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.

Oqyana Group - KD72.6 Million Loss for Fiscal 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And no doubt with good reason.

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

Al Joman: Analysis of Loans by Kuwait Economic Sectors

Last month the fine folks at Al Joman Center for Economic Consultancy published a series of reports analyzing loans by economic sectors (as defined on the KSE) except for the Banks Sector.

Looking at aggregate sector data, we can get an idea of the relative size of a sector and thus its relative importance in the national economy. 

Also by looking at the relative borrowings by firms within a sector we can get a better understanding of the dynamics of that sector. Is the sector dominated by one or a few firms? Or is competition fairly widespread? Which firms are the major players in a sector? 

In several sectors the largest firms (measured by debt) are fairly small.  This is a reflection of the overall size of the Kuwaiti economy as well as government dominance in certain economic activities.

But, and there is always a "but" with AA, there are some factors which mean any conclusions we draw are imperfect: 

1. Al Joman's reports are based only on companies whose shares are traded on the KSE. Private firms are not included. 
2. We're using debt as a proxy for asset size. This ignores equity, though one might argue in a land devoted to OPM debt is not a bad proxy. 
3. Not all firms have released current financial reports. 
4. Companies in certain sectors have borrowed for offshore business and investments. Examples are companies in the Investment Sector or in the Services Sector, e.g., Zain or Agility. Thus, there is some external "noise" in the numbers.
   

But, (a word used almost as often on SAM as "interesting"), we can get a reasonable macro idea or directional perspective from the data we have.

Before we do, some technical "directions" to make your navigation of the reports as useful and easy as possible.  This KSE link will take you to the English language drop down menu for Sectors and the list of companies comprising each Sector. Each company is shown and its Stock Symbol Number. Those SSN's are important (especially for those who don't read Arabic, the language of Al Joman's reports) because the data in Al Joman's report for each Sector is roughly in SSN order. A click of the language button on the right عربي will get you to the Arabic language page. And this link to Al Joman's report page.

Let's begin with an overview via Al Joman's 7 September report - their initial report meant as a macro summary.

All amounts are in KD millions.

Sector	31 Mar 10	30 Jun 09
Investment	5,747	5,937
Insurance	17	30
Real Estate	1,978	1,835
Industry	1,845	1,853
Services	3,916	4,347
Food	171	198
Parallel Market	65	33
TOTAL	13,740	14,233

 

As you look in the individual Sector reports, you'll notice that the total loans do not exactly agree to those shown in the above table. The differences are relatively minor and, to repeat myself (another common occurrence at SAM) can be ignored as we are looking for a macro perspective and general "directional" trends. 

For those, like AA, for whom no nit is to small to pick, here is an updated table. No, in an uncharacteristic move, I didn't refoot the detail to make sure these totals tally to the detail.

Sector	31 Mar 10	30 Jun 09
Investment	5,668	5,937
Insurance	17	30
Real Estate	1,963	1,838
Industry	1,845	1,853
Services	3,936	4,355
Food	171	198
Parallel Market	66	33
TOTAL	13,666	14,244

Since the first table adds to 13,739 for 31 March 2010, presumably due to rounding, the difference  between the original and adjusted tables is "off" by one.   
 

In the Investment Sector (51 firms) of the 5 largest borrowers 4 are distressed. KIPCO being the one "happy" firm. 

Data in KD million as of 31 March 2010. Total Loans at 1Q10 were KD5,668.

Firm	Amount	% Total Loans
Investment Dar	963	17.0%
KIPCO	619	10.9%
Global Investment House	588	10.4%
Aayan Leasing	416	7.3%
Aref Investment	339	6.0%
TOTAL	2,925	51.6%

 

In the Insurance Sector (7 firms) only 3 firms have loans, خليج ت (Gulf Insurance) at KD10.8 and اهلية ت AlAhleia at KD5.3 account for 92.6% of the 1Q10 total. AlAhleia having reduced its borrowings by roughly KD11 from 2Q09. 

In the Real Estate Sector (36 firms) there is no similar dominance. The largest borrower is تمدين ع (Tamdeen) with KD219 or 11.1% of the total as of 1Q10. Al Joman has not reported on لؤلؤة (Lu'lu) Pearl Real Estate or صفاة عالمي (Safat Global). Safat last reported FYE08 when it had KD15. Pearl 3Q09 when it had KD41. If you're looking at the KSE Sector page, note there is no stock with symbol 407. Also Al Joman has جراند (Grand) out of order in its list – using the KSE Symbol Number order as the right one.

