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: 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.

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 –Commentary on 2009 Financials & Rescheduling

Earlier yesterday when I saw that GIH had posted summary 1Q10 financials, I decided to do a quick comment while waiting for the full report. 

That reminded me that I had not taken a close look at their audited 2009 annual report. So as a way of preparing to comment on 1Q10 I did. 

Now instead of commenting on 1Q10, I've decided it's preferable to first make some comments about 2009 FYE as a way of providing a basis for later comments. And, as you quickly see, spouting off on a topic or two along the way.

Cash and Banks  - Less Than Appears

Note 12 Page 48: At year end, Cash and Banks was a robust KD101.2 million. A closer look at Note 12 discloses that KD55.1 million was cash at subsidiaries. That is, this cash is in separate legal entities (at least KD28 million at Al Thouraia) and not necessarily at the disposal of GIH. 

AlThouraia -A Strange Saga

Note 24 Page 57: It seems that a KD43.3 million deposit that AlThouraia Properties placed with a local bank was offset by that bank against a loan made by that bank to the Parent, 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, when GIH only owns about 83.36% of AlThouraia, what is the basis for stiffing the minority shareholders on the offset? By the way GIH "recognized" the offset in its financials.   No skin off its nose as they say.

Note 25 Page 57: This discusses the acquisition of Al Thouraia through an asset swap – non cash. The assets are described on Page 58. In effect through this transaction, GIH acquired control of this company, 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 does not necessarily have control over the new cash. And it's likely that the KD83 million in debt remains a legal obligation of GIH so that impacts GIH's (the Parent's) cash position contrary to the impression from the consolidated numbers.  It's not only down KD28 million but another KD83 million.  This transaction may also be a very convenient way of dealing with a troublesome issue as discussed below - Saudi Mazaya.

Page 58 reveals that Al Thouraia Project Management Company was established in 2008. Having raised a large amount of capital for no doubt worthy investments, it decided to place most of it with a single financial institution – which technically was not a bank but a entity with an investment firm license. Now why would Al Thouraia's highly responsible board do something like that?   Of course, some out there asked similar impertinent questions about the placements by Global MENA Financial Assets with GIH.

Well, it knew the credit of GIH intimately as this press release shows. And as we learn there: 

"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." 

If you've been reading the readers' comments to this blog (where you will often find more informed comment than in the main articles), you have seen The Rageful Cynic's link to a post on the saga of Saudi Mazaya.

Debt Rescheduling - "The Most Short-Sighted Unrealistic Deal of 2009"

Note 29 Page 61-62 details the debt rescheduling.  To put my comments in context, note that this US$1.7 billion equivalent deal is secured by US$1.4 billion in principal investments and US$0.3 billion in real estate.  All conveniently hived off into separate companies so that that the lenders should have an easier time of taking ownership.  They merely have to take the equity in the holding companies.  No need to re-register a plethora of individual assets in their own name.

This transaction, as GIH constantly reminds us, won the "Most Innovative Deal" by Euromoney for the Islamic tranche. And you can read more praise on pages 20 and 21 of GIH's 2009 annual report.  Earlier GIH also issued a brochure full of self praise.

After looking through the terms of the deal, I'd like to belatedly award the entire transaction "The Most Short Sighted Unrealistic Deal of 2009". 

A charitable soul would be likely to give GIH's management the benefit of the doubt – that they were coerced into signing this deal.   In evaluating this it would be useful to know just how hard they fought these terms, if at all.

I'm at a loss to find even a single kind word to say about financial institutions that would impose such a deal on a borrower. Banks are not to be faulted for trying to get back the amounts they loaned. But the terms of a rescheduling should be designed to minimize the damage to the borrower.  Milk the cow don't kill it.  

This deal, as you'll see from the details below, does not do this but sets a thoroughly unrealistic repayment schedule and then couples it with interest rate step ups and other onerous clauses. 

Repayment Schedule:

1. Year 1: 10% 
2. Year 2: 20%. 
3. Year 3: 70%. 15% in the first six months, 20% in the next six months and 35% at year end. 

Did anyone in their right mind think this was achievable without causing great damage?  That markets would recover that fast?  Did anyone notice that GIH has almost KD41 million in bonds maturing during Year 3 on top of this debt service? Even if markets have recovered a sale of that size - a literal fire sale - is likely to burn a lot of value up.

