The Investment Dar - Changes to Restructuring Plan?

Al Qabas reports that this Wednesday, TID held a meeting in Dubai with the Creditors Co-ordinating Committee and Ernst & Young.  This is the first meeting between the CCC and E&Y.  Earlier the CCC had submitted a letter to E&Y asking that it look out for the interests of lenders as well as the owners of the Company.   

As you'll recall, E&Y has been tasked by the Central Bank to perform the technical study required under the FSL as part of the CBK's determination of whether to recommend that the Special Court make the final decision to either allow TID the protection of the FSL or deny it.  So E&Y is working for the CBK and not the lenders or the owners/borrower.

What's intriguing is that the article also mentions that the CCC has been pressuring the Company to inform it of changes and amendments in the restructuring plan which were made without the knowledge of the lenders.  If you've read earlier posts here, you'll recall that I mentioned in March that the FSL gave the CBK the right to impose additional conditions on the borrower and amend the plan in order to improve the probability of the borrower's performance.  

In this situation, the CBK holds the trump card.  It's "yes" vote is necessary for obtaining entry under the FSL.  Given that a liquidation under local laws would be messy and greatly reduce recovery prospects, both TID and the lenders are going to find it difficult to say "no" - though I suppose they can try to negotiate.   The CBK can counter by citing the report of E&Y - the independent experts asked to assess TID's financial condition and the plan.

It's also important to note that Al Qabas' account is only as good as its sources.  Last July the newspaper reported that E&Y was submitting a "final" report.   Though I suppose one possibility is that E&Y's report at that time said that the Company's  financial condition meant the original plan wouldn't "work" and needed to be modified. 

Absent a direct link into the creditor group, we'll have to wait to see what develops.  If any creditor out there reads this as an invitation to comment, he'd be right. Or, if the creditor prefers, make contact outside the blog via our contact form.

The article also mentions that during the  meeting Brother Adnan, TID's Chairman/CEO, reportedly advised the lenders that he had consulted God before founding the company.  «استخار الله ثم اصدر اوامره في تأسيس شركة تحوي بعض الاصول» .  Subsequent events would appear to confirm that he failed to maintain subsequent contact for management advice.  Or perhaps ignored what advice he did receive. Or perhaps he got a "wrong number" in his original contact

Some of the creditors expressed their disapproval over some of the decisions that Mr. Al Musallam had taken.  After a closed debate, he left the meeting and did not return, leaving the CCC and creditors with an advisor.  Some creditors are reported to have objected that the advisor had no legal status. He was not an officer of TID.  He retorted that he had a position in one of the external entities (whatever that means).

Things aren't going well.  

It seems that relations between TID and its lenders are difficult.  Mr. Al Musallam should remember that during the rescheduling the lenders will be poking their noses into his business.  While the restructuring covenants are no doubt "arranged with the greatest of care in the hopes that the cashflow soon would be there", there will be times when interpretations of meaning will arise.  Disgruntled creditors can read things more strictly if their backs are up.

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.

Deloitte Survey on Islamic Banking

You may have seen press reports on a recently released Deloitte survey on Islamic banking.  In at least a couple of cases press reports implied that Deloitte was issuing calls for certain actions to be taken. What I think is the more appropriate characterization was that it was reporting the views of participants in its poll.

The poll itself appears to be a fairly standard exercise  - highly familiar to those of a certain rank in the business world who have email.  One receives a questionnaire and is asked to fill it out. I'm guessing the response rate is not high.  And in many cases the responses are crafted by someone junior to the "business leader".

Deloitte surveyed 40 IFIs and Islamic finance executives across the Middle East.  Well, actually with a focus on Saudi Arabia, Bahrain, UAE, Qatar and Lebanon (page 6).  Surprisingly, Kuwait - the home to KFH and other IFIs - is not included.  

It seems highly unlikely that the results of Deloitte's poll like others of this sort are statistically significant, though they do provide an impressionistic insight into issues.

Let's go to the survey.   

First Deloitte's summary.

Several key themes emerged in the results of this survey.  The first is a fair consensus on the need for an effective regulatory framework and good governance. The survey findings emphasize the importance of introducing new or revised regulatory measures–chief among them being Islamic accounting standards and risk management.  A second theme is the importance of adopting best practices and transparency in financial reporting. A great deal of the present industry shortcomings and performance shocks can be attributed to a lack of practice consistency and regulatory compliance. The necessity of adjusting investment strategies through diversification is a third theme of this report. A final theme is the need for investment in human capital and talent development to cope with the growth and industry challenges.

Now some details.

A.  Areas Requiring New Regulatory Action to Ensure Compliance and Best Practice

1. Islamic Accounting Standards - 61%
2. Risk Management - 61%
3. Corporate Governance - 58%
4. Shari'a Standards and Compliance - 55%
5. Bank credit exposures -45%
6. Conduct of Business and Professional Excellence - 42%

(AA:  It seems to me that the last point can be viewed as responsible for many of the shortcomings embodied in the above.  The smart ethical fellow doesn't need a rulebook to know what to do and to do it).
 
B.  Adequacy of Regulation of Islamic Finance

1. Over regulated - 3% 
2. Appropriately regulated -31%
3. Under regulated - 66%

(AA:  And Deloitte apparently didn't survey Kuwaiti entities!!)

C.  Best Form of Shari'a Regulation

1. Firm specific Shari'a boards - 43%
2. A single regional Shari'a board -57%

(AA:  The single regional board model is used further East - Malaysia, Pakistan - as well as in the Sudan).

D.  Extent of Risk Management for Islamic Financial Products

1. Exists in our organisation - 50%
2. No specific Islamic risk management - 50%

Responses to this question further ranked risks in order of importance:  credit risk (66%), operational risk (60%) and market risk (53%).

E.  Do IFIs Lag Conventional Banks in Risk Management?

1. Yes -    63.4%.
2. Same -  20.0%
3. No -      16.7%

F.  Corporate Restructuring and Capital Adequacy

1. More than 50% of IFIs said they need more capital.
2. 57% said that it was likely they would restructure a current Islamic debt over the next 12 months.

