Setback for Golden Belt Sukuk Holders

Worth Its Weight in Golden Belt Sukuks

On 27 January Citibank who are acting as Delegate for the Golden Belt Sukuk (the Company) advised that:

On 25 December 2019, the trustee of the financial reorganisation of Saad and Maan Al-Sanea pursuant to the Bankruptcy Regulation (Kingdom of Saudi Arabia Royal Decree No. M/50) informed that the Commercial Court in Dammam had rejected including the claims of the Company and the Delegate in the financial reorganisation. On 1 January 2020, the Company and the Delegate filed appeals against these decisions. The appeals will be decided by the Court of Appeal of Saudi Arabia

It’s highly likely that the estate-in-reorganization is insufficient to pay creditors a significant portion of their outstanding dues. Nevertheless, this is a setback for Sukuk holders.

Earlier posts on Golden Belt (10 in all) can be accessed using this link.

 

AlGosaibi v Maan AlSanea - Legal Case Summary and Status

Citi, the Delegate on Saad's Golden Belt Sukuk 1, has posted a notice on the BSE listing the legal cases  it is aware of involving Mr. Al Sanea and his companies as well as their current status.

Besides conveying useful information, the Delegate is putting Golden Belt Certificateholders on notice that other creditors of Mr. AlSanea and his companies are pursuing legal claims.  As long as Golden Belt Certificateholders are not, they are effectively in a junior position.

Why?

As I read the Delegate's last announcement, while a sufficient number of Certificateholders (more than 25%) have voted for Dissolution of the Trust, they have not indemnified the Delegate to its satisfaction.   That is, agreed to reimburse Citi for expenses.  Until that happens, the Delegate is not obligated to take the legal steps to dissolve the Trust, claim on the Repurchase Obligation of Saad Trading and Contracting, and in the event of non payment by STC pursue STC in Court.   Thus, the Certificateholders are effectively in a subordinate position against STC - they have an uncalled guarantee.  

The Delegate is doing this to cover its legal posterior.  In the event that the Certificateholders' recovery is adversely affected by failure to take action, the Delegate will have a legal defense that it has done all it  was obligated to do to protect their rights.

The thorny issue for Certificateholders is whether they agree to repay Citi for legal expenses involved in taking such actions.  Will the net recovery after the expenses be more than if they did not take action?

And this is I suppose as good a place as any to note that Mr. AlSanea still denies any improper or illegal behavior.

Golden Belt Sukuk #1 - Vote for Dissolution But Delegate to Take No Action

Citicorp as Delegate for the above transaction posted a notice on the BSE today that at least 25% of certificateholders had voted to dissolve the trust.  That in effect represents a sufficient vote to accelerate the maturity of the sukuk.  That means the issuer is obligated to pay.  As a shell company with no assets, the issuer will not be able to pay.  

At that point, Saad's purchase obligation will be triggered and the debt will become a direct unsecured liability of Saad.  

However, as pointed out in my earlier post, the certificateholders have no legal access to any real assets.  The land being "rented" in this transaction remains legally registered in Mr. Al Sanea's name.  So in effect they hold an unsecured obligation.  That means they will join the ranks of other Saad unsecured creditors - a large group both in terms of numbers of creditors and amount of debt.  That will enable them to take legal action against Saad.

So no guarantee of repayment.

One wrinkle, despite the vote, the Delegate does not have to take any action until it has been indemnified to its satisfaction.  Citicorp advises in the notice that it is not so indemnified.

I suspect the issue is certficateholder agreement to defray the not inconsiderable legal expenses associated with Citicorp taking action.  The issue is one of simple maths for the investors.  Will their ultimate recovery net of legal costs be positive?

Golden Belt Sukuk 1 - Inching Closer to Dissolution Event

Citicorp as Delegate has posted another update on the Bahrain Stock Exchange.

