Gulf Finance House - 1H10 Financials: Now You See It Now You Don't -- The Magical US$137 Million Provision

GFH has finally posted its 2Q10 interim report.

Let's get straight to the heart of the analysis and our headline, Note 15:

"During the period, the Group's credit enhancement amounting to US$ 102 million issued to financial institutions against credit facility arrangements for a project managed by the Group were enforced by the lenders due to contractual defaults by the project company.  Further, based on the Group's assessment of the likelihood that another project will be able to meet the financing when they fall due, the Group has estimated that its financial guarantee of US$ 35 million may be enforced.  In accordance with the requirements of IAS #37, Provisions, Contingent Liabilities and Contingent Assets, the Group has recognised a provision of US$ 137 million towards these liabilities until revised/ renegotiated terms are agreed with the lenders of the project companies.  The Group has recognised an equivalent amount of reimbursement right which has been included in other assets (note 8)."

Presto, changeo with a bit of Accounting Magic a potential US$ 137 million addition to 1H10's net loss is transformed into an asset!  What's even more astounding is that these projects that cannot meet their debt commitments (to the apparently impatient lenders) will nonetheless be able to honor GFH's reimbursement claim upon them.  Now that is truly magical!

(Side Note:  According to my copy of KPMG's Third Edition of "Insights into IFRS" page 635 commenting on IAS 37.35 (about the recognition of Contingent Assets), KPMG states:

"When realisation of a contingent asset is virtually certain, it is no longer considered contingent and is recognised.  In our view, virtually certain generally should be interpreted as a probability of greater than 90 percent."

Unfortunately, I don't have the latest edition so I would caveat that there may have been some new thinking on the topic of what constitutes "virtually certain".)

Taking this amount to the income statement would roughly triple GFH's loss.  It would also breach the US$400 million minimum shareholders' equity covenant.  But there's one more adverse effect making this US$137 million truly a "triple threat".

As we learn in Note #2 during the discussion of the going concern issue, GFH's capital adequacy ratio at 30 June was 12.92% - leaving little room for maneuver or in the words of KPMG "which restricts the Group's ability to absorb further losses or undertake additional exposures".   (Note to KPMG:  You need to amend the reference in your report to the matter of emphasis from Note #1 to Note #2.)

And I suppose -- to add a fourth reason -- such a loss and such consequent events might make a difficult capital raising exercise just a "wee bit" more difficult.

Where there is a need and a will, there is a way -- as the old saying goes.

Turning to the rest of the financials:

1. Note #5: US$115.4 million (95%) of 1H10's US$121.4 million of Placements with Banks and Other Financial Institutions is pledged against commitments and facilities of projects of the Group.   And so should be excluded from liquidity.  You'll notice it is in the Cashflow Statement.  Some might suggest that proper presentation would be to have these amounts in Other Assets.  And well they might but to no apparent avail.   Some of this cash may be pledged to those adversely affected projects discussed in Note #15.
2. Financing Receivables US$14 million decline (which took place between FYE09 and 1Q10) is still a mystery to me.  It's not in the cashflow statement so it must have been offset against something else?
3. Receivable from Investment Banking Services declined from US$85.3 million at 1Q10 to US$40.5 million at 2Q10.  I can find a provision of US$20 million but am unable to locate the remaining US$25 million in the cashflow statement.  Another magical offset?
4. Note #6:  Assets held for sale include Bahrain Financial Harbour Company (US$175 million), $50 million of GFH's long outstanding Receivable from Sale of Investments (now reduced to US$44.5 million and carried in Other Assets) plus US$35 million of Financing to Projects.  The first two items will be settled "against receipt of consideration in the form of cash and land plots."  Well, when you can't pay cash why not settle your obligation with a highly valuable piece of (no doubt) blank land.  The upside potential is, well, enormous, especially at current depressed prices! 
5. Other Assets - As noted above there are reductions of some US$85 million (See Point #4 above), against the introduction of reimbursement rights of US$137 million whose collection is no doubt at least virtually certain if not certain to a much higher degree.
6. Note 9 updates on the financing.  The LMC US$100 million facility (US$80 million outstanding) carries a "profit rate" (read interest rate of 8.5%!).   The rescheduled West LB facility a 3.75% profit rate (reduced from 5%).  This facility is now secured by GFH's shares in Khaleeji Commercial Bank, which no doubt explains why the promised sale of this asset suddenly was postponed.  Perhaps, the collateral will be sufficient cover to prevent an impairment under IAS #39. Also of note during 2Q10 some "wise" and brave lender has provided a US$16.64 million Murabaha financing due in November 2010.
7. Note #10:  Some 69% of Other income (1H10: US$8.6 million) is composed of income declared because certain liabilities were no longer payable (US$4.2 million) and from recoveries of project expenses (US$1.7 million).  

All in all quite a performance in 2Q10.  For those curious that's not a reference to financial performance but the magic of accounting.