(AA:  Unfortunately, Deloitte did not provide more detail on the response to the second question.  This seems very very high.  I guess that it's either a problem with the sample or with the definition of "restructure".  Perhaps, this includes some non distressed rollovers or refinancings??)

G.  Change in Business Models

1. 66% said that they expected a change in business models in the near future.

(AA:  Not surprising given the problems with previously "proven" business models).
 
H.  Most Relevant Business Models for Islamic Finance

1. Retail - 45%
2. Wholesale - 24%
3. Domestic - 14%
4. Cross Border - 10%
5. Corporate - 7%

(AA:  A couple of interesting points here.  First, no mention of Islamic investment banking.  Second, a very low number for corporate banking.  Again I wonder if this is a problem with the sample or the construction of the question / set of options).

I.  Real Estate Exposure

1. 66.7% of IFIs have REE up to 20%.
2. 18.5% between 21% to 40%. 
3. 7.4% between 41% to 60%.
4. 3.7% between 61% to 80%
5. 3.7% between 81% and 100%.

The survey covers additional sub topics on those listed above as well as a few other topics.

Central Bank of Kuwait Denies Noor and Gulf Investment House Extension on Treasury Share Purchase

I don't remember seeing this sort of refusal before. But I may have missed it.

In any case today, the Central Bank of Kuwait announced that it had refused to extend its earlier approval to both GIH and Noor to purchase or sell up to 10% of their own stock.   Announcements below.

Also anyone out there who can help with tafsir on the legal references please do.  I don't understand the reference to the Commercial Companies Law.  Article 115 has to do with the issuance of "redeemed shares".  Could this be a reference to Article 114?  Nor am I familiar with Ministerial Order (sometimes Ministerial Resolution) #10 of 1987 nor that of #11 of 1988 which amended it, nor #273 of 1999. 

In any case, it would seem a prudent regulatory move to restrain investment companies from buying treasury shares until their financial conditions had shown robust improvement.  Certainly, at this time companies have better uses for their limited liquidity than punting in their own shares.  You'll note in both cases the two firms asked permission to buy their own shares.

GIH

[9:13:26]  ِ.عدم موافقة المركزي لبيت الاستثمار الخليجي بشراء مالايتجاوز 10% من اسهمها
يعلن سوق الكويت للاوراق المالية بأن بنك الكويت المركزي افاد بعدم الموافقة
على طلب تجديد سريان الموافقة لشركة بيت الاستثمار الخليجي (الخليجي) بشراء ‏
ما لا يتجاوز 10% من اسهمها المصدرة ويمكن للشركة فقط القيام بالبيع من رصيد
الاسهم المشتراة المتوافرة لديها وذلك لمدة ستة اشهر تنتهي في 17-3-2011.‏
حيث ان ذلك الامر يتطلب ضرورة الالتزام بما وضعه البنك المركزي من ضوابط
وشروط في شأن تملك الشركة المساهمة لاسهمها اضافة الى ضرورة الالتزام ‏
بأحكام المادة 115 مكرر من قانون الشركات التجارية واحكام القرار الوزاري
رقم 10 لسنة 1987 وتعديلاته بموجب القرارين الوزاريين رقم 11 لسنة 1988‏
ورقم 273 لسنة 1999.‏

Noor

[8:50:52]  ِ.عدم موافقة المركزي لنور للاستثمار (نور) بشراء مالايتجاوز 10% من اسهمها
يعلن سوق الكويت للاوراق المالية بأن بنك الكويت المركزي افاد بعدم الموافقة
على طلب تجديد سريان الموافقة لشركة نور للاستثمار (نور) بشراء ما لا
يتجاوز 10% من اسهمها المصدرة ويمكن للشركة فقط القيام بالبيع من رصيد
الاسهم المشتراة المتوافرة لديها وذلك لمدة ستة اشهر تنتهي في 28-3-2011.‏
حيث ان ذلك الامر يتطلب ضرورة الالتزام بما وضعه البنك المركزي من ضوابط
وشروط في شأن تملك الشركة المساهمة لاسهمها اضافة الى ضرورة الالتزام ‏
بأحكام المادة 115 مكرر من قانون الشركات التجارية واحكام القرار الوزاري
رقم 10 لسنة 1987 وتعديلاته بموجب القرارين الوزاريين رقم 11 لسنة 1988‏
ورقم 273 لسنة 1999.‏
 

Gulf Finance House - Ted Pretty Sees Pretty Good Times Coming

Al Watan has an interview with GFH"s Group CEO Ted Pretty.  They noted that he was a bit more optimistic with them than with the Western media he had met with.  Perhaps, things have improved.  Perhaps, it's a bit of market segmentation.

Here are the main points. My comments are in italics and contained within parentheses.

1. GFH faces difficulties but will regain health at the beginning of 2011.
2. In the past we bit off more than we could chew.
3. The current strategy is to focus on existing investments and projects, complete these and realize value. (AA:  More on strategy later this is not the complete picture).
4. GFH took action early and is starting to see the benefits.  Our 1H10 loss is smaller than 2009's.  Because of its wise actions, the bank is well positioned for profitability and growth in 2011.
5. GFH's 2010 priorities are:  restoring its operating model, reestablishing sources of income, cost control and rescheduling debt.
6. Going forward business activities will comprise as well raising financing, providing consulting services, managing assets, and the development of private capital (private equity), particularly in forming Islamic financial institutions.  He then noted that GFH had raised some US$2.5 billion in capital for a variety of firms:  First Energy Bank, Khaleej Commercial Bank, Bank Q Invest, First Leasing Bank, Asian Finance House, Arab Finance House and others.
7. He said that new capital is not required for and  will not be used to repay debts.   There's no need because the WestLB syndicate and LMC syndicate have been rescheduled.  (AA:  No doubt wishing to reassure investors.  The proceeds of the 2009 new capital were used to repay debt).