1. 22.2% of Certificateholders have voted for Dissolution.  A vote of at least 25% is required.  Earlier this month the vote was 13.62%.
2. The Delegate notes that it is not sufficiently indemnified to its satisfaction.
3. Saad has responded that as long as its assets are frozen it will not be proposing any rescheduling agreement.
4. The matters referred to in the Delegate's 2 February 2010 communication, e.g., Saad's failure to provide a promissory note for the next rental payment and failure to pay BSE fees remain outstanding.

Three comments:

1. It's unclear why it is taking so long for the Certificateholders to vote for dissolution.   This is an important step to protect their rights.  If we believe recent press reports, a large number of lenders are preparing to launch legal actions against Saad.  One doesn't really want to sue after other lenders have obtained judgments and may be in the process of enforcing them.  It's usually first come first served.  
2. Note the comment about the Delegate's lack of indemnification.  If you look closely at the announcement, you'll see that dissolution involves two things:  reaching the 25% vote and indemnifying the Delegate.  The Delegate is looking among other things for a commitment to be paid.
3. It's unclear why Saad would at least not provide the new promissory notes.  As you'll recall from my analysis of the structure of this transaction, the notes are a device designed to try and avoid a messy discussion about the "rent' (or interest) payments in Saudi Courts.  As the Offering Circular for the transaction warned, the periodic Payable Rental Amount (the "Rent") did not bear any discernible relationship to the underlying economic value of the land and thus just might be challenged in Saudi Court.  The pro note is an attempt to get around this by having the Rent as simple debt.  It couldn't be that Saad is attempting to weaken its creditors' case in a Saudi Court. The BSE listing fee is a trivial amount.  It would seem to be well within the living expenses granted Mr. AlSanea by the Courts.

Most recent earlier post here.  Other posts can be accessed using the label "Golden Belt Sukuk 1".

Awal Bank & The International Banking Corporation - Update on Legal Investigations Including House Arrest of Maan AlSanea (?)

Here's a summary of a 17 February report from  AlWatan Newspaper (Bahrain) on the latest in the AlGosaibi/AlSanea affair.   For those who are interested in Mr. AlSanea's fate, you'll want to at least read #7 below.

AlWatan's article is based on an "informed source".

First, the head of the Public Prosecution Nawaf (Abdullah) Hamza, has formed a  panel of independent experts to provide an independent opinion on the financial statements of Awal Bank and The International Banking Corporation.  (Digression from article:  While not stated by AlWatan, clearly this report will be used as part of the justification for the levying of charges.  In 2007 the Public Prosecutor's Office also known as   النيابة الكلية  was given jurisdiction over the investigation of all financial and economic crimes.  At that time Mr. Hamza joined the office leaving his post as Head of the Middle Prosecution Office, though at that point he was not made head of Public Prosecution).

1. The investigations continue at both banks.  Lately the focus has been on management and employees.  It's not clear just how far down the management ladder the investigation is proceeding.  The article uses the terms "managers and employees".  
2. Among the parties being interrogated at the CEO and members of the Executive Committee at Awal Bank.
3. The investigation of Awal's Head of Operations has been completed.  There are no further details in the article on what the results were.
4. In the past 10 days, Awal's CEO has charges directed against him.  He has been released against an unspecified bond and forbidden to travel.  Later the article uses the term "rasmiyan" to refer to charges against the CEO of TIBC.  So assuming the insertion of that additional word was deliberate  and has significance, Awal's CEO appears not to have been formally charged with a crime.
5. Awal's Head of Treasury and Foreign Exchange has been released against a BD2,000 bond and forbidden to travel.  AlWatan does not mention that formal charges were levied.
6. The CEO of TIBC has been formally charged with breach of trust and stealing two billion dollars from AlGosaibi Company for Commercial Services (Bahrain).  He has been released from custody against a BD10,000 bond and forbidden to travel. 
7. The article lists five cases pending against Maan AlSanea in Bahrain: (a) Awal Bank v Maan AlSanea, (b) Bahrain Islamic Bank v Maan AlSanea and Others, (c) Bahrain Islamic Bank v Maan AlSanea and Others, (d) Hasan Sharif and 18 Others v Awal Bank (labor case),  and (e) Salah AlKawaari v Awal Bank (labor case).   I suspect the latter two cases were brought by individuals whose employment was terminated and who feel that their termination process and payments were not fair.  It is not uncommon for a dismissed employee in Bahrain to lodge a complaint with the Labour Ministry.  If the employer and employee cannot reach a solution among themselves, then the dispute proceeds to the Labour Court for a decision.  So, perhaps a more accurate statement is that there are three commercial cases against Mr. AlSanea.  With all the downsizing going on in Bahrain, just about every bank who let someone go, has at least one Labour case against it.
8. Also that a freeze (block) has been put on the assets of Mr. AlSanea and his family in Bahrain and that he has been forbidden to travel until the completion of the investigation.

