Global Investment House Kuwait - Seized Deposits

As per GIH's financials, two deposits totaling KD115 million (US$402.6 million) have been attached or otherwise seized by third parties and are now the subject of legal actions. 

KD71.75 million of this amount relates to an investment that GIH had intended to make in National Bank of Umm AlQawain ("NBQ") for KD183.6 million (US$642.5 million) to purchase a 20% stake.  The two parties signed an MOU in July 2008.  GIH placed the equivalent of KD 71.75 million (US$249.9 million)  with NBQ.  (I suspect the amount placed was US $ or AED as the amount fluctuates from one quarterly report to another.  It would not if the amount were denominated in KD). 

Subsequently, GIH obtained commitments for a US$410 million loan to fund the remaining amount of the purchase price.  In November 2008, it decided not to proceed, canceled the loan and asked for its deposit back.  

NBQ refused alleging breach of contract.  See NBQ's 2008 Annual Report Note #13. (You will have to page through this as it is interactive).

Reportedly, a court in the Emirates gave the first round to NBQ.  No doubt there will be several more rounds.  The two parties' legal arguments are summarized in this article.

The second amount, KD43.2 million (US$148 million), is a deposit placed with a Kuwaiti bank by a subsidiary of GIH (AlThouraia) which that bank offset against obligations owed to it by GIH.  

The total KD 115 million represents roughly 0.1% of GIH's total cash of KD89.6 billion.  From that standpoint it's not a highly significant amount.  

From an equity standpoint, if GIH were to lose the court case against the Kuwaiti bank, the result should be no impact on equity as it would merely be a substitution of liabilities - the liability of GIH towards the bank replaced with one towards AlThouraia.  At some point GIH would have to make its subsidiary whole by transferring funds or other value.

With respect to the NBQ case, it's difficult to make a statement.

It is hard to understand the basis for this lawsuit.  In other words hard to fathom how a properly worded MOU could create a contractual obligation.  But then again AA didn't understand the structure of the convertible bond agreed to by Shuaa Capital and Dubai Banking Group.  Since the NBQ/GIH deal is also structured as a convertible, it may be that some cutting edge financial innovation in the Gulf has produced  a breakthrough in convertible deal structuring.  Or then again maybe just a breakdown. 

In any case, it's hard to imagine the UAE court confiscating GIH's deposit in toto.   

However, even if it did, the damage should be containable.

Global MENA Financial Assets Ltd (GMFA) /Global Investment House Kuwait - Review of GMFA's 31 March 2009 Financials

Following up on my earlier post, today we'll take a more in depth look at GMFA's Audited Financials for the Fiscal Year Ending 31 March 2009  (the "Report"). 

As in my last post, I will again let the Company speak for itself.  These verbatim quotes will be enclosed in quotation marks.  Any observations or tafsir I have will be in parentheses in italics and preceded by AA.

First, let's turn to one of the topics that has caught the attention of more than one observer:  funds placement transactions between GIH and GMFA.  As noted GIH owns 29.99% of the shares of GMFA and has representation on GMFA's Board of Directors.

From the Report, we learn the following:

1. Note 3 (e) Page 58:  "The total maximum lending to Global under the Murabaha contracts peaked at US$140 million and subsequently reduced to $47,765,800 at 31 March 2009 excluding wakala contracts."  (AA:  Using US$500 million as a rough estimate of GMFA's total assets, that would mean placements with GIH by GMFA were 28% of assets.  If we remove the US$250 million represented by the investment portfolio, GMFA's liquid assets were approximately US$250 million.  Thus, the placements with GIH appear to have been roughly 56% of GMFA's liquid assets using our admittedly crude analytical technique).
2. Directors' Report "Corporate Governance" Section Page 39: "Three murabaha transactions amounting to US$88 million were repaid early by Global on 15, 17 and 22 December 2008 respectively and monies were placed with the Company’s bankers, HSBC Bank plc."  (AA:  The full significance of the term "early" is not explained.  Does this mean prior to maturity?)
   