In the Industry Sector (28 firms), صناعات (National Industries Group or NI Group) dominates with KD969.7 or 52.6% at 1Q10. The next largest firm أنابيب (Kuwait Pipe Industries and Oil Services Company) has only KD163. 

In the Services Sector (59 firms) زين  (Zain) and أجيليتي (Agility) dominate accounting for roughly 48.6% of total loans at 1Q10 with KD1,556 and KD356 million respectively as compared to 2Q09 when they were 59.1% with KD2,164 and KD411 respectively.

In the Food Sector (6 firms) the aptly named اغذية "Food" (Americana) dominates with roughly 92.2% of 1Q10 loans with KD157.7. And as the slogan now goes "Americana – 100% Arabian".  And note that United Food Industries Group's symbol is almost the same as Americana's, except UFIG has the definite article "أل" in front, i.e., الغذائية.  Be careful when placing that order with your broker!

In the Parallel Market (14 firms) صفاة عقار (Safat Real Estate) at KD19.8, ميدان (Maydan) at KD18.3 and عمار (Emaar) at KD11.2 account for 74.5% of 1Q10's total. Again note that the KSE list has gaps missing in the sequential order.  Symbols 2001, 2002, 2004, 2009, and 2016 are not used.

The Investment Dar - Central Bank Gets Another Four Months to Ponder

Quoting Reuters, AlQabas reports that the Central Bank of Kuwait applied for an additional four months to determine whether TID should be allowed to enter the FSL process - a step that would give it protection from court actions in the State of Kuwait.  And as well, I suspect, from court actions in most other jurisdictions.

The new period runs from 10 July.

Clearly, the CBK is not as convinced as it would like to be that TID can make the current restructuring plan.  

As noted in an earlier post, it's expected that the CBK will impose some conditions on TID as the condition for an approval.  And perhaps propose some modifications to the restructuring plan itself.

From this distance it's hard to see what the CBK's motive is:

1. Reluctance to make a decision that may turn out to be wrong?
2. Hope that if it waits long enough, events will make the decision for it? 
3. Desire to put pressure on the parties to revise the deal - more to the CBK's liking?
4. Need for time to figure out what the right additional conditions are? And negotiate with the parties?
5. Hold TID's feet to the fire a bit longer as a form of punishment?  Though this risks alienating creditors.

The danger with a delay is that those creditors who are pursuing legal cases may win judgments in foreign jurisdictions.  Though I would expect TID to mount a legal defense in such cases that it was partially under the equivalent of Chapter 11 and that foreign proceedings should be stayed until the CBK made its decision, such a defense may prove less effective than TID being finally and formally under the FSL.

A delay does allow the CBK to increase pressure on both TID and the creditors to accept its conditions with minimum negotiation.

The Investment Dar - Central Bank to Impose Conditions to Enter FSL

Muhammad Sha'baan at AlQabas quotes informed sources that the delay in the Central Bank's approval of TID's entry under the protection of the FSL reflects some fundamental concerns and that as a result the CBK is likely to impose conditions and constraints as the price for TID's entry - which they will secure prior to any approval.

The steps will protect the interests of creditors as well as support the rehabilitation of TID.  And this "workshop" (or perhaps worklist) of effective and swift measures will immediately follow entry under the FSL. 

The article notes that TID's "file" is complicated (and presumably this is the reason for the CBK's caution):

