HSBC: Restrictions on Global under its Restructuring

The Short Fuse on Global's Restructuring

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

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

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

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

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

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

Global Investment House - Al Madina Wins Appeal Against Global

"You're it!"

Today Al Madina Finance and Investment announced (on the KSE and the DFM) that the Appeals Court had overturned the earlier judgment in Global's favor which was rendered by the MOCI's Arbitration Tribunal.

Under that earlier judgment (last April), Al Madina had been ordered to pay Global:

1. US$10,011,224 dollars principal of a loan plus
2. US$300,000 in compensation

If you remember the history, at that time, Al Madina noted that the  judgment was only preliminary and not final and that it would appeal.

Today it noted that on 8 September the relevant court had voided the MOIC Arbitration Tribunal's judgment and had referred the case to the Department of Experts for study.  Al Madina noted this meant that any steps taken by Global to enforce the Tribunal's judgment would be void.

For its part, Global retorted on the KSE (text Arabic only below), that the court judgment was preliminary and not final. And that Global would appeal.

In effect, the game of tag continues.

[12:39:50]  ِ.ايضاح من (جلوبل) بخصوص الدعوى رقم 2010/1675 ‏
يعلن سوق الكويت للأوراق المالية عطفا على اعلانه السابق بتاريخ 04-04-2010 ‏
والخاص بمنازعة التحكيم رقم 2010/41 والتي صدر فيها حكم من هيئة التحكيم ‏
التجاري فى غرفة صناعة وتجارة الكويت بالزام شركة المدينة للتمويل ‏
والاستثمار (المدينة) بان تؤدي لشركة بيت الاستثمار العالمي (جلوبل) ‏
مبلغ وقدره 10,011,224 دولار امريكي قيمة اصل الدين ،ومبلغ 300,000 دولار ‏
امريكي على سبيل التعويض .‏
تفيد شركة (جلوبل) بانه صدر فى الدعوى المذكورة ‏حكما بجلسة 08-09-2010 ‏
والذي جرى منطوقه حكمت المحكمة: ‏
ِ1-ببطلان حكم التحكيم الصادر عن مركز الكويت للتحكيم التجاري بتاريخ1-4-2010‏
لدعوى التحكيم لسنة 2010/41 .‏
ِ2-‏وفى موضوع الدعوى :باحالتها الى ادارة الخبراء ‏
كما افادت شركة (جلوبل) بان هذا الحكم ابندائيا تميهديا غير منهي للخصومة و
ليس نهائيا وانه سوف يتم الطعن عليه بالاجراءات القانونية المناسبة فيما ‏
اذا صدر فى غير صالح شركة بيت الاستثمار العالمي (جلوبل) ‏

Global Investment House Hiring - Opportunity of a Lifetime

From one of our readers.

Hello there...

Love the blog, and thought you would find the following email rather amusing, someone I know received an email from Global Investment House, asking them if they'd be interested in joining? I've heard from others that they're madly hiring too, bet creditors are happy with that from a cashflow perspective...

Note, this person has ZERO financial experience, and had not shared their details with any recruiters for over 2 years. It is a blatant cold call!

The email is copied below (names removed)


Dear XXXX,

Good day and greetings.

We had come across your contact in our database, and here at Global Investment House we are looking to hire Kuwaiti professionals. If you are interested to have new opportunity please send me your update profile so we can take it further.


Looking forward to hear from you.



Best Regards,

XXXXXXX
Senior Officer - Recruitment
Human Resources & General Administration

E-mail:
Tel:
Fax:
P. O. Box:
Website:XXXX
(965) 22951
(965) 22951
28807 Safat, 13149 Kuwait
www.globalinv.net

This is what we in the developed West would call more evidence of the "War for Talent".

Global Investment House v National Bank of Umm AlQaiwain: NBUQ Deposits US$250 Million with Dubai Court

National Bank of Umm al Qaiwain ("NBUQ" or "NBQ", if you prefer) announced on the Abu Dhabi Stock Exchange this morning (23 August) that earlier this morning (the 23rd) it had deposited the US$250 million which is the subject of the lawsuit between it and Global with the Dubai Court.   It went on to note that previously the amount had been on deposit with the Central Bank of the UAE.  

NBUQ described this step as evidence of its good intentions in the matter.   It also noted that it had appealed the verdict of the Dubai Court of First Instance in Global's favor.  The first session of the Appeals Court is scheduled for 29 September.

As I've posted before, if NBUQ can drag the proceedings out, the pressure increases on Global to reach a compromise since it's facing a looming cash crunch due to the unrealistic and unprofessional repayment schedule imposed on Global by its "wise" lenders.  With markets as they are asset sales are difficult.   And the price of an asset fire sale probably much more than paying a break-up fee and forgiving the interest on the "deposit" (if you're Global) or "prepayment" (if you're NBUQ). 

Previous posts can be accessed using the tags "National Bank of Umm AlQaiwain"  or "Global Investment House Kuwait".

Al Mazaya Kuwait - The Villa Project Dubai

When Global floated the subsequently "ill-fated" AlThourayia Project Management Company to invest in Mazaya Saudi Arabia, it noted on page 25 in the Private Placement Memorandum that one of the attractive features of that transaction was the involvement of Mazaya Holding (in which Global has presciently acquired a stake earlier, though Global's stake in Mazaya was not mentioned directly in the PPM):

Mazaya Saudi will be positioned to leverage on Mazaya Holding’s competitive market edge, an absolute advantage against competition. As a new entity, Mazaya Saudi will enter the real estate market backed by Mazaya Holding’s respective expertise. The Company will gain from Mazaya Holding’s breadth of practice,  which has materialized through the 18 projects Mazaya Holding has on hand. Such projects range from megascale residential communities, to high rise mixed-use towers, to BOT projects. Mazaya Saudi will benefit from the know-how of Mazaya Holding, and will seek to develop similar scale projects, which shall be backed by Mazaya Holding’s vigorous methodology.

