AlMadar 30 September 2009 Summary Financials - Arabic

Apparently there's some interest out there in AlMadar's interims.  Here they are in Arabic.  Source Kuwait Stock Exchange website.


[11/17/2009-7:49:12]  
بلغت (خسارة)(مدار) (8.6) مليون د.ك لل9 أشهر المنتهية في 30-09-09 ‏
يعلن سوق الكويت للأوراق المالية أن شركة المدار للتمويل والاستثمار (مدار)‏
افادت بانها حصلت على موافقة بنك الكويت المركزي على بياناتها
المالية المرحلية للفترة المنتهية في 30-09-09 يوم الاثنين الموافق
ِ16-11-2009 ، وفقا لما يلي:‏
البند       ال3 أشهر المنتهية في 30-09-09   ال9 أشهر المنتهية في 30-09-09‏
الربح(خسارة)(د.ك)                (1.405.762)        (8.656.853)‏
ربحية(خسارة)السهم (فلس كويتي)     (3.95)               (24.34)‏
اجمالي الموجودات المتداولة                -              81.874.170‏
اجمالي الموجودات                         -               129.784.215‏
اجمالي المطلوبات المتداولة               -                77.910.681‏
اجمالي المطلوبات                         -                77.854.004‏
ِ اجمالي حقوق المساهمين                -                47.849.080‏
بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ(1.033.531)د.ك
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 414.205 د.ك
ِ2- الفترات المقارنة :‏
البند       ال3 اشهر المنتهية فى 30-09-08  ال9 اشهر المنتهية فى 30-09-08‏
الربح (د.ك)                   (1.417.870)            167.786‏
ربحية السهم (د.ك)                (3.99)                   0.47‏
اجمالي الموجودات المتداولة        -                     125.754.262‏
اجمالي الموجودات                 -                      176.248.835‏
اجمالي المطلوبات المتداولة        -                      91.821.680‏
اجمالي المطلوبات                -                        107.383.520‏
اجمالي حقوق المساهمين         -                        67.218.673‏
وعليه سوف تعاد الشركة الى التداول اليوم الثلاثاء الموافق 17-11-2009 .‏

Central Bank of Kuwait Requires Local Banks to Prepare Estimated 2010 Financials

AlQabas reports that the CBK has issued an order to local banks that they must prepare projected financials for 2010 shortly after the end of Fiscal 2009.  These are to be supplied within the deadline for the submission of the 2009 financials.

Given the financial crisis in 2008 and the impact on the banks, the CBK had not required projected financials for 2009.

Other than the obvious motive of instilling greater discipline in banks' planning, the CBK can use these reports to gauge current bank sentiment to business in 2010, the scope of their planned activities and thus the likely impact on the economy. 

Useful Research Tools & Sources on Macro Issues

There are a variety of useful studies and reports available on macro issues.

First the Worldbank's Reports on Observance of Standards ("ROSCs") which cover a variety of topics: Corporate Governance, Accounting and Auditing, Banking Supervision, and eight others.  No coverage on the GCC yet for Accounting and Auditing.  Nor on Banking Supervision. 

There is one Corporate Governance ROSC on Saudi issued this February.  The Central Bank of Kuwait has announced that the ROSC team will be in Kuwait this December.

ROSCs also available through the IMF portal here.

Second, the IMF's Financial Sector Assessment Program ("FSAP") which issues Financial System Stability Assessments ("FSSAs") available here.

No Money Laundering in Kuwait!

So claims Kuwaiti Minister of Commerce Ahmad Harun.

Quite a remarkable achievement.

Sort of like the humming in Dubai.

Of course, there's always someone with a different view.

Jubailat, Hojjair, and Karawah - Bahrain

Remembered here.

Soon remembered there one hopes.

It's understandable though I suppose how in a big country like Bahrain with its teeming millions one might lose a village or two.  And that might explain the slow delivery of the letters to the CIO.

Awal Bank - Analysis of 3Q08 and 4Q08 Financials

Summary

Based on limited financial information available, it appears that there was a severe reduction of the liquidity in Awal's balance sheet in 4Q08.  Without more financial reports (only 3Q08 and 4Q08 are available on Awal's website) and a full set of financials including the notes (only summaries are posted in public area of the website), it's impossible to determine what caused this reduction in liquidity.  

