International Investment Group - KPMG Report to be Released

IIG announced in several venues today that its new board had approved the release of the KPMG report to certificateholders of its Sukuk.

"Unfortunately", AA missed this "wonderful" investment opportunity.  What was I thinking?  And, so, I won't be getting a copy.

Anyone who has a spare copy that they don't mind sharing please contact me via this blog's Contact Page.

International Investment Group - Update from Delegate on IIG Funding Sukuk (Hint: No Good News)

Deutsche Bank as the Delegate on the above transaction issued an announcement on Nasdaq Dubai advising that:

1. IIG had advised that it was awaiting ministerial approval of its new board so that they could vote to release the KPMG study to certificateholders who had signed a confidentiality agreement.
2. The Paying Agent advised it had not received the funds for the 12 October payment.
3. Certificateholders reminder of Dissolution Events and that they need to vote to accelerate.
4. That IIG has not honored the claim served under the Purchase Undertaking.
5. That the Delegate is not obliged to take actions unless indemnified to its satisfaction.  Apparently, it has not been.

International Investment Group - Explanatory Note on 2009 Financials

IIG Funding issued a brief explanatory note on IIG's 2009 financials on Nasdaq Dubai today.

Rumor: Hassan Al-Ammari Resigns from International Investment Group

Citing an interested source (one with a connection to IIG) Al Watan reports that Hassan Salim Hassan Al-Ammari has resigned from IIG's board due to the lack of co-operation from the Chairman/MD, Dr. Abdulaziz Bader Al Jena'ai.  According to Al Watan's source, Hassan has been unsuccessfully asking for financial and other information for some nine months.

Hassan represents Al Baraka Investment and Development Co (which owns about 5.21% of IIG).

IIG has been suspended from trading on the KSE for failure to provide financials for both 1Q10 and 2Q10.  The last financial it did supply was FYE09 which showed a loss of KD36.5 million versus a KD21.5 million loss the year earlier.

You can read more on IIG by using the tag International Investment Group for earlier posts.

Markaz: Review of Kuwait Investment Sector

 Renovation of Yet Another Proven Business Model In Progress
(Or, Perhaps, A Half Built Mega Project)

Markaz has issued “Kuwaiti Investment Firm Sector Taking Stock Two Years After the Crisis”. The report is an update to one they issued in June 2009.

As usual, good analysis and commentary.

You can obtain a full copy of the report by sending an email to info@markaz.com referring to the title above.

In the interim, some key points from the report.

Let’s start with Markaz’s Conclusion:

“The investment sector in Kuwait has a long way to go on its path towards health especially in light of the Central Bank’s increased oversight on the sector, which may lead to reduced activity among some firms that need to clean house. Given how unpredictable and difficult the sector’s assets are to value, it is difficult to predict the future performance of the sector, especially given the wide variance in case-by-case health.

We are optimistic that 2010 will show a further narrowing in bottom line losses, though we remain skeptical of a return to profit. Not only will companies be looking to offload more of their investments, booking impairment losses in the process, but regional/global equity markets have shown lackluster performance for the year, which may have an adverse impact on both the firm’s quoted investments in addition to the AUMs (thereby reducing fee income), all of which will put downward pressure on the bottom line.”

Historical Performance

I’ll start by noting that the report does not cover all investment companies in Kuwait. It is based on a set of 34 listed companies of which only 28 have reported for 2009. The missing reports include The Investment Dar – which hasn’t issued a financial since 31 December 2008. Nonetheless as with many such studies, it gives a good macro picture.

Earnings in KD millions.

2005	2006	2007	2008	2009
945	281	846	(810)	(778)

1. The graph in Markaz’s report gives a good pictorial sense of the variance.
2. In lieu of a graph, let’s look at statistical measures. All of which are rounded to the nearest integer. The Mean Income over the five-year period is KD97 million. The Standard Deviation (Sample) is 852 and the Standard Deviation Population (762). The SD is between 8x and 9x the Mean. That gives an idea of the variability of income. 
3. During the first three heady years of hefty profits, no doubt equally hefty bonuses and dividends were paid based on reported income -- largely non cash capital appreciation. Many of these payments also no doubt financed by “wise” lenders - who are now left holding the proverbial bag.

Asset Classification

IFRS 7 requires that companies disclose the basis for the valuation of assets held for sale (similar to FASB 157).

1. Level 1: Based on quoted market prices in active markets for identical or similar securities. 
2. Level 2: Based on observable market data – either direct or derived. 
3. Level 3: Inputs into valuation models are not observable market data.

Markaz’s set of companies assets are distributed as follows. Amounts in KD millions.

	FVTPL		FVTE	TOTAL	% TOTAL
Level 1	264		535	799	34%
Level 2	213		365	578	25%
Level 3	236		708	944	41%
TOTAL	713		1,607	2,321	100%
% Total Investments	31%		69%	100%	----

As Markaz notes, the IASB allowed companies to “move” assets from the then inconvenient FVTPL (Fair Value Through Profit and Loss) classification to FVTE (Fair Value Through Equity) which neatly “solved” earnings problems in a time of decline in values.  And, no doubt, achieved its goal of fooling more than a few "wise" investors and lenders.