Interest Rate: 

1. Year 1: 1.5% plus Libor, EIBOR or Central Bank of Kuwait discount rate). 
2. Year 2: An additional 1% on the margin, taking it to 2.5%. 
3. Year 3: An additional 1 % on the margin, resulting in 3.5%. 

The interest rate step-up is designed to put pressure on GIH to meet the unrealistic repayment schedule. It's hard to see the rational rationale for this.  If the term were longer, say 7 to 10 years, this might make sense (though with the step ups a little more spread out).  But with the short tenor, it doesn't make a lot of sense. How many whips do you need to apply to the horse?   And, if GIH can't sell its assets, another 1% is not going to suddenly cause them to do so.

Fees: 

1. A 1% flat fee on the amount of the rescheduling.
2. Plus 0.25% of the amount rescheduled starting on 15 December 2008 to the date of signing. Both amounts to be capitalized. 
3. Then 24 months after signing another 1% flat fee on the amounts outstanding. Also to be capitalized.   A third whip?  Same comment as above.  If GIH is in a tough spot, an extra 1% on the debt isn't going to move them one way or the other.

Covenants:  

GIH commits to maintain: 

1. Asset value to debt outstanding of .75x. 
2. From 30 June 2010 a minimum Capital Adequacy Ratio of 5% increasing to 7% from 1 July 2011 through final repayment 9 December 2012. 
3. If GIH fails to repay 40% of the original facility amount by the second anniversary, the banks have the right to convert the shortfall into GIH shares. 
4. Finally, the proceeds of any new equity raised must be used to prepay the rescheduled debt. Funny I must have missed that point in previous discussions about GIH's approval of its Rights Offering. Did anyone (including GIH's wise creditors) think that potential shareholders are going to be excited about buying new equity in a firm that can't pay dividends and where the proceeds of the offering will not be used to build the business but to pay back apparently rather greedy lenders? Might it not have been a better idea to let GIH raise capital without requiring that it be used for debt prepayments? On the theory that additional capital would build the business capacity which would strengthen the banks' position.  And of course once the cash was in the till, it could be used for cash shortfalls on debt repayments?  Looks like a case of "wise" bankers shooting themselves in the foot.  One wouldn't use the expression "shoot themselves in the head" here as it's pretty clear there would be more damage caused by a bullet in the foot than one in the head to this wise collection of lenders.

No wonder the lenders were besides themselves with effusive praise for GIH and its management. It seems that GIH gave them everything they asked for. Or perhaps just about everything.  Whether this is all achievable or makes the best sense for the banks is debatable.

The only thing I can think of that would justify such terms would be a profound lack of faith in management - probably based on an adverse assessment of fundamental ethics.  That clearly can't be the case here.  Can it?

Global Investment House - Initial Comments on 2009 Financials

More detailed analysis will require a copy of GIH's complete 2009 financials, but here are some initial  and very quick comments.  All amounts rounded to nearest KD 1 million.

LIABILITIES & EQUITY

We'll start here because GIH's central issue is now management of its capital structure, repayment of liabilities while maintaining sufficient capital to support debt market funding (based on the assumption that GIH is a going concern and intends to continue business after repaying its debt). 

1. Total Liabilities and Equity declined KD420 million.
2. Total Liabilities down KD303 million.
3. Total Equity down KD 117 million.