It's also equally difficult to determine if Awal's problems in 2009 (leading to Administration) were the result of illiquidity (reasonably good assets but illiquid so they could not be converted to pay off short term creditors) or insolvency (a decline in asset values significantly below carrying value).  As outlined below, my initial view is that it was the latter.    

Background

On 30 July 2009 the Central Bank of Bahrain announced that pursuant to Article 136 of the Central Bank Law, it had placed Awal Bank under administration.  Later on 9 August it announced the appointment of Charles Russell LLP as Administrator.

The Central Bank of Bahrain and Financial Institutions Law of 2006  ("CBBFIL") provides that three cases under which the CBB may place a licensee under Administration.:

1. "If the Licensee becomes insolvent or appears most likely to be insolvent.  
2.  If the license is amended or cancelled pursuant to the provisions of items (1) and (3) of paragraph (c) of Article (48) of this law.  
3. If the Licensee continued to provide regulated services which resulted in inflicting damages to financial services industry in the Kingdom." 

Presumably, the reason for the CBB's action was the first.  But note that Article 133 of the CBBFIL of 2006 defines insolvency as "A Licensee is deemed to be insolvent if his financial position becomes unstable and he stops paying his due debts other than administrative fines and whatever type of tax."

Financial Analysis

Since Awal was not traded on any exchange, it is not required to publish its full financials.  It did, however, release financial highlights: balance sheet, income statement, cashflow statement and statement of changes in equity - all consolidated.  3Q08 and 4Q08 reports are here.

Without detailed footnotes, the following analysis is somewhat limited.  Admittedly, it raises more questions than it answers.

Let's focus on the balance sheet changes between 30 September 2008 and 31 December 2008.  This would be the first critical period after the financial crisis hit but before the full force was felt.

1. Between these two periods, total assets declined US$1.8 billion dollars. 
2. Equity is only US$25 million lower between 3Q and 4Q08 (the change in YTD net income between the two periods). Therefore, we can say that in effect liabilities accounted for the entire change.
   
3. Every liability category declined:  long term debt US$779 million, due to non banks US$605 million, repos US$227 million (probably greater haircuts by counterparties), due to banks US$141 million, and other liabilities US$46 million. 
   
4. This reduction of liabilities (a negative cashflow) was funded by reductions in assets.   Cash and cash equivalents decreased US$1.429 billion  (from US$2.2 billion to US$785 million).  loans US$630 million, equities and options US$366 million, Funds US$315 million, and interest bearing securities US$49 million.  Partially offsetting these were increases of  US$841 million in Investment Properties and US$125 million Other Assets.

What does this all mean?

Without notes to the financials it's hard to tell, but here are a few observations.

1. A substantial outflow of cash --19.25% of the entire balance sheet -- occurred during the last quarter of 2008.
2. Investment properties (illiquid) increased while more liquid instruments (at least presumably more liquid) equities and options as well as funds declined.
3. Due to non banks declined roughly 45%.  Due to banks only 6%.  Were these contractual maturities?  Or did non banks have a greater insight into credit?  Or inside information?
   
4. Long term debt declined 43%.   It would be very interesting to see the notes to the financials to confirm this was a scheduled payment and not a prepayment.  LTD decreased over the year from US$2.373 billion (31 December 2007) to US$0.867 million (31 December 2008).

Conclusion

As far as the public reports I've seen, there was no payment default.  Rather Awal announced its decision to initiate debt rescheduling with its creditors.  One might expect that if there had been any sort of significant payment default, it would have become public fairly quickly.  Here's the CI downgrade and withdrawal of ratings report.  It does not mention a payment default.

That leaves a more classical balance sheet insolvency as the likely cause of Awal's problems: assets worth less than liabilities.

At 31 December 2008, Awal had US$7.6 billion in total assets supported by US$4.9 billion in liabilities and US$2.7 billion in equity.

That means a drop of at least 35% in the value of assets to reach insolvency.

The recent instruction by the Central Bank of the UAE to its banks to provide 100% for their exposure to Awal supports that view. 

As you'll recall from my earlier post on this topic, the CB UAE Governor is reported to have said that the provision requirements were in line with regional and international supervisors.  A 100% provision implies no recovery - which implies that Awal's assets are worth zero or close to zero (administrators, lawyers, and accountants always feast first on the estate of the bankrupt).

