GFH Bahrain: What’s Changed Since 2010?

Heading Up But Still Lots to Climb

I last posted about GFH in 2010. 

At that point, its financials were a mess.

Along with Global Investment House and The Investment Dar it was part of the trio of once high-flying regional investment banks that hit the wall at high speed. 

What’s happened since then?   

On a positive note, GFH escaped the fate of Global Investment House.  Its shareholders remain in control, cases have been lodged to recover funds, additional capital has been raised, and assets have not been stripped off to creditors. 

Nor is GFH in what would appear to be the nearly persistent vegetative state of The Investment Dar –a chronic condition punctuated by infrequent bouts of apparent lucidity in which TID announces yet another restructuring plan. Sadly during those periods TID is insufficiently lucid to issue financials, the last to see daylight being from FYE 2009, or to even update its website.  Love the Board members’ pictures.  Despite the difference in surnames, three of them look remarkably similar.

So how has GFH performed since 2010?  

Short answer:  not so well. 

On page 36 of its 2015 Annual Report, GFH kindly provide five years of financial highlights.     

GFH ROE 2011-2015
	2011	2012	2013	2014	2015
GFH	0.22%	3.26%	-4.00%	4.79%	1.80%
AA	0.22%	3.26%	-4.01%	2.62%	-0.83%

As you see from the above, AA has a different analysis of the last two years’ ROE.

1.      For 2014 and 2015 GFH used total net income— both GFH shareholders and those of non-controlling interests (NCI)—and equity attributable only to shareholders of GFH (excluding NCI’s share of equity) to determine ROE. 

2.      AA used net income—actually a loss of US$5.5 million—attributable only to shareholders of GFH and like GFH used equity attributable only to GFH shareholders.   Why? Because the point is GFH’s ability to generate income for its shareholders.  Also this choice is related to the nature of consolidated statements as outlined in #5 below. 

3.      As consolidation only affected 2014 (restated) and 2015 results, those are the only two years where there is a difference in calculation methodology.  

4.      Both GFH and AA used beginning and end of period equity to determine a year’s “average” equity to calculate ROE.  Because there were significant capital increases over the five year period (an almost three times increase), this method overstates ROE for certain periods because it understates average equity.  But what’s important here are trends, directional rather than locational statistics.

5.      One very important note:  consolidated financials are an accounting construct.  They are designed to provide a way to analyze the economic performance of a “group”.   But the consolidated "group" is not a legal entity.  That is, the group does not really (legally) directly owns the assets or receive the income shown.  Parent only or individual financial statements show the legal status ownership of assets, cash flows, etc.  Take a look at note 34 in JPMC’s 2015 AR and compare the data to the consolidated financials.  Parent revenues are largely dividends and assets are largely investments. This fact has important implications for investors and creditors that buy holding company equities or unsecured debt securities. Or for lenders to holding companies.  Access to cashflow, access to assets, priority in bankruptcy, responsibility for subsidiary/affiliate debt (absent parent guarantees) are some of these. 

Whether you take GFH’s or AA’s calculations, performance has been “disappointing” (euphemism of the post).  Earnings have been volatile.  ROE has been subpar.

Some of this is economic:  a “weak” (second euphemism) legacy portfolio, the cyclical nature of GFH’s businesses, etc. 

Some of this is a function of internal management: legacy leadership—responsible for the high risk portfolio—was only conclusively removed in late 2013, no doubt delaying remedial action.  GFH has also conducted successful legal actions against “two of its ex-Chairmen for bonuses illegally obtained during the period 2005-2008”  which some readers may interpret as indicating less than the ethics one might hope to find in a self-described Shari’ah compliant institution.   الله اعلم

A coming post will take a look at GFH’s attempt to address its problems.  

Global Investment House: The Future is Now and Likely to Remain So

For Some Now May Be the Only Future They Have

As promised in my first post, some thoughts on Global’s future.

As detailed below, Global faces a variety of very real constraints to growth—the primary one being control by its creditors. If it doesn’t or can’t grow, Global’s net income will remain modest, likely be volatile, and its ROE subpar. These obstacles are formidable and AA has a hard time seeing Global finding a way out of this challenge.

First a recap to set the scene.

Recap

In my previous post I identified a structural problem with Global’s revenues and expenses.  The latter (adjusted to exclude impairment and loan loss provisions) average roughly KD 14 million a year – 140% of the revenues from its core Assets Under Management (AUM) business.  Other lines of business (LOBs) then have to generate enough revenue to cover remaining expenses and produce a profit.

That’s a problem because Global’s other LOBs lack the scale to consistently generate enough revenue to do this –either in absolute or ROE terms.