He also commented that fear was depressing economic and market activity.  However, he noted that several countries had proven that they were able to restart their economies without being dependent on recovery of the US economy.  And called for SWFs to do more to support and develop economic activity in the region noting that the average investor had a predilection to invest in Europe or the USA.

If you believe his pitch, this would be an excellent time to buy GFH shares.  They're selling below par.  Way below par.  US$0.125 on the BSE versus a par value of US$0.33.  The upside potential is unlimited as they say.

And since GFH has yet to publish its Basel II Pillar 3 disclosures as of 30 June 2010 as mandated by the Central Bank of Bahrain, many of you may be forgiven for assuming this means the bank has no risks to report - which, if true, could be a very positive "buy" signal.

Al Safat Investment Kuwait - More Detail on 1H10 KD1.1 Million Loss

Additional detail on ASIK's 1H10 financial performance via an article in Al Watan quoting ASIK's Vice Chairman Mohammad Ali Al Naqi.

While the Company did indeed have KD4 million in profit on the sale by one of its subsidiaries of an investment (in the PRC), this was overwhelmed by mark to markets on Kuwaiti shares.  The VC noted the significant decline on the KSE in 2Q10 as well as KD2.48 million of precautionary provisions on   أرصدة مدينة  .

I'm translating these as "debit balances" and presume they relate to receivables of some sort as opposed to investments.   And I'd certainly welcome any comments from readers who either would like to confirm or amend that translation.

Earlier post on ASIK's 2010 performance here.

The Investment Dar - Dubai Creditor Meeting

TID held a creditors' meeting in Dubai 21 September.  Both Al Watan and Al Qabas have accounts.

The Al Watan (Taamir Hamaad) article is fairly bland - no fireworks.  Adnan Al Musallam  is quoted as reiterating TID's firm desire to repay its debts, adding that the reality of the financial crisis made it incumbent  on everyone the obligation to work together to reach the restructuring.   

He also proposed the formation of a holding company capitalized at between KD300 million to KD400 million - to be administered by the banks and investors - as the vehicle to settle TID's debts.  The rationale appears to be to ensure compliance with the Central Bank of Kuwait's new rules on investment companies.  Apparently to shift the debts off TID's balance sheet along with the assets - thus  improving TID's performance under the CBK's  three ratio tests.  He said that he had requested the executive and legal management of the Company to study this matter.

On the other hand Al Qabas (Mohammad Sha'baan) has a more fiery story (not unexpected) of creditor "anger".  In the Al Qabas version, some creditors are on the verge of a confrontation with TID and its Board over the following:

1. A belief that parties outside the formal management/Board structure of TID are really making the decisions
2. That the Company is deliberately stalling progress
3. That the creditors have been overly patient during the past two years but have gotten nothing from the Company
4. Board Members are deliberately missing meetings with creditors and provoking confrontations in order to evade responding to creditor requests.  A central point is the creditors' demand that they be kept fully in the picture as to what is going on at TID, including efforts to comply with the Central Bank's new regulations for investment companies
5. That some creditors are prepared to bring legal action against all parties - including against the Creditors' Coordinating Committee,  if there is an attempt to impose the restructuring plan without 100% creditor acceptance or acceptance by an absolute majority of creditors.   AA:  This is a puzzling statement.  It's pretty clear by now that all creditors are not going to accept the plan.  And equally that the whole point of recourse to the FSL is to cram down dissident creditors.  Al Qabas' informed sources may be less informed than they claim.
6. That TID has apparently stopped its program of salary reduction for senior management and that the salary scale has reverted to what it was in the boom years.  AA:  This is similar to the earlier theme about creditor anger over a raise and bonus for a member of senior management.  A neat way of attempting to finesse this is to eliminate a reduction and say that technically the fellow is not getting a raise but rather his salary is being restored to what it was prior to the reduction.  Unclear if this is what is going on. 
7. That some Board Members through related companies they control, companies which are partners with TID in certain assets, are gaming the realization of assets.  AA:  This is the fundamental creditor fear - that asset disposals will be gamed to reduce the banks' realization proceeds.  Not an unreasonable fear in the land of egregious related party transactions.

Two quite different accounts, though it should be noted that Al Qabas is speaking about creditor discontent which might manifest itself in the future not battles raging at present.

There's a creditors meeting today in Kuwait for those creditors who missed Dubai.  Hopefully, more detail will be forthcoming.

It's no surprise that creditors' patience is wearing thin.  It's been over two years.  The Central Bank is still reviewing whether to allow TID to use the FSL as cover for its rescheduling.  TID has yet to release any 2009 financials - either quarterly or fiscal year 2009.

Al Safat Investment Kuwait: 1H10 Loss KD1.1 Million

Al Safat Investment issued its 1H10 financials on the KSE today (as usual Arabic only text which is below).

The headlines:

1. A loss for the 1H10 of KD1.1 million and for 2Q10 a loss of KD2.3 million.
2. Comparable figures for 2009 were KD0.05 million for 1H09 and a profit of KD2.0 million for 2Q09.
3. Shareholders' equity stood at KD109 million versus KD136.5 million a year earlier.
4. Current Assets KD56.9 million
5. Total Assets KD177.1 million
6. Current Liabilities KD56.6 million (Positive working capital!)
7. Total Liabilities of KD67.9 million.
8. Total Equity of KD109 million.
9. Don't have an explanation for the KD154,300 difference between Total Assets and Total Liabilities plus Total Equity.  Treasury Shares?

What's interesting is that earlier ASIK had announced  that one of its subsidiaries had concluded a successful exit from a holding in the PRC which would give a profit of KD4.25 million  which would be reflected in ASIK's 2Q10 results.  That suggests that there were total expenses of at least KD6.55 million in 2Q10, assuming no other revenue. Mark-to-markets or provisions, pehaps? 