Dubai - Supplier Financing Being Pursued for Transport Projects?

Another rumor - Dubai is looking for supplier finance for transport projects.

Usually one looks for supplier finance when the usual credit sources (banks and bonds) are reluctant.

If true, not a good sign for Dubai Inc. 

But with so much debt to refinance, how do you get financing for new projects?  You lean on every source you can.

On the topic of involuntary supplier credit, you'll recall there was a very public (and very uncharacteristic) complaint by Japanese contractors about late payments on various projects in Dubai including the Metro.  Earlier SAM post.

Shakeup in Dubai Inc

Dr. Omar Sulayman is out at DIFC.

He is therefore out at Investment Corporation of Dubai ("ICD").

As are the following also out at ICD:

1. Mohammed Gergawi at Dubai Holding  (He just gave a speech this week at World Economic Forum Global Agenda Meeting in Dubai, which was optimistic to put it mildly).
   
2. Sultan Sulayem at Dubai World
3. Mohammed Al Abbar at Emaar

FT analysis here.  Khaleej Times here.

I think there are three motives:

1. Despite the "humming" you're told you can or should hear from Dubai, the financial situation is not good.
2. "New faces" to put in front of the bankers.   Sober new faces not associated with the old policy.  Guys who are going to use both sides of the Xerox paper.
   
3. Cover for Dubai Inc.  Those responsible have been dealt with. 

Markaz Kuwait: Unusual Trading in Agility Shares Prior to Annoucement of US Court Action

The sharp eyed analysts at Markaz have detected what they believe is an unusual pattern of trading in Agility shares on the KSE prior to the announcement of the US trial.

The article goes on to say that Agility issued news of the court case to the Dubai Exchange before the KSE. 

And that there have been calls to the KSE for an investigation.

Here's the report.  Arabic only.

Changes at DIFC? Bin Sulayman Out?

Rumors in the market.  Stay tuned.

Kuwait Stock Exchange - 9 Suspended Companies - Length of Delays in Financials

You'll recall that earlier the KSE suspended 13 companies.  Here's the previous post.

Four have provided their financials:

1. Aref Investment Group (Investment Company) - See post on Aref's financials here.
   
2. Aayan Leasing and Investment Company (Investment Company)
3. Al-Madar Finance and Investment Company (Investment Company)
4. Safwan Trading and Contracting (Services Company)
   

And here for the earnings of Aayan, Al-Madar and Safwan.

Looking at a  KSE announcement from 19 November, we can analyze the remaining companies by the length of delay in their financials. (You can find the text - Arabic only - as described in the previous post above.  It's the 7:59:38 post on the 19th).

First, those only past due for their 30 September 2009 financials:

1. Industrial Investments Company (Investment Company)
2. Salbookh Trading Company (Industrial Company)
3. National Ranges Company (Services Company) a/k/a "AlMadayen"
   

Second, those past due for 30 June 2009 and 30 September 2009 financials:

1. Pearl of Kuwait Real Estate Company (Real Estate)  a/k/a Lu'lu

Third, for 31 March, 30 June and 30 September 2009:

1. Safat Global Holding (Real Estate)
2. Network Holding Company (Services Company)  a/k/a "Shabka".  Shabka is also suspended for failure to pay its listing fees on the KSE for 2009-2010.
   

Fourth, for 31 December 2008 and 31 March, 30 June and 30 September 2009:

1. The Investment Dar (Investment Company)
2. International Leasing and Investment Company (Investment Company)
3. Villa Moda Life Style (Services Company)
   

Company type corresponds to KSE classification.

Clearly, the longer a firm's financials are not provided the stronger the sign of financial distress.  As mentioned before, banks and investment companies' financials must be approved by the Central Bank of Kuwait.  When there is a delay in release of a financial report for one of these parties, it often signals that the CBK and the company are having a disagreement.  That is not a sign of financial strength as the CBK does not frivolously hold up finalization of interim or annual reports.

Kuwaiti Companies Report Earnings - Aayan, Safwan, Madar

Here are the results.

First, Aayan who announced too late on the 16th to avoid being suspended.