Profitability is cobbled together from these “hobby” businesses plus one off items such as FX translation gains from a depreciating dinar or loan loss provision reversals—items whose persistence is unlikely.  

By way of example, if these latter two items had not been present in 2015, Global’s net income would be 10 percent of the reported KD 6.5 million.  Additionally, the non-AUM fee-generating LOBs (chiefly brokerage and investment banking) are market sensitive and thus add unwelcome volatility to earnings.

Strategic Options

In the face of this structural problem, Global can either: 

1. Accept its current position. 
• Live with the volatility. 
• Or rationalize its expense base to reduce the volatility. Without detailed information it’s not possible to determine if cutting what appear to be “hobby” operations – Bahrain and Oman brokerage, for example—would result in significant cost reductions without disturbing the AUM business.  
2. Seek to materially change its fate by significantly growing revenues as a way of eliminating volatility, increasing ROE, and making itself a more credible partner for clients and a more compelling opportunity for equity investors.

As my framing of options indicates, I think growth is the preferable path. 

Shrinking oneself to greatness is not really a business strategy.  Growth will also facilitate the sale of the creditors’ 70 percent stake which as argued below is the major current constraint on the firm’s development.

One caveat about growth.

FGB/NBAD is unlikely to challenge ICBC 'sor JPMorgan’s position.  Nor will Global rival the likes of Blackrock.  That’s fine.  There’s nothing wrong with being a fish in a small pond.  But even a fish in a small pond needs to grow to keep up with the other fish in the same pond. 

There is a third option: a sale to another institution that can fold Global’s business into its own, cut costs, and reap the benefits of scale. 

Two things would be required.  

1. A sale price that would satisfy the creditors.  This probably would be the main sticking point to this scenario.  This early in the life of the debt settlement there probably would be creditor price resistance to a “bargain” sale.  
2. A transaction that does not disturb the current client relationships, i.e., that maintains the KD 1.1 billion in AUM.  That is perhaps easier to achieve if current legacy management and board representation is retained.

If Global doesn’t increase revenues, net income is likely to be volatile, remain relatively modest, and ROE subpar.  As outlined below, Global faces some very real growth constraints. It’s hard for AA to see a way forward for the firm out of this conundrum.

Constraints on Growth

Current Majority Shareholders (Creditors)

The primary current constraint on growth is the majority shareholder (Global’s creditors) who by virtue of their 70 percent equity stake control the firm.  Their self-interest is directly at odds with a pro-growth strategy.    

In the best of times, bank creditors like other “bond” investors focus on return of capital and not like “equity” investors on growth and increasing return on capital.

A debt restructuring typically intensifies this tendency.  Cash extraction from the debtor becomes even more urgent and is imposed through aggressive repayment schedules and rescheduling covenants that severely constrain spending and business development.   

But Global wasn’t a typical restructuring.  Creditors normally don’t take assets to settle debts because they know that their track record in realizing assets is much worse than in underwriting loans.   

The fact that creditors demanded 70% of the rump firm’s equity and existing shareholders gave it is a very clear sign that a serious shortfall from asset sales was expected. That deficit and the need to maximize recovery have no doubt exacerbated the impulse for cash extraction.   

When equity in the borrower is taken, creditors cash out by selling the firm to investors or collecting dividends.  When a sale at an acceptable price is not possible, then dividends become “favorite”. 

At this time, price expectations of seller and buyer are probably far apart.

Since we are only three years into the settlement, an acceptable price for creditors is probably one that is no less than the value ascribed to the equity when the “expected” loss on the settlement was calculated.  To sell for a lower price would require booking a loss.  Over a longer period, the creditors’ price discipline could wane, if earnings prove volatile and that volatility requires a revaluation of the carrying value of the equity.

Given its current condition, Global is not a particularly exciting investment prospect for new investors.  Legacy shareholders probably haven’t changed their minds from 2012/2013 when they turned down an opportunity to infuse new cash.      

If creditors won’t let Global spend “precious cash” to build the business, what other ways could they help grow revenues?

Creditors could shift AUM from their own firms to Global.  They could solicit new AUM for Global.  But if they did, they would share the resulting profit with other creditors and the 30 percent “legacy” shareholders in the firm.  Little economic sense in that, particularly because relatively large amounts would be required and creditors have already taken a “hit” on the debt settlement, no doubt exhausting whatever minute amounts of generosity they may once have had.    

Global’s strategy confirms this analysis. It’s clear that the firm is being managed not for ROE or growth, but for cash extraction.   That involves retaining the “cash cow” KD 1.1 billion in AUM, keeping a firm control on costs, and following a conservative risk acceptance policy. 