It would be interesting to see how many Kuwaiti firms availed themselves of this exception to manage their apparent earnings.

It’s not surprising that overall there is a concentration in Level 3 assets given business models. And one could point to firms in the “Developed West” with similar concentrations. But out of national chauvinism I won’t point but merely link.

Appendix 1 lists the ratio for some 32 firms. There’s wide variance.

1. Gulfinvest International and Al Qurain have 100% of their assets in Level 1.   Noor 85%.  Bayan 84%. Coast 72%. 
2. On the other hand, National International Holding has Level 3 assets at 87%, First Investment at 70%, Al Safat and Al Mal at 67% and Global at 55%.

The Kuwait Investment Firm Sector in the GCC

Markaz notes that the KIFS dominates the rest of the GCC. No one is bigger. No one fell with a larger thud except two Bahraini-based firms in 2009. Markaz provides some income statement data for Fiscal 2008 and 2009 plus 1H10. What would be even more illuminating would be sector balance sheet size.

Leverage

The new Central Bank of Kuwait regulations impose a maximum 2x leverage ratio on the sector. Even after the debacles in 2008 and 2009, the KIFS’ leverage ratio (Total Liabilities/Total Equity) is a “comfortable” 1.84. It’s only when one starts drilling down into the details that one sees the variance.

Below my calculations based on FYE 2009 financials as in Appendix 2.

FIRM	LEVERAGE (TL/TE)
Kuwait Finance and Investment	8.32x
Aayan Leasing and Investment	5.96x
The International Investor	5.88x
Global Investment House	4.12x
International Investment Group	3.57x
IFA	3.29x
Aref Investment Group	2.78x

Note: I have not adjusted the above for minority interests – so these are not strictly speaking Central Bank leverage ratios as will become apparent later when we review Markaz’s calculations, though the number of firms with significant minority interests is limited.

When Aayan’s substantial minority interests of KD42 million are eliminated from the calculation the Leverage Ratio jumps to an eye popping 14x (using the financials reported on the KSE).

Asset/Liability Mismatch

Details are on page 7 of the report. Briefly, conventional firms are more balanced than “Islamic” ones. The former with S/T debt of 40% versus S/T assets of 49%. The latter with S/T debt at 79% versus S/T assets at 36%. But this is largely due to the greater progress made in restructuring conventional firms. (Also note this data excludes The Investment Dar).

Review of the Top Five

Markaz then reviews the top five firms: Global, Aref, IFA, TID (using 2008 data) and Aayan.

Here in tabular form are the results of Markaz’s review of these firms’ compliance with the newly imposed Central Bank of Kuwait regulations.

FIRM	LEVERAGE RATIO	"QUICK" RATIO
Global Investment House	4.11x	17%
Aref Investment Group	2.78x	16%
IFA	3.28x	9%
The Investment Dar*	4.97x	2%
Aayan Leasing and Investment	13.90x	7%
CBK Regulations	2.00x	10%

*TID calculated using 2008 financials.

Markaz then discusses these five firms’ financial position.  If you want a quick insight into them and the investment firm sector in general, this report is a must read.

International Investment Group - Denies "Success" in Repaying Debts

This morning IIG announced on the KSE and BSE that the news in this morning's Al Watan about it successfully paying some US$18 million in debt was in error.

It seems success is not only fleeting, but sometimes it doesn't occur at all.

International Investment Group - Succeeds in Repaying Some Loans

Update:  Apparently, Al Watan's sources were less informed that thought.  Or perhaps success is fleeting.  In any case IIG denied any "success" in repaying loans.  Such is life.

Informed sources have told Al Watan newspaper that IIG recently "succeeded" in repaying US$15 million to one of the Emirati banks and US$3 million to the holders of its sukuk.     As to the latter I didn't see any announcement on Nasdaq Dubai.  US$3 million is the amount of the periodic profit distribution (or  what we here at Suq Al Mal call "interest").

In any case an interesting definition of "success": meeting one's contractual obligations.   In other words, doing what one is expected to do.  Based on that definition, I've had a remarkably successful day today.  I personally had repeated successes in posting on this blog.  I also successfully consumed breakfast, lunch, and dinner today with intermittent successful cups of tea and coffee at other times - both of which, I will add, I successfully prepared. 

The source of liquidity is reported to have been the sales of (a) some shares presumably local, and (b) some real estate and non real estate assets outside the local market.

The article ends with a discussion of how the bulk of IIG's 2009 losses were its share of losses of subsidiary and affiliated companies as if this made some sort of difference.

International Investment Group - Releases 2009 Financials in Kuwait 11 Days After Dubai and Bahrain

As you recall, on 18 July IIG released its financials on the DFM and BSE.  Just this Thursday 29 July, it released financials on the KSE.  Announcement in Arabic below.