[9:8:50]  بلغت (خسارة) (الصفاة) (1) مليون د.ك لل6 أشهر المنتهية في 30-06-2010‏
يعلن سوق الكويت للأوراق المالية أن شركة الصفاة للاستثمار (الصفاة)‏
حصلت على موافقة بنك الكويت المركزي على بياناتها المالية المرحلية للفترة ‏
المنتهية في 30-06-2010، يوم الخميس الموافق 16-09-2010 ،
وفقا لما يلي:‏
البند     ال3 أشهر المنتهية في 30-06-10     ال6 أشهر المنتهية في 30-06-10‏
الربح (خسارة)(د.ك)           (2.283.982)               (1.052.962) ‏
ربحية(خسارة)السهم (فلس كويتي) (2.95)                       (1.36) ‏
اجمالي الموجودات المتداولة                                56.860.414‏
اجمالي الموجودات                                          177.095.485‏
اجمالي المطلوبات المتداولة                                 56.566.959‏
اجمالي المطلوبات                                           67.979.802‏
ِ اجمالي حقوق المساهمين                                   108.961.399‏
بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 342.017 د.ك
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 162.545 د.ك
الفترات المقارنة:‏
البند     ال3 أشهر المنتهية في 30-06-09     ال6 أشهر المنتهية في 30-06-09‏
الربح (خسارة)(د.ك)            2.008.551                    49.797 ‏
ربحية(خسارة)السهم (فلس كويتي)  2.60                          0.06‏
اجمالي الموجودات المتداولة                                66.093.906‏
اجمالي الموجودات                                          210.284.340‏
اجمالي المطلوبات المتداولة                                 38.250.324‏
اجمالي المطلوبات                                           73.726.219‏
ِ اجمالي حقوق المساهمين                                   136.532.947‏
وعليه سوف تعاد الشركة الى التداول بعد عشر دقائق من نزول الاعلان .‏

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.

Global Investment House - Al Madina Wins Appeal Against Global

"You're it!"

Today Al Madina Finance and Investment announced (on the KSE and the DFM) that the Appeals Court had overturned the earlier judgment in Global's favor which was rendered by the MOCI's Arbitration Tribunal.

Under that earlier judgment (last April), Al Madina had been ordered to pay Global:

1. US$10,011,224 dollars principal of a loan plus
2. US$300,000 in compensation

If you remember the history, at that time, Al Madina noted that the  judgment was only preliminary and not final and that it would appeal.

Today it noted that on 8 September the relevant court had voided the MOIC Arbitration Tribunal's judgment and had referred the case to the Department of Experts for study.  Al Madina noted this meant that any steps taken by Global to enforce the Tribunal's judgment would be void.

For its part, Global retorted on the KSE (text Arabic only below), that the court judgment was preliminary and not final. And that Global would appeal.

In effect, the game of tag continues.

[12:39:50]  ِ.ايضاح من (جلوبل) بخصوص الدعوى رقم 2010/1675 ‏
يعلن سوق الكويت للأوراق المالية عطفا على اعلانه السابق بتاريخ 04-04-2010 ‏
والخاص بمنازعة التحكيم رقم 2010/41 والتي صدر فيها حكم من هيئة التحكيم ‏
التجاري فى غرفة صناعة وتجارة الكويت بالزام شركة المدينة للتمويل ‏
والاستثمار (المدينة) بان تؤدي لشركة بيت الاستثمار العالمي (جلوبل) ‏
مبلغ وقدره 10,011,224 دولار امريكي قيمة اصل الدين ،ومبلغ 300,000 دولار ‏
امريكي على سبيل التعويض .‏
تفيد شركة (جلوبل) بانه صدر فى الدعوى المذكورة ‏حكما بجلسة 08-09-2010 ‏
والذي جرى منطوقه حكمت المحكمة: ‏
ِ1-ببطلان حكم التحكيم الصادر عن مركز الكويت للتحكيم التجاري بتاريخ1-4-2010‏
لدعوى التحكيم لسنة 2010/41 .‏
ِ2-‏وفى موضوع الدعوى :باحالتها الى ادارة الخبراء ‏
كما افادت شركة (جلوبل) بان هذا الحكم ابندائيا تميهديا غير منهي للخصومة و
ليس نهائيا وانه سوف يتم الطعن عليه بالاجراءات القانونية المناسبة فيما ‏
اذا صدر فى غير صالح شركة بيت الاستثمار العالمي (جلوبل) ‏

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.

New CEO at Unicorn Investment Bank Bahrain (Delayed News)

I'm catching up on some old news.  

In case you missed it on 2 August, Unicorn appointed Mr. Ikbal Daredia as Interim CEO of the Bank with immediate effect replacing the former MD and CEO, Mr. Majid Al Refai.   Mr. Al Refai remains a member of the Board of Directors.

Mr. Daredia is the Global Head of the Bank’s Capital Markets, Institutional Banking and Treasury units. 

While no reason was given for the abrupt change, rumor (and note that word) is that the Board had differences over "strategy" with Mr. Al Refai - similar to those he had with the Arcapita Board earlier.  Mr. Al Refai is known in part for his keen interest in developing Islamic banking business in Asia.  The Board reportedly wanted to concentrate on Saudi Arabia.  As with Arcapita, he was one of the drivers of the foundation of Unicorn.

Those who read Unicorn's 1H10 financials will also note a loss of US$160 million for the first six months of the year due to provisions of US$97 million and fair value negative adjustments of US$51 million.   This resulted in an approximate 40% decrease in shareholders' equity to US$253 million.  In 2009 the Bank had a modest net income of US$2.2 million.

Aref Investment Company - 1H10 Losses of KD21.4 Million

Aref Investment Group reported its 1H10 financial results on the KSE this morning.  As usual, the announcement is in Arabic only (text below).  With the provision of this report, the KSE will allow the resumption of trading of AIG's shares.

1H10 losses KD21.4 million versus KD38million for the comparable period the year before.  The KD206 million amount for shareholders' equity includes minority interests of some KD37 or so million.

