The Investment Dar - Restructuring Update: Not So Good Times

6 December AlQabas has a fairly long article on recent developments.  See also this earlier post.  Also you can use the label The Investment Dar to see all other previous posts.

My following analysis is based on the working assumption that this report is basically correct.  I'm not in a position to make a final determination.  Bear that in mind as you read what follows.

60 second summary.  The restructuring agreement sounds like a financial Treaty of Versailles.  Draconian. It appears to me to be controlled liquidation based on expectations for less than a full recovery - probably with a large loss.  Perhaps up to 50% of the face amount of claims.

To quote an appropriate song, this leaves TID:    بين شدو و حنيني وبكاء وانيني

Here's a rough translation of the AlQabas article.  My analysis/comments in blue italics:

First Principles

The proposal begins with an "open letter" to creditors encouraging them to approach the restructuring with a philosophy of justice and equal treatment for all parties. That there should be no spirit of one creditor trying to get its rights at the expense of another.  As well, no revenge (presumably against management) but a mutual co-operation to get out of the strait/predicament.  AA:  It's always nice to start with noble intentions.  The details of the Plan will show to what extent these are implemented.  And we will be able to get quite a precise understanding of any issues the creditors have with TID and its management as we step through these details.

Menu of Options (With a "tilt" to the desired outcome)

Then the three options are outlined as well as the reasons why only one of them makes sense.

1. Option 1 is the pursuit of legal claims.  Dismissed  as these will be very long and complicated steps, outcome uncertain, involve creditors paying legal expenses and consume a great deal of time.
2. Option 2 is wind-up/dissolution.  Dismissed as resulting in the destruction of the value of assets, the appointment of a liquidator (no control by banks over the process), as well as possible diversions.  AA:  Presumably the latter refers to the liquidator following his own procedures. and desires.  Those familiar with liquidations will recognize the worry that the liquidator's realization of assets may take longer than necessary, not result in the best sales price and incur extra expenses.  Lawyers, accountants and liquidators feast first in corporate dissolutions well before the creditors.  Note the key creditor issue: a concern about "control".  The Arabic says "Lack of any control by banks or investors".  We'll see that theme sounded more than once as we proceed.  Usually creditors want control when they have an issue with the way those in charge have exercised their powers.
   
3. Option 3 is the restructuring.   Done of course by mutual consent (AA:  Presumably the creditors made TID an offer it decided was wise not to refuse).  Rights of all creditors to be protected to the maximum extent.  AA:  I'm reading this that there is some doubt about a full recovery. And of course I've "read ahead" of you at this point so I know what's coming.   Banks and investors have "full control" to protect their rights.  AA: There's a sign of serious concern here.  An indication perhaps of strong dissatisfaction.  You'll recall the creditors asked and the Central Bank of Kuwait appointed a monitor to watch over things.  A step not taken at Global Investment House.  Certainly of implementation of corporate governance at TID and steps to protect the rights of creditors.  AA:  Apparently, the creditors see this as a needed change from the past.  

Basic Goals

The proposal then describes the basic goals of the restructuring.

1. First, the separation of the assets of the company and an orderly disposal thereof in a reasonable time to preserve asset values.  AA: Signs of a liquidation.  Asset realization to repay the debt.   Not cashflow from operations.
2. Second, the setting aside of a package of security (collateral) sufficient to protect against any situations resembling the current distressed situation. AA:  More signs of a liquidation.  And more indication of a lack of confidence.
   
3. Third, strengthening the corporate governance of TID and raising the level of transparency and disclosure vis-a-vis the creditors.   AA:  Not a ringing vote of confidence in TID management.
4. Fourth, additional measures to ensure that TID's liquidity is kept with creditors not with third parties.  AA:  This provides the creditors a right of set-off.  Presumably there will be sharing arrangements among the creditors to protect those who don't hold the deposits.  Another sign of lack of confidence in TID management.  And another indication that there is concern about ultimate recovery so the need to keep all assets under the control of the creditors.
   
5. Fifth, facilities and financial services able to be traded according to Islamic principles.   AA:  I'm guessing this is so those who want to get out early can - though they'll have to sell at a discount .
6. Sixth, justice for all creditors and investors by establishing the principle of equal treatment in payments.  