Gulf Finance House - Esam Janahi Appointed Executive Chairman More Details on Capital Raising

GFH announced on the BSE today that:

1. Esam Janahi had been appointed Executive Chairman meaning that he would have a role in management presumably superior to that of Ted Pretty, Group General Manager.  (The CBB's Rulebook #2 (Islamic Banks) Module High Level Controls (Module HC) Section HC-1.3.10 expresses a preference that the Chairman be non executive.)
2. "The Board of GFH has also resolved, subject to relevant regulatory and shareholder approvals, to seek a further re-capitalization of GFH by way of issuing equity linked convertible murabahas or similar instruments to raise up to US$300m. Such money will be used solely for acquisitions and growth initiatives. Further details will be made available to the market shortly."
3. Deutsche Bank had been appointed as GFH's "restructuring advisor".  

What's interesting here is that the capital raising does not appear to involve a Rights Offering but rather the offer of convertible securities similar to the one that Deutsche Bank raised earlier.  In which case keep your eyes open for possible discounted instruments as the DB issue was.  With all the implications for leveraged dilution of existing shareholders.  Presumably, the Board has determined that there is insufficient appetite for a straight common equity offer?  Also the comments about the "controls" are designed to reassure potential investors that the new issues won't be used solely for debt repayment, but rather for "growth". 

It's also not clear precisely what DB's role is.  Is GFH seeking to restructure its existing debts?   Or is DB going to focus on the capital raising exercise?  A combination of both?

In commenting on Esam's appointment Ted Pretty said many flattering things about the new Executive Chairman, as you might have expected.  One comment though does stand out:

We now need to aggressively pursue new business in new markets and Esam has an enviable track record in leading such initiatives.

If I'm not mistaken, it was Esam's prior initiatives that led to GFH's current predicament.  Unless of course one believes that the global (lower case "g" please) financial crisis is the sole culprit here.

Oqyana Group - KD72.6 Million Loss for Fiscal 2009

AlQabas reported on Oqyana's annual general shareholders meeting which was held at the Ministry of Commerce and Industry.  As you might guess from the latter statement, that's not a particularly favorable development.  The MOCI doesn't rent out space for meetings.  When a company has a shareholders meeting there, it's because the Ministry has instructed the company to hold one so that it can convey  information directly to the shareholders, usually to advise them of regulatory and other violations  by the company.  These days the MOCI seems to be holding a lot of such meetings.

AlQ mentions two of the comments made by the Ministry:  the Company's financials were delayed.  And it had not registered a piece of property it owns in Bahrain in its own name. Oqyana's Chairman, Nabil Jafar Abdul Rahim noted that the delay was because of the delay in Stehwaz preparing its financials and Oqyana holds 100 million shares in Stehwaz (!).  As to the second comment, he noted that the Company had set up a 100% owned Bahraini subsidiary to hold the real estate.

The Chairman also commented that the primary cause of the Company's loss of KD72.6 million for 2009  versus a gain of KD98 million the year earlier was the revaluation of assets.  Or perhaps more precisely devaluation of assets.  Shareholders' equity stood at KD369 million at FYE09 versus KD429 million the year earlier.  Total assets were down from KD493 million to KD438 million.  

Oqyana holds both Stehwaz and The Investment Dar shares in its investment portfolio.   What value they are being carried by Oqyana is not clear.  If you're not aware, all three companies can be considered distinguished business partners and members of The Investment Dar Group.

Abdul Rahim also noted that Nakheel had given the Company a two year extension to develop its property in Dubai.  Originally the property was to have been developed within 42 months ending in 2009.  Oqyana was unable to secure the necessary financing.  So the extension.  It's unclear  but presumably it's two years from 2009.   Recently, it's been knocking on the doors of local and other banks looking for between US$50 million to US$100 million in loans to move forward.  But it has had no success so far.   

As I'm sure The Real Nick can confirm, a real estate development company without access to loans is in dire straits.  Sort of the equivalent of "The Donald" losing his ego.

On the subject of financing, the Chairman noted that the Company had obtained a loan from a bank in Bahrain against shares of Stehwaz.   This apparently dates from more than a few years back given that Stehwaz has been in rather distressed conditions for some years now.

A new board was elected consisting of Mr. Nabil Jafar Abdul Rahim and representatives of TID, Safwat Real Estate, Efad Real Estate (also affiliated as a business partner with TID), and Adeem.  

If you're not familiar with Adeem, you can link here to "The Navy Seals" of the Investment World!  You can also use the tags "Adeem", "Stehwaz" and "The Investment Dar" to find earlier posts on those entities if you're interested.

Gulf Finance House - Plans to Increase Capital By Up To An Additional US$300 Million

GFH announced on the BSE today that its Board had decided to recommend that shareholders approve a n up to US$300 million increase in capital.   The Board has delegated executive management to take the necessary steps.  A shareholders meeting will be called in the near future as soon as the required regulatory approvals are received.

