Strong Evidence No Discount for Gulf Holdings on Villamar Sukuk Repayment to GFH

AA Solves Another Case by Applying Non-Euclidean Geometry

As you’ll recall, in 2018 GFH purchased the Villamar Sukuk—on which Gulf Holding KSC Kuwait is obligor--from AlRajhi at a discount of some USD 77.8 million from its face value (roughly USD 203 million).

In its FY2018 financials GFH declared a gain of this amount.

In looking closely at GFH’s financials, I thought there were two possible structures for the “settlement”:

1. Option 1: GFH reduced the debt amount, GH to pay USD 125 million
2. Option 2: No reduction in debt amount, GH to pay full USD 203 million.

Based on that June analysis, I assessed that Option 2 was the more likely settlement mechanism. You can read the June blogpost here for the detailed argument for that view.

But as often is the case, GFH’s financials didn’t provide all the information necessary to make a conclusive determination.

An apparent dead end. But not really.

Additional “Evidence”

Gulf Holdings publishes financials.

If GFH offered it a discount on repayment, that should show up in GH’s 2018 annual report.

If it doesn’t, then there is further indication that Option 2 is the settlement mechanism.

As it has done in the past, GH included its financials in the shareholder package for its FY 2018 Annual General Meeting.

According to those financials:

1. The principal amount of the sukuk is unchanged.
2. As per Note 25, there has been no material change since the date of the financials (31 December 2018) and the date of the external auditors’ report (23 April 2019).

If discussions were ongoing for a reduction, then these should be mentioned in the “subsequent events” note. 

That increases my confidence that the sukuk is being “settled” under Option 2: GH to pay full value.

However, it is possible that GFH and GH did not begin negotiations until after 23 April. But again I consider this unlikely.

There was another open question from my June analysis regarding the potential need for a provision. The Sukuk was non-performing and AlRajhi sold it at a 38% discount. That would seem to be a strong indication that the Sukuk was impaired.

So how could GFH be confident enough persuade itself and its auditors to (a) book the entire USD 77.8 million gain in 2018 and (b) treat the Sukuk as unimpaired.

AA overlooked the fact that the sukuk is secured by Villamar Project assets.

GFH is the “natural”--perhaps the only—realistic buyer for these assets. Arguably it is also the potential buyer best placed to extract full value from the assets.

In any sale GFH and GH (controlled by GFH) would enter into “arms length” negotiations to set the price.

Now some out there might be thinking: “But, AA, this gives GFH the opportunity to potentially manipulate the sale price to its advantage to ensure it ‘collects’ 100% of the Sukuk thus justifying the USD 77.8 million ‘debt settlement gain’. It would be able to bury any shortfall in the value of assets acquired where that amount will be hard to detect”.

To those doubters I say that AA is highly confident that GFH will acquit itself in this transaction applying the same standards of ethics for which it is well known.

Regarding a potential sale of GH assets, according to the GH’s 2018 AGM package, shareholders were to be asked to approve the recommendation of the Board of Directors for a strategic sale of Residential South Real Estate Development Company SPC (RSREDC) and the owner of the Villamar project for a total value of US $ 52,466,853 US $ 47,466,853 / cash (US $ 5,000,000) and authorize the Chairman or his designee to take all necessary actions to complete the sale and transfer of ownership.

As I translate the Arabic AGM notice, the sale price appears to have two tranches: a cash tranche of USD 5 million with the remainder non-cash. Perhaps in partial settlement of the Sukuk?

You can check my translation by using the link above to find the AGM Agenda Point 6 on page 5.  If I've missed something, please set me straight.

I haven’t yet found any press release or other announcement about a sale.

But one appears to have taken place.

If I’ve read the information at www.sijilat.bh correctly, ownership in RSREDC (CR 59128-1) was amended in November 2019 from Gulf Holdings Kuwait to GFH Asset Company Cayman Islands.

Anyone out there with info, please post a comment.

Death of Thailand’s Beloved King – Why Didn't Bahrain and Kuwait Embassies Fly Their National Flags at Half-Staff?

Picture Courtesy of Akh  Abu Arqala  Note the Flag of Greece is at Half-Staff

Powered by more than 2,600 journalists and analysts in more than 120 countries, another Suq Al Mal exclusive.  (OK, an overstatement.  AA’s brother is on a strictly business trip to Bangkok).

AA can now report that last week for at least three business days both the Bahrain and Kuwait Embassies in Bangkok have not been flying their national flags at half-staff to participate in official mourning for Thailand’s beloved king. 

A letter to the editor at The Nation indicates that this has been going on for some time and other GCC nations have not lowered their flags.

At least as far as Bahrain an interesting development given the close relations between the two countries and the particular fondness of Bahrain’s Prime Minister for Thailand. 

HRH Shaykh Khalifa personally conveyed the condolences of the government and people of Bahrain on 18 October.  While not the first representative of a foreign nation to pay condolences in person, early enough to show the extent of his feelings

So why didn't Bahrain's Embassy fly its flag at half-staff?