Perhaps this event was partially responsible for the recent AlQabas article   "Companies Disclose in Foreign Markets Prior to Kuwait Due to Weak Transparency Laws".

One hopes that Kuwaiti investors have access to the Internet or they may be second  in line to receive official announcements of rather material information.

[11:43:26]  مجلس ادارة (المجموعة د) يوصي بعدم توزيع ارباح عن عام 2009‏
يعلن سوق الكويت للأوراق المالية بان شركة المجموعة الدولية للاستثمار
ِ(المجموعة د) قد اعتمد البيانات المالية السنوية للشركة للسنة المالية
المنتهية في 31-12-2009، وفقا لما يلي:‏
ِ1) نتائج أعمال الشركة:‏
البند             السنة المنتهية في 31-12-09   السنة المنتهية في 31-12-08‏
الربح(الخسارة) (د.ك)           (36.613.067)          (21.488.623)‏
ربحية (خسارة)السهم(فلس كويتي)   (82.02)                  (49.40) ‏
اجمالي الموجودات المتداولة     35.153.190            54.615.998‏
اجمالي الموجودات              107.056.935           149.062.604‏
اجمالي المطلوبات المتداولة     83.008.705             30.258.046‏
اجمالي المطلوبات               83.624.358             84.578.526‏
اجمالي حقوق المساهمين        23.432.577             64.484.078‏
بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 6.004.401 د.ك
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 3.050.192 د.ك
علما بأن بنك الكويت المركزي قد وافق على هذه البيانات المالية بتاريخ
ِ13-07-2010.‏
ِ2) التوزيعات المقترحة:‏
قرر مجلس ادارة الشركة عدم توزيع ارباح عن السنه الماليه المنتهيه
في 31-12-2009، علما بان هذه التوصية تخضع لموافقة الجمعية ‏
العموميه و الجهات المختصه .‏
علما بان تقرير مراقبي الحسابات يحتوي على اساس عدم القدرة على ابداء الرأي
التالي :‏
اساس عدم القدرة على ابداء الرأي:‏
كما هو مبين في الايضاحات ارقام (2.1 - 12.5) من هذه البيانات المالية ‏
المجمعة فقد تخلفت المجموعة في الفترة اللاحقة عن سداد بعض ادوات الدين ‏
الاسلامية مما اسفر عن قيام بعض الاطراف الدائنة برفع قضايا ضد المجموعة
كما توقفت المجموعة عن سداد تكاليف التمويل المتعلقة بصكوك اسلامية ‏
بالاضافة الى مخالفة بعض الشروط الاخرى الواردة في اتفاقية الصكوك ، ‏
وقد ادى ما سبق الى ان اعتبرت المجموعة قد تخلفت عن سداد صكوك اسلامية ‏
وذلك وفقا للشروط المنصوص عليها في هذه الاتفاقية .‏
بالاضافة الى ذلك تعاني المجموعة من نقص في السيولة ، كما بلغت صافي ‏
خسائر المجموعة 36.6 مليون د.ك تقريبا عن السنة المنتهية في 31 ديسمبر 2009‏
ِ(21.5 مليون د.ك - 2008) كما تجاوزت الخسائر المتراكمة 75% من رأس مال
الشركة الام كما في 31 ديسمبر 2009 .‏
اقتراح مجلس ادارة الشركة الام وفقا لمتطلبات المادة 171 من قانون الشركات ‏
التجارية دعوة الجمعية العامة للمساهمين للموافقة على الاقتراح الخاص باعادة
هيكلة حقوق الملكية وذلك لاطفاء الخسائر المرحلة وتخفيض رأس المال ‏
ِ(ايضاح 22) كما تقوم المجموعة حاليا على وضع الخطط اللازمة والتفاوض
مع الممولين لاهادة هيكلة ديونها .‏
ان قدرة المجموعة على متابعى اعمالها على اساس مبدأ الاستمرارية تستند
بشكل كبير على انجاز هذه الخطط والمفاوضان بنجاح. لم نتمكن من الوصول ‏
الى ادلة تدقيق موثوق فيها وكافية لتحديد مدى قدرة المجمعة على النجاح في ‏
اعادة هيكلة حقوق الملكية والدين المستحق عليها .‏
ونظرا لجوهرية الامور المذكورة بفقرات اساس عدم القدرة على ابداء الرأي ،
فأننا لانبدي رأي على هذه البيانات المالية المجمعة المرفقة .‏
امور قانونية اخرى :‏
ما تم ذكرة في ايضاح رقم (6) فيما يتعلق بارصدة المرابحات والوكالات المدينة
مع اطراف ذات صلة والتي تتجاوز حد التركز الائتماني المسموح بة وفقا ‏
لتعليمات بنك الكويت المركزي .‏

International Investment Group - Sets the Record Straight - It's Business as Usual

Apparently some easily excitable rookie investors panicked when they read IIG's earlier announcement that it was unable to pay some US$152.5 million on its US$200 million sukuk.