Gulf Finance House - 1H10 Financials: Reports of a Turnaround Greatly Exaggerated

On Friday I was quite excited to see that GFH had posted its 1H10 financials and press release thereon.  That is until I printed out the 2Q10 report and found it was actually that for 1Q10.  While the First Quarter was much much better than the Second, I'm assuming this is just a technical glitch, and not a desire to focus on relatively happier days of 1Q.  Hopefully by the time you use the link  above to the financials  all will have been corrected.

In the interim, here are some preliminary observations on the summary 1H10 financials printed in the newspaper, sans as is customary the all important notes thereto.  More detailed comments will follow when the full report is released. 

Income Statement

Revenues

1. GFH doesn't really have much to report for 2Q.  Like Global, GFH's first quarter was much better.  The second for both is rather disappointing to use a charitable term.  
2. GFH had US$7.4 million in revenues during 2Q10 (28.5% of 1H10's US$25.9 million).  In 1H09 the comparable revenues were US$68 million.  A decline of 61% for 2010.
3. 77% of 2Q's revenue was due to FX earnings. I don't believe that GFH has an active Treasury function and so this is probably FX translation gains - a non cash non business revenue. 
4. The US$5.2 million in revenue from "Investment Banking Services" was earned entirely in 1Q10 and as per that Quarter's report US$5.0 million was earned from related parties (Note #11).  That's  96%.  You can tell the economy's bad when when your own "relatives" have no business for you.
5. US$5.1 million in placement, arrangement and management fees, of which 79% was earned in 1Q10.  From the Cashflow Statement it seems that GFH has only collected US$0.2 million during 1H10.

Expenses

1. Staff costs at US$8.8 million are 34% of 1H09's!  Though there is an interesting spike in staff costs in 2010.  In 1Q10 staff costs were US$3.6 million and in 2Q10 US$5.2 million.
2. GFH took a US$20 million impairment provision in 2Q10 as opposed to zero in 1Q10.  This is down from 1H09's US$80 million.
3. The bottom line is that GFH's remarkable improvement in 1H10 versus 1H09 is due primarily to the reduction in expenses from 1H09's US$160.1 million to 1H10's US$73.6 million.  Chiefly reductions in impairment provisions and staff expenses.
4. You'll recall AA's test for a real turnaround in a business is the revenue line.  There is no evidence of any turnaround in the Company's core business. In fact compared to 1H09 core businesses are doing worse.  

Balance Sheet

1. Cash Positions -  Cash increased US$7.8 million largely it seems (though money is indeed fungible) from the sale of US$29.1 million of Treasury Stock for US$7.6 million.  That's a loss of US$21.4 million.  You'll see these numbers reflected in the changes in Treasury Stock and Statutory Reserve in the Equity Account.  An interesting transaction.  I wonder if this was through the market (presumably on the KSE) or a private placement to a wise investor?  Or to a related party?
2. Placements with Banks are down to US$121.1 million at 1H10 from US$156.7 million at 1Q10 and US$455 million at FYE09.  The large drop between FYE 09 and 1Q10 is due to  largely to debt repayments during the first three months of 2010.  In any case, as noted earlier the bulk of the remaining funds are pledged to secure GFH's commitments to make investments.  And so should (unless the 1H10 financials reveal otherwise) not be considered as part of the Bank's liquidity.
3. There was an approximate US$45 million decrease in the Receivable for Investment Banking Services from 1Q10, which I cannot find in the Cashflow Statement.  This may be responsible for the increase in Other Assets by a similar amount?
4. An intriguing new category "Assets Held for Sale" ("AHAS") with a balance of US$260 million makes an appearance in 2Q10.  Apparently a shift of assets from "Investment in Associates".  It will be very interesting to see the basis on which these are carried on the balance sheet versus Investment in Associates ("IIA").  If I remember correctly, IIA are carried at Fair Value Through Profit and Loss.  A change to a different basis for AHAS could have income statement implications., e.g. fair value through equity for one.  As well if they are no longer fair valued but carried at cost, that could potentially - but not necessarily - provide some relief on the recognition of changes in value as "impairments" have a different set of rules than "fair value changes".   The reason my antennae are up on this is because GFH chose 2Q to make this change at about the same time it has signalled that it wants to slow asset sales down.  So I'll be taking a close look at the note on this category in the 2Q10 report  when it is available to see if there is any potential Accounting Magic at work here.
5. Other Liabilities have dramatically increased from 1Q10 and from FYE09.   By US$124 million!!  Hopefully, unlike 1Q10, GFH will provide a note with a breakdown of this category for 2Q10.
6. 1H10 Equity was at US$416.5 million uncomfortably close to the US$400 million net worth trigger in GFH's Sukuk.  Without the 1Q10 remarkable conversion of the Deutsche Bank Murabaha which added US$25 million to Equity, GFH would have breached the covenant.  I use the term "remarkable" because I find it hard to understand why a rational investor would be converting debt in GFH to shares at this point.  Or why there would be a market to purchase GFH's Treasury Shares for that matter.  As I've written before, this transaction's structure allows capital to be infused into the firm without the time consuming process of an Ordinary General Meeting of Shareholders, a Rights Issue, etc.   With the selection of the amount and timing discretionary.  Then again perhaps a wise investor saw and continues to see something here that I don't.