LIABILITIES

1. As noted above, a KD303 million decline.
2. GIH has changed its presentation from the original 2008 annual report and from that in its 3Q09 annual report.  Something that makes analysis a bit more difficult.  What was the change?  Previously, Wakala deposits were broken out.  KD143.5 million at 31 December 2008.  KD44.6 million at 3Q09.  I'm always a bit suspicious when presentation changes like these occur which are not caused by the implementation of new accounting standards.  What could be the reason?  Without the 2009 notes, it's not clear if all Wakala have been repaid.  But I'm guessing they have.  Looking at GIH's 3Q09 financials, we see that some KD23 million in Wakala were repaid during the first nine months of 2009 along with KD18 million in other short term borrowings for a total of KD41 million.  In the full year 2009 KD34 million of short term borrowings are shown as being repaid.  Hard to explain how GIH could unrepay roughly KD6 million (lower figure reflects impact of rounding to nearest million).  Perhaps there will be something in the notes.  What we do know looking at 31 December 2008 and 30 September 2009 is that Wakala were down some KD99 million.  Since Wakala no longer appear as a separate category, they may have been reduced to zero.  In which case KD143 million would have been repaid.  Of which it would appear only KD23 million in cash.  The rest through asset swaps.  You'll recall that GIH had borrowed some rather large unconscionable amounts from Global MENA Financial Assets.   Now if I remember things correctly, GIH said it had stopped all payments to creditors in December 2008.  So these creditors got out.  The rest of GIH's creditors are "stuck" in a multi-year restructuring.
3. In fact on a gross basis - excluding GIH's bonds - borrowed funds have decreased some KD191 million from FYE 2008 to FYE 2009.  Repayments of only KD34 million are shown in GIH's Consolidated Cashflow Statement so the rest were either forgiven (highly unlikely) or settled via asset exchanges. 
4. Also GIH's bonds were down some KD29 million.  This brings the decline to KD220 million.
5. For a company with a debt standstill, it sure seems a lot of debt was "retired" during 2009.
6. Finally "Other Liabilities" are down some KD83 million.  Looking at the 3Q09 financials, this appears to have been concentrated in Payable for Investment Properties which was down some KD63 million at 30 September 2009.  We'll have to wait for the full 2009 report to determine what were the sources of the other KD20 million.

 EQUITY 

1. Two movements in Equity which resulted in the overall KD117 million decline.  
2. A reduction in controlling interests share of Equity by approximately KD141 million.  This is the net loss of KD148.8 million offset by a variety of factors, primarily a KD11 million increase in fair value on available for sale assets not taken through the P&L.
3. An increase in non controlling interests equity position by KD24 million (from KD36.3 mm to KD59.9 million).  Unclear what is behind this.  Perhaps, GIH sold shares in some of its associates to other shareholders?  There are a couple of tantalizing cash inflows in the Investing Activities section of GIH's 2009 Consolidated Cashflow Statement.  But without details its hard to say.

ASSETS

1. Two major drops. 
2. Financial Assets Fair Valued Through the P&L of KD173 million.
3. KD103 million in Investments in Associates.
4. To be looked at in more depth when full financials are available.

INCOME

1. Without the notes, I don't see much point in spending a lot of time on revenues.  Net net they were about the same as in 2008.   A loss of more than KD40 million. The question is when GIH can turn this around.  If it is to remain a going concern, it needs to get revenues going again.  Cost cutting is only to get it so far.
2. GIH's net income improved primarily from lower impairment provisions - roughly KD125 million lower than 2008.
3. A few items caught my eye.  Personnel Expenses were KD12 million in 2009 versus KD7 million in 2008.  Is this separation payments?   It doesn't look like there's a footnote for this expense category, but we'll have to wait until the 2009 financials to see if there's a further explanation.  Perhaps even curiouser is the treatment of these expenses in 3Q09 financials  when PE for the first nine months of 2009 and 2008 are shown as KD 7 million and KD 15 million.
4. Other operating expenses were KD20 million versus KD 14 million in 2008.  Cost of the restructuring?  Also a similar anomaly in 3Q09 financials where the respective numbers for the first nine months of 2009 and 2008 are shown as KD14 million and KD8 million.
5. Also interesting is the share of the net loss attributable to non controlling shareholders.  It's 0.38% for 2009 and 1.05% for 2008.  Non controlling interests of course are not necessarily in all of GIH's in the same percentage.  From 3Q09 financials, it seems there was a turnaround in 3Q.

Kuwait Stock Exchange Requires Global to Get Shareholder Approval of Asset Transfers

AlQabas has a news item that the KSE has sent an official notice to Global Investment House that it must hold a general shareholders meeting and obtain shareholder approval to the transfer of the firm's assets to the fund created in Bahrain before the KSE will give its approval.  The establishment of the fund in Bahrain is part of the restructuring agreement and will hold all GIH's equity/financial investments.  Another fund will be created in Kuwait to hold real estate assets.  More details on the restructuring agreement here.

Readers of this blog will know that GIH has already begun the re-registration process of certain of its assets  - GIH's shares in Global MENA Financial Assets.  Earlier post here.