One of the projects touted as evidencing Al Mazaya's absolute advantage (and if you know the Economics definition between comparative and absolute advantage, you'll know just how remarkable a claim that is) was The Villa Project in Dubai, which involved the construction of 500 villas scheduled for completion in mid 2009. (PPM Page 28).

Gulf News recently ran an update on the project's progress.

The villas were to have a garage and vary in size starting from four bedrooms. "The whole attraction for the project was that you could customise the villas with swimming pools and the landscaping would be included in the fee. We were promised courtyards, water features, a school, mosques, shops and a medical centre, but there is none of that," said the businessman.

According to him, the original location for the development was supposed to be near Global Village, but it was moved by seven kilometres to the current location.

"The big thing at the moment is that [Al] Mazaya are expecting us to pay the Dh25,500 cost of connecting the sewage and Dewa [Dubai Electricity and Water Authority] lines even though its not our responsibility, that's the job of the developer. The frustrating thing is that my neighbour who has Dubai Properties as the developer doesn't have to pay."

The businessman had bought his villa in 2005. "It does say in the contract that they have leeway of a year on completion, but even with that it's two years behind schedule and most of us are still paying rent when we should have moved in," he said.

Other issues concern the poor workmanship and finishing, no boundary demarcation, landscaping or community facilities.

These are some rather serious charges.  But AlMazaya is not shy about taking responsibility for its actions as this quote from the CEO of Al Mazaya Dubai evidences:

"The problems with ‘The Villa' have been due to circumstances beyond our control," he said.

It seems even an  absolute advantage cannot overcome the actions of others.  Unclear if the global financial crisis (lower case "g" on global) is the culprit here.

And a tip of AA's massive tarbouche to Laocowboy2 for calling this article to my attention.

Global Investment House: 1H10 Financials – A Closer Look: Looming Cash Crunch

GIH released its 1H10 financials on the DFM on the 15^th.

With these in hand we can look at a bit more detail – the good, the bad and the ugly – some of which was missing from its earlier press release.

SUMMARY

While Global's press release did some fancy dancing around the losses, the real story from the financials is a looming cash crunch this year. If we assume that cash income from operations can pay most of the operating expenses (except interest), as outlined below, Global has to pay an estimated KD39.8 million in principal repayments and interest for the rest of the year. Estimated adjusted Cash and Banks as of today is some KD40.5 million, leaving no margin of error.

The implications are clear.   

Global is under intense pressure: 

1. To come to deal with NBUQ on the KD71.8 million "frozen" deposit unless justice is swift in Dubai. In which case there is always one more appeal.  Perhaps, a "break-up" fee for walking from the deal?  It may be a small price to pay to unlock this much needed cash.  Forgive interest plus an additional sweetener?
2. To conduct major asset sales – which in this down market are likely to cause accounting losses. While these will be "paper" not cash losses, they will erode capital further which will erode market confidence. 
3. Sell debt or equity to a convenient أبو سكر or الهيئة
4. Or to cause a "miracle" at a subsidiary via a successful prayer through Wali Al Thouraiya. Luckily that saint's tomb is in Kuwait and not in Saudi where that sort of thing is frowned upon. At least officially. 
5. Whatever miracles might occur this year, thanks to Global's wise lenders who imposed an unrealistic and irresponsible three-year rescheduling tenor, the problem only gets worse next year and the year after.
   

ANALYSIS

Net Income

Unlike Global which danced around the earnings issue, let's go straight to the bottom line.

1H10 Net Loss was KD34.9 million versus KD99.7 million for the comparable six-month period in 2009. 2010's performance was affected primarily by losses related to various investments which drove operating income to a loss of KD8.6 million (2009: KD45.6 million). Operating expenses were KD26.8 million (2009: KD54.1 million).

A closer look at 1H10 Operating Income shows that GIH basically broke even in 1Q10 with a loss of KD0.4 million. 2Q10 the loss was KD8.2 million.

Operating Expenses were KD15.9 million in 1Q and KD11.9 million in 2Q. 1Q's personnel expenses were KD0.4 million higher than 2Q's, other operating expense KD1.1 million higher, interest KD0.6 million higher and impairment provisions KD0.75 million higher. Interestingly, personnel expenses were KD0.9 million higher in 1H10 versus 1H09. Perhaps performance bonuses? New hires? More than 50 MBAs as one of our frequent commentators would have it?

During 2Q10, while its fee generating businesses accounted for a respectable KD6.9 million in income (1Q10: KD5 million), these revenues were overwhelmed by losses on financial assets held for sale (KD4.1 million), losses on FVTPL (KD11.9 million), and losses on subsidiary disposal (KD2.4 million). To some extent this is not a surprise. Global's investments are market sensitive and the market declined in 2Q10. Also the company is on a forced "Jenny Craig" diet – selling assets to pay the light bills and its rescheduled debt.

Comprehensive Income

1H10's comprehensive loss was KD41.6 due to downward revaluation of financial investments (KD6.7 million) offset in part by a FX gain of KD1.1 million. The comparable figure for 2009 was a comprehensive loss of KD90.1 million as the Company benefited from a net KD9.6 million in unrealized revaluations.

Cashflow

1H10 cash from core operations was a negative KD18.8 million versus KD16.0 million the year before. When financing costs are factored in (you will see these at the very end of the section on operational cashflow), the numbers are a negative KD25.9 million (1H10) and KD32.6 million (1H09).  They  include principal payments on short term debt: KD10.6 million in 1H10 and KD24.4 million in 1H09. (Note:  The US$50 million (KD14.6 million) debt payment 12 July is not included in these financials).  These are the light bills that Global needs to pay to stay in business.