As usual, GFH's Chairman and Group CEO have many favourable things to say about their  imagined turnaround.  And I suppose one would expect them to make these statements.  

However, to attempt to blame GFH's predicament on factors outside its control or to portray GFH as being in the same condition as every other "global investment bank" is a bit much.

First, GFH is not a global investment bank.  It was and is a regional investment bank.  Just as TID, Global, or Shuaa were and are.  In the grand scheme of things looking across the world, rather modest sized shops all of them.  

Second, the list of global investment banks in serious trouble is rather shorter than the list of all global investment banks.   Even if we were to grant GFH temporary hypthetical membership in the ranks of global investment banks, the Goldmine, Morgan Stanley, JP Morgan, Deutsche Bank et al may have tinkered with their strategies.  But they are not fighting for their lives.   Make no mistake GFH is in serious trouble.  Its rating, its share price and its financial condition clearly indicate that.

Gulf Finance House - 1H10 Losses of US$47.7 Million

Asa Fitch over at The National has an article on the subject.  Funny how GFH was able to get the news out to The National and other media outlets but unable to get the announcement on the three regional exchanges it's registered on.  Or on its website for that matter.

Once they publish their financial report, I'll comment in more detail.  For now, I'd just note that with other firms who have announced dramatic improvements in their 1H10 over 1H09 results that once you've written the assets down to realizable value there are no further write downs and income "improves".  Real improvement comes of course when your firm generates sustainable revenues and cashflow.

AlFarabi Investment Company Planning to Enter Under Financial Stability Law

Yesterday Al Watan published an article stating that Al Farabi had received agreement in principle from the Central Bank of Kuwait to enter under the protection of the Financial Stability Law.

Today AlWatan published an article in which AlFarabi's GM confirms the news.  But denies being the source of the leak as the Company's intention is to wait until the upcoming shareholders' general meeting.

AF is primarily Kuwaiti owned by financial institutions KFH and  Industrial Bank of Kuwait and corporate groups.  From Kuwait:  Al Mousherji, Al Sayer, Hasibat Groups of Kuwait and the Olayan Group of Saudi Arabia.   It states it conducts its business according to the Shari'ah.

It is a private equity, direct investment firm which is probably best known for winning the privatization of the lube oil blending plant from KNPC.  The lube oil venture is separately capitalized from AF.

Repost: AAOIFI May Limit Shari'ah Scholars' Role

An interesting article from Haris Zuberi over at The Islamic Finance Portal.

The guidelines may address whether Shariah scholars can own shares in the institutions they serve and how many advisory boards they join, said Mohamad Nedal Alchaar, secretary-general of the Accounting & Auditing Organization for Islamic Financial Institutions, whose standards have been adopted in countries including the United Arab Emirates and Qatar.

Gulf Finance House Secures Extension of US$100 Million West LB Facility

GFH announced on the BSE today that it had secured an extension of the US$100 million "stub" remaining from the US$300 million West LB syndicated murabaha.

The "new" facility is for a tenor of two years with a further one year extension at GFH's request.  The "profit rate" (interest rate) is reportedly lower.

This helps GFH avoid an immediate crisis as the full US$100 million was due this month.

An interesting question, if the banks have refinanced GFH because it could not pay and have reduced the interest rate, do Paragraphs 58 and 59 of IAS #39 require that the lenders book a provision?  See here for an earlier discussion of the requirements of IAS #39.

The Investment Dar - Musallam at Today's OGM - The Future is Bright

The following is based on AlAmir Yusri's article in the 10 August AlWatan.

Monday (9 August) TID held an ordinary general shareholders' meeting at the request of the MOCI in the words of Badr AlShamary, the representative of the MOIC, the meeting was called "in consideration for the shareholders, to protect the national economy, and in conformity with the Commercial Companies Law."  The Company will be holding its "own" OGM on 26 August.

Some 64.88% of shareholders were present and so there was a quorum.  AlWatan notes that the meeting was a vindication of sorts for the current management and board as not a single shareholder lodged a formal complaint or objection regarding management's or the board's conduct.  One shareholder did raise an objection about the MOCI's conduct with respect to TID.