3. GIH Financials Scope Limitation Section in GIH's auditors report on GIH's interim financial statements for the first nine months of 2009:  "Furthermore on 15 December 2008 the Parent Company defaulted on the repayment of a USD 200 million  (KD 55 million) syndicated facility and subsequently suspended any principal repayments towards the banks and financial institutions falling due after the default date."
4. GMFA's Report, Footnote 11, Subsequent Events Pages 64-65: "On 4 June 2009, Global and its subsidiaries repaid US$9.6 million by way of partial repayment of the total principal amount owing under murabahas reducing the Group’s exposure to US$38.1 million.
   Towards the latter part of 2008, the Group started assessing the feasibility of acquiring two assets from Global. In June 2009, the Company, through one of its Subsidiaries, acquired a minority holding in Twenty Third Project Management Company W.L.L. and consequently an indirect interest of five per cent. in Dar Al Tamleek Co. (also known as Saudi Housing Finance Company), a mortgage finance company incorporated and based in the Kingdom of Saudi Arabia offering Shari’ah compliant mortgage financing products, from Global. The consideration for the acquisition, US$4.1 million (KD1,200,210) was set off against a corresponding amount owing under the murabaha contracts reducing the Company’s exposure to US$34.0 million.          
   The Company remains in negotiations with Global regarding the possible acquisition of a further asset, which is intended to further reduce the amount owed by Global and its subsidiaries to the Group to nil. The Company will inform shareholders, on behalf of the Group, in respect of any material developments with respect to the possible acquisition of this asset, but there can be no certainty that an agreement can be reached to acquire this asset, in which case, the Group’s exposure to Global and its subsidiaries will remain outstanding at US$34.0 million. At the balance sheet date, the Directors of the Company resolved to impair the Global murabaha by 25 per cent. or US$8.5 million, based on the principal amount outstanding US$34.0 million."

Second, some other interesting items from GMFA's Report.

1. Management Fee Expense and Payments: As per the Report Footnote 3 (a) Page 57: "The management fees expensed for the period amounted to US$6,878,143. The management fees outstanding at 31 March 2009 were US$2,175,596."  (AA:  This means that GMFA has paid the difference in cash to the Investment Manager, Global Capital Management Ltd, a subsidiary of GIH, = US$4.702,547).
2.  Management Fee Calculation:  As per the Report also Footnote 3 (a) Page 57: "The Investment Manager is entitled to a management fee, payable quarterly in arrears, at an annual rate of 2 per cent. of the Net Asset Value of the Company.  The Investment Manager is a related party of the Company and is a wholly owned subsidiary of Global."  (AA:  The Net Asset Value is equal to assets minus liabilities.  Therefore, NAV includes GMFA's cash and deposit holdings plus the Islamic finance transactions. As at 31 March 2009, the Report shows that these assets totaled some US$226.3 million or roughly 51.1% of GMFA's total assets of US$442.3 million.  As well, as per Note 4 on Page 59, US$21.3 million of GMFA's US$214.5 million  in carrying value for its Investment Portfolio was comprised of a GIH payment obligation - the Put Option Derivative cancellation fee.  At current short term US Dollar interest rates the Investment Manager has a challenging task in finding earning opportunities in the deposit market in excess of its Management Fee).
3. Intercompany Loan Repayment:   Again as per the Report Footnote 3 (a) page 57: "The initial portfolio was transferred to the Company through an intra-group loan facility extended by Global, which was repaid in December 2008".  (AA:  I didn't see the loan amount in the Report.  However, it does appear in) GMFA's 30 September 2008 Interim Report on page 40 in Footnote 8: "Since inception of the Company, an intra-group loan facility has been provided between Global Investment House, the Company and its Subsidiaries. All intra-group loans between the Company and its Subsidiaries have been eliminated upon consolidation. The loan of US$8,949,303 outstanding at 30 September 2008, is payable to Global Investment House. The loan is non-interest bearing and repayable on demand."
4. Legal and Accounting Fees:   As per the Directors' Report Page 38:  "During the period the Company incurred fees of US$432,984 comprising legal and accounting fees in relation to the work undertaken by the Murabaha Committee".  (AA:  It is unclear to me whether this is (a)  for the period from late December when the Board became aware of the transactions through 31 March 2009 or (b) from the date of the formation of the Murabaha Directors Committee on 2 March 2009).
   