Kuwait Ministry of Commerce and Industry Takes Action Against Abuse of Related Party Transactions

Earlier AlQabas had reported that the Kuwaiti Ministry of Commerce and Industry (MOIC) had discovered material violations in related party transactions undertaken by Kuwaiti companies. Earlier post here.

AlQabas now reports the Department of Shareholding Companies has written a general circular to a number of companies in which it requires that they return funds withdrawn from their companies for certain transactions described as related party transactions. Or that they provide a firm undertaking to do so. Both to be accomplished this year. The penalty for failure to comply is that the MOIC will refuse to allow these companies to found new companies.

The MOIC took this step after it discovered that companies were withdrawing funds under the pretext of related party transactions. An action described as "fraudulent" (tadlis) and hiding the true position of the companies from their shareholders. The financial crisis was offered as an explanation for companies abandoning sound principles for related party transactions.

One particular prominent set of violations were intercompany loans between parent and related companies. It was noted that many of these were now in the process of regularization through settlement via transfer of ownership of shares. Another violation mentioned was that by investment firms who extended loans from funds they managed for other parties. The article closes by noting that these excesses (literally exceeding proper bounds) give rise to suspicions that there was collusion for benefit among companies, members of boards of directors or members of executive management.

Taking the AlQabas story as accurate there are a few conclusions we can infer:

1. The pattern of "looting" companies to benefit another is sufficiently widespread and/or the amounts involved are sufficiently substantial. Otherwise the MOIC would deal with a small problem much more quietly.
   
2. Unspoken is if there will be recourse to the public prosecutor. Perhaps, the intent is to allow the companies an opportunity to put things right.  If they do so, no prosecution.  And if not, then ...
   
3. The reference to investment companies "raiding" funds they manage to lend to themselves is intriguing. There is only one public instance of this that I am aware of: the very substantial sums of money advanced by Global MENA Financial Assets to Global Investment House. And just recently the last remaining obligation was agreed to be settled by a share swap. Earlier posts here and here and here and here and here.

Global MENA Financial Assets Update

Some news on Global MENA Financial Assets ("GMFA") from the London Stock Exchange:

(1) GMFA's EGM has approved settling the debt with Global by taking shares in AlFajer.  60.3 million shares voted "yes".  6.6 million no.  The "Yes" votes were 90.2% of those voting.  However,  GMFA has 252 million shares so the "Yes" vote represents 23.9% of total shares. In any case GIH's obligation to GMFA is now extinguished in exchange for the AlFajer shares.  As per GMFA's notice to the LSE, the formal re-registration of the shares will take place in January.  Earlier post here.

(2) The Board of Directors of GMFA has informed the LSE that it intends to ask the shareholders to vote to delist.  The reason is essentially to get around the IFRS requirement that the quoted price of the shares be used to determine their value for financial statement reporting for shareholders preparing financial statements according to IFRS.  The justification is that the shares are thinly traded and are trading below market.

(3) An EGM is scheduled for 27 January to vote on this measure.

(4) GMFA has filed the necessary notice with the LSE to advise that Global Investment House's shares in GMFA have been transfered to Global MENA Macro Fund (as per the requirements of the restructuring agreement).

Earlier posts on GMFA and Global can be found by using the respective labels on Suq Al Mal's homepage.

Global MENA Financial Assets LSE Announcement on AlFajer

Here's Global MENA Financial Assets announcement on the proposed debt for equity swap with Global Investment House ("GIH").

From the announcement, it seems that AlFajer isn't doing well right now.  However, GMFA's directors appear to believe it is a company with a lot of potential.   Or at least perhaps more potential than GIH.

Two paragraphs in the LSE release caught my eye.  Maybe they will catch yours as well.  Blue italics are courtesy of AA.

Taking the two statements at face value, it would seem that the Directors of GMFA who include Ms. Maha Al-Ghunaim, CEO of Global Investment House (though of course she may be a dissenting board member on this view) have a rather dim view of the recoverability of amounts due from Global.