So today IIG set the record straight with announcements on the KSE, BSE, and Dubai markets.

"Notwithstanding this announcement IIG wishes to confirm that it and its businesses are continuing to trade normally."

AA certainly hopes that investors will come to their senses and recognize IIG for what it is.  And as well to place the comments in context: apparently "trading normally" up North has a different meaning than in some other markets.  

After all when you claim to follow Shari'ah principles and have the highest ethical standards, who on Earth would doubt your word?  Certainly, not AA.

International Investment Group: Draft 2009 Financials KD 36.6 Million Loss

IIG Funding Limited announced on Nasdaq Dubai this morning that the Central Bank of Kuwait had accepted IIG's 2009 financial statements, though it didn't post a copy.  I didn't see the financials at the KSE but over at the DFM there's a copy - with some of the notes provided.  Also at the BSE but without the notes.

IIG advised the Deloitte is preparing an English language version.  AA certainly hopes with a larger type than in the Arabic extracts provided so far.

If like mine your microscope is in the shop for it annual servicing, you'll  have  to join me in squinting as we review the DFM material.

Accounting/Legal/Regulatory Matters

1. No Audit Opinion:  Due to a variety of factors (including a concern over the "Going Concern" assumption), IIG's auditors have decided not to express an opinion on the financials.
2. CCL Article 171:  IIG has accumulated losses which exceed 75% of its legal capital.  It has called a shareholders' meeting to approve a plan to eliminate some KD40.7 million in accumulated losses by (a) reducing legal capital some KD25.5 million (from KD45.7 million to KD20.2 million) and  (b) using share premium (KD4.3 million) and reserves totaling KD12.1 million).  See Note 22.
3. Violation of Limit on Related Party Transactions:  As its auditors' note, IIG is in violation of the Central Bank of Kuwait's limit on exposure to related parties.  I presume this breach resulted from the collapse in IIG's capital from KD64.5 million to KD23.4 million and not from any new extensions of credit. 

As we continually hear on this blog, debts are settled with cash.  So why the initial focus on non cash matters?  Because these "events" are likely to further sap confidence in IIG.  That will have a direct impact on  the attitude of various market participants towards the Company's future.   And IIG needs all the goodwill and forbearance it can muster.

But in the final analysis cash is king.  A pocket full of money can buy a lot of goodwill and burnish the most tarnished of reputations.

So let's turn to the financials.  We'll begin with the balance sheet because repayment is unlikely to come from operating cashflow.  Rather asset realisation (sales) are the most likely (theoretical) source of the cash necessary  to reduce debt.  I'd note that all that follows is preliminary because we don't have a legible copy of the Company's full 2009 audited annual report.

Balance Sheet

1. More 50% of the Company's assets are with related parties.  And are not only in "Investments in Associates" but as well Receivables and Murabaha and Wakala Transactions (which should be a source of liquidity IIG but apparently isn't) and land acquired from an affiliate.  That can't be particularly encouraging. 
2. Investments in Associates (KD47.3 million out of KD107.1 million in total assets) are carried on the equity method (original cost plus share of net income).  Over the past two fiscal years IIG has recognized income statement losses of some KD32.6 million - which like the original profits declared were "paper" entries only.  If there are more "profits" in these firms, there may be more "air" to let out of IIG's balloon. 
3. The Murabaha and Wakala transactions are secured by collateral.  In 2008 it was worth KD71.2 million.  As of FYE 2009, it's valued at KD44.2 million.  Presumably a decline in market value.  Another perhaps disturbing trend.  And since related and other parties who gave the collateral are no doubt suffering from liquidity problems of their own, it would seem to make sense for them to liquidate the collateral and pay off their dues to IIG leaving themselves roughly half or more of the KD44.2 million.   Since that's not happened, the value and liquidity of this collateral has to be questioned.
4. And finally there's the Egyptian real estate purchase (from a related party of course) for KD10.5 million in Other Assets and Real Estate.  I can't read all of Note 21.2 but it seems the total transaction was for KD13.4 million.  IIG got the Egyptian land  (KD10.1 million) and shares worth KD3.3 million in exchange for shares in an affiliate worth KD4 million and non cash debt "settlements" of some KD9.4 million.  No doubt some very fine assets changed hands here.
5. Most of and perhaps all of the above carried on a "cost less impairment basis".
6. Turning to liabilities, there are some KD83.6 million - no question about their value.  Equity is at KD23.4 million.  If the ultimate value of assets turns out to be lower by more than 22% then creditors won't get back 100% on the dollar. 

 Income Statement

1. A glance at IIG's income statement shows that most of the income (or losses) are paper items not cashflow.  Share in earnings (for the past two years losses) of affiliates.
2. For 2009 operating results were a loss of KD15 million versus KD6.6 million in 2008.  A major driver was increased (equity method) losses from affiliates which rose to KD21.2 million from KD11.4 million the year before.
3. Operating expenses were KD21.6 million, KD6.8 million over 2008 due largely to provisions of KD6 million.
4. Net loss was KD36.6 million versus KD21.5 million the year earlier.
5. Comprehensive Income was a KD41.2 million loss resulting from KD4.5 million in fair value changes not passing through the Income Statement.