That last point, the reported arrest, seems to be a topic of some interest out there from the number of hits this blog gets related to that topic. 

A couple of observations. 

First, as you've noticed from the cases pending against some of the senior managers of the two banks, they have been released from jail (against rather small bonds considering the allegation of the amounts involved) and forbidden to travel.   I'd guess that would involve surrender of one's passport. That is a modified form of house arrest, meaning in this case that they can move about within the country but may not leave.  No electronic ankle bracelets and stay at home rules.  Just to be clear I have not seen any credible report that Mr. AlSanea has been arrested/jailed.  I'd also note that modified house arrest would be fairly normal procedure for someone accused of a major crime.  Or someone who could be a material witness in an investigation.

Second, it's not clear to me if Mr. AlSanea is currently in Bahrain.  If he's not, then the Bahraini prohibition on travel would be theoretical rather than practical - at least until he entered the Kingdom.  My impression is that he is in Saudi Arabia, probably in AlKhobar.  If so, he's probably subject to similar restrictions on travel in the Kingdom. 

In the interest of fairness a couple of points.  And it's very important that all who follow news on these cases keep these two points in mind.

First, this post is based on a newspaper article.  It is not an official statement issued by the Public Prosecutor or any other official body in Bahrain.  Reports in the press are not always complete or accurate.  "Informed sources" often aren't. And note that AW's article seems to be based on a single source.   

Second,  individuals named in this post (either directly as in the case of Mr. AlSanea or others by their titles) may have been accused of wrongdoing.  However, at this point, there have been no convictions by any competent courts of any criminal or civil offenses.  And it is only the courts that are competent to issue such judgments.

Saad Golden Belt Sukuk 1

Today the Delegate (agent) on the Sukuk, Citicorp posted an announcement on the Bahrain Stock Exchange.

Main points and my comments:

1. Vote to Dissolve (Acceleration) - So far only 13.62% of certificateholders have voted to dissolve the transaction.  This is remarkable given that until they trigger the repurchase obligation of Saad Trading and Contracting I believe they are in a worse position legally than Saad's direct creditors.  How is that?  Until the transaction is dissolved, the principal is not due.  Not  until the principal is due from Issuer (which is a shell company) can the purchase obligation of Saad be triggered.  Until then Saad is "past due" on the rent (interest).  This is the financial equivalent of staying in one's cabin after the Titanic has hit the iceberg.  The announcement does note that certificateholders have been forming groups.
2. Failure to Provide Rental Notes - Saad has not provided the promissory note for the upcoming rental payment.  As you'll recall from the earlier analysis of the transaction, Saad was supposed to provide promissory notes for each of the rental payments due (the "interest").  This mechanism was designed to have a simple straightforward document on which a lawsuit in Saudi Arabia could be based and thus avoid having to bring in all the transaction documents.   As discussed that in itself could pose a problem in a Saudi Court.  Since the "rental payments" were constructed without any reference to the economic value of the property, it could be even more troublesome.  Failure to provide the Notes is a Termination Event.  Let's see what the next action taken by the certificateholders is.
3. Failure to Provide Funds - Saad is not providing any funds and so the issuer may be unable to pay listing fees on the BSE in which case the Sukuk will be de-listed.  Both Citicorp (the Delegate) and Ohad (who are providing the Issuer corporate services) have not been paid.  In many deals like this where there is no real underlying business by the Issuer, the service providers make sure their fee is taken "off the top" from the issue proceeds.  In this case they contented themselves with a "promise to pay" from Saad.
4. Citicorp as Delegate - The address given by Citicorp is now "Restructuring Group" indicating that they have moved responsibility.  You might wonder why since other than their fees they have no money at risk.  In a situation like this, a certificateholder facing a loss (and here one has to assume it may be more of a head shaving than a haircut) might well start reviewing the conduct of the Delegate and Ohad to see if he can find any basis to sue them for "malpractice" in the discharge of their duties as a way of getting some money back on the investment.  Both have pockets to pick and probably with more cash than Saad.   There will also be scrutiny of the offering documents for failures by the placement agents.  My recollection is that these documents were very well crafted and the risks laid out very clearly.  As you'll note in the final point in its announcement, the Delegate is careful to note that certain powers have been retained by the Issuer - in effect carefully reminding readers of the limits of its legal responsibility and thus its exposure.