كشف المستور.. ببغاء يفضح خيانة رجل كويتي لزوجته مع الخادمة

It is said that falcons are more discreet.

From Arab Times

KUWAIT CITY, Oct 18: In a new method devised to detect matrimonial infidelity, a Kuwaiti woman actually used a parrot to expose her husband suspected of having intimate affair with a housemaid, as the parrot mimicked flirtatious exchange of words between the man and the housemaid, reports Al-Shahed daily. 

The woman lodged a complaint with officers at Hawalli Police Station and accused the husband of cheating, noting she had been suspecting the man for a while before the parrot started mimicking flirtatious words in the apartment. 

She added the husband was surprised when he saw her returning from the office before time and became nervous. However, the prosecution officer said the case could not be regarded as crime based on lack of credible evidence.

See the link at Al-Shahed for the Arabic version.

If you're looking for a parrot or perhaps have a sudden need to sell one, look no further.

Global Investment House - 2015 Financial Performance Reveals Structural Problems with Earnings

It's a small world after all, and for some even smaller

It’s been five years since Global signed its first restructuring agreement and three years since its final settlement with creditors.

How is Global doing?   What are its prospects for the future?   

The first question is the subject of this post.  I’ll cover the second in a companion post.

Catching Up with Global

 

When last I posted, Ms. Maha was Chairman, GIH had published financials showing about KD 1 billion in assets, and the firm was touting its first rescheduling deal with its creditors.

At that point, commenting on the deal’s principal repayment terms—10 percent the first year, 20% the second year and a whopping 70% the third year—I noted that:

“It's highly unlikely that Global is going to be able to meet the repayment schedule even with one or two small miracles coming its way.   With the short fuse and the extensive trip wires (by way of covenants below), the spectre of a second default has to be haunting Global's management and shareholders.”

Not surprisingly in mid-2013 GIH negotiated a second rescheduling deal that gutted the firm: almost all of GIH’s “fine” assets were transferred to creditors in settlement of the debt.  Because the assets weren’t that “fine”, the creditors took a 70 percent stake in the “rump” GIH.  For a variety of reasons, the firm focused its business strategy on fee-based not balance sheet intensive business.  Ms. Maha was replaced as Chairman, though she remains on the Board as Vice Chairman and retains a role in management.

Review of 2015 Performance and Financials

Overview

The structure of GIH’s revenues and expenses indicates a high probability of future earnings volatility. Normalized expenses are 140% of AUM related revenues.  Non AUM LOBs can’t consistently generate enough revenue to cover the remaining expenses and generate a meaningful profit. They are market sensitive (volatile) themselves and more importantly lack scale.  They are more “hobbies” than substantial LOBs.

Besides these structural earnings problems, I noticed a few things in the loan portfolio and murabaha receivables worthy of comment.  Nothing that is life threatening.

Income and Expense

Net Income:

Global earned KD6.5 million in 2015 versus KD6.4 million the year before.  However, 2015 net income was bolstered by a (non-cash) write back of KD4.3 million of loan provisions.   Without this “timely” reversal, net income would have been a much lower KD2.2 million.

Revenues:

Fees and Commission Income accounted for 89% of total revenues in 2015 and 66% in 2014.   Within this category, AUM related fees account for some 80% of revenues, and represent a relatively stable revenue stream.  The other key fee-generating LOBs-- brokerage and investment banking-- each generate about one tenth of the AUM fees but are more volatile.

In 2015 Global benefited from KD 1.8 million in FX translation gains (KD 2.2 million in 2014) due to depreciation of the KD against the US dollar.  Not a stable core revenue source.

Net interest income contributed KD 1.6 million.

Fair Value Through Profit and Loss a loss this year of KD1.5 million vice KD0.8 million in positive revenue the year before.

Expenses:

Excluding loan provisions and impairment losses, Global’s average expenses are about KD 14 million a year – 140% of its stable AUM related earnings.

Structural “Problem” with Earnings

That’s a problem because Global’s other fee-generating LOBs (chiefly brokerage and investment banking) are market sensitive and more importantly lack the scale to  consistently generate significant revenue  to both cover expenses and generate a profit.   Growing earnings by growing assets is constrained by policy and no doubt as well by limited market access. 

Global then is forced to rely on one-offs such as continued depreciation of the KD or provision write backs to turn a reasonable profit.  Note that if there had been no FX translation gain in 2015 and no write back of the provision, Global would have had a modest profit.   

Balance Sheet

As mentioned above, a couple things caught my eye in the loan portfolio and murabaha receivables.

Loan Loss Provision Write Back

According to GIH’s 2015 annual report note 13, the write back provision for credit losses “for the year include KD 3,292 thousand (2014: KD 130 thousand) written back as a result of settlement agreement with a borrower.” 

Note the term “settlement agreement”.  GIH did not restructure the loan. The amount was not repaid in cash. Rather the bank took securities to settle the loan as is clear from an analysis of the firm’s cashflow statement and note 11.  The absolute increase in assets in note 11 is much more than the amount shown on the cashflow statement.