Cashflow from changes in operating assets and liabilities were a positive KD30.1 million in 1H10 and KD34.1 million in 1H09. Essentially Global is dis-investing from its operating businesses – through asset disposals. Also as its business activities and volumes slow, there is less need for "working capital", e.g., receivables, etc.   The bad thing about a strategy like this is that it's limited to the amount of assets you have to sell.

As a result of the above, total operating cashflow was KD4.1 million positive in 1H10 versus KD1.5 million positive in 1H09.

Investing activities in 1H10 were a net use of cash of KD12.6 million (largely associated with the closing of AlThouraiya in 1Q10). In 1H09 this category provided KD35.9 million in positive cashflow.

Financing activities were a negligible outflow of KD0.5 million in 1H10 versus KD4.9 million outflow in 1H09.

The bottom line a net reduction in Cash and Banks of KD8.9 million in 1H10 and a net increase of KD32.5 million in 1H09.

The pattern in operating cashflow is likely to repeat itself: operating losses from the core business plus negative cashflow from financing costs offset by a net inflow from further disinvestment/reduction in core operating assets and liabilities.

Balance Sheet

Global's assets have shrunk from KD1,011 million at 30 June 09 to KD823 million at FYE 09 to KD774 million at 30 June 10. This pattern is likely to continue as the Company continues to sell off assets and reduce debt.

Equity (excluding minority interests) continues a similar downward pace: KD213 million at 30 June 09, KD163 million at FYE09 and KD124 million at 30 June 10. Minority Interest also is declining. KD81.3 at 30 June 09 to KD31.0 at 30 June 10. As Global sells its less than wholly owned subsidiaries, it "loses" the Minority Interest associated with these companies.

There is another side to this coin (pun intended). It also loses the Cash and Banks associated with the sold subsidiaries. As disclosed in Note 6, the closure of Al Thouraiya "cost" Global KD18.725 million in Cash and Banks. At 1H10 (Note 8), KD37.2 million of the Company's KD92.3 million of Cash and Banks is cash at subsidiaries – which arises solely on consolidation and may not be under the Company's control – though the sad stories of Global MENA Financial Assets and Al Thouraiya may evidence Global's powers of persuasion, particularly where it controls the Board. An ability to persuade legally independent companies to take actions contrary to their interests and then settle the resulting obligations by taking fantastic assets instead apparently less valuable and pedestrian cash. Notwithstanding this "history", a conservative approach would be to discount Global's liquidity position by excluding the "consolidated" cash.

A discussion of cash would not be complete without referring to the US$250 million deposit frozen at NBUQ by the wise application of both impeccable transaction structuring skills and similarly impeccable legal document drafting. The saga continues. Global has won in the Court of First Instance. NBUQ is appealing. When this will be settled is not clear. We're only at Round Two out of a potential three round bout.

Looming Cashflow Crisis

Finally, as Global has noted, it has paid in principal payments US$78.9 million under the restructuring so far this year, leaving another US$92.6 million (roughly KD27 million). We can estimate the remaining interest for 2010 at roughly KD12.8 million by using 1H10's expense. The required debt service is KD39.8 million. Global's estimated cash on hand (excluding amounts arising on consolidation) is KD55.1- KD14.6 July principal repayment = KD40.5 million. This rough calculation indicates how close Global is to the "tripwire".

Global is under intense pressure to: 

1. Settle with NBUQ on the US$250 million "frozen" deposit unless justice will be uncharacteristically swift in Dubai. And if it is, NBUQ has the right of one more appeal. 
2. Sell assets. Under these market conditions, fire sale may be the more apt description. The result of which while they will be "paper" losses, will nonetheless inflict real damage on Global in terms of eroded market confidence following further erosions in capital. 
3. Sell equity or obtain debt from أبو سكر or الهيئة. One of our regular commentators suggested this may be a viable option, if things get difficult. 
4. Look to create a miracle with a subsidiary – an appeal to the regional St. Jude of financial institutions – Wali Al Thouraiya. Subsidiaries, watch your cash!
   

The problem is that this is only Year 1. Under the irresponsible and unrealistic three year debt rescheduling imposed on Global by its wise lenders and agreed by its wise management (probably at the financial equivalent of gunpoint), the problem only gets worse next year as the scheduled payments are larger than this year's. So Global could well meet this year's cash requirements only to find itself in the same dire situation on 31 December 2010.

Global Investment House 1H10 Results: Still Bleeding Not as Fast

GIH announced its results for the first six months of 2010.  The press release was three pages.  Since financial/business performance wasn't that great, a great deal of space was devoted to awards and other "lemonade from lemons" type items.

But, let's let Global speak for itself.

Key points of the results :

• Fee-based businesses (asset management, investment banking and brokerage) generated operating income amounting to KD12.0 million and a profit of KD6.8 million during H1 2010. 
• During H1 2010 losses from principal investments and treasury activities were KD41.1 million, representing a reduction of 49% compared to H1 2009
• During H1 2010 interest expense reduced by 37%
• Global made a second principal prepayment of USD50 million of its restructured debt thereby meeting 46% of the principal repayment obligations due by 10 December 2010
• Overall net loss of KD34.4 million (KD0.028 per share), a 65% reduction over H1 2009 loss of KD98.6 million (KD0.080 per share).

And now to the tafsir.

1. Global's fee based businesses won't be paying too many bills with a net profit of KD6.8 million, particularly when this probably doesn't consider their corporate overhead.
2. The Company notes elsewhere in the press release that the annualized average loss on its principal investments during 1H10 was 12.4% compared to 17.4% in 1H09.  One suspects that the other contestants for PERE Awards 2009 "Middle East and North African Firm of the Year" had records less stellar than these.
3. Interest expense came down largely from the signing of the rescheduling agreement which eliminated the additional penal default margin.
4. On the debt rescheduling front, as noted earlier, Global has a long way to go on the debt repayment front.
5. And proving that net income is truly the bottom line, net income for the period is mentioned last:  a KD34.4 million loss, 65% lower than KD98.6 million for 1H09.  Do firms really think that by burying the bad news investors will overlook it?  Or that by reciting modest and manufactured achievements they can make it look less bad?  And anyone want to bet if there were positive net income that it wouldn't be the very first item right  on the top of the list?