During the meeting TID's Chairman and Managing Director, Adnan AlMusallam, made the following points:

1. TID is not going to be liquidated.
2. In fact its brightest days are ahead of it, apparently by 2012 if not sooner.
3. It has no "poisoned" assets but rather its assets are real.
4. While they were affected by the crisis, they did not die.  Such assets as Bank Bubyan, Aston Martin, Bank al Bilad, Oqyana and Khabaari are solid.
5. BLOM Bank has joined the restructuring after a conversation with the Company and the CCC - even after winning its court judgment in London.  (There is a critical difference between getting a judgment and getting the cash).
6. Now 83% of the creditors have agreed the restructuring.
7. Good progress is being made with Commercial Bank to come to a friendly resolution of the Bank Boubyan shares problem.
8. The Central Bank of Kuwait handled the crisis -- that's probably the global (small "g") financial crisis -- in the most professional of manners.
9. A small thing like a lawsuit wouldn't disturb our great relationship with the Central Bank.  (You'll recall that TID sued the CBK over what it claimed was unfair treatment concerning its 2008 financials).
10. TID has four month extension of the stay on legal claims against it in Kuwait.  You'll recall the Central Bank asked for an additional four months to decide whether to recommend for or against TID's final entry under the Financial Stability Law.

All in all a very optimistic assessment.  As Adnan noted even during the Iraqi invasion he refused to be pessimistic.  And if you've read the Arabic text closely ( ان شاء الله..والله على ما اقول شهيد ) , you'll have noticed that Adnan not only swore by God but also called Him as a witness.  So it's doubly hard not to take his comments at face value.

And no doubt with good reason.

Those persuaded by his performance will have to wait to buy shares as TID remains suspended on the KSE.

Gulf Finance House - Obtains Permission to Delay Release of 2Q Financials Until 16 August

GFH announced on the Bahrain Stock Exchange this morning that it had obtained the consent of the "regulatory authorities in Bahrain" to an extension of the time required to present its 2Q10 financial statements.  GFH has up to 16 August to issue the financials.  And since its Board will meet on 15 August to approve the financials, it appears that the release date will be next Sunday or Monday.

No reason was given for the need for the extension which is for a relatively "short" period.

There are two reasons that spring to my mind why such a delay would be required:

1. The extension of the roll-over of the US$100 million stub from the West LB syndicate which comes due this week has not been finally agreed.   If true, this could reflect some hard negotiating on deal terms and pricing.  Or perhaps a slow moving lender "thinking carefully" about its decision.
2. Its external auditors need for more time to complete their review of the 2Q report. This could be related to questions on the value of assets or income.  Equally clearly it could be related to the roll-over and the strength of the comments in their review "opinion" if roll over is or is not achieved.

These are not the only potential causes.

There could be some that are rather benign:

1. Inability to get a Board quorum until then for some reason, 
2. Unavailability of key audit firm personnel.   
3. The need to first finalize Khaleej Commercial Bank's 2Q report.  Though since its Board meets tomorrow the results should be known by now and could be included in GFH's financials for release the next day - Wednesday or Thursday.

However, I suspect these are not the cause but rather it's one of the first two above - which indicates the stress under which GFH is operating.

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 .‏

Islamic Finance - What Does That Term Mean? "Whither Islamic Finance?"

Islamic Finance - a topic much debated these days.

What does it mean?

Is is a real alternative to conventional finance?  Or just an Abu Yusuf trick?

Here's a link to a post by practicing Islamic banker from the GCC with his take on this topic.  "Whither Islamic Finance?"

Well worth a read.

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.

AlGosaibi v Maan AlSanea - Fortis Bank v ADIB - Fortis Drops "Structured" Bombshell

 

 Warning:  Ethics Depicted in Picture May be Smaller Than They Appear

In  my earlier post analyzing the Awal Bank L/C I spent a bit of time speculating on the transaction as a disguised money on money loan and the potential role of Bunge in the second leg, the purchase on a spot basis of the commodity back from from AlGosaibi/Awal Bank.  The necessary step to get funds to AlGosaibi for the loan.

As they say (and they are right), reading is fundamental.   I could have saved a bit of time by looking a bit closer at two documents I had printed out.  

Today having posted on the BNPP lawsuit against ADIB, I decided to finish off the ADIB topic by commenting on the two latest submissions by ADIB and Fortis' counsel in the Fortis Case (NY Supreme Court Reference #601948/2009) - Documents #78 and #79.   Documents I had printed out on 9 July!

Right there on the first page of the 9 June 2010 letter from George O. Richardson, III, Esq.  of Sullivan & Worcester, Fortis' counsel, was the revelation that Bunge had informed ADIB of the precise nature of the transaction via an email prior dated 7 April 2008 - that is, prior to the date  ADIB agreed to confirm Awal Bank's letter of credit.  ADIB's SWIFT confirmation to Fortis was sent 16 June 2008  as per Document #24 Exhibit #2.  Some two or so months later.   By the way, that document (not the Bunge 7 April email but the copy of  SWIFT confirmation of the LC) was submitted by ADIB as part of Nuhad Saliba's Declaration.  Ms. Saliba is Head of the New Countries and Global Wholesale Banking Department at ADIB.