“Souk legend” (the Gulf equivalent of urban legend) is that GIH’s KD 1.1 billion in AUM-the main driver of current revenue—is largely (almost all?) comprised of KIA funds that Ms. Maha played a key role in obtaining.  The creditors are smart enough to recognize that they need legacy management to keep current customers in place and perhaps incrementally add to AUM. This probably explains her continued presence in the board and in executive management as well as the retention of other “key” legacy managers.

As regards expenses, a glance at note 16 (2015 annual report) shows no evidence of significant investment in new assets, including computer equipment which would involve relatively small amounts.   Assets are almost fully depreciated.  While accounting useful life is not the same as economically useful life, this does suggest some replacement is likely needed.  That it has not occurred at any measurable level is revealing. Directors’ fees are also being kept at modest levels.  Usually, in the old boy (and in this case one girl) world of boards, cost control is not an urgent imperative.  The amounts are not just that large.  Clearly expense control is a key business focus.

In terms of risk aversion, the overconcentration in cash and cash equivalents is a very clear sign of heightened risk control and husbanding cash for dividends.  With 50% of assets in low ROA banks and cash despite there being no material debt obligations, it is clear the firm is being managed for cash not ROE.

Other Actors – Private Clients

Could other parties step up to deliver needed growth?

Retail investors aren’t going to provide the revenue required.  Too many small ticket transactions and portfolios would be required to change Global’s fortunes.  Many new retail customers would increase operational costs offsetting some of the revenue gain.

Large institutions and HNWIs could drive material change at GIH.   But what is their incentive to shift their portfolios? Global doesn’t appear to have any compelling investment product or products that differentiate it from its competitors and make it a “must have” for such an investor.  Why would such an investor select Global over NBK or another major regional or international firm?  

Global also still carries some remaining baggage from its 2008 difficulties, particularly in the treatment of investors in AlThouraia/Mazaya Saudi and Global MENA Financial Assets. This probably exacerbates non Kuwaiti GCC nationals’ general concerns about Kuwaiti business practices as well as the appetite of those Kuwaitis who invested in these funds.

But there’s another constraint. Assuming there are private institutional and HNW investors (and these are likely to be Kuwaiti rather than other GCC investors) willing to do business with Global, where would the funds come from?

As discussed in my post about the NBAD/FGB merger, the GCC is a minor financial market when measured in terms of assets and earnings and is highly likely to remain so for a variety of reasons (demographics, the nature and size of local economies, etc.). 

With GCC asset managers this is even more the case.  Major world firms have AUM in the trillions (Blackrock at $4.6 trillion) and net income is measured in billions (Blackrock north of $3 billion) or hundreds of millions. 

Currently, Global is mid-tier behind NBK Capital and KAMCO each of who have at least 3.5 times Global’s AUM.  A significant shift in Global’s fortunes would require a major shift away from these other firms.  Something that doesn’t seem highly probable to AA.  “Losing” 10% of your clients is a rare occurrence.  “Losing” 30% or more even less probable.     

Other Actors-Official Institutions

What would motivate a government-related entity to place investments with Global when 70% of the profit on the relationship will go into the hands of creditors, who include foreign banks?  And very likely include some investors who have acquired their positions at a discount.  Few like to feed vultures.

Another constraint is that non-Kuwaiti official institutions are unlikely to shift business to Global.  They have their own national firms to support and sad to say many in the GCC have a dim view of Kuwaiti business practices.

All in all a rather bleak strategic cul-de-sac.

Global Investment House - 2015 Financial Performance Reveals Structural Problems with Earnings

It's a small world after all, and for some even smaller

It’s been five years since Global signed its first restructuring agreement and three years since its final settlement with creditors.

How is Global doing?   What are its prospects for the future?   

The first question is the subject of this post.  I’ll cover the second in a companion post.

Catching Up with Global

 

When last I posted, Ms. Maha was Chairman, GIH had published financials showing about KD 1 billion in assets, and the firm was touting its first rescheduling deal with its creditors.

At that point, commenting on the deal’s principal repayment terms—10 percent the first year, 20% the second year and a whopping 70% the third year—I noted that:

“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.”

Not surprisingly in mid-2013 GIH negotiated a second rescheduling deal that gutted the firm: almost all of GIH’s “fine” assets were transferred to creditors in settlement of the debt.  Because the assets weren’t that “fine”, the creditors took a 70 percent stake in the “rump” GIH.  For a variety of reasons, the firm focused its business strategy on fee-based not balance sheet intensive business.  Ms. Maha was replaced as Chairman, though she remains on the Board as Vice Chairman and retains a role in management.