Some additional items:

1. Global continues its drive to rationalize its cost base, cutting general overheads by 15% 1H10 versus 1H09.  As noted these include business travel, promotion, and communication costs - essential expenditures to develop revenue.  
2. NBUQ intends to appeal the Dubai Court of First Instance's judgment in favor of Global.

As always we at Suq Al Mal are on the look out for major contributions to advancing corporate spin.  We were not disappointed today.  

So a very special tip of Abu Arqala's massive tarboush to whoever at Global came up with the phrase "impeccable track record" and used it in conjunction with Global's success in having a US$103 million in assets in its Saudi fund.   Presumably, that track record does not include Al Thouraia Project Management Company  or Saudi Mazaya - as both are now safely interred.   Or Global MENA Financial Assets.  Or maybe there's a local definition of impeccable that I've missed.

Once Global releases its 1H10 financial report expect more comments.

Al Joman: Analysis of Loans by Kuwait Economic Sectors

Last month the fine folks at Al Joman Center for Economic Consultancy published a series of reports analyzing loans by economic sectors (as defined on the KSE) except for the Banks Sector.

Looking at aggregate sector data, we can get an idea of the relative size of a sector and thus its relative importance in the national economy. 

Also by looking at the relative borrowings by firms within a sector we can get a better understanding of the dynamics of that sector. Is the sector dominated by one or a few firms? Or is competition fairly widespread? Which firms are the major players in a sector? 

In several sectors the largest firms (measured by debt) are fairly small.  This is a reflection of the overall size of the Kuwaiti economy as well as government dominance in certain economic activities.

But, and there is always a "but" with AA, there are some factors which mean any conclusions we draw are imperfect: 

1. Al Joman's reports are based only on companies whose shares are traded on the KSE. Private firms are not included. 
2. We're using debt as a proxy for asset size. This ignores equity, though one might argue in a land devoted to OPM debt is not a bad proxy. 
3. Not all firms have released current financial reports. 
4. Companies in certain sectors have borrowed for offshore business and investments. Examples are companies in the Investment Sector or in the Services Sector, e.g., Zain or Agility. Thus, there is some external "noise" in the numbers.
   

But, (a word used almost as often on SAM as "interesting"), we can get a reasonable macro idea or directional perspective from the data we have.

Before we do, some technical "directions" to make your navigation of the reports as useful and easy as possible.  This KSE link will take you to the English language drop down menu for Sectors and the list of companies comprising each Sector. Each company is shown and its Stock Symbol Number. Those SSN's are important (especially for those who don't read Arabic, the language of Al Joman's reports) because the data in Al Joman's report for each Sector is roughly in SSN order. A click of the language button on the right عربي will get you to the Arabic language page. And this link to Al Joman's report page.

Let's begin with an overview via Al Joman's 7 September report - their initial report meant as a macro summary.

All amounts are in KD millions.

Sector	31 Mar 10	30 Jun 09
Investment	5,747	5,937
Insurance	17	30
Real Estate	1,978	1,835
Industry	1,845	1,853
Services	3,916	4,347
Food	171	198
Parallel Market	65	33
TOTAL	13,740	14,233

 

As you look in the individual Sector reports, you'll notice that the total loans do not exactly agree to those shown in the above table. The differences are relatively minor and, to repeat myself (another common occurrence at SAM) can be ignored as we are looking for a macro perspective and general "directional" trends. 

For those, like AA, for whom no nit is to small to pick, here is an updated table. No, in an uncharacteristic move, I didn't refoot the detail to make sure these totals tally to the detail.

Sector	31 Mar 10	30 Jun 09
Investment	5,668	5,937
Insurance	17	30
Real Estate	1,963	1,838
Industry	1,845	1,853
Services	3,936	4,355
Food	171	198
Parallel Market	66	33
TOTAL	13,666	14,244

Since the first table adds to 13,739 for 31 March 2010, presumably due to rounding, the difference  between the original and adjusted tables is "off" by one.   
 

In the Investment Sector (51 firms) of the 5 largest borrowers 4 are distressed. KIPCO being the one "happy" firm. 

Data in KD million as of 31 March 2010. Total Loans at 1Q10 were KD5,668.

Firm	Amount	% Total Loans
Investment Dar	963	17.0%
KIPCO	619	10.9%
Global Investment House	588	10.4%
Aayan Leasing	416	7.3%
Aref Investment	339	6.0%
TOTAL	2,925	51.6%

 

In the Insurance Sector (7 firms) only 3 firms have loans, خليج ت (Gulf Insurance) at KD10.8 and اهلية ت AlAhleia at KD5.3 account for 92.6% of the 1Q10 total. AlAhleia having reduced its borrowings by roughly KD11 from 2Q09. 

In the Real Estate Sector (36 firms) there is no similar dominance. The largest borrower is تمدين ع (Tamdeen) with KD219 or 11.1% of the total as of 1Q10. Al Joman has not reported on لؤلؤة (Lu'lu) Pearl Real Estate or صفاة عالمي (Safat Global). Safat last reported FYE08 when it had KD15. Pearl 3Q09 when it had KD41. If you're looking at the KSE Sector page, note there is no stock with symbol 407. Also Al Joman has جراند (Grand) out of order in its list – using the KSE Symbol Number order as the right one.

In the Industry Sector (28 firms), صناعات (National Industries Group or NI Group) dominates with KD969.7 or 52.6% at 1Q10. The next largest firm أنابيب (Kuwait Pipe Industries and Oil Services Company) has only KD163. 