1. A significant amount of creditors want nothing to do with the restructuring and are determined to continue legal action.  The concern is that a foreign judgments will be immune from the FSL and thus will disturb the Company and upset the legal protection given.   AA:  There is no real way that the CBK or Kuwaiti authorities can get 100% a priori assurance this will not happen.  The hope is that a foreign jurisdiction will recognize the FSL as being analogous to USA Chapter 11 and stay legal actions in their countries.  This is something the Kuwaiti authorities have to make a leap of faith on once they've decided the larger issue - whether it is better to liquidate or rehabilitate TID.  The USA (State of New York to be precise) has recognized the Administration of TIBC in Bahrain as a fair and reasonable process and has stayed legal actions. One would hope Kuwait could get similar treatment.
2. The Company has yet to issue any financial reports from 2009 or 2010. The article describes several legal/regulatory issues -- the holding of annual shareholders' meetings, restoration of trading on the KSE --  as well as the determination of the Company's financial situation.  AA:  The regulatory issues are immaterial to the issue of ability to repay creditors.  The major issue is whether it makes sense to liquidate the Company or run it as a going concern (which will have a higher expense level).  Which course provides the highest net payout?   Which course does the least damage to Kuwait? The longer the file is left undecided the more value that will be lost. 
3. Complete and detailed information and explanation from the Company is lacking.  The Creditors Co-Ordinating Committee failed in obtaining information on some issues - where the answers are still "floating" according to creditors.  AA:  The CBK, CCC and creditors need to determine if the Company is being forthright.  If it is not, then it's time to remove the Board and management and go forward with the restructuring.  Or put the Company in Administration.  If the situation is unclear because of external factors and the Company cannot respond with precision, then the creditors will have to learn to live with ambiguity.  One would have hoped that by now the creditors would have made a decision on this score or decided to accept less than forthright answers.
4. Some points remain open.  It appears the chief one is shareholder support.  AA:  It seems a mite optimistic to expect shareholders to put more money into TID at this point (as it does for Global) until shareholders seem the direction of the restructuring.  Presumably, any money put in will wind up immediately in the creditors' pockets.  A rather hard sell to shareholders who have probably lost most if not all of their past equity.  Invest money not to build for the future but to pay off loans. Even putting money in to build the business requires a bit of optimism - perhaps irrational - at this stage.
5. Another major unresolved issue is expense reduction/control including grants, bonuses etc for management.  AA:  Unless this is the typical bankers' myopic focus on pennies in a restructuring, this is a rather disturbing bit of news.  If repayment of TID's mountain of debt depends on reducing relative hillocks of expenses, it may be time to consider Administration.  Unless of course the intent of the plan is a disguised liquidation.  Or there is no alternative to current management and controls are required to avoid dissipation of assets.   
6. Ernst and Young (who the CBK hired to evaluate TID's financial condition) ran a series of stress tests (to use a term common in the press).  Apparently under some of these TID was unable to repay principal and/or service debt.  That led E&Y to comment on the Company's debt burden and  reliance on two sources of revenue.  The CBK is said to be looking for 100% assurance that TID will be able to service its debt according to the plan.  AA:  Perhaps this is just a flight of rhetoric.  But if the CBK is looking for 100% assurance, it needs "tae think again".   The only thing the CBK can be sure of with that level of precision is that banks under its supervision are likely to make manifestly stupid loans again and get themselves into a serious deteriorated situation.  It cannot be sure that TID will sail through.  What it needs is a reasonable assurance - tempered by a keen understanding of what a bankruptcy this size will mean for Kuwait.   The US Court didn't have 100% assurance when it let General Motors through the gates of reorganisation.  

There are a couple of other points of note in the article:

1. Legal experts say that the CBK is not bound by the Special FSL Court's request.  That as the Central Bank it has certain powers beyond and above the FSL.  
2. The Company is described as being in the position of "one standing on shifting sand" given the decline in asset prices and the problem of coming up with asset values given different and moving prices.
3. Some local banks (Kuwaiti) have provisioned between 50% to 100%.  In any case by the end of the year according to CBK requirements, provisions will have to be at 100% as for other troubled investment companies.  AA:  Presumably at that point, having taken the pain, banks don't need to accommodate a plan because they have nothing to lose.  The bankers' rule that a recovery on a fully provisioned loan is found (new) money as opposed to recoveries of old lost money.

Additional conditions and safeguards - while no doubt justified - are unlikely to provide 100% assurance of TID's success.  At some point the CBK will have to make a decision - formed largely by the intersection of approximations of fact and the realities of policy - what is best for Kuwait.   And then prepare itself for criticism that its decision was flawed.  With no doubt a major part of that criticism coming from the "wise and learned" members of the Majlis al Umma.

The Investment Dar - No Decision from Central Bank

It's been roughly four months since TID received the preliminary approval of the Special FSL Court to begin the process for the Company to seek protection under the FSL.  Under the law, the Central Bank of Kuwait has four months to review a proposed  restructuring plan, the financial condition of an applicant and make a determination as to whether it believes there is a reasonable chance that the a company will be able to meet its restructured obligations.  Earlier post on details of FSL here.