Review of 2015 Performance and Financials

Overview

The structure of GIH’s revenues and expenses indicates a high probability of future earnings volatility. Normalized expenses are 140% of AUM related revenues.  Non AUM LOBs can’t consistently generate enough revenue to cover the remaining expenses and generate a meaningful profit. They are market sensitive (volatile) themselves and more importantly lack scale.  They are more “hobbies” than substantial LOBs.

Besides these structural earnings problems, I noticed a few things in the loan portfolio and murabaha receivables worthy of comment.  Nothing that is life threatening.

Income and Expense

Net Income:

Global earned KD6.5 million in 2015 versus KD6.4 million the year before.  However, 2015 net income was bolstered by a (non-cash) write back of KD4.3 million of loan provisions.   Without this “timely” reversal, net income would have been a much lower KD2.2 million.

Revenues:

Fees and Commission Income accounted for 89% of total revenues in 2015 and 66% in 2014.   Within this category, AUM related fees account for some 80% of revenues, and represent a relatively stable revenue stream.  The other key fee-generating LOBs-- brokerage and investment banking-- each generate about one tenth of the AUM fees but are more volatile.

In 2015 Global benefited from KD 1.8 million in FX translation gains (KD 2.2 million in 2014) due to depreciation of the KD against the US dollar.  Not a stable core revenue source.

Net interest income contributed KD 1.6 million.

Fair Value Through Profit and Loss a loss this year of KD1.5 million vice KD0.8 million in positive revenue the year before.

Expenses:

Excluding loan provisions and impairment losses, Global’s average expenses are about KD 14 million a year – 140% of its stable AUM related earnings.

Structural “Problem” with Earnings

That’s a problem because Global’s other fee-generating LOBs (chiefly brokerage and investment banking) are market sensitive and more importantly lack the scale to  consistently generate significant revenue  to both cover expenses and generate a profit.   Growing earnings by growing assets is constrained by policy and no doubt as well by limited market access. 

Global then is forced to rely on one-offs such as continued depreciation of the KD or provision write backs to turn a reasonable profit.  Note that if there had been no FX translation gain in 2015 and no write back of the provision, Global would have had a modest profit.   

Balance Sheet

As mentioned above, a couple things caught my eye in the loan portfolio and murabaha receivables.

Loan Loss Provision Write Back

According to GIH’s 2015 annual report note 13, the write back provision for credit losses “for the year include KD 3,292 thousand (2014: KD 130 thousand) written back as a result of settlement agreement with a borrower.” 

Note the term “settlement agreement”.  GIH did not restructure the loan. The amount was not repaid in cash. Rather the bank took securities to settle the loan as is clear from an analysis of the firm’s cashflow statement and note 11.  The absolute increase in assets in note 11 is much more than the amount shown on the cashflow statement.

A single customer was responsible for 77% of the write-back.   A quick scan of annual reports back to 2012 suggests--but does not prove--that GIH has held this provision since at least 2011. 

The same note states:  “Loans are granted to GCC companies and individuals and are secured against investments in the funds and securities held in fiduciary portfolios by the Group on behalf of the borrowers.”

Why didn’t GIH seize and realize the collateral long ago?  Why hasn’t done the same with the borrowers representing the KD 5.9 million in unused provisions?

One explanation might be that legal processes in Kuwait are painfully slow.  Thus, GIH was legally unable to seize the collateral and extinguish the loan, but rather forced into prolonged negotiations with the borrower. 

That the reversal came at just the “right” time to protect earnings is certainly a remarkable coincidence.  Perhaps difficulties in 2015 caused management to redouble its efforts to collect.  Perhaps a long period of negotiation finally came to a close.  From the financials, it does not appear that GIH gave the borrower a discount on the asset swap.

Loan Portfolio:

Is there room for more earnings positive settlements with borrowers?

Net loans are KD 1.6 million = gross loans KD 7.5 million less provisions of KD 5.9 million (note 13). 

That KD 5.9 million would appear to be able to fund a few “timely reversals”.  

Particularly because Global holds KD17.8 million (fair value) collateral as per note 25.2.2 page 57.  That’s 240 percent coverage of the gross amount of the portfolio.  One might argue and AA certainly would that there doesn’t appear to be a compelling reason to hold a loss reserve when collateral coverage is so high.   

But there’s more.

Global is accruing interest on the gross portfolio because KD 490K in accrued interest in 2015 equates to a whopping 21% per annum yield on the average net loan portfolio. (Simple average of 31 December 2015 and 2014 amounts).  It’s a more reasonable 4.8% on the average gross portfolio. 

To accrue interest, Global would either have to be receiving cash or have almost certain assurance of payment of the interest. 

