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.

Dubai Escrow Law: Exemptions Fueled Boom and Left Buyers High and Dry

 Credibility - Now You See It, Now You Don't

A very good piece of investigative reporting by Asa Fitch at The National.

In 2007 with great fanfare Dubai passed a law requiring that developers set up escrow accounts to ring fence buyers' funds so they would only be used for construction and related costs on the projects that the buyers invested in. 

Rather quietly and quickly the Dubai Land Department gutted the law by granting exemptions to certain master developers. Among this select group were Nakheel and Emaar as well as other Dubai World entities.  The latter two have recently (three years later!) disclosed this fact.  Apparently, neither they nor the DLD considered it material information an investor/buyer might be interested in knowing or have a right to know.

A couple of quotes:

The developers of multiple projects in Dubai that are stalled spent money in this way, and now homeowners find that their investments were spent but that the projects cannot continue without new funding.

But having to comply with escrow laws could be burdensome for developers such as Nakheel and Emaar because of their obligation to build expensive infrastructure in their master developments. Emaar said in its prospectus last week that if it had to comply with escrow laws, its "business model may be significantly impaired as it would only be able to finance the construction of projects with corresponding purchase price instalments once certain construction milestones are met".

Poof, there goes the last illusion of Dubai as a world class financial center.

And, no, it's not a matter of professionalism  as one "expert" has it.  It's much more basic.  It's a matter of running a fair, honest market.  When the games are rigged, one is well advised to go to another casino.  When one doesn't get a fair shake (or a fair Shaykh), it's time to look to another market.

To be very clear, the central issue here is not that an exemption was given.  It was that the granting of the exemption was not disclosed.  Neither by the Government or the companies.  There may have been what were considered at the time very good reasons to give an exemption.  The problem was that buyers had no way of knowing.  They should have.  

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.

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.

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.

Dubai's Real Estate Woes Continue

A Not So "Unique" 50 Story Dream from 1997 

 

One of our regular readers/commentators, Laocowboy2, called this New York Times  article on the continuing woes in Dubai's real estate market to my attention.

Some quotes with captions.

"We're not in Kansas anymore, Toto"  The biggest mistake - mistaking a foreign country for your own - and assuming that legal systems, services, construction quality are just like "back home".

“It’s not like in Western countries. It’s very difficult to exit here if there’s a problem. And we’ll never get our money back, but now we’re stuck dealing with this hole.”

AA's Second Law of Lending and Investing: "Due Diligence Before the Deal Not After"

"At the time, few asked if there was a legal framework for resolving potential disputes. Now, with the glitter gone, interviews with investors, legal specialists and real estate analysts here show that many who bought in are finding it hard to get out."

“The rules of the game are definitely opaque here,” said an investor who has bought several properties in Dubai and who insisted on anonymity because of delicate talks with developers and regulators. “In the United States, I would know my legal position much more clearly and could take actions if necessary.“ 

Besides "location, location, location" supply and demand also impacts prices.

Although about 70 percent of empty lots from three years ago have been filled, real estate construction since then has far exceeded the purchases, more than doubling the amount of vacant space available, said Timothy Trask, the director of corporate ratings at Standard & Poor’s in Dubai.

No mention of quality of materials and construction.  Perhaps, that will become  more widely apparent in a few years time, though there's always the odd Discovery Gardens or Sky Gardens or The Villa to help discover flaws.

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.

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.

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.

Rumor: Hassan Al-Ammari Resigns from International Investment Group

Citing an interested source (one with a connection to IIG) Al Watan reports that Hassan Salim Hassan Al-Ammari has resigned from IIG's board due to the lack of co-operation from the Chairman/MD, Dr. Abdulaziz Bader Al Jena'ai.  According to Al Watan's source, Hassan has been unsuccessfully asking for financial and other information for some nine months.

Hassan represents Al Baraka Investment and Development Co (which owns about 5.21% of IIG).