In the Services Sector (59 firms) زين  (Zain) and أجيليتي (Agility) dominate accounting for roughly 48.6% of total loans at 1Q10 with KD1,556 and KD356 million respectively as compared to 2Q09 when they were 59.1% with KD2,164 and KD411 respectively.

In the Food Sector (6 firms) the aptly named اغذية "Food" (Americana) dominates with roughly 92.2% of 1Q10 loans with KD157.7. And as the slogan now goes "Americana – 100% Arabian".  And note that United Food Industries Group's symbol is almost the same as Americana's, except UFIG has the definite article "أل" in front, i.e., الغذائية.  Be careful when placing that order with your broker!

In the Parallel Market (14 firms) صفاة عقار (Safat Real Estate) at KD19.8, ميدان (Maydan) at KD18.3 and عمار (Emaar) at KD11.2 account for 74.5% of 1Q10's total. Again note that the KSE list has gaps missing in the sequential order.  Symbols 2001, 2002, 2004, 2009, and 2016 are not used.

Global Investment House v National Bank of Umm AlQaiwain: GIH Proposes Negotiations?

In what is billed as an exclusive interview with AlWatan, Amir Yusri writes that Badr AlSumait, GIH's CEO, said that Global's doors remain open to NBUQ to discuss an amicable solution outside of the court room.  One that would of course respect GIH"s right to the deposit.

As you'll recall from earlier posts on SAM, the Dubai Court of First Instance has ruled in GIH's favor ordering NBUQ to return the deposit with legal interest at 9%.

It's hard to know what is at play here.  

Is GIH concerned that NBUQ will launch an appeal and win?  Or that it will be able to tie up the funds for a prolonged period - a rather dangerous development for GIH given the unrealistically short repayment tenor on its restructuring?  

And thus by offering to accept a lower interest rate or a staged repayment to secure repayment?  And a relatively prompt repayment?

Global Investment House - Announces It Has Paid Restructured Debt Installment

When times are good, one announces a new loan with great fanfare and self congratulation.  Once one has defaulted the situation changes.  Repayment of one's contractual obligations - previously taken as a given - is no longer certain so one announces the "successful" making of a repayment.  This is also a strategy to burnish one's now tarnished name with a bit of "good news".

Today GIH issued press releases on the DFM, BSE and KSE announcing that it had successfully repaid US$50 million in principal on its restructuring for value 21 July.

As noted, with this repayment and the first US$28.9 million repayment in April, GIH has repaid US$78.9 million on its restructuring, 46% of the amount due by 10 December 2010, Plus an additional US$20 million in interest.

It has also repaid some KD20 million in bonds (US$68,7 million).

In very rough numbers, GIH has about US$2 billion in debt.  The above amounts (excluding interest) are roughly 7% of the total.  That this amount is low is not surprising - the repayments schedule has been designed to give some breathing room for asset price appreciation.   It begins with rather modest payments in the first year which then increase in the latter years.  The problem GIH faces is that the tenor on its restructuring is an unrealistic three years.  So the increase is rather sharp.  And represents a very real minefield for the Company particularly if the economic recovery is modest or slow.

Global Investment House - National Bank of Umm AlQaiwain to Appeal

Following yesterday's announcement by Global Investment House that the Court of First Instance in Dubai had ruled in its favor over the long standing dispute between NBUQ and GIH over a US$250 million deposit, today NBUQ issued a press release on the ADX relating its side of the story and advising that it intends to appeal the judgment.

When NBUQ files its appeal, the judgment of the lower court will be stayed while the Appeals Court hears the case.  The party losing in the Appeals Court will have the right of a final appeal to the supreme court.

Global Investment House - Poor Performance of Funds Highlighted Why?

AlQabas has an interesting article on YTD performance through 25 June performance of funds domiciled in Bahrain.  Global has I believe some 12 or so funds listed on the BSE.

For the record, the results were:

1. European Stock Index Fund down 9.8%
2. US Stock Index Fund down 7.52%
3. Energy and Petrochemical Industries down 6.32%

Other firms similar negative performance is mentioned.  

1. SICO's Gulf Stocks Fund is down 6.53%
2. TAIB's Bank's MSCI-based GCC Stocks Fund (Islamic) down 5.77%.

Interesting article because of the focus on Global - and the performance of just three of its funds.  In an environment where other fund managers are incurring losses as well.  

Global Investment House Wins Round #1 Against National Bank of Umm Qaiwain

GIH announced this morning that the Court of First Instance in Dubai had ruled in its favor against NBUQ ordering it to return GIH's US$250 million deposit plus interest and costs to GIH.

This is indeed good news for GIH.  Or perhaps more precisely for GIH's creditors.

As of 31 March 2009, NBUQ had roughly AED3.2 billion in cash and banks (roughly US$859 million).  Repayment to GIH would leave NBUQ will a net positive balance in interbanks to the tune of some AED1.7 billion or so.

But it's important to note that this is also just the Court of First Instance.  NBUQ has the right of appeal in which case implementation of the judgment will be suspended.

You can also read NBUQ's discussion of the law case (prior to this judgment) in Note 13 to its 31 March 2010 financials linked to above.

New Central Bank of Kuwait Regulations on Investment Companies - Practical Difficulties

Muhammad Shabaan at AlQabas has an article that several investment companies have held urgent meetings with the CBK or are trying to arrange meetings to discuss the new regulations on investment companies which pose difficulties for them - particularly those in distress.

In particular one firm with a three year rescheduling recently agreed (clearly Global though its name is not mentioned) pointed out that it cannot comply with the regulations and the terms of its rescheduling.

What's likely to happen is that the CBK will have to give some firms a "pass" on the implementation dates under the argument that they are taking significant steps to improve their financial positions in the spirit (but not the letter) of the regulations.