A single customer was responsible for 77% of the write-back.   A quick scan of annual reports back to 2012 suggests--but does not prove--that GIH has held this provision since at least 2011. 

The same note states:  “Loans are granted to GCC companies and individuals and are secured against investments in the funds and securities held in fiduciary portfolios by the Group on behalf of the borrowers.”

Why didn’t GIH seize and realize the collateral long ago?  Why hasn’t done the same with the borrowers representing the KD 5.9 million in unused provisions?

One explanation might be that legal processes in Kuwait are painfully slow.  Thus, GIH was legally unable to seize the collateral and extinguish the loan, but rather forced into prolonged negotiations with the borrower. 

That the reversal came at just the “right” time to protect earnings is certainly a remarkable coincidence.  Perhaps difficulties in 2015 caused management to redouble its efforts to collect.  Perhaps a long period of negotiation finally came to a close.  From the financials, it does not appear that GIH gave the borrower a discount on the asset swap.

Loan Portfolio:

Is there room for more earnings positive settlements with borrowers?

Net loans are KD 1.6 million = gross loans KD 7.5 million less provisions of KD 5.9 million (note 13). 

That KD 5.9 million would appear to be able to fund a few “timely reversals”.  

Particularly because Global holds KD17.8 million (fair value) collateral as per note 25.2.2 page 57.  That’s 240 percent coverage of the gross amount of the portfolio.  One might argue and AA certainly would that there doesn’t appear to be a compelling reason to hold a loss reserve when collateral coverage is so high.   

But there’s more.

Global is accruing interest on the gross portfolio because KD 490K in accrued interest in 2015 equates to a whopping 21% per annum yield on the average net loan portfolio. (Simple average of 31 December 2015 and 2014 amounts).  It’s a more reasonable 4.8% on the average gross portfolio. 

To accrue interest, Global would either have to be receiving cash or have almost certain assurance of payment of the interest. 

The cashflow statement shows that Global did not receive cash payments in 2015 for about KD 500 million of interest accrued that year, an amount very close to the interest accrued on these loans.  Of course, the KD 500 difference could well relate to other interest bearing assets.  It could relate primarily to the loans but be due to timing difference:  the interest payment was received after 31 December 2015.  If cash is being received and Global holds such an excess of collateral, how does it justify maintaining the reserve to its auditors? 

On the other hand, if Global is accruing interest—but not receiving cash—, its justification is likely based on asserting that collection of interest is almost certain given the collateral it holds. If the interest is secure and again the collateral so much larger than the principal, then it would seem the principal is also secure and no provision is needed.

All this suggests to AA that Global has some “dry powder” for future contingencies.

Murabaha Transactions

Global is earning a princely 5.28% per annum on these one year transactions (note 12).  Not many good investments offer such a return for a one year tenor.  Kudos to GIH for finding this consistently attractive opportunity—5.24% in 2014, 5.3% in 2013, and 5.45% in 2012.

One would think that such rates would come at the cost of higher risk, but the provision is a modest KD 123K on some KD 3.1 million. 

One thing did catch my eye.  Note 25.2.2 page 57.   The murabaha receivables were more than 180 days past due (but not classified as impaired) as of 31 December 2015 and as well at 31 December 2014.  I didn’t see a reference to collateral for these transactions.  Of course, AA has been around the block a few times on “Islamic” banking transactions and knows that in addition to careful structuring (technically حيل) “Islamic” finance is one area of the faith where miracles occur with a dazzling regularity.

Notwithstanding the above, perhaps a provision of some sort would be warranted.  And could be accomplished by a simultaneous reversal of some of the loan provisions and booking of an equivalent amount as provision for the receivables.  But of course الله اعلم

National Bank of Kuwait – Related Parties’ Loans Analysis

One of our regulator and insightful commenters, Advocatus, said that there were rumors in the market that NBK was experiencing problems with its exposure to M Al Khorafi and had to extend the loans more than once to keep them from becoming classified as non performing.

An intriguing comment.

Abu Shukri is known as a careful banker, but even Homer nodded from time to time. And sometimes it is very hard to say "no" to a very well connected shareholder. As they say: "Past performance is not a guarantee of future results."

Without access to NBK's internal records, it's not possible to say one way or another. Let's look and see if we can find any signs of difficulties in NBK's financials.

Related Party Information

The first assumption is that loans to MAK or other AlKhorafi entities would be reported in the Related Parties Section. The data below is taken from the Related Party Notes in the Bank's Quarterly financials and is expressed in millions of KD.