The Bunge email was sent by Rachel Wong of Bunge SA Geneva to Naeem Ishaque, Manager Financial Institutions at ADIB.  There are a variety of copy parties but their affiliations are not clear from the message.  The email is Exhibit #1 to Exhibit A in the Richardson Letter (Document #79).

So what did the Bunge email say?

"Section 15. Structure  This is a structured transaction whereby Discounting Bank [AA:  Fortis though at this point Fortis name is not mentioned, perhaps because Bunge was still shopping the second confirmation] is required to discount or fund the Instrument in favor of the Beneficiary once the documents are deemed in compliance at its counter, Applicant [AA:  AlGosaibi Trading] will on-sell the Goods to another Bunge affiliated company ("Bunge Buyer").  Once Beneficiary receives the discounted proceeds under the Instrument, Bunge Buyer will effect sight payment to the Applicant immediately.  Applicant will enjoy the cash financing during the Tenor [AA:  the 360 days from acceptance of documents until payment] before repaying the Issuing Bank [AA:  Awal Bank] on maturity of the Instrument."

This effectively demolishes ADIB's argument that it thought this was a trade transaction and that somehow it was tricked and so inadvertently and innocently defrauded.   ADIB is clearly an active and knowing participant in the transaction which equally clearly is a "money on money" loan.  Some might say that transactions like this are  a fraud against the Shari'ah. (With respect to AA's position please see the last sentence).

It also raises a very fundamental question about ADIB's earlier legal arguments in which it and its counsel claim that the bank did not see this was a structured transaction and had no inkling that it was participating in a money on money financing.   

ADIB's learned counsel at Dewey & LeBoeuf have set a high standard of knowledge in their previous pleadings.  They asserted that because Fortis Singapore advised a L/C for the same goods and in fact the same documents, Fortis Netherlands - half way across the world - was deemed to know this with respect to the Awal LC  it confirmed. 

Therefore, it seems highly appropriate and fair to apply D&LB's standard to ADIB with even more rigor because ADIB operates from a single country.  Thus with the greater proximity one would no doubt expect that the knowledge at ADIB permeated every level of that firm, including the chap who makes the tea.

Some might also be tempted to remark that there is a repetitive pattern here with "Islamic" banks of much less than كلام شريف  in their legal pleadings as in the case of TID v BLOM.

Heeding the admonition of Imam AlGhazali, AA will remain silent on all these points.

AlGosaibi v Maan AlSanea - BNPP versus Abu Dhabi Islamic Bank in re TIBC L/Cs

In discussing the Fortis lawsuit against ADIB, I mentioned that ADIB was also a defendant in a lawsuit brought by BNP Paribas' "Full Commercial" Branch in the Kingdom of Bahrain.

The relevant documents can be found at the NY Supreme Court Website http://iapps.courts.state.ny.us/webcivil/FCASMain  under Case # 603365/2009.   Or more precisely one document as all that is posted so far is the complaint by BNPP - missing what I'll bet ares some very interesting attachments.  Unclear why this is.  Especially since the submission in question dates from November 2009.

Here are the facts from the material posted on the NY Supreme Court's website:

1. In March 2009, ADIB issued six irrevocable reimbursement undertakings ("IRU's") in favor of BNPP to induce it to confirm 6 "commercial" letters of credit issued by The International Banking Corporation in favor of Dawnay Day and Co for the Account of AlGosaibi Trading Company.
2. BNPP confirmed TIBC's letters of credit and then upon presentation of the documents accepted the documents and the time drafts presented.  
3. On an unspecified date, BNPP claimed reimbursement of some US$44,875,000 from ADIB.  Presumably, the maturity date of the accepted time drafts.
4. ADIB refused to pay.
5. In September 2009 (after acceptance of the drafts by BNPP) ADIB obtained a judgment in Bahrain Court enjoining ADIB from making any payment.  
6. BNPP is seeking to have the Court issue a temporary restraining order preventing ADIB from moving assets (presumably balances in its correspondent accounts in NY) from the USA.
7. Its claim is for the principal of the payment (US$44,875,000) plus interest, attorney's fees and costs.

Now to some comments.