Golden Belt Sukuk 1 Management Advises Saad Group Not Responding to Info Requests

A disturbing disclosure on the Bahrain Stock Exchange today from Golden Belt Sukuk 1 management.

"Regular requests for various documents and information have been made by Golden Belt and the Delegate to Saad.  Saad has also been asked for money to pay various expenses of Golden Belt (which has no money of its own), including the BSE listing fees. Saad has neither acknowledged or responded to any of these inquiries."

One might understand an inability to provide money given that Maan's assets have been frozen.  It's harder to explain why information wouldn't be forthcoming.

Citibank is the Delegate on the transaction.   Golden Belt is managed by Ohad Trust.  Graham, is that your signature?

By the way it's not only the BSE listing that's in jeopardy if the company doesn't pay.  Golden Belt's Bahraini Commercial Registration (C.R. 65124-1) is up for renewal 9 May 2010.  And, as I've noted before, there's the very interesting fact that the registered owner of 99% of Golden Belt's shares is AlGosaibi Investment Company!

Islamic Financing & Restructuring Part III - Golden Belt Sukuk 1 (Saad Group)

This is the third installment in my series on Islamic Financing and Restructuring.

Today's it's the Saad Group's turn, specifically, Saad Trading Contracting and Financial Services Company (a limited partnership formed in Saudi Arabia) ("Saad") and Mr. Maan AlSanea.

Our "kit" is a bit lighter than our last excursion (TID Global Sukuk 1) as all I could find was the Offering Circular ("OC").   The OC is well done - no doubt a combination of Bahrain legal requirements and the professionalism of the parties involved in the transaction.  The Risks Section is  particularly robust and clear. 

Just in case, you left the AAOIFI principles behind on our last journey, here's another copy.

And before we start, just one disclosure.  While I watched Boston Legal carefully, I am not a lawyer so don't rely on this or earlier comments as legal advice.  What follows is based on practical business experience not legal training.  If you want Denny and Alan, you will have to hire them.   And probably for this transaction you'd be better served by Nigel or Neale.

Short details on the transaction:

1. US$650 million in principal.
2. Five year maturity with Periodic Distribution Amounts (in a non Shari'ah compliant transaction that would be called interest) paid every 15 May and November at Libor plus 0.85%.
3. Final maturity 15 May 2012.  Single bullet payment of principal on that date.
   
4. Islamic Structure:  Ijara (rent transaction).  Maan AlSanea as Chairman of Saad leases  (the Head Lease) certain land (ex buildings) in Saudi Arabia to the Issuer (a special purpose Bahraini company)  who in turn sub leases it back to Saad.  The net proceeds of the Sukuk issue (keep the word "net" in the back of your mind as it will come up again) are paid to Saad as the advance lease rental for the Head Lease.  A single payment up front.  This gets him his "loan" if we were using non Shari'ah financing. The payments under the Sub Lease are the origin of the debt service for the Sukuk.
   