The Curious Case of Al Thouraia Project Management Company WLL

This company has come up more than once in earlier posts on Global Investment House ("GIH"). 

Today it's time to take a closer look. 

Documents related to the Offering of AlThouraia can be found here. If that doesn't work, go to GIH's website.  Click on the Investor Relations tab. And then Global News. And then scroll down to 2 June 2008.

On 2 June 2008, with great fanfare GIH announced this KD180 million (US$630 million or SAR 2.5 billion) private placement.

Global announced the launch of Al-Thouraia Project Management Company's capital increase to KD180 million.  Al-Thouraia shall be utilized as a Special Purpose Vehicle (SPV) to invest its whole capital in Mazaya Saudi for Commercial Investment Company "Mazaya Saudi", which has been incorporated in the Kingdom of Saudi Arabia, and will be managed by Mazaya Holding Company "Mazaya". Global Acts as Lead Manager Al-Thouraia Project Management Company. Mazaya Saudi will operate as a real estate development company in the Kingdom of Saudi Arabia in order to capitalize on the opportunities available in the Saudi Arabian real estate sector, which is known to be a vibrant, growing and a lucrative market.  Mazaya Saudi will have a paid-up capital of SR2.5bn.  Mazaya Saudi shall conduct its business in accordance with Islamic Shari'a.

The Al Thouraia Summary outlined the attractiveness of the deal:

1. The market opportunity in Saudi. 
2. Strategic partners from Kuwait (Al Mazaya Holding) and Saudi (Abdullatif Alissa Group and Abdulaziz AlAjlan) plus some unnamed other strategic investors. As noted in GIH's press release above, to include Global itself. 
3. Excellent promised financial results: An IRR of 20.1% with solid cashflow -- an average dividend payout ratio of 60%. All achieved with moderate use of debt. Leverage ratio (no more than 35% at its peak). 
4. As well as the prospects of a liquidity enhancing listing on the Saudi Stock Exchange.
   

As is common, the "teaser" was accompanied by a Private Placement Memorandum . That link will take you to the copy posted on GIH's website. Surprising for a deal this size, this document is rather disappointing. Certainly, this is not as polished or professional as efforts by say Arcapita or Investcorp – two firms that I would expect GIH considers its peers. Perhaps, this is an earlier version which was revised later. Perhaps, this fundamentally reflects on the relative state of Kuwaiti regulations vis-à-vis some other GCC states?

As I read it, some items caught my eye. And some did not – that is, while I was expecting them, they didn't appear. 

The language and content of the Disclaimer need work and tightening. No doubt for some a technical quibble. But how one deals with the details is often a good indication of how one deals with the big picture.  The sort of thing a professional looks at to gauge the professionalism of his or her competitor.

The Term Sheet is rather short and incomplete. It should discuss all significant aspects of the deal, thus, providing the investor with a summary snapshot of the transaction in a single place. Besides the financial aspects, the identity of major parties, relationships/contracts among them, expenses and fees, length of the Offer including various steps, e.g., Offer Period, Allocations, Issuance.  And so forth

The Saudi Real Estate Market section does not discuss major items such as:

1. Laws and Regulations affecting a landlord's right and ability to increase rentals, including requirements, timing, procedures.
2. Commercial Issues:  The types of leases commonly used in the Kingdom, e.g., short or long term, escalation and early termination/cancellation clauses, whether operations and maintenance are separate from rental and what controls exist on increases in those critical cash outflows, etc.  The prevalence of rebates, decorating/finishing allowances to tenants, etc in the market.
3. Legal  Issues including mechanisms for challenges to rental and fee increases.  The ability, procedures and timing to evict of clients in breach, etc. 
4. Status of Mazaya Saudi.  There is a disconnect between the press release  ("has been incorporated") and the PPM ("being established").  A small point admittedly.  One simply explained no doubt.  But one wonders why the two weren't conformed.
5. Mazaya Holding Kuwait:  On Page 25 we learn that Mazaya Saudi will be "positioned to leverage on Mazaya Holding (Kuwait's) competitive market advantage". One that provides as we are told an "absolute advantage against competition". Certainly an enviable position to be in for this Kuwaiti Company not only in its home market but in what is for it the relatively new market of Saudi Arabia.  On Pages 26 -28, we get more details on the remarkable Mazaya Holdings. Formed in January 2004, it has 18 projects – of which it has completed a grand total of 4.  Of the 4, there is the 22 storey Global Tower, 32 villas in the Al Maha Project, the Al Roya Tower and 6 buildings in Dubai Healthcare City.  With these major accomplishments under its belt, it already enjoys an absolute advantage. Imagine its market position today. I'm guessing The Donald may be its latest apprentice. He's going to have to hustle to make the cut!  Or "You're Fired!"
6. Strategic Shareholders:  We also get a partial glimpse into the proposed shareholding structure. There's a list of three entities and the promise of other strategic investors. Perhaps for competitive or business confidential reasons the target holdings of each are not disclosed, though one might expect a prospective shareholder to wonder just what level of financial commitment these entities were going to make to the venture. 
7. Management:  There's no mention of the proposed members of the Board and CEO, their CVs and  perhaps more importantly what rights the investor has in choosing them. Recall that the investor is a unit holder in Al Thouraia and Al Thouraia is the shareholder in Saudi Mazaya. Al Thouraia as an entity will vote for the Board at Saudi Mazaya.  And that is precisely where the assets and cash generation take place.  As an aside, I'd guess (note that word) that this structure is used to "get around" Saudi Capital Markets Authority regulations on floating shares in Saudi companies. The share flotation is outside the Kingdom and therefore outside the CMA's regulations. 
8. Investor/Shareholder Rights: The usual enumeration of rights is missing. Such things as voting for the board and management, pre-emptive rights, requirements for the mandatory provision of periodic information (financials and otherwise) by the company as well as rights to demand information.  
9. Use of Proceeds: No separate page. No real discussion. From Page 7 we see there is a 1% placement fee and 4% marketing fee – both non refundable. Unclear if this means that GIH earns 4% even if it doesn't place the Units? 