Quarter	RP Loans	Collateral	% Cover
1Q07	215.1	519.7	242%
2Q07	262.2	608.4	232%
3Q07	294.9	634.3	215%
4Q07	307.3	672.6	219%
1Q08	285.5	728.2	255%
2Q08	295.2	742.0	251%
3Q08	316.6	719.1	227%
4Q08	350.6	494.4	141%
1Q09	278.8	451.5	162%
2Q09	310.4	544.9	176%
3Q09	189.7	363.8	192%
4Q09	219.3	343.8	157%
1Q10	210.7	380.2	180%
2Q10	186.5	350.7	188%
3Q10	183.7	413.1	225%

1. Collateral coverage is reasonably comfortable, except for 4Q08. If there was a problem with Related Party loans, it's likely this is when it occurred. Two factors accounted for this change: a very dramatic decline in collateral and an increase in outstandings. 
2. The significant drop in collateral coverage in 4Q08 coincides with the dramatic decline in market values following the collapse of Lehman. This suggests that the collateral is composed of equities and other marketable securities. 
3. One would also expect that this would be a time of liquidity and cashflow stress leading borrowers to draw down additional amounts to cover their needs. 
4. However, there is remediation on the principal side in 1Q09 with a KD71.8 reduction (twice the increase in 4Q08). That's quite remarkable because this was not exactly a "boom" time for Kuwait or the world in general. 
5. Further declines in 2010 appear to indicate that there is no problem with RP loans. By 1Q10 these were below their 1Q07 level. Collateral coverage remains comfortable and the absolute of loans outstanding is below those in 1Q07. 
6. I'd guess that Zain shares make up a good portion of the collateral for MAK exposure. But that is just a guess. If so, the Itisalat acquisition should lead to a further dramatic reduction in RP loans.

Renegotiated Loans

Another place to look is for the IFRS #7 Note on renegotiated loans. 

1. Note 28.1.4 to NBK's 2009 financials state that only KD8.4 million of loans were renegotiated in that fiscal year and nil the year before. I didn't seem similar disclosure in the 2007 financials.
2. If NBK were having problems with MAK exposure, one might expect to see larger "renegotiated" amounts, though it is possible in this sort of situation for a bank to extend a new loan to repay another short term loan and treat it as a new loan. One would expect that interest would have to be paid in full for the auditors to sign off. I'd note that one's expectations are not always fulfilled.

Conclusion

The financials don't disclose any problems, though as mentioned above this analysis is based on an external diagnosis without benefit of x-rays (details of NBK's exposure to the AlKhorafi Group).

Global Investment House Pays Another US$72.5 Million on its Restructured Debt

Global announced that value 21 October 2010 it had paid down another US$72.5 million of principal on its restructured debt.

With that payment it will have paid down 8.8% of its total debt.  It has nine quarters to pay the rest.  A journey of one thousand miles begins with a single step.

Global Investment House - Better Times Coming. Capital Increase in 2011?

Au or FeS₂?

Also from the Reuters Middle East Investment Summit, Ms. Maha Al Ghunaim noted that:

1. Global's performance for 2H10 will be better than 1H10.   (Global lost KD34.4 million in 1H10 compared to KD98.6   in 1H09.
2. The Company continues to monitor its costs and further reductions are in store.
3. It expects to begin discussions with unnamed strategic investors in 1Q11 to discuss a capital raising.

Gulf Bank Kuwait - On the Mend. No More Loans to Saudis.

A banker's memory is a wonderful thing.  
Even the most painful experiences can be forgotten. 

Michel Accad gave an interview at the Reuters Middle East Investment Summit in which he made the following points:

1. 3Q10 is the turning point in GB's two year strategy to rebuild.  
2. Each subsequent quarter will be a relative improvement over the previous.  
3. By 3Q11 the rebuilding will be done (apparently one quarter ahead of time) and the bank will move to strengthen its income generation or its geographic coverage.
4. The goal is to increase local market share from today's 12% to some 16% in five years.
5. After 3Q10, the Bank will not need to provision as much but will continue to do so for precautionary reasons (rather than need).
6. The Bank has decided not to make any loans to Saudi clients for at least 3 years.  No doubt a reaction to its troubles with AlGosaibi and Saad Groups.  
7. Instead it will, however, make loans to foreign investors for their projects in Kuwait. And no doubt concentrate on its high quality Kuwaiti clients.
8. As of 3Q10, the Bank has successfully reduced its non performing loans below 20% of the total portfolio.  That's a lot of "Saudi" clients, it appears.

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

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

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

Kuwaiti Investment Companies Blame Central Bank for Delay in 2009 Financials

AlQabas reports that unnamed listed Kuwaiti investment companies have launched a sharp attack against the Central Bank claiming that they provided their financials four months ago, responded to requests from the Central Bank for clarifications three months ago and have heard nothing.

Since CBK approval is required to release financial reports and since financial reports are a condition for the holding of the required annual shareholders' meeting, these meetings have not taken place exposing the companies to fines from the MOIC.  

The article also notes that where another company has a significant ownership stake in a "delayed" company its own financials are delayed because the first company's auditors don't have enough information to complete their audit work.

While Al Qabas did not name the companies, according to the KSE, the following companies have been suspended for failure to provide 2009 financials:

1. The Investment Dar, last financial released 31 December 2008.  It is therefore missing the quarterly reports from 2009 plus FYE 2009 plus the first two quarters of 2010.
2. International Leasing and Investment, last financial released 30 September 2008.  So it is missing FYE 2008, the first three quarters and FYE for 2009 plus the first two quarters of 2010.
3. Abraj Holding, last financial released 31 July 2009 so it is missing FYE 2009 (October fiscal year end) and the first two quarters of 2010. (Technically Abraj Holding is not an "investment firm", though it may look like one from its activities).