5. Legal Structure:  Limited recourse certificates (Trust Assets only) with a Saad purchase obligation.  Under the Sub Lease Agreement, the certificates are redeemed at face value plus any unpaid Periodic Distribution Amounts.  See the OC Section 9 "Termination Sum" on page 38.  Such purchase can take place either at maturity (scheduled dissolution) or prior thereto in certain cases (unscheduled dissolution after the occurrence of dissolution events and a vote to terminate by holders of at least 25% of the sukuk amount).  In effect this is a form of guarantee just like the structure in TID Global Sukuk 1, though we won't call it that.
6. Governing Law:  English Law for the Head Lease, the Sub Lease, Certificate Purchase Agreement (agreement with banks who placed the deal), Service Agreement  (Saad to maintain properties including any major maintenance) and the Costs Undertaking (Saad to pay the various service providers, e.g., Ohad, Citicorp).  All these documents are part of the Trust Assets.  The Corporate Services Agreement (Ohad and the Issuer for Ohad's services) under Bahrain Law.   And finally Saudi Law for the Promissory Note and Note Issuance Agreement and each Payable Rental Promissory Note (for the next rental payment due under the Sub Lease).
   

Let's turn to the detail.

(1) The Trust Assets

As per the OC page 19 "Recourse to the Issuer is limited to the Trust Assets and the proceeds of the  Trust Assets are the sole source of payments on the Certificates. Upon the occurrence of a Sub-Lease  Termination Event which constitutes a Dissolution Event, the only remedy available to Certificateholders will be to require the Sub-Lessor (or the Delegate acting on its behalf) to invoke its rights against the Sub-Lessee to pay the Termination Sum due pursuant to the rights granted in favour  of the Sub-Lessor under the Sub-Lease Agreement."

So what are the Trust Assets?

Title to land parcels in Saudi?  No.  As per the OC page 26, the land parcels are recorded in the name of Mr. AlSanea.   And there they shall apparently stay.

As per the OC page 17  "The ‘‘Trust Assets’’ consist of all of the Issuer’s rights, interest and benefit, present and future, in, to and under the Head Lease Agreement, the Sub-Lease Agreement, the Promissory Note, each Payable Rental Promissory Note, each of the other Transaction Documents, all monies standing to the credit of the Transaction Account, and all proceeds of the foregoing." 

The investors' security then is in the strength of these contracts. 

(2) The Purchase Obligation

Under the Sub Lease, the Issuer may call upon Saad to redeem the certificates prior to maturity if there is a Dissolution Event and at least 25% of Sukuk holders vote to terminate.  OC Section 9.2 page 38.

Dissolution Events (in a non Shari'ah compliant financing "Events of Default") are detailed in OC Section 12 page 39.   These contain the normal non payment (7 day grace). as well as several others . This Section does not contain any general covenants on Saad nor any cross default language.   However,  Section 12 (c) contains reference to Sub Lease Termination Events also triggering a Dissolution Event.  Flipping to Section 3.5 pages 68-71 we find the usual event of default matters covered under Sub Lease Termination Events.

(3) Promissory Notes

To support the purchase obligation there is a note for US$650 million.  Note that is for the gross proceeds of the issue not the net proceeds.  It will become clear why I keep hitting this point later.

At the beginning of each rental period, Saad will execute an additional promissory note for the Payable Rental Amount which is the funding for the Periodic Distribution Amount (in a non Shari'ah compliant transaction that would be called interest).

This is a "neat" drafting approach.  In the event that Saad doesn't pay, instead of  hauling a stack of complicated documents subject to English Law into a Saudi Court, the intent appears to be to have a straightforward and simple document that clearly evidences Saad's obligation to pay.  Of course, the borrower would very likely try to get all the documents into court to prolong the case and seek whatever advantage he could. 

(4) Restructuring Issues

First, some background points from the OC.