1. "The agreed consideration will be the waiver of amounts owing from Global to GMFA under the Islamic finance contracts entered into between GMFA and Global (the "Global Financing Contracts"). As a result, the Company's exposure to Global under the Global Financing Contracts will be entirely eliminated. The Directors believe that this would be a very positive outcome given concerns over the recoverability of these amounts."
2. "As at 31 March 2009, KD48.6 million ($170.1 million), representing approximately 95.7 per cent. of the Al Fajer shareholders' gross assets was invested in short term assets and money market instruments. Due to the turmoil that has impacted financial markets recently, Al Fajer faces counter-party risk in relation to some of these investments. Al Fajer has made a provision of KD2.5 million ($8.9 million) in respect of these investments in its 31 March 2009 financial statements. As at 30 September 2009 approximately KD20 million ($69.9 million) of Al Fajer's investments were subject to a freeze on redemption. Since this time, approximately KD0.58 million ($2.0 million) has been received and the balance is currently in the process of being restructured."
   

Global Investment House Proposes Asset Swap to Global MENA Financial Assets

AlQabas reports that Global Investment House ("GIH") has proposed to swap its 20% share in Fajr Reinsurance Company as settlement of amounts owed to Global MENA Financial Assets.

Two earlier posts here and here.  Others can be accessed via the labels Global Investment House and GMFA.

I'm still a bit unclear on how/why GIH's creditors are tolerating the settlement of Global's obligations to a related party (Global owns roughly 30% of Global MENA Financial Assets) in full and without any rescheduling of obligations.  

Perhaps, it's that the amount is minor (US$40 or so million) in the context of Global's total rescheduling.  Creditors do seem to have agreed to GIH paying off its existing bonds (KD89.5 million - US$313.5 million) at their maturity dates.

I'm guessing the argument is that failure to settle these obligations might create potential legal problems that  would potentially upset the  KD500 million restructuring.  Or that it will be impossible to get the "widows and orphans" who hold these instruments to agree.

If you're wondering, no, AA doesn't actually think that widows and orphans hold these obligations.

Global Investment House - Treasury Share Purchases 4Q08

As companies encounter financial difficulties, their business comes under more intense scrutiny.  This is part of the breakdown in trust that initially occurs when a borrower tells a lender that it cannot meet scheduled repayments or when a formerly high flying company has reversals. 

Suddenly the best customer in the world is a scoundrel - proving once again the old definition of  the commercial banker is well founded.  What is a commercial banker?  He's a guy who gives you an umbrella on a sunny day.  And at the first drop of rain wants it back immediately.

GIH is not immune to this process.  In an earlier post Suq Al Mal looked at the funding relationship between GIH and GMFA, a London Stock Exchange listed fund (of which GIH holds 29.99%) which has come under the review of at least one regulator.  The link to that earlier post is here.  There are several open questions from that post.  The key one is how GIH reportedly repaid deposits  taken from GMFA early (presumably before maturity) after it had declared a principal standstill on bank and bond debt.

Another topic that attracted attention is the dramatic 4Q08 increase in GIH's holdings of its own shares ("Treasury Shares"). Many analysts noted that between 30 September 2008 and 31 December 2008,  these increased from 20.5 million shares worth KD20.1 million to 81.9 million shares worth KD59.0 million.

This is the topic of this post.

One unsubstantiated rumor was that GIH had bailed out a substantial shareholder as it ran into difficulties.

As noted above, that theory is a rumor.

 

In the absence of Kuwait Stock Exchange mandated public disclosure of  details by a company in dealing in its own shares (as occurs on the LSE, for example) there is no conclusive answer.

However, it is possible to use GIH"s financials to investigate this issue a bit further.

The first line of inquiry is to see if Treasury Share purchases are out of the ordinary.  In other words, did these only occur to any extent during 4Q08?  Or does GIH have a consistent pattern of dealing in its own shares?

By looking at the Consolidated Statment of Changes in Equity GIH's quarterly financials, it is clear that at least during 2007 and 2008, GIH regularly traded in its own shares often in sizable amounts.

The following list summarizes 2007 activity:

1. 1Q07 Opening Balance: KD20.5mm Purchases: KD5.8mm Sales: KD1.8mm Closing Balance :KD24.4 mm.
2. 2Q07 OB: KD24.4mm P: KD16.8mm S: KD36.3mm CB: KD5.0mm.
3. 3Q07 OB: KD5.0mm P: KD12.1mm S: KD13.6mm CB: KD3.5mm.
4. 4Q07 OB: KD3.5mm P: KD41.4mm S: KD43.3mm CB KD1.5mm.