Perhaps, it's a question of whether they (CBK) believe what they been given.

Footnote:  As if "poor" Abraj didn't have enough problems already, a group of shareholders has reportedly written to the MOIC complaining that in contravention of the law two government employees are member of the board:  one gentleman who works in the general administration of the fire department and the second who works in handicapped citizens affairs.

Abyaar Real Estate KD50 Million Asset for Debt Swap?

Citing informed sources, Al Watan reports that Abyaar will sign an asset for debt swap of KD50 million with a group of lenders.  The amount represents 35% of FYE 2009 debt.

The article also claims that additional debt settlement/restructuring agreements are near to signing and will follow in train.

Earlier post on Abyaar here.

Mayzoon the Magnificent

Kuwait sheep sold for KD25,000. Apparently gets KD200 per night for his "particularly good breeding ability."  Next stop Dubai?

This beats Sa'eed Al Huweiti's take on his falcon.  But not yet those tasty Kuwaiti pigeons!

The Investment Dar - Creditors Warn TID Central Bank Will Not Impose Restructuring Against Our Will

Nancy Reagan

White House Photo in the Public Domain

Al Qabas, as it often does, has a different take on the story about TID proposing a 50% haircut than Al Watan.

Here the story is that the creditors have said that if Dar's request for a 50% haircut proves true, then this will give the Central Bank of Kuwait full justification for turning down its application for the FSL.  (You may as I have been struck by this formulation.  Either a deficient translation on my part.  Or maybe the story of the 50% haircut was wrong).

They also remarked that the Central Bank will never force a restructuring on them without their consent as they are the owners of the money and should decide their fate.  So a consensual plan agreed by all parties will be required.

Finally they are quoted as saying that there is an indication that the entity charged with preparing the report on Dar's ability to remain a going concern and pay its debts shares Dar's opinion that it can comply with the financial ratio set in the new Central Bank of Kuwait regulations if it can deal with approximately KD500 million of burden which will strengthen shareholders' equity in addition to bringing it in compliance with the new principles.   I'm taking Al Qabas description of the "entity" to mean E&Y.  And am not sure why the circumlocution is necessary.

As I've indicated before, I really don't understand the fixation on the new CBK principles.  Dar is in a life or death situation with the rescheduling.  It seems eminently reasonable that if it can't meet the new regulations that should be a very minor consideration in the greater scheme of creditor repayment and the continued existence of the Company.  There are many ways this can be "handled" to preserve the regulation but give Dar some breathing room.  Would one really "put down" Dar because it couldn't meet a ratio if it could repay a substantial portion or all of its debt?

All this talk of the regulations makes about as much sense to me as arguing about the  poor  quality  of the band as it plays the final songs just before the Titanic sinks.

Maybe one of my regular readers can tell me precisely what I'm missing. 

It's also unclear if this story came before or after this one.

Ah, Kuwait land of mystery and intrigue.  And also family values.

The Investment Dar - No Intent to Ask for 50% Haircut

Barbershop in the Bus Station Tirth Raj, Rajasthan
Copyright funky footage

Creative Commons Attribution 2.0 Generic

Al Watan quotes sources close to The Investment Dar as saying that the Company has no intent to ask for a 50% haircut (KD 500 million) on its existing debts .  That it intends to repay its debts in full.  Moreover it would never sue the Central Bank of Kuwait  which it respects and values.  I guess the meaning here is won't sue again as they did earlier.

You'll recall earlier that there were reports that TID had made just such a request bypassing its creditors and writing directly to the Central Bank of Kuwait.

The Investment Dar - Rumor of Restructuring Bombshell: Request for 50% Hiarcut

Major Al-Musallam Rides to Glory

Before we go further to be very clear this is an account which neither the Company, the Central Bank or the creditors have confirmed.
Update:  TID has denied this story.

Al Qabas reports that TID has submitted a completely new restructuring plan to the Central Bank of Kuwait which calls for lenders to forgive 50% of the existing debt, i.e. KD500 million.   According to the report, lenders were not consulted or advised prior to TID sending the proposal to the CBK.

What's going on here is anyone's guess.

Mine is that the Company and the lenders are jockeying from (what I think is) the fallout from the Ernst and Young report.  As you'll see below. TID and its lenders appear to have been discussing alternatives /modifications to the original plan. From the Al Qabas account these seem predicated on the fact that the Company cannot repay all the debt.  The unpayable quantum seems around a 50% or so.

I suspect that Ernst and Young came back with a very negative assessment of  TID's ability to repay in full and, thus, case serious doubt on the Company's ability to continue as a going concern.  As you're aware, the Financial Stability Law is designed to give protection to viable companies.  It is not intended as a mechanism to provide legal cover for disguised liquidations.  If I'm right (and as Umm Arqala will tell you that's a rare occurrence), a report like this would have thrown quite a large "wrench" into things, complicating the CBK's acceptance of the already agreed restructuring.  How could the Central Bank recommend to the Court that the Company be allowed under the FSL under such circumstances?