(a) Page 25 - "The calculation of the Payable Rental Amounts is not directly linked to the value of the Land Parcels, and as a result should the calculation of the Payable Rental Amounts be challenged by the Sub-Lessee there is a risk that the Saudi courts may apply the principles of equity."  Recall that the rental payment is being reverse engineered.   We know where we want to get.  The investors want a return of Libor plus 0.85% per annum paid to them.  The borrower wants US$650 million.   This issue arises strictly because of the "Islamic" nature of the transaction.  There can be no interest, but the investors want a certain return.  The Promissory Notes are designed to overcome this issue in a Saudi Court by reducing the "case" to one of an unpaid debt acknowledged by Saad for a sum certain.

(b) Page 28-29 - There is a good description of enforcement of obligations in Saudi Arabia.  This is key because as the OC's Risk Section points out, most of Saad's assets are in Saudi Arabia.  The key sentence in this section is "The courts and judicial committees of the Kingdom of Saudi Arabia have the discretion to deny the enforcement of any contractual or other obligations, if, in their discretion, the enforcement thereof would be contrary to the principles of Islamic law."  An issue that faces every creditor whether he extends under Shari'ah compliant or non Shari'ah compliant structures.

(c) Page 30 -  Another key sentence:  "The concept of trust as deemed in common law jurisdictions does not exist in Saudi Arabian law."

(d) Page 45 Use of Proceeds - The net proceeds are estimated to be US$645,750,000 or US$4,250,000 less than the gross proceeds.  The difference is for the banks' placement fees as well as legal and other costs.

Second, as the Lease and Sub Lease are the heart of the security for the transaction, these would be a target for an attack.  Can a party overturn the Sub Lease contract on the basis of equity using an argument that the rental is not fair given the value of the land? If Saad is insolvent, can a creditor argue that the rental payments are a lesser obligation than that creditor's debt and that the creditor should be paid first.  Here again the Promissory Notes are a defense that the rental payment is just as valid a debt as the creditor's loan.

This is also where the difference between gross and net proceeds finally comes in.  The Promissory Note is for US$650 million.  But the amount Saad received was US$4.25 million less.  In Saudi Courts borrowers have been known to produce an accounting of all cash flows in an effort to reduce the amount they owe the lender.  The bank gave me a $100 loan and over the years I paid them back $100 (the borrower would list all payments to the bank irrespective of whether they were principal or interest).  Since the Shari'ah doesn't recognize interest, the Court could assume that all cash flows were principal.   Once a banker from a neighboring country told me that a borrower had pulled this ploy and the court ordered his bank to refund the overpayment!  That is, the bank wound up owing money to a non paying borrower.  If  Saudi courts still might  take this stance, then Saad could charge that he only received US$645.75 million not US$650 million -  and therefore there was something wrong with the Note and the transaction.  I think if the gross proceeds were desposited to Saad account and he paid the US$4.25 million in fees, there would be a stronger case than if  he only received the net.  This is not an issue particular to this transaction, even a conventional non-Shari'ah bond could run aground on this shoal.

(6) Other Interesting Points from the OC 

(a) OC page 14 Ownership of the Issuer.  AlGosaibi Investment Holding EC  Bahrain ("AGIH")  owns 99%.  Those of you who have been following the legal battle between AlGosaibi and Mr. AlSanea know that AlGosaibi has accused him of undertaking transactions in AlGosaibi companies without their knowledge.  It would be very interesting to know who at AGIH authorized this transaction.  Without that information, we can't draw any conclusions.

(b) OC page 22-23 Shari'ah Opinion.  The last paragraph gives an insight into the practical approach taken:  "The Shari’ah Board also took into consideration (i) the legal constraints under which this product is being developed; (ii) the need to facilitate and bring ease to the Islamic financial institutions and others who are determined to raise financing according to Shari’ah principles; and (iii) the prevailing conditions and a¡airs of the Ummah and the need to remove them from the shackles of riba. And Allah Knows Best."

For those interested there is a description of the Saad Group  as well as some now dated financials at the end of the OC. 

If there are any trained lawyers out there, I'd love to hear your thoughts on Golden Belt as well as on my previous post on TID Global Sukuk 1.  All without attribution and as well pro bono.