At this point the Central Bank of Kuwait has not issued its final conclusive decision.  

Mohammed Al Itribi at AlQabas reports TID held a consultative meeting yesterday (14 July)  with the Creditors Co-Ordinating Committee to advise them of the lack of a decision by the CBK. 

The article notes that this can mean that (a) the CBK is about to issue a negative decision or  (b) as allowed under Article 19 of the FSL ask for additional time no to exceed another four months.   The FSL allows only a single four month extension.

I still think it's unlikely the CBK is going to reject TID's restructuring given the negative fallout on Kuwait.  Perhaps, they're looking to find a way to approve.  And that ties into the E&Y report.   

The  KD64,000 question is precisely what it said.   Did it support the restructuring plan?

If not or if the CBK is uneasy,  then a possible alternative would be to change terms of the plan - extend the tenor or re-profile payments to push any perceived problem out far enough so that the possibility of repayment is increased.  The promise of CBK approval for changes in the Plan could be a powerful incentive for banks to go along and agree - as this will provide some closure to the TID file.   Even if it's only a temporary pushing of the problem to the future.

The article also notes that some alternatives were discussed if the CBK's decision is negative.

The central issue with alternatives is ways to prevent dissident creditors' lawsuits from threatening the viability of the restructuring plan.   One would expect that dissident creditors would seek Court orders  forbidding the disposal of assets by TID during the course of their legal action.   That cuts off cash flow for repayments under the restructuring.  If the dissident creditor wins, assets could be lost - though no more than the creditor's claim (including legal interest, costs, etc).  

One strategy is to just tough it out delaying court decisions as much as possible. Seeking court permission to sell assets and place the  amount at dispute (but not the entire proceeds) in escrow pending the court's decision - allowing the remainder of the proceeds to make payments under the restructuring. 

Or trying to substitute less desirable assets.  Here take my shares in TIDBank and let me have the Bahrain Islamic Bank shares. 

Following the tough it out strategy requires  the co-operation of the  agreeing creditors to go forward.  And strong discipline in their ranks.  It also depends in the final analysis on the amount of the dissident creditors' exposure and their ability to bring suit in various jurisdictions.     

National Investments Clarifies Bahrain Judgment Against The Investment Dar

Yesterday evening, I posted a quick translation of an article in AlQabas about an NIC Court victory in Bahrain that was interpreted as posing a potential serious problem to TID in implementing its restructuring.   Today NIC responded with a clarifying announcement on the KSE.  The text is below.  As usual Arabic language only.

NIC makes the following points:

1. In the lawsuit, it is acting as manager of the AlWataniya (or National) Money Fund.
2. The judgment it has won is procedural.  Earlier the Court of First Instance in Bahrain had refused to hear the case claiming it did not have jurisdiction.  The Appeals Court ruling overturns this judgment but it does not decide anything against TID.
3. This step will allow NIC to refile its attachment/freeze on TID's Bahrain assets and refile its case in the Court of First Instance.
4. The total amount of the money owed to the Fund (including both NIC and its clients) is KD 9,755,548 against which it has taken provisions of KD4,879,649 to today's date.   (Re earlier post: It's pretty sad if you can even get the numbers right when you're translating).
5. And that it will not get any money until a final judgment is rendered by Bahrain Courts. Remember the three strikes analogy here.  The case can be appealed all the way to Bahrain's "Supreme Court", the Court of Cassation.
6. NIC will keep the KSE advised.