The cashflow statement shows that Global did not receive cash payments in 2015 for about KD 500 million of interest accrued that year, an amount very close to the interest accrued on these loans.  Of course, the KD 500 difference could well relate to other interest bearing assets.  It could relate primarily to the loans but be due to timing difference:  the interest payment was received after 31 December 2015.  If cash is being received and Global holds such an excess of collateral, how does it justify maintaining the reserve to its auditors? 

On the other hand, if Global is accruing interest—but not receiving cash—, its justification is likely based on asserting that collection of interest is almost certain given the collateral it holds. If the interest is secure and again the collateral so much larger than the principal, then it would seem the principal is also secure and no provision is needed.

All this suggests to AA that Global has some “dry powder” for future contingencies.

Murabaha Transactions

Global is earning a princely 5.28% per annum on these one year transactions (note 12).  Not many good investments offer such a return for a one year tenor.  Kudos to GIH for finding this consistently attractive opportunity—5.24% in 2014, 5.3% in 2013, and 5.45% in 2012.

One would think that such rates would come at the cost of higher risk, but the provision is a modest KD 123K on some KD 3.1 million. 

One thing did catch my eye.  Note 25.2.2 page 57.   The murabaha receivables were more than 180 days past due (but not classified as impaired) as of 31 December 2015 and as well at 31 December 2014.  I didn’t see a reference to collateral for these transactions.  Of course, AA has been around the block a few times on “Islamic” banking transactions and knows that in addition to careful structuring (technically حيل) “Islamic” finance is one area of the faith where miracles occur with a dazzling regularity.

Notwithstanding the above, perhaps a provision of some sort would be warranted.  And could be accomplished by a simultaneous reversal of some of the loan provisions and booking of an equivalent amount as provision for the receivables.  But of course الله اعلم

Global Investment House and National Bank of Umm Al Qaiwan - $250 Million Deposit

The Art of the Deal?

When last (18 October 2010 to be precise) we looked, Global Investment House and National Bank of Umm AlQaiwain were locked in an epic legal battle over a US$250 million “deposit” (if you’re GIH) or a “contractually binding pre-payment” for convertible securities (if you’re NBQ).

You’ll recall that in July 2008 NBQ and GIH had signed an MOU for GIH to purchase NBQ convertible bonds. GIH deposited the funds, but December that same year requested their return as it began to encounter debt problems of its own.  NBQ refused stating that there was a binding deal to buy the convertibles.  

The Dubai courts became involved shortly thereafter and the case was still live in early 2015 with no final ruling.    

During that period, the Supreme Court of Dubai several times reversed lower court judgements and sent the case “down” for a second look by the Appeals Court.  “Experts” from the Dubai Financial Market were asked to provide their input.  That apparently wasn’t enough.  So “experts” from the Emirates Securities and Commodities Authority were pressed into service.

AA is pleased to note that during 2015 the parties agreed an out-of-court settlement.  Of the $250 million original amount, NBQ kept $35 million plus the equivalent of another $34 million (the penal interest amount, the Dubai court had required NBQ to place in escrow with it).   The remaining $215 million was returned to GIH --more precisely to GIH’s creditors who acquired this asset along with no doubt many other “fine” ones in the debt swap.

NBQ is roughly $79 million richer.  GIH’s creditors $35 million plus lost interest/lost opportunities poorer.  GIH poorer as well but hopefully wiser.

Another chapter in structuring and legal documentation breakthroughs (or more precisely breakdowns) of convertible securities in the GCC comes to a close.     On that topic, relevant posts here: 

http://suqalmal.blogspot.jp/2009/11/one-billion-dirham-camel.html

http://suqalmal.blogspot.jp/2010/03/adia-investment-in-citigroup-time-for.html

While this saga has ended, AA’s interest has not.  Expect a post soon on Global Investment House.

Memory lane:

Earlier posts on GIH/NBQ can be found here. 

http://suqalmal.blogspot.jp/search/label/National%20Bank%20of%20Umm%20Al%20Qaiwain

If you’re interested, Note 14 in NBQ’s 2015 Annual Report provides a summary of the court saga.  

http://www.nbq.ae/annual_report/NBQ-2015-REPORT-EN.pdf 

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.

Global Investment House - Better Times Coming. Capital Increase in 2011?

Au or FeS₂?

Also from the Reuters Middle East Investment Summit, Ms. Maha Al Ghunaim noted that:

1. Global's performance for 2H10 will be better than 1H10.   (Global lost KD34.4 million in 1H10 compared to KD98.6   in 1H09.
2. The Company continues to monitor its costs and further reductions are in store.
3. It expects to begin discussions with unnamed strategic investors in 1Q11 to discuss a capital raising.