Golden Belt Sukuk 1 (Saad Group) Vote on Dissolution

Following the payment failure on 16 November 2009 and the earlier event of dissolution notified investors last August, the Delegate on the Sukuk has approached investors again asking them whether they wish to vote to dissolve the Trust and thereby collapse the Sukuk triggering Saad's purchase obligation. 

25% of investors have to vote for this to be effective.

So far 7.4% have. 

Notice posted on BSE here.

The International Banking Corporation - Comments on 2008 Financials

Not so long ago I took a look at Awal Bank's financials, today it's TIBC's turn.

From a review of TIBC's financials, it's clear that the bank was exposed to significant risks  arising from certain legal arrangements with its holding company, Ahmad Hamad AlGosaibi and Brothers ("AHAB").   AHAB held legal title to TIBC's investment portfolio and to the collateral on its loans.  And this may be a large part of the reason for the collapse of this apparently well capitalized bank.

In both cases, under the legal agreements between AHAB and TIBC, AHAB held these assets in "trust" for the bank.   But the critical legal issue is whether such a trust structure would be recognized by a Saudi Court.  That is, would the Saudi Court look through AHAB's legal title to ascribe direct ownership of the assets to TIBC?  If it did, then these assets would be outside of AHAB's "estate" and would not be subject to  an AHAB bankruptcy, insolvency or administration.  If it did not,  then  these are AHAB's assets to be divided among  AHAB's creditors - not just TIBC.   

Update:  From the Golden Belt 1 Sukuk (Saad Group):  ""The concept of trust as deemed in common law jurisdictions does not exist in Saudi Arabian law."  Here's the link to that post.


I'm guessing as with Awal that TIBC's problem is solvency not liquidity.  With  TIBC's relatively high equity to total assets ratio, there would have had to been a substantial erosion in asset values to trigger insolvency.  From the structure of TIBC's balance sheet the two areas  where this is most likely to have occurred in are loans and investments.   The loss of the assets themselves would have the most impact on the  bank's equity.

Now to the detail.

Unlike Awal, TIBC posts more financial info on its website.   At the "Publication" drop down menu, you'll find quarterly financials for 2008 and audited annual financials for 2005 through 2008.

As with Awal, let's focus on the changes from 3Q08 to 4Q08.

Total Assets declined US$498.5 million from US$4.3 billion to US$3.8 billion - roughly 11.6%.  Compared to 4Q07 the decline was a more modest 6.6%.

On the liability side, the major declines were US$268 million in due to banks, US$70.5 million in due to customers, US$30.9 million in due to related parties, and US$12 million in other liabilities.  A total of  US$381.5 million. A decline of US$117 million in equity accounted the remainder.  Declines are all fairly reasonably spread and there is no one group with a major cashflow in its favor as with Awal.

It's difficult to use TIBC's 2008 quarterly financials to analyze term loans because the bank and its auditors appear not to have been able to make their minds up about a consistent presentation of term loans on the balance sheet during 2008.  After appearing earlier in the year, these completely disappeared in 3Q08 only to re-emerge in 4Q08.  Looking at Note 10 in the fiscal year end ("FYE") 2007 financials, TIBC had US$375 million of outstanding term loans.  US$100 million was due in the next twelve months.  In  the 2Q08 financials  term loans had decreased by $100 million and US$75 million was shown as due in the next twelve months (Note 8).  This suggests that there was no prepayment of term loans.  However, if there were, it would appear to be only for US$75 million - though this amount may be included in Due to Banks as a current payment.  The presentation in TIBC's financials is confusing on this score and so it's difficult to be definitive.

On the asset side,  cash and banks were down US$429.4 million.  This funded the  reduction of US$381.5 million in liabilities plus increases in loans of US$77.2 million and other assets of $24.5 million.  The US$171 million drop in investments was largely due to  US$117 million in  (non cash)  fair value adjustments  (reflected directly in equity) plus an apparent US$54 million of cash realizations.

At 31 December 2008, equity was US$1.3 billion and total assets US$3.8 billion.  Like Awal, rather  sharp declines in asset values would have to have occurred to significantly erode capital to zero or near zero.