As I've noted before KFH owns some 53% of AIG and is providing support to weather the current crisis.  Earlier posts can be accessed using the tag "Aref".

[10:27:46]  بلغت (خسارة)(عارف) (21.4) مليون د.ك لل6 أشهر المنتهية في 30-06-2010‏
يعلن سوق الكويت للأوراق المالية أن شركة عارف الاستثمارية (عارف)‏
حصلت على موافقة بنك الكويت المركزي على بياناتها المالية المرحلية للفترة ‏
المنتهية في 30-06-2010، يوم الاثنين الموافق 30-08-2010 ،
وفقا لما يلي:‏
البند     ال3 أشهر المنتهية في 30-06-10     ال6 أشهر المنتهية في 30-06-10‏
الربح (خسارة)(د.ك)             (16.954.474)            (21.418.959) ‏
ربحية(خسارة)السهم (فلس كويتي)     (16)                         (20) ‏
اجمالي الموجودات المتداولة                                   299.743.103‏
اجمالي الموجودات                                            661.056.688‏
اجمالي المطلوبات المتداولة                                   392.279.750‏
اجمالي المطلوبات                                             452.963.950‏
ِ اجمالي حقوق المساهمين                                     208.092.738‏
بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 680.466 د.ك
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 7.859.169 د.ك
الفترات المقارنة:‏
البند     ال3 أشهر المنتهية في 30-06-09     ال6 أشهر المنتهية في 30-06-09‏
الربح (خسارة)(د.ك)            (20.470.712)           (38.020.436)‏
ربحية(خسارة)السهم (فلس كويتي)     (19)                       (36)‏
اجمالي الموجودات المتداولة                                  311.066.999‏
اجمالي الموجودات                                           657.443.445‏
اجمالي المطلوبات المتداولة                                  333.757.640‏
اجمالي المطلوبات                                            450.767.484‏
ِ اجمالي حقوق المساهمين                                    206.675.961‏
وعليه سوف تعاد الشركة الى التداول اليون الثلاثاء الموافق 31-08-2010‏ 

The Investment Dar and Commercial Bank of Kuwait - Settlement of Boubyan Bank Shares

Quoting informed banking sources, AlQabas reports that Commercial Bank of Kuwait has proposed to TID that the BB shares be sold and that any amount remaining after the settlement of TID's obligations to  CBK will then be remitted to TID.

In effect then, CBK is proposing to treat the transaction as a secured loan rather than a failed repurchase agreement.  Under the latter, CBK would be entitled to absolute ownership of the shares with no payment at all to TID.

Clearly, CBK doesn't want to enter into the rescheduling as one of the creditors and share the BB shares (very good collateral) with the entire set of creditors in return for "security" in the pool of what Adnan Al Musallam has more than once described as "strong" assets (which are probably less "strong" and certainly less liquid than Boubyan's shares). 

There is a reason why some creditors lend on a secured basis as opposed to an unsecured one.   They get to pick the collateral that gives them the credit comfort they need to extend the loan.  And know that if the borrower doesn't pay, they have a second way out that doesn't involve a rescheduling.

The proposal seems an eminently reasonable solution.  

As the parties have haggled over this problem, they lost a chance to conclude a quick sale with a willing buyer with deep pockets (National Bank of Kuwait).   Perhaps, the Central Bank can be persuaded to allow NBK to buy another 19.196%.  The share price is an attractive KD0.560.

Aayan Leasing and Investment - 1Q10 Loss of KD7.8 Million

ALI announced its 1Q10 earnings today on the KSE.  As usual only Arabic text  (below) is available. The Central Bank of Kuwait approved release of the financials on 16 August.  There was no explanation for the delay.  Based on "history", I'm guessing that as with the Company's 2009 financials, the delay has been occasioned by the KSE's more than usual scrutiny.

The headline number is a loss of KD7.8 million for the first quarter compared to a loss of KD12.5 for the period the year earlier.  Shareholders' equity is KD23.6 million versus KD89.1 million at 1Q09.  Equity was KD31.2 million at 31 December 2009. 

As you might expect, the auditors have raised a matter of emphasis about the Company's ability to continue as a going concern.  Current Liabilities (KD410 million) exceed Current Assets (KD166 million).  Accumulated losses are KD75 million.  

That last comment has got me scratching my head.  On 10 August ALI held its OGM/EGM in which shareholders agreed to use Reserves of KD37.8 million plus reduce the paid in capital to KD29.6 million (from KD63.9 million) to offset accumulated losses.  They also agreed to a KD10 million capital increase by way of a rights offer at par (KD0.100 per share).  So is it that the legal steps to accomplish this have yet to be finalized?  If so, isn't this fact worth noting?  That is, that the Company is taking steps to rectify the situation. Otherwise readers might infer there is an ongoing unaddressed  violation of Article 171 of the Commercial Companies Law.

The auditors also mention ALI's default on some KD100 million of debt.  In the August 10 OGM/EGM Ali "T" AlGhanem, the Company's Chairman, predicted the signing of a rescheduling agreement within two to three weeks.   KFH is the lead bank on the rescheduling negotiations.

A difficult situation. 