IIG has been suspended from trading on the KSE for failure to provide financials for both 1Q10 and 2Q10.  The last financial it did supply was FYE09 which showed a loss of KD36.5 million versus a KD21.5 million loss the year earlier.

You can read more on IIG by using the tag International Investment Group for earlier posts.

Commercial Bank of Kuwait Terminates S&P Ratings

On 23 September, S&P announced it was withdrawing from rating CBK at the bank's request.  In line with standard operating procedure for rating agencies, S&P gave a final rating.

S&P affirmed its 'BBB/A-2' long- and short-term counterparty credit ratings on Commercial Bank of Kuwait

(CBK) with a stable outlook. 

The rating agency said it had bumped up CBK's rating by one notch to reflect that it was a systemically important bank and that the likelihood of government support was high. 

Then it went on to say that it estimated CBK's distressed loans at 20% of the total loan portfolio.  And that provisioning needs are likely to weigh heavily on the bank in the next two years.  

It's clear from that language that CBK is not providing current data.  Either the deterioration in the loan portfolio is sudden or S&P just got an inkling.  In any case, not a sign of the sort of candor one would expect between issuer and rating agency.

I suspect the ongoing problems in the loan portfolio and S&P's likely future focus on them were the reason for the bank's "excusing" the agency from further rating duties.

Some thoughts:

1. CBK is not alone in its aggressive business posture.  This suggests that other banks may be experiencing increases in their distressed loans.  CBK as the proverbial canary in the coal mine.  The banking system had just under 10% at FYE 2009 - already a distressed scenario.  
   
2. This a rather short-sighted though common reaction.  Shoot the messenger for delivering bad news.  Pretend that everything is OK. The problem is that CBK's loan portfolio will not recover miraculously.  Future earnings statements will reflect the provisions.  And the fiscal year end report will reflect the percentage of distressed loans.  Frankly, this just looks bush league.  
3. In addition,  Fitch and Capital Intelligence rate CBK as well - and both have downgraded the bank earlier.   If distress continues, they are likely to do so again. And this leaves CBK then in the distinguished company of Dubai Inc.  Perhaps, not exactly the sort they should be palling around with at present.

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

Al Safat Investment Kuwait - More Detail on 1H10 KD1.1 Million Loss

Additional detail on ASIK's 1H10 financial performance via an article in Al Watan quoting ASIK's Vice Chairman Mohammad Ali Al Naqi.

While the Company did indeed have KD4 million in profit on the sale by one of its subsidiaries of an investment (in the PRC), this was overwhelmed by mark to markets on Kuwaiti shares.  The VC noted the significant decline on the KSE in 2Q10 as well as KD2.48 million of precautionary provisions on   أرصدة مدينة  .

I'm translating these as "debit balances" and presume they relate to receivables of some sort as opposed to investments.   And I'd certainly welcome any comments from readers who either would like to confirm or amend that translation.

Earlier post on ASIK's 2010 performance here.

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.

Al Safat Investment Kuwait: 1H10 Loss KD1.1 Million

Al Safat Investment issued its 1H10 financials on the KSE today (as usual Arabic only text which is below).

The headlines:

1. A loss for the 1H10 of KD1.1 million and for 2Q10 a loss of KD2.3 million.
2. Comparable figures for 2009 were KD0.05 million for 1H09 and a profit of KD2.0 million for 2Q09.
3. Shareholders' equity stood at KD109 million versus KD136.5 million a year earlier.
4. Current Assets KD56.9 million
5. Total Assets KD177.1 million
6. Current Liabilities KD56.6 million (Positive working capital!)
7. Total Liabilities of KD67.9 million.
8. Total Equity of KD109 million.
9. Don't have an explanation for the KD154,300 difference between Total Assets and Total Liabilities plus Total Equity.  Treasury Shares?

What's interesting is that earlier ASIK had announced  that one of its subsidiaries had concluded a successful exit from a holding in the PRC which would give a profit of KD4.25 million  which would be reflected in ASIK's 2Q10 results.  That suggests that there were total expenses of at least KD6.55 million in 2Q10, assuming no other revenue. Mark-to-markets or provisions, pehaps? 