Let's take a closer look at the balance sheet.

1. Cash and Banks was US$1.1 billion.  Three key items from Note 4.  (a) 86% of these deposits were with banks and financial institutions in Europe. (b) 76% of deposits were with A rated counterparties.  (c) TIBC claimed a strict risk concentration limit of 10% of capital.  Also there are no related party deposits of any significance disclosed in Note 25.  Taking these comments at face value, one would not expect a major loss in this asset category.
   
2. Investments were carried at US418.1 million with negative fair value adjustments of US$426.6 million.  Earlier in the year TIBC carried its investments at fair value through profit and loss ("FVTPL").  At 31 March 2008, TIBC had recorded a net loss of US$204 million. due to investment losses taken through the income statement.  After 1Q08 TIBC engaged in an asset sale and asset purchase with related parties (presumably its parent AHAB).  Sales of US$867.2 million and purchases of US$839.1 million.  The sales would allow TIBC to dispose of the FVTPL assets - transferring them to available for sale ("AFS") would not have been possible.   However, the new investments could be booked as  AFS with no problem.  Why AFS?  Because any changes in fair value could be taken directly to equity by passing the income statement.   Through the miracle of accounting principles, TIBC was able to report a net profit of US$156.1 million for fiscal 2008.   The US$426.6 million loss on investments was recorded directly in equity.  However,  when we look at comprehensive income, we see that the bank actually had a loss for the year of US$270 million (US$156.1 million in net income minus the US$426.6 million in  negative fair value adjustments).  Another key piece of information is in Note 7 where it states that the bank's investment securities are registered in the name of the holding company (AHAB).  Use of a Saudi registered company to act as shareholder would facilitate TIBC making investments in the Kingdom.  There is no obvious legal reason/advantage to have AHAB hold shares in  the UAE, Kuwait or other GCC stockmarkets.  However, as outlined above, this arrangement could also present a danger to the bank if there were a problem at AHAB and a Saudi Court did not recognize TIBC's title.  Then the bank would be one of AHAB's creditors with a claim on AHAB's estate rather than as the legal owner of the investments.  This could be a potential area where asset values were lost.  Bolstering this view is that it appears the investments were shares traded on the Tadawwul (Saudi market).  There has not been a complete collapse in share prices on that market.
   
3. TIBC's main business is commercial lending with US$2.3 billion out of the bank's US$3.8 billion of assets at FYE 08.  Again from Note 4, 99.9% of the loan portfolio was in the GCC/Middle East region.  TIBC also discloses that the majority of loans and advances are secured with a minimum coverage of 110%.  Describing the collateral later in the Note, TIBC says that it is land deeds, plant and machinery or cash collateral.  From the liability side of the balance sheet (customer deposits), it's clear that cash collateral is de minimis.   Usually with land or plant and machinery, most banks use a much lower borrowing base.  That is, they will lend maybe 50% or so against such assets given their illiquidity and high discounts required to sell.  If Borrower A didn't make a go with his factory, why would Buyer B believe he could unless he could get them at a steep discount a la Irridium?  And again there is the same note as with investments.  The holding company is the legal holder of the lien on a trust basis for the bank.  That implies that most of the loans were in Saudi Arabia - as there would be no advantage to using AHAB to hold collateral in another country.   There is the same problem as with the investments: if the holding company gets into trouble, all the collateral may be blocked in its estate, leaving the bank as a creditor of the holding company and with uncollateralized loans.
   

Finally, one parting comment on a recent report that creditors had tracked down some gold shipments involving AlGosaibi and Saad.

TIBC began gold trading in 2006 with sales volumes of some US$1.2 billion, followed by US$2.3 billion in 2007 and US$2.5 billion in 2008.  Profit margins were roughly 1.4% of sales.  It's unclear if TIBC were matching spot trades or whether it was taking actual possession of the gold.  The news articles suggest it was taking possession - at least for the sums mentioned in those articles.   It will be interesting to follow developments on this topic.