[13:38:23]  بلغت (خسارة) (أعيان) (7.7) مليون د.ك لل3 أشهر المنتهية في 31-03-2010‏
يعلن سوق الكويت للأوراق المالية أن شركة أعيان للاجارة و الاستثمار (اعيان)‏
حصلت على موافقة بنك الكويت المركزي على بياناتها المالية المرحلية للفترة ‏
المنتهية في 31-03-2010، يوم الاثنين الموافق 16-08-2010 ،
وفقا لما يلي:‏
البند       ال3 أشهر المنتهية في 31-03-10     ال3 أشهر المنتهية في 31-03-09
الربح (خسارة)(د.ك)               (7.785.523)              (12.553.455)‏
ربحية(خسارة)السهم (فلس كويتي)   (12.6)                    (20.6)‏
اجمالي الموجودات المتداولة      165.971.276             248.207.741‏
اجمالي الموجودات               510.637.020           595.882.901‏
اجمالي المطلوبات المتداولة      410.252.612             351.840.048‏
اجمالي المطلوبات               441.957.164             458.057.552‏
ِ اجمالي حقوق المساهمين        23.643.193              89.142.376‏
بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 66.680 د.ك
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 1.303.522 د.ك
علما بان تقرير مراقبي الحسابات يحتوي على عدم التأكد المتعلق بالاستمرار
على اساس مبدأ الاستمراريه :‏
دون التحفظ في نتيجتنا ، نلفت الانتباه الى الايضاح 2 حول المعلومات الماليه
المرحليه المكثفة المجمعه و الذي يبين ان المجموعه تكبدت خسائر بمبلغ ‏
ِ8.042.649 د.ك لفتره الثلاثة اشهر المنتهيه في 31-مارس-2010 ، و كان لدي ‏
المجموعه خسائر متراكمه بمبلغ 75.175.026 د.ك ، وكما في ذلك التاريخ تجاوزت ‏
المطلوبات المتداوله للمجموعه موجوداتها المتداوله بمبلغ 225.830.362 د.ك
اضافة الى ذلك ، عجزت الشركة الام عن سداد التزامات دين بمبلغ 99.993.871د.ك
و علقت دفعات سداد المبالغ الاساسيه لالتزامات الدين الى البنوك و المؤسسات ‏
الماليه ، و هي تعمل بفاعليه مع الممولين لاعادة جدولة التزامات ديونها ‏
بالكامل ، ان هذه الظروف مع الامور الاخرى المبينه في ايضاح 2 تشير الى وجود
عدم تأكيد مادي مما يمكن ان يثير شك كبير حول قدرة المجموعه على الاستمرار ‏
في اعمالها على اساس مبدأ الاستمراريه .‏

 

The Investment Dar - The Zakat Issue

As is often the case, our readers contribute greatly to the posts here, providing additional information and correcting my mistakes.

Such is the case with two recent posts on TID and Zakat.  The first here.  The second here.  And at the latter you'll find the reader's comments that sparked this post.

Let's start by going over the history.

In the first, I relayed a comment in Al Qabas that the Creditors' Coordinating Committee had been surprised by TID advising them that some KD12 to 15 million of Zakat was unpaid.

In the second, I got into a discussion with one of our readers, who prefers to remain Anonymous, about whether there was a delay in payment of Zakat by TID.  He directed me to a source that I should have reviewed before uncritically repeating what Al Qabas had said in its article:  TID's financial statements. 

Like reading one's computer hardware and software manual before proceeding, it really does pay to read the financials.  (And this exchange has occasioned a new "label" or "tag" - "RTF" - shorthand for Read the Financials).

So there are three issues here:

1. Did TID "surprise" its creditors by recently informing them of pre-existing liability it had not disclosed before?
2. Has TID delayed payment of Zakat?
3. And related to the above two topics, how is TID calculating its Zakat obligation?

On the first question, a quick glance at TID's 2008 audited financials Note #15 shows that TID has disclosed its unpaid Zakat obligation.  KD11.4 million of Zakat is shown as part of the balance of Payables for FYE 2008.  Comparable balances disclosed earlier were KD5.5 million at FYE 2007 and KD1.3 million at FYE 2006.  So no surprise to those who RTF. 

As a side note, if you look carefully at the Consolidated Statement of Changes in Equity, you'll notice that TID's Zakat appropriations from Reserves are a year in arrears.  That is,  the appropriation in 2008 was actually for Fiscal Year 2007.  So, it's likely that there is a Zakat amount due for 2008 to be reflected in 2009's annual report and for 2009 to be reflected in 2010's annual report. Again careful readers of TID's financials will not be surprised that these obligations are there.  What will be the unknown is their amounts.

It may sound surprising that after reporting a major loss in 2008, TID would be subject to any Zakat at all for that year.

So let's turn to how TID calculates Zakat.  There are two ways:

1. A statutory obligation as per Law 46 of 2006.
2. Its adherence to Shari'ah. 

As per Law 46 of 2006 (English here and Arabic here), all companies in Kuwait (except government entities) are required to pay 1%  of income to the Ministry of Finance as Zakat.

And we learn from Note 38 to the 2007 financials:

During the year ended 31 December 2007, the executive regulations of Zakat has been issued and which stipulates that, each Kuwaiti shareholding company should deduct 1% of its net profit as Zakat and should be forwarded to Ministry of Finance. The amount of Zakat expense has been calculated on the basis of the Group’s profit multiplied by the number of days starting from the date of issuing the executive regulations  on 9 December 2007 to 31 December 2007.

What this means is that TID is complying strictly with its statutory obligations.  The Law came into force on 9 December and so its 2007 income subject to statutory Zakat is  only 22 days out of the year.  Because there was a loss in 2008, no statutory Zakat is due for that year.

Beyond its legal obligation, since Fiscal Year 2005, TID has been computing Zakat as follows (Note # 2.17):

Based on the recommendation of the Sharia’a Supervisory Board, the Group started to calculate Zakat based on Wea’a Al-Zakat which consists of assets and liabilities that are subject to Zakat. Zakat is deducted from the voluntary reserve.

Note 3.18 in the 2008 audited financials confirms that the Company is still calculating Zakat on this basis - which means there is likely to be a provision for 2008 despite the loss that year because this Zakat is calculated based on assets and liabilities - which while diminished are still there.  To complete the story, prior to 2005, TID computed Zakat on the basis of its adjusted Equity.

TID only recognizes the statutory Zakat (Law 46/2006) amount as an expense in its financials.   The  Wea'a Zakat amount is directly charged against Reserves.  Therefore, this amount does not appear as an expense on TID's income statement.  I presume that TID adjusts this Wea'a Zakat amount for the statutory amount so it doesn't "double pay" Zakat.

As per Note 16 in the 2007 audited report  you'll notice that the statutory amount is a relatively small KD78,874  - less than 1.9% of the net KD4.2 million that TID added that year to accrued Zakat. 