1. It's not clear to me why there isn't more precision in documents sent to the Court with exact dates when events took place, additional details of the individual transactions -  currency, goods, tenor, etc.  Perhaps time was of the essence and BNPP's lawyers wanted to file quickly to block the potential movement of assets outside of the USA. 
2. Dawnay Day was a very large "financial firm" with a commodities trading wing which ran into some "financial difficulties" as a result, I believe, of the global financial crisis (small "g" as always).  It was also an active participant in structured "Islamic" trade transactions as described in my post about Fortis.  It had at least one subsidiary Condor Trading which it uses so that the "purchaser" and "seller" of the goods are not the same party.  
3. It appears (but the documentary record here is very slim so this is an educated guess) to be a mirror of the Fortis transaction.  The TIBC L/Cs are one half of the "Islamic" structure:  the purchase on deferred terms.  For TIBC/AlGosaibi to actually get the funds a spot sale on a cash basis is required.  That could have been with Condor with TIBC Bank acting as the "arranger" of the transaction.   That is probably the most likely scenario and the one that I think happened - but again note this is an educated (or uneducated) guess.
4. Since discovery in other legal cases has resulted in the publication of  some details of at least the US - domiciled US dollar accounts of Awal Bank and TIBC, clever boots might be looking through that material for incoming credits around the time of the negotiation/acceptance (but not the payment date) of the first leg letters of credit. That is in the Fortis case the Awal Bank LC confirmed by Fortis under ADIB's IRU.  And in the BNPP case, the letters of credit issued by TIBC and confirmed by BNPP against ADIB's IRUs.  If these are indeed disguised clean money on money loans, the second leg (the spot sale) should have occurred around the same time.  The amounts would not necessarily be the same as interest on the loan might be built into the price on the first leg (the deferred payment).
5. But one key additional bit of information.  If we look at the Fortis Case (NY Supreme Court Reference 601948/2009 Exhibit #2 Document #34 Amended Declaration of Qays Zubi, we note two things.  First, TIBC LC's seem to have been denominated in Euros not US.  Second, a restraining order has only been obtained for four L/Cs not six as mentioned in BNPP's complaint.  The total of the L/C's mentioned in the Qays Zubi Declaration are some Euros 18,243,975.  Clearly, that does not equal US$44,875,000.  Two L/Cs are "missing".  Does that give Fortis a legal "wedge"?
6. We also learn that the payment dates on the TIBC L/Cs were between 22 June and 24 June.  You'll also notice that the certified translation has an error in that it shows the last LC as due March 23,2009.  The Arabic clearly states (in "Western" numbers not Arabic!!!) 23 June. 
7. The central point of BNPP's claim (like that of Fortis) is that under a documentary (aka commercial) letter of credit the bank's obligation to pay is independent of the commercial contract.  Its obligation is set by the terms of the letter of credit.  Compliance with the documentary requirements of the letter of credit establishes the obligation.  
8. To overcome the rather substantial amount of case law and precedents in favor of BNPP's legal position, I believe ADIB has to prove two things. (a)  Fraud in the inception.    (b) Involvement of BNPP in that fraud.  That is a a tough row to hoe as the saying goes.  

Aayan Leasing and Investment - MOCI to Press Forward with Shareholders' Meeting

Muhammad Sha'baan at AlQabas reports that the Ministry of Commerce and Industry is determined to push forward with the shareholders' general meeting it has called and which will take place in early August.  At that meeting the MOIC will deliver its report to shareholders on the Company's financial condition as well as violations of various laws and regulations committed by the Company - including the delay in releasing financial statements, holding the required shareholder's annual meeting along with other unspecified violations.

As per the article, the MOCI does not intend to tell the shareholders what to do but expects that they will in light of its report take action.  It will also refer certain violations to the Public Prosecutor for investigation.

The Company has apparently tried to get the MOCI to let it set the agenda for the meeting.  The MOIC has refused and has noted that the shareholders' meeting it has called will take place prior to any OGM that the Company may call. 

Apologists for the Company have reportedly argued that the Company was unable to secure the Central Bank of Kuwait's approval of its financials until just recently and so it shouldn't be held accountable for the delay in financials.  Further as financials are a condition precedent to an OGM, neither should it  be blamed for the failure to hold the OGM.   Critics have retorted that the Company delayed in providing certain information to the Central Bank and is therefore, after all, culpable.

The Future of Sukuk - Asa Fitch at The National

Asa Fitch over at The National has a piece on the sukuk market which you might find interesting.

Personally, I vote for a future.  As with any new financial instrument there is a bit of teething pain.  And the problems encountered today will lead to changes in structures  to correct defects.  As well, one can wish for a bit more investor intelligence though that is perhaps pushing the frontier of optimism a bit far.

Aayan Leasing and Investment - Press Release on 2009 Financials

Below is Aayan's announcement of its 2009 financial results from the KSE.  As usual Arabic only.  If you're wondering why Total Liabilities and Equity don't foot to Total Assets of KD510 million, the difference is Minority Interests of KD 42 million.

Looking at Aayan's 3Q09 financials, it's pretty clear that the bulk of the loss was due to the watchful eye of the Central Bank of Kuwait which no doubt suggested that ALI recognize  in 4Q09 an additional KD50 million of its full year losses of KD77 million.  That latter figure includes the share of Minority Interests in the loss - roughly KD3.8 million.  When the full report becomes available, it will be possible to refine that calculation. 

For those who don't read Arabic:

1. The first line is net profit/loss.  KD(73.3) million
2. The second net profit/loss per share.  KD(119.18)
3. The third current assets.  KD162.2 million.
4. Then total assets.  KD510.1 million.
5. Then current liabilities.  KD400.4 million.
6. Then total liabilities.  KD436 million.
7. Then shareholders' equity (excluding minority interests).  KD31.2 million.
8. 2009's figures are on the right with comparable 31 December 2006 figures on the left. 
9. And to facilitate your reading, I've included after each of the categories above the rounded 2009 figures.