I'm also guessing this occurred prior to the end of the first four month period the CBK had for evaluation of the suitability of the original plan and of TID to enter finally under the FSL.

What leads credence to both assumptions are reports in the article that the lenders have floated some  proposals or modifications of their own and the timing of those negotiations.  One was the conversion of  roughly half the debt to equity with some preservation of the rights of the existing shareholders.  Presumably, the lenders could quite easily make the argument that if a debt conversion were required, the old equity has been lost .  And thus the old equity holders should be wiped out.  Their proposal is reported as more generous, though it's not clear what percentage they would allow the old shareholders in the post conversion equity.  Leaving 10% or 20% might for example be considered highly generous by the lenders and an "outrage" by the existing shareholders.  Negotiations on this proposal supposedly took place between July and September.  The story goes that TID's Board went back on a tentative agreement because some of the existing major shareholders did not want their equity interests diluted.  (Unclear to me how you dilute something worth nothing.  There's also a hint here that the major shareholders are very important people.   And, if you know Al Q's politics, you might suspect they are pointing the finger at regal personages).

As a second alternative, the lenders suggested taking some assets in exchange for the debt.  The article says  that E&Y determined that this proposal was acceptable under international principles.  Dar supposedly made a counter offer that brought things back to zero. 

At this point, the two sides are in a deadlock.  I think that TID's proposal (assuming the report is accurate) is more a negotiating tactic than a viable proposal.  Rather it is an attempt to break the logjam by setting forth a maximum position.  One they probably know both the lenders and the Central Bank would have a hard time accepting.  What this proposal does, though,  is shift the parameters of the debate.  While lenders may reject a 50% discount, it may be harder to avoid some meaningful haircut - particularly, if the choice is bankruptcy.  And in order to get itself out of having to make a decision that may prove wrong or hurt its and the country's reputation, the CBK may be inclined to lean on the parties to compromise.  TID has just set one bound on the compromise.

It could be that they are trying to play for time - hoping for a miracle.  Realistically playing for time  hurts all parties - TID, the lenders, Islamic Banking, and Kuwait.  But maybe that's the goal - to maintain the status quo.

The article describes the choices in front of the Central Bank as:

1. Issue a conditional acceptance of the proposal subject to conformity with accounting principles and the agreement of the lenders.  (Or in other words neatly pass the buck.  Or is that the dinar? As Al Q elegantly puts it, getting the lenders to agree may be very difficult given the Company's breach/violation of the existing agreement.  That raises AA's first law of underwriting and due diligence "know your customer".)
2. Reject the proposal.  In which case it's expected that TID will sue the CBK in an attempt to confuse the issue and buy more time.  As Al Qabas elegantly puts it الى ما لا نهاية . (Probably not a first choice. More likely is forcing the Company and its creditors back to the negotiating table.  Or putting them in a situation where they will decide the fate of TID, if that fate is to be bankruptcy).
3. Push the lenders to bankrupt the Company - which will lead to all sorts of negatives for all parties and harm the financial sector, Islamic Banking and the reputation of Kuwait. (I'm guessing not an alternative high on the CBK's list).
4. Convert TID to a holding company.  This would remove it from Central Bank supervision so that the lenders can apply the restructuring deal agreed.  Also the CBK's June ratios would not apply.  (This seems to me to be a bit of red herring.  The CBK can grant an exemption to TID as a finance company from the regulations.  Supposedly the lenders will reject this because they don't think the administration of the company is really interested in solving the problem.  The lenders have on more than one occasion made it quite clear what they think about management's ethics.  They began by asking the CBK to place a minder in the Company.  Then they pushed for the appointment of a Chief Restructuring Officer).
5. Force TID back to the negotiating table with the lenders to find a solution and return to the original plan.  (This seems contradictory.  The original plan is probably moot at this point.  I think the lenders are going to have to accept some changes - and these will be against their interests.  From the report of the alternatives they've offered already it seems pretty clear that they've accepted this - even if it was no doubt reluctantly.  The CBK may well force the parties back to the negotiating table but there will be a new deal.  Perhaps the CBK could impose a time limit for reaching an agreement using as the deadline some date prior to the date it's required to give a recommendation to the FSL Court).
6. Give TID an exemption from the new ratios saying the old plan was devised based on Central Bank advice to the lenders and thus it's not fair to change the rules on them.  As per the article, TID has apparently been saying that the original restructuring plan doesn't conform with the CBK's  "new rules".  The implication being the plan must be modified.   (I don't think that the CBK new rules are the real issue here.  The sticking point is TID's ability to pay and to continue as a going concern.  If the new rules were the only point, then I think the CBK would have given the exemption.  This could be quite easily fudged as an agreed plan to implement the new rules. And so it could be presented not so much as an exemption but a granting of additional time to achieve the goal.  When the debt is paid in full, TID will clearly be in compliance).
7. Exit TID from the FSL and leave it to its fate.  (The CBK probably doesn't want to be the one who puts down this dog.  Better to have the lenders do so.  The "trick" is to find a way to put the parties in a situation where they either come up with a solution or fail - a way which keeps the CBK's hands pristine.  The time limit for the CBK to give its recommendation to the FSL Court is a neat escape hatch.  If the parties haven't agreed by then, the CBK can tell the Court it cannot make a recommendation.  The Court should then refuse to allow TID final entry into the FSL.  Since this is the last extension allowed, the matter is out of the CBK's hands.  Nature and the courts then take their course.  That should be quite a frightening thought for the lenders .  As they stare into the abyss  of almost a complete loss, all sorts of discounts and compromises may become possible).