National Bank of Umm Al Qaiwain 3Q10 Financials - Update on Global US$250 Million Deposit Dispute

NBUQ released its 3Q10 financials earlier today.  (Yes, I'm still stubbornly using that abbreviation even though their stock symbol is NBQ  But I will alternate today between the two to partially satisfy those who have "complained".)

The major focus is as usual on the dispute over the US$250 million "deposit" (if you're Global Investment House) or the "prepayment" (if you're NBUQ).  As you'll recall the dispute turns over whether an MOU between the two parties was a binding contract obliging GIH to buy securities convertible into NBQ equity.  Yet another example of poor transaction structuring and legal documentation involving this instrument - which has been a rather costly mistake for purchasers in the past.

You can find more on this topic by using the labels "Convertible Bonds" and "National Bank of Umm Al Qaiwain".

The relevant notes in their financials are Other Assets (Note 13) and Other Liabilities (Note 17).  

As per Note 17, NBQ is holding the funds in a non interest bearing account in the amount of AED918.25 million (equal to US$250 million at the FX rate as of 30 September).  But as you'll see from Note 13, it has deposited AED1,034 million with the First Instance Court of Dubai pursuant to an order from that Court.  

The difference (just under AED 116 million) is presumably interest and perhaps legal costs for Global.   The amount represents a little over one quarter's net income for NBUQ.

The Appeals Court is scheduled to hear NBQ's appeal on 8 November 2010.   The 29 September session adjourned without taking a decision and was designed to let NBQ object to both the decision in Global's favor and the interest payment.

You'll also note that in Other Assets, NBQ is showing some AED82.7 million in "split deals".  Shades of Mashreqbank and its deals with Awal Bank and with TIBC.

Global Investment House - A Global Leader in M&A?

Everything is relative:  In a small bowl, a small fish can feel very, very big.

On 27 September, Global published a press release in which Mr. Badr Abdullah Al Sumait was quoted as saying:

"نعتز بهذا الانجاز المتمثل في تبوء جلوبل مراكز متقدمة ضمن كبرى بنوك الاستثمار العالمية في مجال الاستشارات المالية لعمليات الدمج والاستحواذ. ويؤكد هذا الإنجاز الدور الذي تلعبه جلوبل على مستوى المنطقة في تقديم خدمات الاستشارات المالية كما ويدعم سياسة الشركة المستقبلية في التركيز على الأنشطة التشغيلية ومن بينها الاستثمارات المصرفية."

Quite a statement "ranked among the largest investment banks in M&A".

What was the basis for what might appear to be a rather extraordinary claim?

Reports from Thomson Reuters and Merger Market.

In TR's report on the first six months of 2010, Global was:

1. 4th among financial advisors in M&A deals completed in the MENA region 
2. 17th among international investment banks for deals completed in the EMEA region.
3. 15th for deals completed in Emerging Markets

In MM's report, Global was:

1. 6th among FAs for announced M&A deals in MENA during the first half of 2010
2. The Bharti Airtel/Zain transaction on which Global acted as FA was the largest in the MENA region and 8th worldwide.

There's no dispute about Global's position in the league tables, which was due to a single transaction, Bharti/Zain.   Each transaction does count.  Global was Bharti's advisor and so has earned a place in the league tables.  But this single transaction is its only claim to league-table prowess.

And so like the local mutriba after her first big hit, it may be a bit premature to claim to be the next Fairouz or Umm Kulthum,   One may well turn out to be, but the claim will only be proven by repeat performances.   

Now I'd repeat what Global says in its press release:  it is the only GCC or MENA firm to make the list.  So maybe Global might more properly see itself as a regional leader in M&A (though I'd still contend that it had to have repeat performances to qualify at that level).  Not Kawkab Al-Sharq but perhaps Kawkab Al-Khalij.

To be fair,  let's trundle off (electronically, of course) to Thomson Reuters highly intelligent Deals Intelligence Site to take a first hand look at the 2Q10 Global M&A Report.  And by doing so, get a bit of context.

A few factoids from that visit.

M&A Volume for the First Six Months of 2010

Announced - US$1.065 Trillion / Completed US$811 billion

1. Americas:    US$523 billion / US$405 billion
2. Africa/ME:  US$  42 billion / US$  32 billion
3. Europe:        US$269 billion / US$200 billion
4. Asia Pacific: US$199 billion / US$114 billion
5. Japan:            US$  32 billion  / US$ 60 billion

Anyway you slice it Global's US$10.7 billion in 2010 transactions are drop in the vast ocean of all deals. 1%.   It did have a good sized share among Africa/Middle East deals - 25% Announced Deals and 33% Completed Deals - but Mr. Al Sumait is claiming that Global is among the  leading global investment firms in M&A.  Not that it's a leading firm for Africa/Middle East M&A.   