Cashflow Statement

1. None included.  
2. Perhaps there was no cashflow for 2009?  More likely IIG forgot to include.

It's hard even for an optimistic fellow like AA to take too much comfort from these financials.  With all the related party transactions, one has to question the real value of assets.  And the very real prospect for an accelerated death spiral if there is an attempt to undo the daisy chain. On top of that is the general lack of liquidity in Kuwait.

International Investment Group: Defaults on Sukuk 2009 Financials Released

Today Deutsche Trustee Company, Delegate on the IIG Funding Limited Sukuk, announced on NasdaqDubai two further defaults on 10 July 2010:

1. First, IIG Funding did not pay the July 2010 Periodic Distribution Amount ("PDA" or "interest").   As you'll recall, the April PDA of US$3,353,062.50 was missed.   Since the Sukuk has a fixed interest rate (6.75% p.a.), the July PDA is the same amount meaning IIG has not paid a total of US$6,706,125.00 in PDAs.
2. Second, IIG (the parent and ultimate borrower) did not honour its Purchase Undertaking in the amount of US$152,467,782.23 representing principal of US$147,490,000 plus 100% of the unpaid PDA of US$4,977,782.22 on these amounts.  That is, 74.2274% thereof.

What is interesting is that Certificateholders did not dissolve the Trust for the April non payment under Article 13.  Rather they chose to use the Put Option under Article 6.5.   See Offering Circular here.   

What that means is that IIG was only obligated to Purchase the interests of those investors who exercised the Put Option (which had a one time exercise date of 10 July 2010).  Only 74.2274%. voted to exerecise the Option.  Technically, the remaining 25.773% of principal is not past due.  Those Certificateholders are in effect in a subordinate state.  Not a particularly wise position to be in. 

Presumably, the Certificateholders will vote again on a Dissolution - thus accelerating the entire principal and ensuring they are all on the same legal footing.  A failure by IIG to honour its Purchase Undertaking is another Article 13 Event of Dissolution. 

Anyone out there who has an explanation for this approach - that is, not voting straight away for Dissolution and accelerating all the Certificates - please post.  This seems a very perplexing approach.  The prudent passenger does not stay below deck on the Titanic after it has collided with the iceberg.

IIG has advised that it is unable to make the payment and referred to its engagement of KPMG to help it devise a restructuring plan. 

I'll post separately about IIG's 2009 financials.  As you might expect, they are not "pretty".

International Investment Group: KPMG Report Ready But 2009 Financials Not Approved

IIG issued a press release on NasdaqDubai advising that while KPMG had completed its interim report, the Company could not release it yet because the Central Bank of Kuwait had not yet approved IIG's 2009 audited financials.

That latter statement indicates that the news in those financials is going to be what we in the financial world describe as "disappointing".

Here's the text of the press release:

Reference to the subject above and our announcement dated 22/04/2010, relating to the interim KPMG  report, to be received on 31/05/2010 and submitted to Sukukholders, which includes a preliminary  assessment of the company’s financial position and the options available to the company. 

Kindly be advised that KPMG has finalized the report referred to above, but IIG is yet to receive Central  Bank of Kuwait’s approval of its financial statements for the fiscal year ending December 31^st, 2009.  Accordingly, IIG is not in a position to release the aforementioned report, which includes references to the  31^st December financial statements, before obtaining such approval. 

We shall provide the interim report to all sukukholders who has signed confidentiality agreement, as soon  as the Central Bank’s approval is received.

IIG's Audited Finacial Sattements for the year ended as on 31st Dec 2009, shall be released to the market upon receiving Central bank of Kuwait's approval.

Earlier post here.

AlJoman - Why the Kuwait Stock Exchange Needs Strong Regulation

Earlier this month AlQabas published a lengthy summary of a recent report by AlJoman Center for Economic Consultancy.  Here's the full report from AlJoman's website.  

You'll notice that AlQ has reordered the topics.  We'll work with AlQ's order in this post.  

The article is a blistering attack on market manipulation and regulatory failures. 

1. Al Joman says that there are about 15 main "investment blocs" that each control from 2 to more than 10 companies that are active in the KSE.  According to its analysis only a very few of them engage in professional or responsible behavior. 
   
2. Three of the groups have fallen and AlJ expects at least one other to this year.
3. The first group mentioned is the Abraj Bloc (Abraj Holdings, Shabka Holdings, and International Leasing and Investment).
4. The second is the Ahlia Bloc (AlAhlia Holding Company and Gulf Invest).
5. The third the International Group Bloc (PetroGulf, Grand, Investors Bank, Usul, and International Investment Group.)
6.  It then turns to a discussion of large and unjustified losses to the shareholders of the companies comprising these groups - which it notes shake confidence in the KSE as well as harm its foreign reputation stating that they consider that removing these distressed companies from the list of traded companies (presumably an expulsion from the KSE) would be considered a positive step. even if only partially (meaning this step by itself is not sufficient).  And that it is possible to lighten the harm caused shareholders and the economy by  removing  these long notorious companies instead of having let them continue to exhausting shareholder money for a long time and in a clear open fashion visible to all.  Clear responsibility for this state of affairs is laid upon the management of the KSE.