1. Net loss of KD7.1 million for the three months ending 30 September 2009 and KD27.5 million for the nine month period.
2. Capital funds down to KD71.2 million from KD126.3 million on 30 September 2008.
3. Aayan's auditors have issued an "emphasis of matter" comment regarding the company's ability to continue as a "going concern".

Second, Madar who also announced too late on the 16th.

1. Net loss of KD1.4 million for the three months ending 30 September 2009 and KD8.7 million for the nine month period.
2. Capital funds down to KD47.8 million from KD67.2 million on 30 September 2008.

Third, Safwan who announced on the 17th.

1. Net profit of KD0.4 million for the three months ending 30 September 2009 and KD1.0 million for the nine month period.
2. Capital funds up to KD8.2 million from KD7.5 million on 30 September 2008. 

All three of these companies' shares have now resumed trading on the KSE.

Tie Your Camel First, Then Trust in God - Part II

In this article the tie your camel injunction (make sure there are utilities) applies not only to builders but also to buyers.

Previous "tie your camel" post.

A Fair Day's Wages for a Fair Day's Work - Follow-Up to Hadith Qudsi #21

A follow-up to my earlier post, two articles from GulfNews Dubai.  A bright one here and one not so bright here.

The next step is making sure the wage paid is fair.

"A fair day's-wages for a fair day's-work:" it is as just a demand as
Governed men ever made of Governing. It is the everlasting
right of man.

Thomas Carlyle

Kuwait on the Brink

Picture Copyright AlQabas Newspaper Kuwait

Friday's AlQabas first page headline - largest word "Fauda"  = Chaos.  

Most likely next we'll see a resignation by the government.    Then the Amir will call "recess".

Fish From Tubli Bay - Dead or Alive - What's the Difference?

On a fair day, one can smell the bay.  Tubli Bay that is.

Frankly I wouldn't eat a live fish caught in Tubli's "fair" waters.

What's the old saw?  Give a man a poisoned fish and he gets sick.  Teach a man to harvest poisoned fish and ....

But to the meat of the article and "bidun ta'liq":

Public Commission for the Protection of Marine Resources, Environment and Wildlife fisheries and marine resources director Jassim Al Qaseer said he had not heard of any such complaint.  But he said dead fish in Tubli Bay was "normal" due to the chemicals in the water.

"There is no need to worry because when it comes to Tubli, seeing dead fish is a normal occurrence because of the chemicals in the water," he said.  "But selling the fish to people is dangerous because it can pose serious health risks and people can get ill.  "I doubt that these people are selling the fish to the general public - it would be most probably to their friends."

UAE Central Bank Implements Basel II

Лучше поздно чем никогда

Article here.

S&P Predicts Bank Merger Activity in UAE, Kuwait and Bahrain

Article here.

The key issue is the market for corporate control.  Many local private investors would prefer to hold the majority in a "samak saghir" (small fish) than a minority position in a "huut" (whale).  And in  the merged entity there is sadly only one chairman.  And it is hard to let go of control.

Perhaps, the sting of corporate distress coupled with regulatory encouragement can do the trick.

Zain Share Price and KSE Decline - What are the Implications?

There has been a lot of analysis about the decline in Zain shares and the implications for the Kuwaiti market.  Usually along the lines of the importance of Zain's volume.  Here's one from AlphaDinar.  A good explanation of the key role played by the blue chip Zain.

What I'd like to do is look at the implications of a prolonged decline in Zain's share price and in the KSE  on local borrowing and debt service.

First an introduction to set the stage.

Anyone familiar with the term "Kuwaiti investor" also knows that this term is generally associated with the terms  "capital appreciation", "OPM",  "leverage",  and "collateral".   And only rarely with the concept "cashflow from operations".

Let's deal with these one by one.

1. Capital Appreciation - The typical Kuwaiti investor has a unique "appreciation" for the strong potential of his assets to increase in value.   Cashflow is generally a secondary consideration if at all.  The belief is that in the not-too-distant future one will be able to sell one's assets to another party at a substantial premium. A trade sale.  A primary market sale or IPO.
   
2. OPM - Other Peoples' Money - especially bank debt - is always preferable when funding investments. If something unexpectedly goes wrong, one has not committed one's own capital to the  full entry price.
   
