You've probably seen the press reports that Gulfinvest had defaulted on a AED 200 million loan extended to it by Abu Dhabi Commercial Bank which Shuaa Capital had guaranteed. The loan was to partially finance Gulfinvest's purchase of 19.2% of Ahlia Investment Company (since 2007 Ahlia Holding Company) from Shuaa. As a result of the default, Shuaa is now obligated to pay ADCB AED 200 million.
How did Shuaa get in this situation and what are the consequences?
Sixty second summary:
- Shuaa has already taken an AED156.6 million provision (in its 2009 annual report) so the financial pain is already felt.
- Recovery prospects are probably best characterized as difficult given that Ahlia represents roughly 73% of Gulfinvest's assets.
- The story of the sale is complicated. Shuaa seems to have been motivated to provide the guarantee so that it could close the sale. The profit on which was 26% of 2006 net income.
- Gulfinvest appears to have paid a significant premium over "market" price for the acquisition. Almost twice market!
Now the details.
Those with long memories will recall that Shuaa's 2005 acquisition of Ahlia had been
controversial in some quarters. As far as I know, no regulatory action was taken against Shuaa for the transaction. Here's one article about the
ESCA. And there is nothing on file against Shuaa at the
DFSA for this transaction.
In 2006 it sold all of its shares in Ahlia to Gulfinvest, in whom Ahlia was a significant shareholder.
As the below press release from the KSE 29 July 2006 discloses Gulfinvest bought 100% of Emirates Company for Opportunities Ltd #3 which owned 115,730 shares of Ahlia for KD51.9 million. This is what the press release states but it's clear from
Ahlia's 2006 financials that the purchase must have been for 115.73 million shares. As an unrelated (to this story) comment, you might find Note 27 (Related Party Transactions) and 32 (Regulatory Violations) in Ahlia's report interesting reading.
Here's Gulfinvest's 29 July 2006 press release on the transaction.
[7/29/2006-7:58:14] ِ(غلف انفست) تشتري "شركة الامارات للفرص المحدودة 3" بمبلغ 51,9 مليون د.ك
يعلن سوق الكويت للأوراق المالية أن الشركة الخليجية الدولية للاستثمار
ِ(غلف انفست) قد قامت بشراء "شركة الامارات للفرص المحدودة 3" بالكامل،
وذلك بمبلغ قدره 51,9 مليون د.ك (واحد وخمسون مليونا وتسعمائة ألف
دينار كويتي).
علما بأن "شركة الامارات للفرص المحدودة" تمتلك عدد 115,370 سهم
من أسهم الشركة الأهلية للاستثمار.
وعليه، تصبح ملكية (غلف انفست) في الشركة الأهلية للاستثمار 30,17%
بشكل مباشر وغير مباشر، وذلك بدل ملكيتها السابقة البالغة 11,03%.
If we look at the 2006 annual audited 2006 financials for Shuaa Capital Note 8, we get more details. The sale price was AED 656.744 million and Shuaa recognized a gain of AED 67.821 million. This represents roughly 26% of Shuaa's 2006 net income of AED 262,43 million. Strong incentive to "close the deal"! And maybe take a bit of credit risk. And maybe in retrospect a bit too much.
What motivated Gulfinvest is less clear. In the period around the end of July 2006, Ahlia was trading at KD0.240 or so. A glance above shows that Gulfinvest paid almost twice market price for the shares!!!
Let's go a bit deeper.
In Gulfinvest's
2006 Annual Report Note 2, we see that it actually only paid cash of KD37.9 million. It financed the remaining KD 14 million by using KD1.7 million in dividends from AIC to pay Shuaa and KD12.3 million though a note payable (presumably to Shuaa) which carried interest of 7.75% p.a. It also recognized some KD15 million in goodwill on the purchase.
In its
2007 Annual Report, Gulfinvest disclosed in Note 8 that this receivable was settled during 2007 by utilizing a portion of the term loan "availed from a bank in the UAE". The term loan is for KD14.96 million. The term loan appears to be some KD2.697 million larger than required.
Could the difference be interest? And how can we put a boundary on the interest calculation? The convenient thing is that Shuaa's fiscal year 2006 ended 31 March 2007. At that point as per Note 33 in its
2006 annual financials it is showing an AED 207 million guarantee. It's a safe bet that this is this loan. So the maximum period for interest is from August 2006 through March 2007 or 8 months. At 7.75% that's KD0.634 million.
In rough numbers leaving KD2 million or AED 26 million of apparently extra (note the qualifier "apparently") debt which Shuaa has guaranteed.
The press reports that Shuaa helped Gulfinvest get the loan from Abu Dhabi Commerical Bank. The loan was secured by the pledge of the 19.2% stake in Ahlia bought by Gulfinvest. But ADCB also wanted and got Shuaa Capital's guarantee. Perhaps a sign to Shuaa that it was taking on more credit risk that it bargained for.
With the default and the legal obligation of Shuaa to pay ADCB, some press articles have remarked that this is yet another headache for Samir Ansari, Shuaa's CEO. However, a glance at Note 33 in Shuaa's 2009 financials (now a December Fiscal year end) shows that it already took an AED 156.643 million provision. So the headache was recognized long ago and preparations made. The financial pain has been taken. Or largely taken. If the provision proves later to be insufficient, the likely additional amount seems clearly manageable - and not life threatening to Shuaa.
Once it pays off the ADCB loan, Shuaa will step into the shoes of ADCB with Gulfinvest's other creditors to negotiate the debt rescheduling.
From a quick glance, recovery looks difficult.
As per Gulfinvest's
30 September 2009 financials (the latest I can find) Gulfinvest has KD63.4 million of assets. Of this total KD46.1 million is represented by Ahlia. It's now trading at roughly one-tenth of its value on 29 July 2006. And roughly KD20 million of that now belong to Shuaa. Other creditors (excluding Shuaa) are some KD34.6 million.
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