I've sort of given away the plot here.  The original research report by Al Joman begins "innocently" enough with a discussion of  the decline in KSE trading in April compared to May.   After presenting some comparative statistics, AlJ begins to describe the reasons.  The first hint is the comment that negligent traders have discovered there are more paper companies and so have become more selective in trading.  Turning to its list of factors, the first item is the lessening of manufactured or imaginary trades or trades agreed beforehand.  Which have come to everyone's attention through increased complaints.  The impact of the new capital market law which criminalizes these wrong practices.  The second is exceptional "feverish"  trading in transport or logistic company  as shares as part of an organized propaganda and scheduled effort to to spread rumors.  Manipulated volumes and prices.

Not too far into the report and it's pretty clear that this is not your normal market analysis.

It only gets better.  Comments on those responsible for cheating numerous innocent traders.  Management from the companies themselves, media circulating lies - print, satellite television, internet sites (heavens an attack on bloggers!).   Than an absolutely blistering attack on the KSE.

Some discussion of the Commercial Bank of Kuwait 11 April Board meeting and the responsibility of directors under the title "Commissioning Not Entitling" (my loose translation).  Calling for independent investigations of board conduct at troubled companies to find out the real reasons for losses and the decline in asset values along with steps to recover funds if board members are guilty of wrongdoing.

The end of the article deals with a review of 2009 earnings predictions by 4 newspapers in Kuwait along with AlJoman's.  And some comments that so far (not all firms have reported results yet!) net income for the two year period 2008-2009 is approximately zero.

An interesting factoid - as of the date of AlJ's report only 25% of Kuwait's 333 companies had reported 1Q10 earnings.  One suspects the delay is not due to needing a lot of time to add up the profits.

Dubai Holdings Commercial Operations Group - Voluntary Suspension of MTN Listing on Nasdaq Dubai

DHOC announced that it was voluntarily suspending its listing due to failure to provide 31 December 2009 financials within the mandated time frame.  It expects to report by 16 May as reported earlier.

NasdaqDubai also announced that it had suspended IIG for failure to provide its 2009 financials as well as the continuing suspension of the following (already suspended) for failure to provide 31 December 2009 financials:

1. TID Sukuk
2. Nakheel 2
3. Nakheel 3

International Investment Group Issues Clarification - It's Business As Usual

Today IIG issued a press release on the Bahrain Stock Exchange (Arabic) and NasdaqDubai (English).

The press release notes that in addition to engaging KPMG Advisory WLL IIG has hired the Law Office of AlWaqayan, AlAwadhi and AlSaif (local Kuwaiti law firm) and DLA Piper (international law firm).  It is also looking to set up a committee (the NasdaqDubai press release uses the more elegant word "forum") to negotiate with creditors.   

As noted before, an interim report from KPMG is expected at the end of May with the "final" at the end of June.  As per my earlier post, this appears to be a rather preliminary report.

Now creditors would be naturally concerned when their obligor misses  the payment of what some might characterize as  a relatively trivial sum of US$3.4 million for interest. 

Notwithstanding the above announcement IIG wishes to confirm that IIG's and its associated businesses continue to trade on a normal basis and the day to day operations of such businesses have not been effected by the above event.

While an interesting definition of what is "normal", this belated entry into our competition is clearly not strong enough to cause our distinguished panel of judge (AA) to reverse the earlier award to Dr. Adnan Musallam and TID.   Though I suspect there will be additional opportunities for further entries as time passes.

International Investment Group Appoints KPMG Advisory WLL Kuwait as Financial Advisor

Today IIG Funding (the Issuer) and Deutsche Bank (the Delegate) issued separate announcements on Nasdaq Dubai related to the payment default on IIG's US$200 million sukuk.

Basically, these are as required by the legal documentation governing the transaction.  Both parties must notify certificateholders of their right to vote for a dissolution (a minimum 25% of certificateholders must so vote) in order for the two parties to be required to take action.  They must also receive indemnification satisfactory to them from certificateholders for taking such action as well.

Deutsche Bank mentions that IIG has engaged KPMG Advisory WLL Kuwait as a financial advisor.  Here's DB's quote of an extract from a letter it received from IIG.

The Obligor has appointed KPMG Advisory W.L.L., Kuwait ("KPMG") in relation to carrying out an independent business review exercise for the Obligor, preceding a detailed financial restructuring engagement at a later date. KPMG's scope of work will include preliminary assessment of the company's present financial position and the possible options to meet its obligations.