[11:7:1]  ِ.ايضاح من (استثمارات) بخصوص ما نشر فى احدى الصحف المحلية ‏
يعلن سوق الكويت للاوراق المالية بان شركة الاستثمارات الوطنية ‏(استثمارات)‏
تود ان توضح بخصوص ما نشر فى احدى الصحف اليومية حول الحكم الصادر ‏
من محكمة الاستئناف البحرينية ،تفيد الشركة بالاتي :‏
ِ- ان الحكم المذكور صادر لصالح شركة الاستثمارات الوطنية (استثمارات) ‏
بصفتها مدير صندوق الوطنية النقدي اى ان الحكم صادر لصالح الصندوق ‏
المذكور .‏
ِ-الحكم ينص على الغاء حكم محكمة اول درجة والقاضي بعدم اختصاص ‏
محاكم البحرين بهذا النزاع والحكم مجددا باختصاص محاكم البحرين ‏
بذلك النزاع وتثبيت الحجوزات المتخذة على اصول شركة دار الاستثمار محل ‏
النزاع فى البحرين ،ومن ثم اعادة ملف الدعوى الى محكمة اول درجة للفصل ‏
فى الموضوع .‏
ِ-اما بالنسبة لتاثير ذلك على البيانات المالية لشركة الاستثمارات الوطنية ‏
فالشركة تفيد بان اجمالي استثمارات الشركة وشركاتها التابعة فى الصندوق ‏
المذكور يبلغ 9,755,548 د.ك ،وقد تم حتى تاريخة اخذ مخصص لذلك الاستثمار ‏
يبلغ مجمله 4,879,649 د.ك .‏
ِ- الشركة لن تقوم باسترجاع ايا من المخصاات الماخوذة سواء لها او لشركاتها ‏
التابعة الا بعد صدور حكم نهائي بهذا الخصوص وتحصيل المبالغ المشار اليها .‏
وسوف تقوم الشركة بموافاة ادارة السوق باى تطورات بخصوص ذلك الموضوع .‏
وعليه سوف تعاد الشركة الى التداول بعد عشر دقائق من نزول الاعلان .‏

The Investment Dar - Restructuring Plan Does Not Incorporate New Central Bank Regulations - So What?

You've probably seen the articles (Gulf Daily News, AlWatan, and AlQabas) saying that TID, its creditors, Morgan Stanley and Credit Suisse met 6 July to discuss the draft restructuring plan and to discuss the fact that the plan does not incorporate the new Central Bank guidelines for investment companies.

Much is made of the fact that the Central Bank guidelines must be completely implemented by June 2012.

As you'll recall (and if you do not, look here and here), these impose certain rather strictly drafted ratios:

1. Leverage of 2:1 (Total Liabilities to Equity)
2. 10% Liquid Assets Ratio
3. A cap on foreign borrowing - 50% of total equity.

Frankly, this seems much ado about nothing.

Barring a miraculous recovery of asset values, there are two ways that TID can get in compliance with the ratios.

1. Its shareholders agree to fund a massive increase in capital.
2. Its creditors, particularly the foreign ones, forgive debt.  Other options would be defeasance.  Or equity conversions.

Hard to imagine rational investors throwing good money after bad (subscribing for new equity) for the sake of complying with some regulation.

Impossible to imagine creditors forgiving debt - especially the "Islamic" ones even in light of the clear guidance in 2:280.  

Defeasance would require sufficient assets in the "trust" to provide a comfort margin.  Given the quality of TID's "core assets", one would expect a very large margin.   That would leave other creditors high and dry.  As well, the hook into the Company by not defeasing provides at least additional theoretical source of repayment. 

Converting secured debt into equity doesn't seem like a particularly appealing prospect unless the conversion could be into an instrument that was called "equity" but was actually the equivalent of secured debt.

There's no real motive for a shareholder or creditor to take any of these actions.  Both realize that the Central Bank's options are limited.  It's not going to place TID into Administration (at least not beyond what the restructuring is already doing) for the sake of  enforcing a regulation.

More likely than not the Central Bank of Kuwait will have to give TID a special exemption from the new rules - an extension beyond the 30 June 2012 "deadline".   Just as it is likely to have to give Global such a pass.

The Investment Dar - National Investments Wins Appeal in Bahrain

 

Muhammad Al Itrabi at AlQabas reports that National Investments Company Kuwait has won an appeal in Bahrhain against TID relating to some KD30 million in debt.

The article notes that this judgment given before the Central Bank has made its final decision about allowing TID to enter the safe harbour of the Financial Stability Law potentially complicates implementation of TID's restructuring.  And opens the doors to other lenders taking action.

That may be a bit of a over reaction.

First, like American baseball, one gets three "goes" in the Bahrain (and other local court systems).  In Bahrain in particular, it's not over until the fat lady (the Court of Cassation) sings.   By the time the Court of Cassation renders its verdict it's highly likely that the CBK will have decided whether or not TID should enter the FSL.  