3. Leverage - The more that one can lever one's investment the higher the IRR.   And the more one can lever one's equity into multiple investments, the richer one can become  Also, if as is typical one's investments have no appreciable cashflow,  the ability to secure additional borrowings is a lifesaver when it comes time to pay the interest on the original loans.  As you'd expect, this works really well in a rising market.  The lender believes it has extra collateral and so can extend another loan.  Local lenders  too share the appreciation of capital appreciation.   In a small overbanked market like Kuwait, it is also difficult to get new customers.  A bank grows with its existing customers - one way or another.  And what bank does not want to grow its bottom line and balance sheet?  But a key risk is overlooked:  cash funded debt is being based  primarily on paper increases in value  - which are subject to negative as well as positive investor sentiment.   
   
4. Collateral - The way to get leverage is to pledge one's assets.   And to the extent that the same asset can be used to support more than one loan the higher one's leverage.   As the asset increases in value, one gives a second lien to another hungry banker and then builds a whole new pyramid of investments. And this brings us back to another virtue of using OPM:  in the event of a problem  with an investment, the investor (borrower) can simply walk away surrendering the asset to the lender. 
   

The result is an inverted pyramid of investments fundamentally supported by growing debt.

Second, now to the analysis.

What could go wrong?

1. In 4Q07 the Central Bank of Kuwait tightened the calculation for 80% loans to deposits ratio moving from a month-end basis to a daily average basis.  (Page 36 here).  In 1Q08, in an effort to control inflation, the CBK pushed banks to lower commercial and consumer lending.  The money tap was turned to a trickle.
2. In 3Q08, the global financial crisis hit.  Foreign banks began restricting loans.  As the tide of liquidity flowed out, asset values declined.  
3. A double barreled effect.  Not only were new funds cut off.  But as asset values declined, collateral values for existing facilities eroded.  Lenders began demanding reductions in principal of loans.  And banks might demand that interest actually be paid.
   

Where to get the cash?

One turns to one's best asset.  One that actually generates cashflow.  For example, Zain.

Plan A was to try to sell off a division or two (initial focus Africa).  Sales proceeds could be dividended to "needy" shareholders. 

That didn't work out. 

So Plan B is to sell a stake to a strategic investor.  Recently Zain shareholder(s) announced the sale of 46% of existing shares to a collection of  Indian investors "Vivasi Group".   Note:  Zain is not issuing new shares to fund expansion.  Existing shareholders are cashing out to get needed cash.

The problem is with Zain's share price down to KD0.960 (Market Cap KD3.93 billion US$13.8 billion - down 50+%) Plan B gets more difficult.  Just this week, BSNL announced that it saw the need to renegotiate the price.  As you might guess, they're not offering to pay more.

The problem is further compounded because as the market drifts lower more investors' collateral is worth less.  Lower collateral cover is generally accompanied by higher banker anxiety and demands for additional collateral or cash.  This affects not just individuals but corporate entities - like the investment companies.  Or the "industrial" companies in the country many of whom only had profitable years in the past because of their investment portfolios.   Let me emphasize that point to make sure it's clear:  their actual business operations did not turn a profit.  They only made a profit because of   (paper) investment income.

With that as background the import of the decline in Zain and the KSE is outlined in stark fashion.

Aref Investment Group Kuwait Releases 3Q09 Financials - KD55.1 Million Loss for First Nine Months 2009

You'll recall that Aref was one of the firms whose trading was suspended this Monday for failure to file its 3Q09 financial report with the KSE.

On 18th November it announced its results:

1. KD17.1 million loss for 3Q09 and KD55.1 million loss for the first nine months of 2009.  In 2008 those figures were respectively KD12.1 million profit and KD39.6 million profit.
2. Total shareholders' equity stood at KD245.1 million versus KD329.5 million at 30 September 2008.
   

From the wording of the KSE announcement, it's clear that Central Bank of Kuwait approval was holding up release of the financials.

You can find the KSE announcement on its Arabic language page under AlBayanat AlTarikhiyya and then under 'Ilanaat AlSuq AlTarikhiyya for 18 November 2009.  There's a problem with the English page formatting.  In any case the announcements there are all Arabic language.  There are no English translations.

BTW Aref is now trading again.