This will involve:

• a study of the cash position, debt obligations (servicing and repayments) and cash flow requirements (short to medium term); 
• understanding of the timing and extent of expected cash inflows; 
• analysing the Obligor's cost structure and investment portfolio and understanding the management's strategy and intent regarding the same;  
• carrying out a high-level desktop valuation analysis of the Obligor's significant group  companies/investments as at 31 March 2010 or as at any other agreed cut-off date;  
• performing sensitivity analysis on the base forecasts provided by the management;  discussing actions (if any) taken/planned by the management; and  
• identifying the key gaps and issues the business faces and recommending alternative options and next steps.

The intention is that an interim report will be provided by 31 May 2010 with a final report available by 30 June 2010.

Some comments.

1. First of all the scope of work is typical "accounting firm" speak.  All the major steps are set forth, including the initial understanding of the company's position. 
2. Right now what the above describes is the first stage in a two stage process with the second stage involving detailed advice on the formal restructuring. 
3. Since the sukuk is secured by certain investments (investments in affiliates and available for sale investments) more than a desk top study will need to be done at some point as these are a key source of cashflow to IIG.  

International Investment Group Kuwait - Additional Background

Given the news item about IIG's problems, let's take a closer look at IIG.

In case it wasn't clear from the details in my previous post, IIG is a finance company in Kuwait that operates "in accordance with Islamic Shari'ah principles".   To quote further from its website:

At IIG, we firmly believe that Shari'ah principles and transparent corporate governance is essential to building and maintaining public trust. We at, IIG are guided by our values to maintain the highest level of integrity, treat everyone with dignity and respect, focus on our customers and demonstrate excellence in all we do.

And I think that quote quite nicely sets the stage for what follows.

Let's start with the Sukuk.  It is listed on NasdaqDubai where you can find a variety of documents including the Offering Circular.

A few details on the US$200 million sukuk:

1. Maturity 10 July 2012.
2. Quarterly Periodic Distribution Amounts (every calendar quarter on the 10th) at 6.75 per cent per annum.
3. Mudarabah structure.
4. Principal repayment can be either in cash or IIG shares.  5,754.25 shares per US$10,000 of face value or approximately US$1.73 per share.  IIG currently trades at 44 Kuwaiti fils per share, roughly US$0.15.
5. As disclosed in IIG's 2008 annual report (the last issued), the sukuk is secured by  (a) available for sale investments (approximately KD0.4 million out of the total portfolio of KD17.5 million), composed predominantly of  unquoted shares, and (b) investments in affiliates (approximately KD54.3 million out the total portfolio of roughly KD76.6 million).
6. Kuwait Financial Centre ("Markaz") acts as security agent.
7. In the event that IIG Funding doesn't pay back, the certificateholders can call upon IIG to purchase the certificates at their nominal value plus "interest".  If IIG fails to pay, then the certificateholders can pursue the collateral through the Trustsee/Delegate.
8. Typical Dissolution Events ("Events of Default").
9. Upon the occurrence of a Dissolution Event, an early termination can be triggered by the positive vote of 25% of the certificateholders.  This accelerates the maturity of the sukuk.
10. Certificateholders have an individual right to "put" their certificates to the obligor (Section 6.5 a).  The voluntary put date is 10 July 2010.  An investor with a minimum of US$10 million can put the his certificates to IIG Funding for redemption.  So if one is an investor who wants to establish a legal right against IIG as a direct creditor but can't persuade other creditors to vote for an Early Dissolution, this could be the way out.  Of course, as noted above, the investor needs to have a minimum of US$10 million to tender.  Failure by IIG Funding to pay the put amounts would appear to trigger another Dissolution Event so certificateholders would get another vote.  The Delegate (Deutsche Bank) also has the right to take action without a vote, since the Trustee,  IIG Funding, has delegated its powers to do so to DB.

A few other things from the Offering Memorandum.

From Page 100  A Verbatim Quote on Shareholding

"IIG has been a publicly listed company since November 1997. The table below sets out information in relation to holdings of 2 per cent. or more in IIG’s shares as at 1 May 2007:

Shareholder	# of Shares	Percentage
Kuwait Clearing Company(1)	37,953,500	11.93%
Al Tawfeeq Company for  Investment Funds Ltd(3)	23,745,200	7.75%
IIG – portfolio holdings(2)	18,745,845	5.89%
Arab Banking Corporation (B.S.C.)	18,686,119	5.87%
IIG(4)	14,616,533	4.59%
Gulf Monetary Group	14,302,800	4.50%
Al Madar Finance & Investment Co.	11,721,250	3.86%
Grand (Real Estate)	7,370,680	2.32%

Notes:

(1) This company acts as a nominee for shares held on margin accounts to facilitate forward trading.

(2) These are shares held by IIG as portfolio investments for third parties, see ‘‘Businesses – Asset management’’.

(3) This company is part of the Al-Barakah Group in Saudi Arabia which was one of IIG’s founding  shareholders. IIG’s Vice Chairman also holds board and management positions with companies in this group.