 Link to earlier post.

Global MENA Financial Assets Ltd (GMFA) /Global Investment House Kuwait

GMFA is a closed-end investment company incorporated in Guernsey on 2 June 2008.  It is listed on  the London Stock Exchange.   LSE link here.

GMFA was formed with the intent of investing in financial assets in the MENA region (including Turkey)

Global Investment House Kuwait ("GIH")  holds 29.99% of GMFA.   GIH is in the midst of major debt restructuring - which hopefully will be the subject of another post in the not too distant future.

Other major shareholders, aggregating 42% of the total, are detailed on page 41 in the Annual Report mentioned below.

Global Capital Management Limited (“GCM”), a subsidiary of GIH, is the Investment Manager for GMFA.

I've just seen GMFA's audited Annual Report and Consolidated Financial Statements for the period 2 June 2008 (inception) through 31 March 2009 (the "Report").

These are their first audited financials and so are of interest, especially given the current GIH debt negotiations and the links between the two companies outlined above.

Rather than interpreting the Report, I'm just going to quote verbatim from it to let the Company speak for itself.  I think you'll find this informative even though you'll have to spend a bit of time reading.  Plunge in.  I think you'll find it well worth your time. 

In a few places I have added some comments in italics preceded by "AA" to identify them as mine and distinguish them from the text of the Report.  These are references to other portions of the Report or to information on the LSE website.  Because the LSE website uses pop-up boxes, I can't provide links.

I would strongly encourage you to read the entire Report to hear all that the Company and its Directors have to say.

From the Chairman's Statement

(1) Islamic Money Market Instruments (Pages 5-6)

"As at 31 March 2009, the Company held cash, deposited with HSBC, Citibank and Standard Chartered Bank of US$145.1 million and Islamic money market instruments in the form of agency agreements (wakalas) and murabahas with various entities: Global and its subsidiaries, two Kuwaiti companies and one Jordanian company, with an aggregate face value, gross of impairments, of US$107.2 million (plus profit).

In the unaudited non-statutory interim accounts as at 30 September 2008, cash deposits of US$273.8 million were shown. Due to a misunderstanding between the Company’s service providers, money market instruments amounting to US$140.0 million, which had been acquired in August 2008 with Global and its subsidiaries, were recorded as cash at Bank of New York and shown in the accounts as such, whereas the wakalas with two Kuwaiti companies of US$74.9 million were shown as foreign currency cash. Although this was a wrong description, it did not affect the net asset value of the Company.

The Board was not aware that the Company and its subsidiaries (the “Group”) had entered into Islamic money market instruments until late December 2008. Following this discovery, the Board engaged its Auditors to review the Group’s accounting entries so that the Board could be satisfied that the Group’s accounting records accurately reflected the Group’s assets. In addition, the Independent Directors gave instructions to the Investment Manager to seek the immediate repayment of monies invested in murabaha arrangements, to terminate all the murabaha arrangements, and not to enter into any further murabaha arrangements or to agree revised terms without the Independent Directors’ approval.

At this time, the Board also learned that the Company, through its wholly-owned subsidiary, FAB, had entered into a further three Islamic money market instruments with Global, a substantial shareholder of the Company and the parent company of the Investment Manager, and its subsidiaries, for an aggregate principal amount of $47.8 million (plus profit). Subsequently, this amount was reduced to US$34 million. The Board also learnt that the Company, through its wholly-owned subsidiary, FAB, had entered into two Islamic money market instruments with two Kuwaiti companies (other than Global) in August 2008, which were later renewed in November and December 2008, on which Global acted as Islamic financing agent, for a total principal amount of US$74.9 million (plus profit) and an Islamic money market instrument was entered into with a Jordanian company in December 2008 for a total principal amount of JD3.0 million (US$4.2 million) (plus profit).