I'm making the presumption here that since the Wea'a Zakat amount is voluntary, there is not necessarily a deadline for its distribution.  Nor are the amounts required to be paid to the Government or another third party.  That means that the Company has discretion to whom and when to distribute.   Technically then TID would not violated any requirement for payment.  Strictly speaking, it would not be "late".

Though if I'm wrong on this latter point, I hope someone will post and correct me.

But let's look a bit deeper at the accumulation of unpaid Zakat obligations by looking at two tables.

The first is an attempt to derive the cash payments of Zakat that TID actually made during the period 2005 through 2008.   Amounts are in thousands of KDs.

Year	Open Bal	Additions	Close Bal	Payments
2005	2.7	1,096.9	320.5	779.1
2006	320.5	2,848.3	1,342.0	1,826.8
2007	1,342.0	5,746.4	5,541.3	1,547.1
2008	5,541.3	6,734.7	11,373.8	902.2
TOTAL		16,426.3		5,055.2

Notes:

1. Derived Payments = Open Balance + Additions - Ending Balance.
2. Opening and Ending Balances are from the Payables Notes in TID's Annual Reports for the period.
3. Additions are per the Consolodiated Statement of Changes in Equity.  You will notice that for a couple of fiscal years there is an increment to Zakat from TID's subsidiaries which appears as a separate entry to Retained Earnings.  The Zakat additions for TID are charged to Reserves.  I have used both in my calculations for Additions.
4. 2007 Additions in the table above includes KD78,874 of Statutory Zakat as there was no adjustment to net income for that year to back it out.

Now let's take a look at Zakat payments per year as a percent of Opening Balance and Additions during the year.

Year	Percent
2005	71%
2006	58%
2007	22%
2008	7%

Clearly, there is a sharp decline in amounts disbursed in 2007 well before the crisis started.  And the overall distributions during this period are some 30.8% of the Zakat accrued.

Perhaps, the cause is having to deal with larger amounts and the need to thoroughly vet a recipient before  disbursing funds.   Or, perhaps, it is a cash management issue.

If the timing of distributions is purely discretionary, then I wonder if the lenders can insist that Zakat distributions be stopped or greatly limited until they are repaid?

The Investment Dar - Al-Musallam Denies Problems

This Thursday (26 August) TID held its 2008 shareholders' annual meeting (delayed because of the delay in finalizing its financials).   Both AlQabas and AlWatan have accounts of that meeting.  Some 73.11% of shareholders' interests were represented.  As per the KSE, the only disclosed major shareholders of TID are the Kuwaiti General Organization for Social Insurance (7.7%) and Efad Real Estate Company and associated companies (18.21%).  So there appears to have been broad shareholder participation.

AlQabas notes that the meeting was held in an atmosphere of "impressive calmness".   All items on the agenda were approved, including agreement with the Board's recommendation that no dividend be declared for 2008. (TID reported a net loss of  KD80.3 million for 2008 of which KD78.6 million is attributable to TID shareholders.  From 2007 to 2008 TID's total shareholders' equity declined from KD349.6 millionn to KD168.5 million due to KD52.9 million of 2007 dividends, KD 37.4 million of losses recorded directly in equity and net purchases of treasury shares of some KD12.2 million.)

The tenor and results of the meeting no doubt a clear reflection of shareholders' confidence in Mr. Al-Musallam's stewardship and performance.

Mr. Al-Musallam also took the opportunity to "set the record straight" on several points, including most of the assertions in a recent AlQabas article:

1. As he has on several earlier occasions, he noted that statements that TID was going to be liquidated were not true pointing out the strength of TID's assets.
2. The CCC is not discussing resigning.
3. In that connection he commented that TID is happy to have the Central Bank of Kuwait's supervisor, Dr. Abid AlThafiri, stay on, but that decision is solely the CBK's.
4. There are no differences with the CBK.  The CBK poses questions and TID answers them.
5. More than 83% of the creditors have agreed to participate in the rescheduling.  The remaining 17% represent only KD110 million.
6. He expects to achieve success with Commercial Bank of Kuwait and Cham Islamic Bank (Syria)  and then will have 89% agreement.
7. He's optimistic about obtaining the Central Bank of Kuwait's approval for TID to enter under the protection of the FSL.  
8. He noted that many of the creditors who have indicated they intend to pursue legal claims (the 17% soon to be 11%) were waiting to see the results of the current stage (presumably whether TID gets under the FSL) before proceeding.  The unspoken point here being that if TID enters the FSL, then perhaps some or all of these holdouts may join the rescheduling.  Not an unreasonable assumption.
9. Contrary to rumors, there is no raise for any senior member of TID's management.  Apparently, not even an "unrealized" one! 
10. TID is not late with its prior year's zakat.  Though the wording used here seems to imply that perhaps the committee has not yet distributed it - which would qualify as being "late" for a simple minded guy like me.  وأكد المسلم أنه لا يوجد تأخير في دفع الزكاة عن الشركة، مستشهداً برأي لجنة الفتوى والتشريع التي أكدت على ان الشركة لم تتأخر ولكن هذه الزكاة تعود الى السنوات الماضية، منوهاً الى ان اللجنة تقوم باخراج الزكاة من وقت الى آخر حسب الحالات التي تقوم بدراستها من وقت الى أخرى
11. Perhaps, the answer is that "class is not yet over" and the studies continue?  Anyone who can confirm or amend my translation, please jump in with a post.
12. He did take the time to point out that the 2008 loss (largely due to provisions of KD89.5 million) was not realized.  
13. Asked about 2009's financials and the CBK's requirements for additional provisions, he declined to answer, commenting that the Company respected its regulator's (the CBK's) views, would have the auditors review them. But in the final analysis will do what the CBK requires.
14. One other important "bit" he stated that the Company had appointed new auditors (dual case used).  In 2008 TID used the local incarnations of Deloitte and Touche and KPMG.  
15. The Ministry of Commerce and Industry raised comments during the meeting that the Board did not meet during 2008 (I take this to mean regarding 2008 financial performance not that there were no board meetings that year) and that TID failed to properly register its shares in Bahrain Islamic Bank,.  These shares (8.7% of BIsB) were acquired by TID in satisfaction of a financing receivable and are discussed in Note #8 to its 2008 financials. Mr. Al-Musallam said that the Board did not meet because the financials were not approved (presumably he's referring to the auditors and CBK).  The BIsB shares are in the process of being registered.