Quantum of Debt and Value of Assets

These two topics are the heart of the creditor decision process.  The higher the value of assets relative to the quantum of debt the less restrictive and onerous the terms of the restructuring.  And here we get confirmation of the basic problem the creditors think they face:  an asset value shortfall.

The Co-Ordinating Committee states there is KD1.220 billion of total debt (US$4.227 billion!) composed of KD 272 million in banks and wakala, KD586 million in various bi-lateral and collective loans, and KD 362 million in sukuk. (KD1 = US$3.50).

TID and its advisors estimate the value of the assets is between KD1.350 billion (short term) and KD1.650 billion long term.  AA:  Assuming these values, at the end of the process with any sort of interest payments, creditors and various other parties will leave little behind - another indication that liquidation is most likely.  TID's incentive is clearly to give a highest possible value in the hope that time will work in their favor.

On the other hand the creditors' and their advisors' view of asset values is different.  KD 600 million for a short term liquidation and KD 1.3 million for a long term liquidation.  The text indicates a 50% recovery rate.  AA:  Equally clearly no one on the creditor side wants to be proven wrong later if there is an asset shortfall.  So the bias is to lower values.  But the disparity here with TID's valuation is  large.  This indicates the strong possibility for less than a full recovery.  In fact a fairly substantial loss.  Hence, the need to control the process to try and extract maximum value.  Of course, anyone who's been involved in a creditor-led disposal of assets knows that creditors are not that much better than liquidators in realizing maximum values.

Restructuring Conditions

1. Imposition of requirements for complete transparency and methods to ensure it.  AA:  Pretty clear why this is being hit.  And notice it is the first point.
2. No sale of any asset without the creditors' consent.  AA:  Completely understandable in a liquidation with insufficient assets to cover debts.
   
3. All asset sales on a sound basis (sahih), legally done, at market prices and not to related parties.   AA: That this point is raised speaks volumes about the creditors' impression of past practice. 
4. TID will not be permitted to dispose of any of its liquid assets without the knowledge of the Co-Ordinating Committee and the agreement of the "restructuring officer" (unclear if this is the CRO appointed by TID earlier or a new position).  AA:  No big surprise here.
   
5. Any amount to be distributed by TID goes to creditors first before management or shareholders.  AA:  No cash to grow/develop the business.  Pretty clear implication for the future of TID.
   
6. Co-Ordinating Committee has the right to refuse to agree the company's financials.  AA:  Again less than a vote of confidence in management.  They're not allowed any control over assets.  And now aren't even allowed to finalize financial reports.  Perhaps a hint of disputes over the long delayed 2008 fiscal report.  Or other concerns about the integrity and completeness of financials.

Small Creditors' Deal

To accomodate small creditors - defined as those with claims less than KD 3 million (US$10.5 million) - a special deal is offered:

1. 25% of claim amount paid quickly.
2. 50% of claim paid in second tranche.
3. 25% remaining along with other large creditors.

AA:  Gets the small creditors votes.  Recall there's no Chapter 11 in Kuwait so 100% agreement is required to close the restructuring.  Letting the small creditors out early is the price the bigger creditors have to reluctantly pay to maximize their own recovery. 

More Protective Conditions

As a prelude, there is a repetition of the argument that the restructuring will be quicker and more certain than legal proceedings.  It's noted that such proceedings will be complicated and take a long time to get the first level judgment which of course is automatically stayed when the losing party lodges an appeal.   But the deal has a legally enforceable fail-safe mechanism if the borrower fails to honor the restructuring plan.

1. Clear and strong condition that if the company fails the creditors will be entitled to take possession of all assets immediately to protect their rights.  AA:  To be incorporated into the restructuring agreement so exercise of the right can be immediate.
2. Complete transparency and the ability to track the Board to ensure that measures are being implemented.  AA:  We've seen this theme before.
   
3. Pledge of the assets for the loans effective so that court action is not required to enforce rights. AA:  The restructuring terms formalize the granting of collateral so that legal procedures in case of TID's subsequent failure will be more straightforward and simple.
   
4. Structuring the debt so that it is capable of being traded (according to Shari'ah principles) for those who want an early exit.  AA:  Some creditors just want out.  This gives others or new creditors the opportunity to acquire debt at a discount (probably a very steep discount).  Existing creditors can average down their cost base.  New creditors can hope to earn substantial returns.
   