Due to the conflicts of interest existing between the Company, its Investment Manager and two of its directors (by virtue of their position within Global), a committee comprising the  independent directors of the Company was established at the beginning of March 2009 to deal with all matters and business relating to and arising out of the entry into of all of the Islamic money market instruments (the “Murabaha Committee”). The Murabaha Committee, comprising myself and John Hawkins (joined by Terrence Allen and Kishore Dash when they became directors of the Company in April 2009 and July 2009, respectively), has been working with the Investment Manager and the Company’s legal advisers, Ashurst LLP, on the recovery of the amounts invested in the Islamic money market instruments."

(2) Corporate Governance (Page  8) 

"You will see from the Corporate Governance Report that a number of issues have arisen during the year.  The directors believe that the issues have been satisfactorily addressed and that the appropriate internal controls and systems are now in place. There is an issue as to whether or not murabahas were permitted investments but the Board has clarified the position by restricting the holding of cash to deposits with banks of high credit standing and with strict exposure limits.  The Board hopes that it will succeed in negotiating a satisfactory recovery of the monies invested in these murabahas. The Board recognises the importance of the continued co-operation of the Investment Manager in attempting to recover the outstanding monies owed under these arrangements."
(AA:  The Directors' Report on Corporate Governance is on pages 39-40.  The Directors' Report also contains discussions of other matters relevant to corporate governance, various board committees, internal controls, special committees formed by the Independent Directors, etc).
  

From the Directors' Report

(1) The Put Option (Page 38-39)  

 "At Admission, the Company acquired six unlisted companies from Global comprising part of the initial investment portfolio at a cost of US$152 million. Global granted the Company a put option on these unlisted assets at an aggregate strike price of their acquisition cost, such option to be exercised by serving notice on Global during the period beginning on the first anniversary of Admission and the close of business on the thirtieth day thereafter.

The Directors have considered carefully whether or not to exercise the put option, balancing the attractiveness of the investment portfolio against the deteriorating economic outlook caused by the dramatic events in global capital markets, the current financial position of Global and the Company’s existing outstanding murabaha with Global.

                                                                                         
As announced on 17 July 2009, following discussions with Global, the Directors agreed, subject to all necessary regulatory requirements, to terminate the put option agreement for a payment of US$21.259 million from Global. The Board believes there is significant value which can be derived in time from these six investments and indeed the value of two of the investments transferred has increased over the period from Admission to the first anniversary of Admission. Thus whilst the investment portfolio has, as a whole, continued to perform well, the valuation of four of the six investments concerned has been impacted by the fall in markets. The payment to the Company of US$21.259 million represents the difference between the value of these four investments as at 30 June 2009 and their acquisition cost.

 
The Directors propose to distribute this cash, which is expected to be received on or before 15 September 2009, by way of a special dividend to shareholders in due course."                                        

(AA:  As per information at the LSE website link provided above, at the shareholders' EGM on 29 October 2009, roughly 82% of shares present voted for the Board's proposal to cancel the put option against the US$21.259 payment.  Shareholders representing roughly 30% of GMFA's total shares were present for the vote.  In effect then the motion was carried by approximately 25% of GMFA's shareholders.  I'd also note that it is common that many shareholders do not show up for an AGM or EGM, even when very important matters are on the agenda). 
          
(2) The Investment Manager (Page 40-41)

"Having considered all the issues, the Directors consider that in the circumstances the continued appointment of the Investment Manager on the terms agreed continues to be in the best interest of the shareholders and the Company. In reaching this conclusion, the Directors have considered a number of factors, including the views of Global and a number of the Company’s other shareholders (see the section below entitled “Relations with Shareholders”), as well as the options available to the Company.

The determining factors were the Investment Manager’s relationship with the unlisted investments, the regional investor base and the support for the Investment Manager expressed by a number of shareholders."