Finally to close out this post, a recap from the Creditors' Committee official letter to the Central Bank rejecting TID's new plan "in whole and in detail":

1. TID's proposal makes a gift of the money of others (the lenders) to the Company and strengthens (supports) the rights of equity at the expense of the lenders who have not received a single fils since the beginning of the crisis but only promises.  (But they were some really nice promises. Perhaps, even said with one's hand on the Qur'an).
2. TID's proposal is contrary to international and global practices (customary usage) and puts the lenders in the situation of a fait accompli with the proposal being put forward without their agreement or consultation.
3. TID's management is "hitting" (harming) the interests of the creditors and shareholders.  Therefore the lenders reject the idea of a discount which is unjust.
4. The Committee considers that TID's proposal ignores the repayment schedule already agreed.  10% in Year 1, 20% Year 2, 20% Year 3, 30% Year 4 and 20% Year 5.  (There seems to be an argument of a breach of faith here.  And, yes, while the lenders may be thinking of a breach of the agreed business contract for the rescheduling, AA also is thinking that in this context the term applies as well to  religion).
5. TID's proposal prefers (in the sense of giving priority) the shareholders over the lenders contrary to what was agreed previously.
6. The Company has wasted the shareholders' money hiring financial and legal advisors and wasted the banks time negotiating the past 18 months.  

This has been a bad situation from Day #1.  The passage of time has not made things better.  It's likely to get worse.

The lenders face a real dilemma.  Do they compromise to try and get back as much as they can?  Or at some point do they just bring down the house of cards?  With 18 months of time on their hands, lenders may have built rather hefty provisions against this name.  That may give them a bit more negotiating room.

The Central Bank is in the most uncomfortable of positions.  It's got to be hoping that third parties or events are dispositive and that it doesn't have to make a difficult decision.

International Leasing and Investment Company - 3 Directors Reportedly Resign

Outside the KSE: They Walk Among Us But Are Forbidden to Trade

 

According to Tamir Hammad at Al Watan 3 members of ILIC's Board have resigned in the past two days.  On Sunday, Mohammed Ahmed Saad Al-Jasser, the representative of Abraj Holding (a 32.3% shareholder in ILIC).  On Tuesday Messrs. Khaled Mohamed Nasser Al-Aboude and Badr AlDeen Noyoh, representatives of the Islamic Development Bank (a 28% shareholder).

As the story goes, the three former directors refused to give a reason.  Indications are that there are sharp differences in the company which will be laid at the feet of the regulators to sort out.

And much there is to sort out.  Among the listed but suspended (from trading) companies on the KSE, ILIC and Villa Moda have the dubious distinction of having failed to issue 7 financial reports - their last being 30 September 2008.  Even poor old TID only has 6 reports past due and shares that honour with Safat Global.

You'll recall there was an earlier flap over whether Mr. Fuad Hamed Abdulqader Al-Homoud was returning in an executive role to the company.   Apparently, that rumor has surfaced again.  Supposedly, a neutral party was negotiating a debt rescheduling agreement with the lenders supported by the IDB and Mr. Al-Jasser.  The latter to take a key management role.  Then some shareholders started pushing for the return of Mr. Al-Homoud as the story goes.   Apparently, those who thought his previous stewardship exemplary.   In any case this supposedly led the 3 directors to exit.  

What's interesting here is that shareholders with more than 60% of the firm don't seem to be able to control the Board.

Anyone with an insight or opinion, please post.

For those interested in a trip down memory lane, you can access earlier posts by using the tag "International Leasing and Investment".

Department of No Surprises: Leaked Results of Booz Study - One Bank is Strong the Rest at Lower Levels

5 October's  Al Qabas contains a supposed "leak" of the study Booz did for the Central Bank of Kuwait.  The results one bank is strong and the remainder satisfactory and partially satisfactory.

Since no names were given, I suppose it's a big mystery who the one strong bank is.  That is, of course, if you don't know anything about Kuwait and Kuwaiti banking history.  

Al Qabas' sources tell it the report was given to the Central Bank last week and that the CBK is studying Booz's conclusions to determine which banks need to raise additional equity and which can strengthen their balance sheets by issuing bonds.

Global Investment House - A Global Leader in M&A?

Everything is relative:  In a small bowl, a small fish can feel very, very big.