As the table shows, Africa/ME is rather small beer in the M&A world representing 4% of announced deals and completed deals. 

Let's look at this from another angle - the top 25 advisors for worldwide M&A.

Top 25 Global M&A Advisors

1. Global's name does not appear either in Announced Deals or Completed Deals.
2. The top ten firms (led by the perennial leader Goldman) had between US$213 billion to US$112 billion in announced transactions and US$169 billion (Goldman again) and US$60 billion in completed transactions. UBS was in 10th place Announced Deals with US$112 billion.  And Rothschild in 10th place in Completed Deals with US$60 billion.
3. The advisory firms in 25th rank Jeffries (Announced) and Blackstone (Completed) had respectively US$21 billion and US$14 billion in transactions.

Generally the first ten firms are considered the leading firms. Unless one is prepared to define "leading" investment banks in a very generous way Global again fails to make the "cut". 

 Top 25 Financial Advisors for EMEA M&A

1. Deutsche Bank holds pride of place in Announced Deals with US$94 billion with Citi at US$45 billion in 19th place.  
2. For Completed Deals it's Morgan Stanley with US$85 billion.  JPMorgan  is in 10th place with US$50 billion.
3. Global makes its appearance in 23rd place with US$11 billion in transactions for Announced Deals (up from 220th the year before) and 17th place for Completed Deals. Well out of the magic circle of the top ten.

In this category, Global can make the claim that it has made substantial progress - but on a regional not global level.  As I said above, the real proof will be if Global's name is in the list next year.  But until it cracks the top ten it won't be a leader but a second tier player.

Can anyone out there remind me what Global earned on the Bharti transaction?  Earnings are very important in this business.  For the first six months of 2010, the Company reported advisory related fees of KD1.9 million up substantially from the KD0.3 million it earned in 2009.  That's a 638% increase.  One would hope the fee on a US$10.7 billion would be a "bit" more.  Maybe we'll see the full force of the fee in the 3Q10 financials?

And finally at the end of the Global press release, you'll find links to Thomson Reuters and Merger Market reports which can give you an insight into the general M&A market.

Gulf Bank: The Golden "Prize"

 

The Gold's There.  Look Closer.

According to the informed sources of Al Watan, a European Group is now bidding to acquire a significant/meaningful share in Gulf Bank through the services of a Kuwaiti intermediary.  And is therefore bidding against the Qatari Group.

The article goes on to say that GB is expected to declare a profit of KD35 million for the first nine months of 2010.  3Q10 provisioning is expected to be much less than during the first two quarters this year  because GB has provisioned 100% of Saad and Al Gosaibi exposure (KD 120 million!) plus 100% for The Investment Dar, 50% for Global,  and 50% for Aayan Leasing and Investment.

Anyone out there know if the provision levels for TID, Global, and Aayan are Central Bank mandated?  Or if they're just GB's calculations.

I guess Global may be among the worlds leading investment banks  for M&A as Mr. Al Sumait said not so long ago (a post is coming on that topic) but seems to be in rather poor company with respect to its loan repayment prospects.  Half full or half empty?  But nonetheless better than some others.

Markaz: Review of Kuwait Investment Sector

 Renovation of Yet Another Proven Business Model In Progress
(Or, Perhaps, A Half Built Mega Project)

Markaz has issued “Kuwaiti Investment Firm Sector Taking Stock Two Years After the Crisis”. The report is an update to one they issued in June 2009.

As usual, good analysis and commentary.

You can obtain a full copy of the report by sending an email to info@markaz.com referring to the title above.

In the interim, some key points from the report.

Let’s start with Markaz’s Conclusion:

“The investment sector in Kuwait has a long way to go on its path towards health especially in light of the Central Bank’s increased oversight on the sector, which may lead to reduced activity among some firms that need to clean house. Given how unpredictable and difficult the sector’s assets are to value, it is difficult to predict the future performance of the sector, especially given the wide variance in case-by-case health.

We are optimistic that 2010 will show a further narrowing in bottom line losses, though we remain skeptical of a return to profit. Not only will companies be looking to offload more of their investments, booking impairment losses in the process, but regional/global equity markets have shown lackluster performance for the year, which may have an adverse impact on both the firm’s quoted investments in addition to the AUMs (thereby reducing fee income), all of which will put downward pressure on the bottom line.”

Historical Performance

I’ll start by noting that the report does not cover all investment companies in Kuwait. It is based on a set of 34 listed companies of which only 28 have reported for 2009. The missing reports include The Investment Dar – which hasn’t issued a financial since 31 December 2008. Nonetheless as with many such studies, it gives a good macro picture.

Earnings in KD millions.