Risk Factors are Jenny Craig slim. 

At one level to the point of being obscure. I'm really not sure but it seems that what is being said regarding Regulatory Risk is that the investor only has to fear regulations that are "vague and incomplete in nature". Would that mean that a clear imposition of tax or a definitive cancellation of a permit would therefore be benign? 

On the other hand there are some very clear and very true statements here, such as "Future Performance is Difficult to Predict". 

Mostly though  there's a lot that I would have expected to see but didn't.  And to be fair it's not only in GIH's PPM but in many many others issued not just in the GCC:

1. A clear statement that this is a speculative investment.  If you build it, they may not come.  This is after all spec real estate.  New developments. 
2. Contractor performance issues:  If you hire them they may not build on time or to specification. 
3. Availability and sufficiency of utilities and other public services. If you build it, you might not have electricity, water, sewage. And maybe no or  inadequate roads into the area. 
4. Re-letting rental risk. If they move out, you may get less rent from the new tenant.
5. A wider definition of competition – more than price:  quality, location, amenities, etc. 
6. Increases in operating and maintenance costs above rental increases. 
7. Structural Issues: an SPV in Kuwait stands between the investor and the income generating property in Saudi. Repatriation of funds. Potential tax issues. FX risks. 
8. Potential Conflicts of Interest:  I was surprised that this wasn't discussed since Mr. Omar El-Quqa, EVP at GIH, was also a member of the Board at Mazaya Holding. As we learn in this press release from July 2007, GIH then sold some 48 million shares in MH, but remained the second largest shareholder with 5.5%. Perhaps, between July 2007 and June 2008, there were further changes in shareholding. I didn't see anything on GIH's website, nor in its first three quarterly reports for 2008. But I may have missed something. Depending on the various stakes the proposed Strategic Partners might hold, it would seem that good form would require some contemplation of potential conflicts of interest.In any case, I suppose we can conclude that GIH saw no conflicts of interest nor any potential for them and so rest comfortably. At the end of 2008, GIH reported in Note 19 (a) that it owned 21% of Mazaya. Note this year end shareholding is well after the private placement. And it may have been a Victor Kiam moment. "I liked the razor so much I bought the company". Having done the deal and seen more evidence of MH's absolute advantage, it may have seemed like a good deal to reacquire some shares.  In which case perfectly innocent.
9. Material Contracts:  Summary of contracts with Mazaya Holding and any other parties.  All fees they are entitled to. On Page 35 we see they get an annual fee of 0.75% of paid up capital. KD1.35 million a year seems a rather small incentive for MH to apply its "absolute advantage" for Mazaya Saudi instead of for its own projects where it gets to keep the lion's share of the profits.
   

As we know GIH's placement effort was successful, though I couldn't find a press release on GIH's website. In fact there seems to have been almost total radio silence on the topic going forward. No mention in its 2008 annual of its great success in raising KD180 million. No press release. But then I may have not looked hard enough. The only GIH driven publicity I could find was a Bloomberg press item referring to advertisements that GIH placed in the Kuwaiti press in November 2009. Those trumpeted the fact that the Appeals Court had ruled it was not guilty in a civil case brought by a Japanese real estate firm regarding this transaction. There were, to be fair, the mandatory disclosures in GIH's financial reports.

Subsequent to the Offer, Al Thouraia placed roughly KD83 million with GIH in an "Islamic" transaction. A KD43 million deposit was also placed with a Kuwaiti bank. It's unclear to me why the funds were not immediately transferred to Saudi Mazaya. The 2 June 2008 press release was clear. "Al-Thouraia shall be utilized as a Special Purpose Vehicle (SPV) to invest its whole capital in Mazaya Saudi for Commercial Investment Company "Mazaya Saudi". And we're told on Page 24 that among its other activities, Mazaya Saudi would engage in Portfolio Management to "amplify shareholder value". No mention that Al Thouraia would do more than invest in Mazaya Saudi.  So shouldn't investments, if any, be in Mazaya Saudi's name?  The need for the funds in Saudi would seem to be manifestly urgent. The PPM (Page 24) discloses that Saudi Mazaya intended to begin work on three projects the first year. What better preparation for that than to get the funds in Saudi so they would be ready to be employed?

Perhaps, out of caution in a deteriorating market, the Board at Al-Thouraia decided it would be wise to keep the money in Kuwait where it would be safer. Perhaps just about the same time that the Board at Global MENA Financial Assets decided to park a significant portion of its assets and liquidity at GIH. Two rather strong market endorsements of the financial stability and security of GIH. A possible example of the market phenomenon known as "a flight to quality". And as I've noted before both entities were well positioned to well understand the financial condition of GIH.

Anyways let's follow the story using GIH's 2009 financials. 