That information is followed by standard details on related party transactions:  KD0.321 million of income and KD4 million of expenses.  The fact that the Board has decided to recommend against a cash dividend for 2009.  The longish bit is an extract from the auditors' comments on the Company's financial condition (summarized in my post yesterday so I won't repeat here) along with the comment that ALI's accumulated losses exceed three-quarters of its legal capital and so in accordance with Article 171 of the Commercial Companies Law it is required to call an extraordinary shareholders' meeting to come up with a solution.  The options are  (a) raise new equity, (b) reduce capital or (c) dissolve the Company.   A solution can involve both options (a) and (b).

[8:17:36]  مجلس ادارة (اعيان) يوصي بعدم توزيع ارباح عن عام 2009‏
يعلن سوق الكويت للأوراق المالية بان شركة اعيان للاجارة والاستثمار (اعيان)‏
افادت ان مجلس الادارة قد اجتمع يوم الاثنين الموافق 12-07-2010‏
واعتمد البيانات المالية السنوية للشركة للسنة المالية المنتهية في 31-12-09‏
وفقا لما يلي:‏
ِ1) نتائج أعمال الشركة:‏
البند             السنة المنتهية في 31-12-09   السنة المنتهية في 31-12-08‏
الربح(الخسارة) (د.ك)           (73.358.493)            413.729‏
ربحية (خسارة)السهم(فلس كويتي)   (119.18)                 0.68‏
اجمالي الموجودات المتداولة     162.182.723       259.676.790‏
اجمالي الموجودات              510.109.513        600.822.985‏
اجمالي المطلوبات المتداولة     400.371.774       333.762.993‏
اجمالي المطلوبات               436.985.779      450.438.515‏
اجمالي حقوق المساهمين        31.200.238        101.523.604‏
بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 321.117 د.ك
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 3.997.962 د.ك
علما بان موافقة بنك الكويت للاوراق المالية على هذه البيانات كانت بتاريخ
ِ07-07-2010 .‏
ِ2) التوزيعات المقترحة:‏
أوصى مجلس ادارة الشركة بعدم توزيع اى ارباح عن السنه الماليه المنتهيه
في 31-12-2009 . علما بأن هذه التوصيه تخضع لموافقه الجمعيه العموميه ‏
والجهات المختصه .‏
علما بان تقرير مراقبي الحسابات يحتوي على التالي :-‏
ِ1- عدم التأكد المتعلق بالاستمرار على اساس مبدا الاستمرارية :‏
دون التحفظ في رأينا ، نلفت الانتباه الى الايضاح رقم 2 حول البيانات ‏
المالية المجمعة والذي يبين ان المجموعة تكبدت خسائر بمبلغ 77.175.466 د.ك
للسنة المنتهية في 31 ديسمبر 2009 ، وكان لدى المجموعة خسائر متراكمة ‏
بمبلغ 67.505.320 د.ك ، وكما في ذلك التاريخ تجاوزت المطلوبات المتداولة
للمجموعة موجوداتها المتداولة بمبلغ 225.892.585 د.ك . اضافة الى ذلك ، ‏
عجزت الشركة الام عن سداد التزامات دين مبلغ 78.065.913 د.ك وعلقت ‏
دفعات سداد المبالغ الاساسية لالتزامات الدين الى البنوك والمؤسسات المالية،
وهي تعمل بفاعلية مع الممولين لاعادة جدولة التزامات ديونها . ان هذه الظروف
مع الامور الاخرى المبينة في ايضاح 2 ، تشير الى وجود عدم تأكد مادي مما ‏
يمكن ان يثير شك كبير حول قدرة المجموعة على الاستمرار في اعمالها على ‏
اساس مبدأ الاستمرارية .‏
ِ2- الامور القانونية والرقابية الاخرى :‏
ووفقا للمادة رقم 171 من قانون الشركات التجارية ، حيث ان الشركة الام قد ‏
خسرت اكثر من ثلاثة ارباع رأس المال ، يجب على مجلس ادارة الشركة ‏
الام الدعوة الى عقد جمعية عمومية غير عادية لمناقشة خطط الشركة الام ‏
في المستقبل .‏

Aayan Leasing and Investment - 2009 Losses of KD73.2 Million

Aayan Leasing and Investment has reported its 2009 earnings and they are dismal:

1. A net loss for the year of KD77,175,466.
2. Accumulated losses of KD67,505,320
3. Current Liabilities exceed Current Assets by KD225,892,585
4. Default on KD78,065,913
5. Breach of Article 171 of the Commercial Companies Law = Loss of more than 75% of legal capital.

Not a pretty picture, but I suspect still prettier than what happens to creditors and shareholders.