[9:8:50]  بلغت (خسارة) (الصفاة) (1) مليون د.ك لل6 أشهر المنتهية في 30-06-2010‏
يعلن سوق الكويت للأوراق المالية أن شركة الصفاة للاستثمار (الصفاة)‏
حصلت على موافقة بنك الكويت المركزي على بياناتها المالية المرحلية للفترة ‏
المنتهية في 30-06-2010، يوم الخميس الموافق 16-09-2010 ،
وفقا لما يلي:‏
البند     ال3 أشهر المنتهية في 30-06-10     ال6 أشهر المنتهية في 30-06-10‏
الربح (خسارة)(د.ك)           (2.283.982)               (1.052.962) ‏
ربحية(خسارة)السهم (فلس كويتي) (2.95)                       (1.36) ‏
اجمالي الموجودات المتداولة                                56.860.414‏
اجمالي الموجودات                                          177.095.485‏
اجمالي المطلوبات المتداولة                                 56.566.959‏
اجمالي المطلوبات                                           67.979.802‏
ِ اجمالي حقوق المساهمين                                   108.961.399‏
بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 342.017 د.ك
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 162.545 د.ك
الفترات المقارنة:‏
البند     ال3 أشهر المنتهية في 30-06-09     ال6 أشهر المنتهية في 30-06-09‏
الربح (خسارة)(د.ك)            2.008.551                    49.797 ‏
ربحية(خسارة)السهم (فلس كويتي)  2.60                          0.06‏
اجمالي الموجودات المتداولة                                66.093.906‏
اجمالي الموجودات                                          210.284.340‏
اجمالي المطلوبات المتداولة                                 38.250.324‏
اجمالي المطلوبات                                           73.726.219‏
ِ اجمالي حقوق المساهمين                                   136.532.947‏
وعليه سوف تعاد الشركة الى التداول بعد عشر دقائق من نزول الاعلان .‏

Damas - Board Undertakes Further "Progress" in "Enforcing" Enforceable Undertaking

Actual Cascade Agreement.

Look closely for the water.  

DIL shares in green.

 

Damas' Board announced on NasdaqDubai further developments related to the Abdullah Brothers and the DFSA mandated Enforceable Undertaking.

Damas is getting ready to sign a Cascade Agreement with the Flying Abdullah Brothers and their two companies Damas Real Estate LLC and Damas Investments Limited. as well as these entities' other lenders. 

Under the proposed CA Damas will agree:

(a)   not to enforce its rights under the settlement agreement dated 10 October 2009 between, amongst others, the Abdullah Brothers and DIL; and
(b)  not to enforce its rights under the share pledge (the "DIL Share Pledge") granted by the Abdullah Brothers on 31 October 2009 in favour of DIL in respect of 350 million shares in DIL (the "DIL Pledged Shares").

I presume that DIL is just agreeing to forbearance on its rights above.  That is, it has not renounced these rights nor is it sharing the DIL Pledged Shares with the other lenders.  This sort of inter lender agreement is fairly common.  The operative presumption being that if one creditor moves to exercise its rights it could bring the debtor down thus hurting all the parties. So it's an agreement among the lenders to move in tandem.

It's probably a safe bet that the FAB were consistently "wise" investors.  Thus, they probably used the loans from other lenders to finance similar "great" investments in real estate, etc. as they ones they made with the money they stole, excuse me, "withdrew without proper documentation" from DIL.  Which suggests that the cash flow may well be as depicted above.  In such a case one wouldn't want to be at the tail end of the cascade.

Not much that could be done.  They say (and they are so often right that I don't even bother to contradict them anymore) that Mar Jude is the Patron Saint of Bank Loan Workout Groups.  Where's Amos Yaqub when DIL needs him? He's got a special "in" with Mar Jude.