On 27 September, Global published a press release in which Mr. Badr Abdullah Al Sumait was quoted as saying:

"نعتز بهذا الانجاز المتمثل في تبوء جلوبل مراكز متقدمة ضمن كبرى بنوك الاستثمار العالمية في مجال الاستشارات المالية لعمليات الدمج والاستحواذ. ويؤكد هذا الإنجاز الدور الذي تلعبه جلوبل على مستوى المنطقة في تقديم خدمات الاستشارات المالية كما ويدعم سياسة الشركة المستقبلية في التركيز على الأنشطة التشغيلية ومن بينها الاستثمارات المصرفية."

Quite a statement "ranked among the largest investment banks in M&A".

What was the basis for what might appear to be a rather extraordinary claim?

Reports from Thomson Reuters and Merger Market.

In TR's report on the first six months of 2010, Global was:

1. 4th among financial advisors in M&A deals completed in the MENA region 
2. 17th among international investment banks for deals completed in the EMEA region.
3. 15th for deals completed in Emerging Markets

In MM's report, Global was:

1. 6th among FAs for announced M&A deals in MENA during the first half of 2010
2. The Bharti Airtel/Zain transaction on which Global acted as FA was the largest in the MENA region and 8th worldwide.

There's no dispute about Global's position in the league tables, which was due to a single transaction, Bharti/Zain.   Each transaction does count.  Global was Bharti's advisor and so has earned a place in the league tables.  But this single transaction is its only claim to league-table prowess.

And so like the local mutriba after her first big hit, it may be a bit premature to claim to be the next Fairouz or Umm Kulthum,   One may well turn out to be, but the claim will only be proven by repeat performances.   

Now I'd repeat what Global says in its press release:  it is the only GCC or MENA firm to make the list.  So maybe Global might more properly see itself as a regional leader in M&A (though I'd still contend that it had to have repeat performances to qualify at that level).  Not Kawkab Al-Sharq but perhaps Kawkab Al-Khalij.

To be fair,  let's trundle off (electronically, of course) to Thomson Reuters highly intelligent Deals Intelligence Site to take a first hand look at the 2Q10 Global M&A Report.  And by doing so, get a bit of context.

A few factoids from that visit.

M&A Volume for the First Six Months of 2010

Announced - US$1.065 Trillion / Completed US$811 billion

1. Americas:    US$523 billion / US$405 billion
2. Africa/ME:  US$  42 billion / US$  32 billion
3. Europe:        US$269 billion / US$200 billion
4. Asia Pacific: US$199 billion / US$114 billion
5. Japan:            US$  32 billion  / US$ 60 billion

Anyway you slice it Global's US$10.7 billion in 2010 transactions are drop in the vast ocean of all deals. 1%.   It did have a good sized share among Africa/Middle East deals - 25% Announced Deals and 33% Completed Deals - but Mr. Al Sumait is claiming that Global is among the  leading global investment firms in M&A.  Not that it's a leading firm for Africa/Middle East M&A.   

As the table shows, Africa/ME is rather small beer in the M&A world representing 4% of announced deals and completed deals. 

Let's look at this from another angle - the top 25 advisors for worldwide M&A.

Top 25 Global M&A Advisors

1. Global's name does not appear either in Announced Deals or Completed Deals.
2. The top ten firms (led by the perennial leader Goldman) had between US$213 billion to US$112 billion in announced transactions and US$169 billion (Goldman again) and US$60 billion in completed transactions. UBS was in 10th place Announced Deals with US$112 billion.  And Rothschild in 10th place in Completed Deals with US$60 billion.
3. The advisory firms in 25th rank Jeffries (Announced) and Blackstone (Completed) had respectively US$21 billion and US$14 billion in transactions.

Generally the first ten firms are considered the leading firms. Unless one is prepared to define "leading" investment banks in a very generous way Global again fails to make the "cut". 

 Top 25 Financial Advisors for EMEA M&A

1. Deutsche Bank holds pride of place in Announced Deals with US$94 billion with Citi at US$45 billion in 19th place.  
2. For Completed Deals it's Morgan Stanley with US$85 billion.  JPMorgan  is in 10th place with US$50 billion.
3. Global makes its appearance in 23rd place with US$11 billion in transactions for Announced Deals (up from 220th the year before) and 17th place for Completed Deals. Well out of the magic circle of the top ten.

In this category, Global can make the claim that it has made substantial progress - but on a regional not global level.  As I said above, the real proof will be if Global's name is in the list next year.  But until it cracks the top ten it won't be a leader but a second tier player.

Can anyone out there remind me what Global earned on the Bharti transaction?  Earnings are very important in this business.  For the first six months of 2010, the Company reported advisory related fees of KD1.9 million up substantially from the KD0.3 million it earned in 2009.  That's a 638% increase.  One would hope the fee on a US$10.7 billion would be a "bit" more.  Maybe we'll see the full force of the fee in the 3Q10 financials?

And finally at the end of the Global press release, you'll find links to Thomson Reuters and Merger Market reports which can give you an insight into the general M&A market.