And here's 2008's activity.

1. 1Q08 OB: KD 1.5mm P: KD 8.6mm S: KD 2.5mm CB: KD7.7mm.
2. 2Q08 OB: KD 7.7mm P: KD30.3mm S: KD25.2mm CB: KD12.7mm.
3. 3Q08 OB: KD12.7mm P: KD 7.4mm S: KD 0.0mm CB: KD20.1mm.
4. 4Q08 OB: KD20.1mm P: KD49.0mm S: KD10.1mm CB: KD59.0mm.

I have not seen an explanation by GIH for this activity.  My guess is that these transactions were undertaken to support GIH's share price.

The next line of inquiry is to see if the price paid during 4Q08 was out of line with the market price.

The first step in that process is estimating the average cost per share GIH paid for the shares purchased during 4Q08.

Looking at the above information in conjunction with that in the Treasury Shares Note in GIH's financials, we can do just that.  At 31 December 2009,, GIH held 81.924 million of its own shares acquired at a cost of KD59.029mm or KD0.721 per share.

We can further decompose that aggregate cost into two components:  shares purchased during 4Q08 and those acquired earlier.

From an analysis of GIH"s financials, it seems Treasury Shares are accounted for on a FIFO basis.  If that assumption is correct, the average cost of the shares acquired during 4Q08 is KD0.683 per share.  Cost allocation to the KD10.1mm of share sales in 4Q08 would be from shares purchased earlier.  Using 3Q08 data, that would mean that after the 4Q08 sale, 10.438mm shares (from those held at the end of 3Q08) with an aggregate cost of KD10.236mm were part of the 4Q08 ending balances.

By simple arithmetic the number of shares GIH acquired in 4Q08 would be 71.486 mm shares (81.924mm - 10.438mm).  These "new" shares would have been responsible for KD59.029mm - KD10.236mm in cost (KD48.793mm)  which is fairly close to the cost of 4Q08 purchases reported in the 4Q08 financials.

Turning to KSE price data for GIH shares, we see the following:

1. From 1 January 2008 until 31 August 2008, GIH's shares traded in a fairly narrow band oscillating around KD1.000 per share.
2. In September the shares began a decline reaching KD0.770 at the end of the month.
3. During October the shares declined further to approximately KD0.485.
   
4. In November the shares traded in the KD0.400's ending the month at KD0.410.
5. In December the shares traded downward reaching KD0.242 on 23 December where they remained for the rest of the year.

Clearly, in order to achieve an average price of KD0.683 on the shares bought during 4Q08, they would have had to be purchased during October.

Let's look at KSE volume data based on the assumption that all share purchases and sales have to clear through the KSE.

There were several large trading days during the month: 

1. 8 October 16.7mm shares for KD9.7mm
2. 9 October 15.5mm shares for KD10.3mm
3. 14 October 14.7mm shares for KD9.8mm
4. 15 October 13.5mm shares for KD9.1mm
   

With the assumptions and analysis above, it is during this period that the shares would have to have been purchased if they cleared through the Exchange.

I'd also note that there were a series of six large identical trades on 4, 7, 8, 9, 10 and 11th December.  All for 55,920,000 shares at a price of KD21,530,950 at a per share price of KD0.385.

These trades seem to have been a calculated attempt to stem the decline in share price.  Besides pride there are a variety of other possible reasons for supporting a share price as anyone familiar with the closely related terms "Kuwaiti investor", "pledge", and "leverage" would know.    

You may be thinking:  why don't these trades - which total KD129.2mm -  appear in GIH's 4Q08 financials. Why aren't both Purchases and Sales for 4Q08 each KD129.2mm higher?  Good question.  I'm presuming because they were rollover transactions or offset by other transactions GIH did not have to include them.  If they were not GIH trades, then there is a very intriguing (notice I did not say interesting) question as to who did and why?

After this intervention stopped, the share price declined to KD0.242 at year end dropping eventually to double digits in 2009 before recovering later this year to just under KD0.100 today.

So this analysis has not provided a definitive answer to the rumor cited above.  One bit of further information, the timing of the purchase dates could go a long way to resolving this issue.