(4) These are treasury shares. IIG is permitted to hold up to 10 per cent. of its paid up capital as treasury shares."

AA;  IIG owns 17.54% of Grand.

As of today, IIG lists the following as major shareholders as per the KSE.

1. Arab Banking Corporation 5.63%
2. AlBaraka Company for Development and Investment, 5.21%
3. Gulf Monetary Group Bahrain 8.2%  (Interestingly, on the BSE website it's noted that IIG owns 50.12% of GMG.  Investors Bank with 27.66% is the only other major shareholder shown).

Turning to  IIG's 2008 annual report (2009 is not yet released):

1. I didn't see IIG's investment in Gulf Monetary Group mentioned  in the 2008 financials so this must be a 2009 or 2010 event.
2. The term "related party" is used more frequently in IIG's annual report than the word "interesting" is used in this blog.   And that's not only interesting but also quite a record.  As per Note 22, some 38% of total assets are with related parties, including substantially all of the company's liquidity.  Note 6 states that IIG held KD71.2 million of collateral against the KD34.5 million in wakala and  murabaha payables. to related parties.  The nature of the collateral is not described.  As Note 22 assures, all related party transactions are approved by the shareholders at the annual general meeting.  Unclear if this is a retroactive approval.
3. There seems to be a significant amount of cross shareholding between IIG and its investments and other related parties. Grand, Gulf Monetary Group,  
4. One would expect no less in Kuwait, I suppose.  And equally one might make the argument that when you've got good business partners, whom you know and trust well, it's just natural to do more business with them.  And the same with investments. 

International Investment Group Follow Up on Default

Today there was a flurry of activity on Nasdaq Dubai around IIG.

First, the Exchange suspended IIG's US$200 million sukuk.

Then, IIG Funding issued an announcement on the default on the Periodic Distribution Payment ("interest") on its Sukuk along with the canonical words that a  payment default of more than three  business days constitutes a Dissolution Event.  That gives the certificateholders the right to vote and if enough of them vote positively (at least 25%), the maturity of the issue is accelerated.   

You will notice that IIG Funding's announcement neatly skirts another potential Dissolution Event from  Section 13 (e) of the Offering Memorandum.  I've highlighted the relevant section in blue italics.

either (i) the Issuer becomes insolvent or is unable to pay its debts as they fall due; (ii) an administrator or liquidator of the whole or substantially the whole of the undertaking, assets  and revenues of the Issuer is appointed (or application for any such appointment is made);   (iii) the Issuer takes any action for a readjustment or deferment of any of its obligations or makes a general assignment or an arrangement or composition with or for the benefit of its  creditors or declares a moratorium in respect of any of its indebtedness or any guarantee of  any indebtedness given by it; (iv) the Issuer ceases or threatens to cease to carry on all or  substantially the whole of its business (otherwise than for the purposes of or pursuant to an  amalgamation, reorganisation or restructuring whilst solvent); or

A glance at IIG's 30 September 2009 summary financials (the latest issued) suggests that the Sukuk represents roughly 85% of IIG's borrowings.

International Investment Group Misses Another Sukuk Payment - Headed for Rescheduling

IIG issued the following announcement on the Nasdaq Dubai earlier today.

12 Apr 2010 - 16:11:22

IIG Funding Limited - International Investment Group KSCC (IIG)

Kindly be advised that IIG has communicated to the Sukukholders through IIG Funding Limited (Issuer of its US$ 200 million Sukuk) of its inability to make the Periodic Distribution Amount of USD$ 3,353,062.50, due on April 12^th, 2010 (being the first business day after April 10^th, 2010, scheduled for the distribution.)

 IIG has appointed an international consulting firm in relation to carrying out an independent business review, preceding a detailed financial restructuring at a later date.

You'll recall they missed a payment in January which they made on 20 January.  Earlier posts here and here.

IIG is currently suspended from trading on the KSE for failure to provide its 31 December 2009 financial to the Exchange within the specified time.

International Investment Group Kuwait Cures Payment Default

If you've been following the story, you know that on 11 January, IIG Funding Limited was to make a Periodic Distribution Payment (equivalent to interest under a conventional bond) of US$3,353,062.50 on its US$ 200 Million Trust Certificates "Sukuk Al Mudarabah" due 2012.

It did not.

At the time IIG (which is the source of the payment) advised it intended to pay on the 19th.

The payment was received on 20 January.

Under the terms of the Certificates a  three day delay in payment is grounds for the dissolution of the Trust.  Once the three days passes, even if IIG makes the payment as it did in this case, the Certificateholders have the right to dissolve the murabaha transaction.  A dissolution  is the same thing as an acceleration of a conventional bond:  IIG would be legally obliged to repay the Certificates in full - some US$200 million in principal plus any Periodic Distribution Payment ("interest") due.  

However, just as with a conventional bond, the Certificateholders must vote to exercise their right to accelerate payment. 

My guess is that they will not.