1. Note 24 Page 57: It seems that a KD43.3 million AlThouraia deposit with a local bank was offset by that bank against a loan made by that bank to GIH. It's unclear to me what the legal basis for this offset is. Did AlThouraia guarantee the loan made by the bank to GIH? If not, how does the bank cross legal entity lines? Particularly, if GIH only owned about 83.36% of AlThouraia, what is the basis for stiffing the minority shareholders on the offset? There are all sorts of theoretical possibilities. And without picking one, let me just list some of them. Was the problem at the outset, when the deposit was placed? Perhaps, Kuwait doesn't have an ironclad "trust" law covering such deposits? And GIH placed the deposit with the bank "in trust for Al Thouraia" only to be rudely surprised later? Perhaps, there was an innocent clerical error about the name of the bank account holder when it was set up? Perhaps, the funds were mistakenly described as collateral? I'd appreciate a post from anyone out there with any insight on this. 
2. Note 25 Page 57: GIH acquired Al Thouraia through an asset swap – a non cash transaction. The assets exchanged are described on Page 58. It would be interesting to know if Al Thouraia's Articles of Association provided for Al Thouraia conducting the sort of activity that this asset swap implies. Or if Al Thouraia's shareholders either approved this step and/or amended the Articles. In any case through this transaction, GIH acquired control.  In so doing it added KD28 million or so to its cash balance, and removed KD83 million in borrowings (from Al Thouraia) from its balance sheet on consolidation. Note GIH did not necessarily obtain control over that cash. And it's likely that the KD83 million in debt remained a legal obligation of GIH.  In addition to these benefits, GIH's shareholding also implied the right to disconnect the feeding tube.
   

As we learn in Note 5 to the Company's 1Q10 financials, on 14 March 2010, GIH liquidated Al Thouraia recognizing a KD0.824 million accounting profit, while experiencing a KD18.725 million cash outflow. What explains this rather perplexing move by a Company desperately in need of cash to pay hungry creditors? The liquidation extinguished GIH obligations in the amount of KD125.6 million. The rationale for KD18 million tradeoff is suddenly a lot clearer. 

It also closes the book on Al Thouraia. A story which GIH no doubt wishes to forget as well hopes that its clients and the market will as well.

As indicated by the title, a curious case indeed.  And one subject to many interpretations.

Global Investment House - Returns to Sound Principles of Investment, Corporate Governance, Asset Valuation and Strengthening of Management with New Competencies

As part of its campaign to repair its brand and image, GIH held a two day seminar /training session for members of the Kuwaiti press on how to read financial statements (clearly a very needed and worthy goal) earlier this week.  At the closing ceremonies in which the participants were presented certificates, both Ms. Maha Al Ghunaim, Chairperson and Managing Director, and Mr. Bader Al Sumait, CEO spoke.  Both AlWatan and AlQabas have articles in their 27 May editions.

Let's start with a quote from Ms. AlGhunaim - which incidentally was the headline used by AlWatan for its article.

مها الغنيم: «جلوبل» تعلمت من الدروس الماضية ورجعت إلى القواعد السليمة في الاستثمار والحوكمة وتقييم الأصول وتعزيز الإدارة بكفاءات جديدة

The above quote can be roughly translated as:

Maha AlGhunaim:  "Global learned from the past lessons and has returned to sound principles in investment, corporate governance, asset valuation, and strengthening of management with new capabilities."

Which I suppose we can take to be an admission that at some point it was operating with unsound or no principles in those rather key areas in running a business.  Sadly, the reason for that lapse wasn't addressed.  Or wasn't reported.  In any case it is, I suppose, comforting that this is a "return" rather than a "first encounter".

As you'd expect, both GIH's Chairperson and CEO sounded themes designed to put a positive spin on the firm, though frankly my head is still reeling from the quote above.

1. To my surprise I learned from Ms. Maha that the putting of GIH's assets into the Global Macro Fund and the Real Estate Company was designed to protect their value of the assets and preserve the rights of the shareholders.  Mistakenly, I had thought this was done to facilitate creditors' ability to seize the assets in case of a failure by GIH to perform.  You'll recall hat these assets (some US$1.7 billion equivalent) are pledged to the banks.  In the event of default, instead of having to go through the laborious and legally risky step of registering a host of individual assets in their names, all they need do is take the equity in the two companies.  Presumably, with documents of transfer already signed by GIH - whose shareholders confirmed the transfer and the restructuring in their Ordinary General Meeting.  So that all the legal steps apparently have been well covered.  In any case, when you're wrong, you're wrong and it's good to be set straight.
2. Global's asset management business is large - US$6 billion in assets under management - and the firm is at the top (literally summit) of the regional asset management cohort.
3. Global's research and analysis is rigorously impartial and professional.

There was also a tour d'horizon on local and international affairs to reinforce the image of expertise of GIH. 

1. There was some discussion on the crisis - global in nature.  You'll note that that's "global" not "Global".  Unprecedented distress requiring unprecedented government action.
2. Some criticism of the Kuwaiti Government's efforts to deal with the crisis.  Not enough done.  The USA's program was held up as a model.  The KG needs to start buying assets to alleviate the problems as clients wallets are empty and the banks sit on their liquidity.
3. A  prediction that some of the distressed Kuwaiti companies are probably going down this year.  Those that didn't face their problems with "courage".  I wonder who Ms. Maha might be  thinking about when she mentions courage.  Perhaps, Mr. AlMusallam? Mr. Al Janahi?
4. The loan market is likely to be tight and not improve before 2011.  
5. The Kuwaiti Government pumped a lot of money into the banks but they're not lending.  Rather they're asking the Government to issue bonds so they can employ their liquidity.  Considering all the excellent lending opportunities in Kuwait that the banks don't have, I guess this is surprising to some.
6. It will be wise to give listed firms time to get ready for the new Capital Markets Authority Law.  And the KSE should not try to be an interim CMA.   The experience in Egypt, Dubai, Oman and Saudi is good and should be studied. 
7. The Government's privatization scheme may founder on its desire to make a profit.  Conditions are not conducive to trading.  The Government should bear in mind the benefits to both itself and the private sector from privatization. 
8. The GCC states plans to intervene to prop up the Euro (and thus their foreign investments denominated in the Euro) were criticized.  Government money should be spent in Kuwait solving the crisis at home. 
9. Apparently, there is a rumor that she and Mr. Al Sumait are being considered for the CMA Board!  Though it seems that she and Badr have only one thought and that is to preserve and protect the rights of GIH's shareholders.  How very lucky that is!   I trust they saved a seat for Dherar.  Or Ali.