (usually the maximum is two or three years I think but am not certain).  In this way it could issue multiple tranches so that the amount it brings to the market at any one time is more digestible. 

As to the motives behind the raising of new equity, I think these include more than just funding operating expenses:

1. Regulatory compliance.  GFH's CAR is "on the wire".
2. Market credibility.  New equity would be a demonstration of confidence in the future, though a failure will be a major setback.
3. Funding for upcoming debt repayments.
4. Funding for operating expenses.

 

International Investment Group - Explanatory Note on 2009 Financials

IIG Funding issued a brief explanatory note on IIG's 2009 financials on Nasdaq Dubai today.

International Leasing and Investment Company - Attempt to Stack Board?

Al Qabas has a follow-up to their earlier report of the resignation of 3 directors at ILIC.  See earlier post on that topic here.

1. The Company has supposedly written to the MOCI requesting that it approve the replacement of Mr. Mohammed Al-Jasser with Mr. Basil Al Mutawa (a relative of Mr. Bassim Al Mutawa one of the major shareholders).  If this is approved then Abraj Holding/Boubyan Bank would not be represented on the Board despite AH's 32.3% share in the Company.  Boubyan has made a loan to Abraj and its representation on ILIC's Board was no doubt a way of looking after its interests in the collateral.
2. Also the Central Bank is said to have approved ILIC's 2008 financials which reportedly show a loss of US$120 million with the result that shareholders' equity was reduced to US$45 million.  Loans are said to remain at 2007's level:  US$600 million.  The CBK has, it is said, reservations on the financials.  And the auditors are refusing to give an opinion.
3. The two directors from the Islamic Development Bank are still tendering their resignations given their concern that the actions being taken are not in the interest of rescuing the Company.  Official bodies are reported to have rejected charges levied against the two directors as inventions and levied by parties who want to take control of the Company without involving other shareholders.
4. When the 2008 financials are released various infractions will be disclosed.  It's said that the auditors have concerns about the use to which loans were put.
5. The same parties behind the Board machinations are reported to be trying to block Mr. Faisal Al Zamil (Kuwait's representative on the IDB Board) from assuming a position in executive management  in the Company in order to enable them to put in someone who will look after their interests.
6. Finally creditors are said to be disgusted with the developments at the Company.

As I mentioned earlier, IDB and Abraj Holding, control over 60% of ILIC and should be able to take control of the Board.  If the Central Bank can finalize ILIC's financials, then the MOIC can call for a shareholders' meeting and presumably the majority of shareholders can vote in their own candidates for the Board - at least a majority.

SICO Bahrain: Dubai Debt Problems Just Deferred Until 2014?

SICO Bahrain has issued a new report, "Dubai Debt Concerns Deferred to 2014".  SICO Research is only available to registered users so you'll have to sign up to read the report in detail.

Here are some highlights.  Themes that might already be familiar and some not.

1. Forgetfulness of investors in limelight.  Some history on the trends in CDS spread differentials between Dubai and Abu Dhabi (180 bps in October 2009 to 480 bps in early December and then again to similar levels around the Greek crisis).
2. Recent US$1.25 billion issue not sufficient to plug the 2010 deficit (estimated at US$1.6 billion).  Plans to slash subsidies and other transfers by 64%, though wages to increase by nearly 20% as the Government needs to make room for more nationals entering the workforce.
3. Repayment schedule remains a challenge.  SICO estimates very modest debt repayments in 2011 and 2012.  For the period 2013 - 2015 excluding bilateral, the estimates are US$1.7 billion in 2013,   US$19.23 billion in 2014 and US$0.5 billion in 2015.   So a definite debt hump in 2014 - and the reason for the title to SICO's article.
4. Economic recovery may not improve Government revenues.  Trade and tourism not expected to generate significant large government revenues.
5. Not many options to improve finances.  Taxes a possibility but pose competitive disadvantage vis-a-vis other GCC states.
6. Sale of assets a possibility.  SICO believes the Government may take the strategy of selling partial stakes to raise cash rather than relinquish control of strategic assets.
7. Dubai increasingly "leveraging" the UAE brand.  Apparently in the prospectus for the recent bond, a great deal was made of the fact that the UAE has a AA sovereign rating.  SICO sees this as a way of diverting attention from Dubai's 395 bps CDS roughly 296 bps higher than Abu Dhabi.  In my opinion it may also be a way of reminding investors of Abu Dhabi's deep pockets.
8. Despite the negatives, SICO does not believe a sovereign default is likely.  It seems to me that the major issue here is one of pricing of credit as well as lenders and investors being careful about the quantum they commit to the Emirate.

Boubyan Bank to Liquidate Shares Owned by Awal Bank to Partially (Very Partially) Collect Debt

Mohamed Sha'ban at Al Qabas reports that having received judicial authority, Boubyan will sell some 300,000 shares in International Finance Company on the KSE to partially settle a debt of SAR 111 million owed by Awal to it.  Furthermore it will sell some 61,000 Global GDRs listed on the LSE through the manager of the fund holding the  shares.

Since AlDawliah is trading at around KD0.250 per share the recovery is half of that pictured above.  A penny on a dollar of debt.

Golden Belt Sukuk 1 Certificateholders Make Up Their Minds

Today via an announcement on the Bahrain Stock  Exchange Citibank, the Delegate on the Golden Belt Sukuk, advsied:

The Delegate refers to previous notices issued by the Delegate dated 24 August 2009, 7  October 2009, 17 November 2009, 23 November 2009, 2 February 2010, 16 March 2010, 28 April 2010 and 22 July 2010.

In these notices, the Delegate noted that, in accordance with the Terms and Conditions of the Certificates, prior to acting upon any instructions from Certificateholders it is entitled to be  indemnified to its satisfaction.

The Delegate confirms that on 27 September 2010, it entered into a deed of indemnity (the  Deed of Indemnity) with a number of Certificateholders (the Indemnifying  Certificateholders). The Indemnifying Certificateholders represent at least 25 per cent in  aggregate face amount of the Certificates outstanding.

Acting under instructions from the Indemnifying Certificateholders, the Delegate has served a  Notice of termination of the Sub-Lease and made a demand for all amounts due under the  under the Costs Undertaking.