A new Board was elected as follows:

1. Adnan Abdul Qadir Mohammed Al Musallam, Chairman and MD
2. Rajam Al Roumi
3. Ghanem Al Ghanem
4. Adel Behbehani
5. Adnan Nisif
6. Musa'id AlMukhaytar
7. Nabil Abdul Rahim

And "reserve" directors (in case of need for a replacement of a sitting director):  Nabil Amin, and Abdul Muhsin Al Kandari.

Hopefully, this impressive performance (there's that word again) will silence the unfounded criticism of TID in the market, leaving only the founded sort.

The Investment Dar - Creditors Committee "Fed Up" or Posturing for the Central Bank?

Today's (25 August) AlWatan and AlQabas carried two quite different articles on the Creditors Committee.  One can consider these straightforward news items.  And perhaps, just perhaps, attempts to influence the Central Bank's decision making process.

Playing the role of good cop is Bader Abdullah Al-Ali, CEO of Gulf Investment House Kuwait, the official spokesman of Creditors' Coordinating Committee ("CCC").  As reported in AlWatan, he noted:

1. That the Central Bank of Kuwait had played a pivotal role in the rescheduling expending considerable efforts to bring agreement between the concerned parties.
2. That the CCC believed the rescheduling remained the best means available and offered the ideal reclamation of lenders' rights.
3. That the fundamental goal of the CCC was the essential role of involving the lenders in crafting the rescheduling according to generally accepted international principles.
4. That the CCC was confident that the CBK understood the role the CCC played.
5. That the CCC hoped for the response of the CBK in the shortest time possible.

Or in other less polite words:

1. You've done your part and we acknowledge your professionalism.  So now it's time to acknowledge ours.
2. The plan is fine we, the CCC on behalf of the lenders, crafted it according to generally accepted international principles (which should no doubt trump any purely local or regional views that you might have).
3. So don't tamper with it.  And be sure not to exclude us in the process.
4. Get off your duffs and approve it.

The bad cop role falls to unknown sources who have provided AlQabas with the background for its article.

1. TID's application for entry under the FSL has effectively ended the productive work of the CCC.  The Central Bank has the entire file in its hands.  As a result, the CCC is reduced to holding meetings to discuss the latest developments without being able to influence them.
2. The FSL represents the last chance of the Company.  If entry is rejected, a myriad of lawsuits against the Company and its management will be launched seeking bankruptcy.
3. Ernst and Young have bluntly told the CCC that they were engaged by the CBK and have no connection with the CCC or the lenders.  Their marching orders come from the CBK alone.
4. The CCC, mindful of its responsibility to the lenders, are fearful that actions may be taken affecting the Company without their involvement or knowledge.
5. As a result, they discussed at their last meeting whether or not they should withdraw and resign en masse.
6. Adding to their rancor from exclusion from the process are several items, some of which have recently emerged.  
7. Apparently TID has advised the CCC that it had some KD12 to 15 million of  unpaid Zakat arrears which date from before the crisis.  The CCC do not understand why these were not paid as the associated profit has already been distributed.  There was no note of these in information provided.  Nor does there appear to be any fatwa authorising the delay.
8. There are increases in salary for one of the senior executives as well as a requested bonus.  (No doubt a "performance" bonus.  And, yes, the term "performance" is used in the same sense as in my recent post on GFH's 2Q10 financials).
9. The Company's failure to present financials for periods after 2008.
10. The resolution of TID's file is dragging on and may extend to next year.
11. The dissolution of the CCC would deal a fatal blow to the Company as the CCC is the glue which binds the "alliance" of consenting creditors.
12. Failure to obtain the protection of the FSL will lead to thousands of lawsuits which will rain down on the Company.
13. The article closes by noting the frustration of the CCC with TID's public relations firm who are felt to have issued a torrent of meaningless press releases about nothing.  Adding insult to injury, it seems that TID has incurred payables of 7 million (presumably KD) for these services.  This last bit has me questioning my translation as I'd expect there would be some sort of expense controls in place from the CBK appointed manager and/or the CRO.  So I'm inviting comments on my translation - the last sentence in the Al Qabas article.

Certainly, there's a lot of justification for rancor in the CCC and among the lenders.  They've expended a lot of time dealing with the rather slippery management at TID to get this far.  That matters aren't moving more quickly has got to be distressing.  As I am sure are the latest "shenanigans" of the Company - though frankly speaking, the lenders can no doubt expect many many more during the implementation phase of the restructuring.

But as we did above with the good cop's position, let's translate the bad cop's argument into less politically correct speak:

1. We, the CCC, are the critical guys in the process holding the creditors together. If we walk, TID comes crashing down.
2. You're ignoring us.
3. We're fed up by your inaction and by the Company's shenanigans. (Notice, as usual, AA is being highly charitable.  And my zakat in that respect is being paid on time!).
4. If we don't get what we want, we're going to take our ball and go home.
5. Then you'll be the culprit as TID collapses.

While no doubt this tactic does put a bit a pressure on the CBK, in the final analysis it's not very credible.  The lenders are not going to walk away from their best hope of recovery:  the rescheduling and the FSL.

If the Central Bank is looking for way out of approving TID's request, then this may be just the entree they're looking for.    That being said, I don't expect that.  My worst case scenario is that the CBK comes back with modifications to the plan - which by that time the parties thereto should be sufficiently exhausted that they will willingly accept what the CBK wants in order to finally close the file and move forward.