If the CBK rules against TID, then the implications are clear.  A massive legal scramble.  It's not likely that the CBK is going to unleash this sort of "trouble" on the already troubled Kuwaiti financial sector.  

If it rules in favor of TID, then it's going to be mighty difficult for any Kuwaiti Company to launch legal actions in a foreign jurisdiction.  It's also highly likely that the Courts of Bahrain will recognize the FSL protection.

Hard to see this being anything but a minor annoyance.  And it might just prompt the CBK to speed up its decision.

The Investment Dar - Good News? Aston Martin Planning a Stock Offering

If the report in AlQabas (which quotes the Internet financial site, City AM,) proves to be correct, there could be some very good news for TID and its eager creditors.

David Richards, Austin Martin's Chairman, is quoted as saying that AM is considering an IPO with valuations mooted in the GBP 1 billion range.  Or a tie up with another manufacturer.

And the news couldn't have come at a better time for TID as the Central Bank of Kuwait carefully considers E&Y's "fateful, final" report on TID's financial position and its ability to meet its obligations under the proposed restructuring as the basis for its decision on letting TID enter the "safe harbour" of the FSL.

Of course, there can be many a slip twixt cup and lip, particularly when one is only at the stage of considering an IPO.   

One might, I suppose, also wonder about the credibility of this source which believes that Austin Martin "is majority owned by the Kuwaiti sovereign wealth fund Investment Dar, which bought it for £503m from Ford in 2007." 

The Investment Dar - Ernst and Young Delivers "Final" Report on Restructuring Plan

AlQabas reports that E&Y has delivered its "final fateful" report on TID to the Central Bank of Kuwait.  The report includes a valuation of the Company's assets which is the basis for E&Y's judgment as to whether TID is capable of continuing as a "going concern" and meeting it repayment obligations under the restructuring.

As well, that the Company held a meeting with E&Y to discuss its analysis.  And that according to sources close to the Head of the Creditors Committee, the CCC held a meeting with Credit Suisse, Morgan Stanley and the Company to discuss the latest developments.

And finally that there are members of the CCC who are ready to propose alternatives should the CBK take an adverse decision on the restructuring plan.

I'd be rather surprised if the CBK did not approve the plan.  Rather if it has serious concerns, it might seek to amend the plan in one or more areas, though again I don't expect this. 

Presumably, the development of alternatives is a further demonstration of AA's Law of the Conservation of Due Diligence.  If you fail to do proper due diligence in the underwriting stage, you "catch up" in the restructuring stage.  And then of course the amount of work reflects the impact of time value (present value).  Much more is done.

As you know, the CBK's approval is required for entry by TID into the safe harbour of the FSL which will protect it - at least in Kuwait and probably in other jurisdictions - from dissident creditors' legal actions.  And recall that the FSL does give the CBK the right to amend the restructuring plan if it feels that such is needed to ensure its implementation.

The Investment Dar - No Agreement on Draft Budget Expenses

Citing informed sources, AlQabas reports that the meeting earlier this week between the Creditors Co-ordinating Committee and the Company did not resolve the differences over the level of operating expenses in the proposed five-year budget (which is required under the restructuring).

At the end of the meeting, the CCC came up with some modifications to the Company's budget which were devised by the Chief Restructuring Officer - who was appointed by both sides as a "neutral" party to review the proposed five year projected financials/budget.

The Company is expected to reply within the coming week.  If it agrees, then the revised budget will be submitted to the Central Bank for its review.  If not, the dispute will remain open (unresolved).

As noted in the previous article, the creditors' position is that expenses should be in harmony with the new situation the Company finds itself in.  Meaning probably fairly dramatic cuts in operating expenses.

The central question is just how deep the cuts are and whether they are really required.  Or if they are a bit of overkill by overzealous bankers.  Without details, there's no sound basis for judging one way or the other.

The Investment Dar - TID and Creditors Debate Expense Controls

AlQabas reports that the Creditors' Co-Ordinating Committee and TID will meet in Dubai on 23 June to discuss the CCC's request that TID reduce operating expenses.   As per the article the creditors want at least a 40% reduction in expenses during the first three years of the rescheduling.   The Five Year Budget and projected financials the Company presented propose expense levels much higher than that.  

TID's argument is that it needs to maintain a certain level of expenses to manage its affairs and fulfill all the requirements of the restructuring -- and from the reports of terms of the restructuring I've seen there are many.   