2005	2006	2007	2008	2009
945	281	846	(810)	(778)

1. The graph in Markaz’s report gives a good pictorial sense of the variance.
2. In lieu of a graph, let’s look at statistical measures. All of which are rounded to the nearest integer. The Mean Income over the five-year period is KD97 million. The Standard Deviation (Sample) is 852 and the Standard Deviation Population (762). The SD is between 8x and 9x the Mean. That gives an idea of the variability of income. 
3. During the first three heady years of hefty profits, no doubt equally hefty bonuses and dividends were paid based on reported income -- largely non cash capital appreciation. Many of these payments also no doubt financed by “wise” lenders - who are now left holding the proverbial bag.

Asset Classification

IFRS 7 requires that companies disclose the basis for the valuation of assets held for sale (similar to FASB 157).

1. Level 1: Based on quoted market prices in active markets for identical or similar securities. 
2. Level 2: Based on observable market data – either direct or derived. 
3. Level 3: Inputs into valuation models are not observable market data.

Markaz’s set of companies assets are distributed as follows. Amounts in KD millions.

	FVTPL		FVTE	TOTAL	% TOTAL
Level 1	264		535	799	34%
Level 2	213		365	578	25%
Level 3	236		708	944	41%
TOTAL	713		1,607	2,321	100%
% Total Investments	31%		69%	100%	----

As Markaz notes, the IASB allowed companies to “move” assets from the then inconvenient FVTPL (Fair Value Through Profit and Loss) classification to FVTE (Fair Value Through Equity) which neatly “solved” earnings problems in a time of decline in values.  And, no doubt, achieved its goal of fooling more than a few "wise" investors and lenders.

It would be interesting to see how many Kuwaiti firms availed themselves of this exception to manage their apparent earnings.

It’s not surprising that overall there is a concentration in Level 3 assets given business models. And one could point to firms in the “Developed West” with similar concentrations. But out of national chauvinism I won’t point but merely link.

Appendix 1 lists the ratio for some 32 firms. There’s wide variance.

1. Gulfinvest International and Al Qurain have 100% of their assets in Level 1.   Noor 85%.  Bayan 84%. Coast 72%. 
2. On the other hand, National International Holding has Level 3 assets at 87%, First Investment at 70%, Al Safat and Al Mal at 67% and Global at 55%.

The Kuwait Investment Firm Sector in the GCC

Markaz notes that the KIFS dominates the rest of the GCC. No one is bigger. No one fell with a larger thud except two Bahraini-based firms in 2009. Markaz provides some income statement data for Fiscal 2008 and 2009 plus 1H10. What would be even more illuminating would be sector balance sheet size.

Leverage

The new Central Bank of Kuwait regulations impose a maximum 2x leverage ratio on the sector. Even after the debacles in 2008 and 2009, the KIFS’ leverage ratio (Total Liabilities/Total Equity) is a “comfortable” 1.84. It’s only when one starts drilling down into the details that one sees the variance.

Below my calculations based on FYE 2009 financials as in Appendix 2.

FIRM	LEVERAGE (TL/TE)
Kuwait Finance and Investment	8.32x
Aayan Leasing and Investment	5.96x
The International Investor	5.88x
Global Investment House	4.12x
International Investment Group	3.57x
IFA	3.29x
Aref Investment Group	2.78x

Note: I have not adjusted the above for minority interests – so these are not strictly speaking Central Bank leverage ratios as will become apparent later when we review Markaz’s calculations, though the number of firms with significant minority interests is limited.

When Aayan’s substantial minority interests of KD42 million are eliminated from the calculation the Leverage Ratio jumps to an eye popping 14x (using the financials reported on the KSE).

Asset/Liability Mismatch

Details are on page 7 of the report. Briefly, conventional firms are more balanced than “Islamic” ones. The former with S/T debt of 40% versus S/T assets of 49%. The latter with S/T debt at 79% versus S/T assets at 36%. But this is largely due to the greater progress made in restructuring conventional firms. (Also note this data excludes The Investment Dar).

Review of the Top Five

Markaz then reviews the top five firms: Global, Aref, IFA, TID (using 2008 data) and Aayan.

Here in tabular form are the results of Markaz’s review of these firms’ compliance with the newly imposed Central Bank of Kuwait regulations.

FIRM	LEVERAGE RATIO	"QUICK" RATIO
Global Investment House	4.11x	17%
Aref Investment Group	2.78x	16%
IFA	3.28x	9%
The Investment Dar*	4.97x	2%
Aayan Leasing and Investment	13.90x	7%
CBK Regulations	2.00x	10%

*TID calculated using 2008 financials.

Markaz then discusses these five firms’ financial position.  If you want a quick insight into them and the investment firm sector in general, this report is a must read.