GFH Bahrain: What’s Changed Since 2010?

Heading Up But Still Lots to Climb

I last posted about GFH in 2010. 

At that point, its financials were a mess.

Along with Global Investment House and The Investment Dar it was part of the trio of once high-flying regional investment banks that hit the wall at high speed. 

What’s happened since then?   

On a positive note, GFH escaped the fate of Global Investment House.  Its shareholders remain in control, cases have been lodged to recover funds, additional capital has been raised, and assets have not been stripped off to creditors. 

Nor is GFH in what would appear to be the nearly persistent vegetative state of The Investment Dar –a chronic condition punctuated by infrequent bouts of apparent lucidity in which TID announces yet another restructuring plan. Sadly during those periods TID is insufficiently lucid to issue financials, the last to see daylight being from FYE 2009, or to even update its website.  Love the Board members’ pictures.  Despite the difference in surnames, three of them look remarkably similar.

So how has GFH performed since 2010?  

Short answer:  not so well. 

On page 36 of its 2015 Annual Report, GFH kindly provide five years of financial highlights.     

GFH ROE 2011-2015
	2011	2012	2013	2014	2015
GFH	0.22%	3.26%	-4.00%	4.79%	1.80%
AA	0.22%	3.26%	-4.01%	2.62%	-0.83%

As you see from the above, AA has a different analysis of the last two years’ ROE.

1.      For 2014 and 2015 GFH used total net income— both GFH shareholders and those of non-controlling interests (NCI)—and equity attributable only to shareholders of GFH (excluding NCI’s share of equity) to determine ROE. 

2.      AA used net income—actually a loss of US$5.5 million—attributable only to shareholders of GFH and like GFH used equity attributable only to GFH shareholders.   Why? Because the point is GFH’s ability to generate income for its shareholders.  Also this choice is related to the nature of consolidated statements as outlined in #5 below. 

3.      As consolidation only affected 2014 (restated) and 2015 results, those are the only two years where there is a difference in calculation methodology.  

4.      Both GFH and AA used beginning and end of period equity to determine a year’s “average” equity to calculate ROE.  Because there were significant capital increases over the five year period (an almost three times increase), this method overstates ROE for certain periods because it understates average equity.  But what’s important here are trends, directional rather than locational statistics.

5.      One very important note:  consolidated financials are an accounting construct.  They are designed to provide a way to analyze the economic performance of a “group”.   But the consolidated "group" is not a legal entity.  That is, the group does not really (legally) directly owns the assets or receive the income shown.  Parent only or individual financial statements show the legal status ownership of assets, cash flows, etc.  Take a look at note 34 in JPMC’s 2015 AR and compare the data to the consolidated financials.  Parent revenues are largely dividends and assets are largely investments. This fact has important implications for investors and creditors that buy holding company equities or unsecured debt securities. Or for lenders to holding companies.  Access to cashflow, access to assets, priority in bankruptcy, responsibility for subsidiary/affiliate debt (absent parent guarantees) are some of these. 

Whether you take GFH’s or AA’s calculations, performance has been “disappointing” (euphemism of the post).  Earnings have been volatile.  ROE has been subpar.

Some of this is economic:  a “weak” (second euphemism) legacy portfolio, the cyclical nature of GFH’s businesses, etc. 

Some of this is a function of internal management: legacy leadership—responsible for the high risk portfolio—was only conclusively removed in late 2013, no doubt delaying remedial action.  GFH has also conducted successful legal actions against “two of its ex-Chairmen for bonuses illegally obtained during the period 2005-2008”  which some readers may interpret as indicating less than the ethics one might hope to find in a self-described Shari’ah compliant institution.   الله اعلم

A coming post will take a look at GFH’s attempt to address its problems.  

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.

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.

The Investment Dar - New Look to the Website

Overheard on the sidelines of the recent OGM, the Chairman/CEO (in the middle) listens to two stockholders discussing the firm's fall:

"There's a 269th Rule of Acquisition?" 

Our friends over at The Investment Dar have a new look to their website.  A space theme.  Much "neater" looking than the new one over at The National.

Wonder if the lenders approved the expense for the redo? 

And wonder if they're ready to boldly go where no lender has gone before?  (Under the FSL)

Gulf Bank: The Golden "Prize"

 

The Gold's There.  Look Closer.

According to the informed sources of Al Watan, a European Group is now bidding to acquire a significant/meaningful share in Gulf Bank through the services of a Kuwaiti intermediary.  And is therefore bidding against the Qatari Group.

The article goes on to say that GB is expected to declare a profit of KD35 million for the first nine months of 2010.  3Q10 provisioning is expected to be much less than during the first two quarters this year  because GB has provisioned 100% of Saad and Al Gosaibi exposure (KD 120 million!) plus 100% for The Investment Dar, 50% for Global,  and 50% for Aayan Leasing and Investment.

Anyone out there know if the provision levels for TID, Global, and Aayan are Central Bank mandated?  Or if they're just GB's calculations.

I guess Global may be among the worlds leading investment banks  for M&A as Mr. Al Sumait said not so long ago (a post is coming on that topic) but seems to be in rather poor company with respect to its loan repayment prospects.  Half full or half empty?  But nonetheless better than some others.

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.

Markaz: Review of Kuwait Investment Sector

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

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

As usual, good analysis and commentary.

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

In the interim, some key points from the report.

Let’s start with Markaz’s Conclusion:

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

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

Historical Performance

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

Earnings in KD millions.

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

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

Asset Classification

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

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

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

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

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

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

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

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

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

The Kuwait Investment Firm Sector in the GCC

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

Leverage

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

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

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

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

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

Asset/Liability Mismatch

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

Review of the Top Five

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

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

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

*TID calculated using 2008 financials.

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

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.

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?