The creditors for their part claim that the expenses remain elevated and are not consistent with the situation of the Company and general economic conditions and that the Company does not need the number of staff.

As I've written before, there is a natural tension in restructurings between the debtor and the creditor over expenses.  And often the creditors insist on draconian cuts which do not materially improve their repayment prospects but which often dramatically harm the Company's ability to function as a going concern.

Without details it's hard to say.  But I think you can see which side of the debate I'm leaning towards from my comments.  That's of course not to say that there shouldn't be some expense control.  But that it should be focused and relevant. 

The Investment Dar - Update on Implementation of Rescheduling

Both AlWatan and AlQabas have articles on the latest developments on TID's restructuring - presumably from a Company press statement.  I suspect we will see that published on TID's website on Tuesday.  Probably as with the last announcement in Arabic only.

Here's a hasty translation.

1. The Creditors' Coordinating Committee ("CCC") announced that most of the commercial aspects of the rescheduling have been agreed with TID.
2. That the English language version of the legal documentation will be completed in one week.
3. Thereafter an Arabic translation will be prepared and given the the Shari'ah Board of TID for a final review (this will take several weeks) before the legal agreements are given to the Special FSL Court for its review. 
4. That in order to speed up implementation of the restructuring, TID has agreed that whatever the date of FSL Court approval, it will use a date no later than 30 September 2010 to begin the calculation of "profit" (interest) with the first interest payment no later than 31 March 2011.  And that the first principal repayment will be no later than 30 September 2011.
5. That TID has voluntarily agreed to be bound by the conditions of the restructuring - including the management of the Company's affairs -  as if the Special FSL Court had already approved the restructuring plan.
6. That the CCC and Chief Restructuring Officer are revising the five year budget/plan and projected financials presented by TID at the 24 May meeting with creditors and will present a revised version to the Company.
7. There is a final quote from Bader Abdullah Ali - the CCC's spokesman.  The most significant part of the quote is that the CCC's role will be concentrated on (a) the revised budget, (b) supervision  of the activities of the Company and (c) the stages of entry under the FSL.

Within the progress update, there are two key points - #5 and #7 and #4.   The creditors have persuaded TID (no doubt gently)  that they should be in control now prior to the anticipated approval of the FSL application.  And as part of that the Company has agreed to an absolute "last date" for starting the timing of interest and principal repayments. 

The Investment Dar - Update on Financial Stability Law Process

AlQabas reports that Ernst and Young has presented its preliminary report on TID to the Central Bank of Kuwait.  It's expected that its final report will be presented in July.  The Central Bank will then study both reports to determine if TID is solvent and should be allowed to used the Financial Stability Law to implement its restructuring.  After completing that study, it will make its recommendation to the Special FSL Court.

The article goes on to note that if the Plan is approved the Central Bank will retain a monitoring role.  If the Company fails to abide by the restructuring, then the Central Bank would recommend whether TID should be given a second chance or should be put into liquidation.

I suspect that this means that a final decision on TID's entry under the FSL will take place in late July or early August.  A September implementation - as discussed earlier in the Kuwaiti press - might take place.  One potential timing issue could be Ramadan - which is expected to begin somewhere just before mid August.

Earlier posts on the Financial Stability Law can be accessed using the label "Financial Stability Law".

The Investment Dar - TID's Shari'ah Board "Slaps Down" TID's Defense in BLOM Lawsuit

TID has issued a press release that its Shari'ah Board met 22 May and reviewed the Wakala Contract between TID and Banque du Liban et D'outre Mer ("BLOM").

The Board ruled as follows:

1. The contract is Shari'ah compliant.
2. The Company should not make assertions in Court about whether a contract complies with Shari'ah or not before it has obtained the judgment of its Shari'ah Board.
3. The Company should withdraw this defense its Court Case against BLOM.  

The Company noted at the end of the press release that it had done so.

This is a rather significant development.  

First, TID's Shari'ah Board has set down a clear rule.  The determination of what is Shari'ah compliant is the Board's responsibility and not management's.  And that no actions are to be taken before the Board rules.

Second, in no uncertain terms, TID's Shari'ah Board has "slapped down" TID's  rather shabby (I'm being polite again) attempt to hide behind the Shari'ah to avoid settling an obligation.