5. The ability to study the assets of the company one by one and the opportunity to secure pledges on them.  AA:  Since this is a liquidation, this makes perfect sense.
   

Implementation

1. Creditors are asked to respond by 23 December with the goal of implementing the restructuring in February 2010.
2. Formation of 3 SPVs to which the Company's assets will be transfered:  real estate, shares, and foreign assets.  AA:  If you didn't see this as a liquidation before, this should be the final proof.  The SPVs will provide another layer of creditor protection in case of a need to seize the collateral.
   

Status of Acceptance

1. TID's Board and managment have agreed.  AA:  An offer they decided was wise not to refuse.  Can't imagine this was embraced with enthusiasm.
2. 80% of creditors have accepted (appears to be by number of creditors not volume of debt) and KD880 million by amount.   AA:  This may be the 66% percent referred to in my earlier post.  
3. The main remaining creditor is Investment Dar Bank which is reported to hold 27% of the debt.   And which is expected to agree shortly according to a source connected with TID.  AA:  I'm hoping this is IDB and its clients as 27% of the debt is KD 324 million which would appear to be an excessive credit concentration for a bank like IDB to have with anyone much less a related party.  You'll also recall the earlier post about Mustafa AlSalih's rumored resignation from IDB and Adeem which would appear to be related.

Status of Financials

The article quoting a source at TID states that the company will present its 2008 financials to the Central Bank of Kuwait either 6 or 7 December.  We'll see how long it takes the CBK to approve.

Co-Ordinating Committee

I had made a point that the CC was largely invisible and had apparently not weighed in to support the restructduring.  The article concludes by saying that they have done so.  It also identifies the spokesman for the CC as Bader Abdullah Al Ali.  AA:  This is the name of the CEO at Gulf Investment House Kuwait.   Usually CEO's of creditors don't get involved in restructurings.  Usually most of the roles on committees are given to major creditors.  GIH is relatively small with some KD 59.9 million of shareholders' funds as per their 30 June 2009 financials.  I hope that GIH is holding a small amount of this paper.

The Investment Dar - News Coming Much Less to Smile About that Global

I hope to post an update a bit later tonight.

The initial news does not look good for Investment Dar.  There probably will be a rescheduling but on fairly onerous terms.

Stay tuned.

CNPC Replaces Total in Pars 11

The Peoples Republic of China continues its economic penetration of the region.

Back in Washington, minds are focused on what are imagined to be more urgent foreign policy matters.

In the final analysis, economics is the basis of all sustainable political power. 

Countries and elites that ignore this very simple, very basic rule of life find their own power gradually slipping away and the standard of living of their people eroded.

Warba Bank - Founding General Meeting 21 December 2009

Probably I'm one of the few non Kuwaitis who has been wondering when Warba Bank would be officially launched.

Earlier this year, the Kuwaiti Government announced the formation of this Islamic Bank with a rather unique feature.  The Kuwait Investment Authority will subscribe for 100% of the capital KD 100 million (US$350 million).  Then 76% of the shares in the bank will be distributed among Kuwaiti citizen alive on the date of the official launch of the bank.

It seems the founding general meeting will be held on 21  December as the Council of Ministers has given the formal authorization for KIA to go ahead with the meeting.  A Board will be elected.  Then each Kuwaiti citizen will get his share allotment.

(Clearly Warba is a place name as the standard dictionary definition would not do for a bank - Islamic or otherwise).

Global Investment House - Significant Restructuring Progress: The Best of Times

AlQabas Newspaper Kuwait Copyright

6 December AlQabas carries an account of a Euromoney interview with Ms. Maha AlGhunaim, Chairwoman of the Board of GIH.  She's got a good reason to smile.

Main points from the article and some commentary.

1. Holders of all three bonds have agreed with the company.  AA: Not surprising since they are not being asked to reschedule their bonds (payments will be made according to the original maturities), they have been given collateral (apparently for 100% of the value of the bonds) and GIH has agreed to abide by certain unnamed conditions.
2. 51 of 53 lenders have agreed to the proposed restructuring.  Again no haircuts and it appears no prolonged retiming of payments.  At least that's how I'm reading "fatra muhala".  Also collateral will be offered.  AA:  Very good progress.  It seems there would have to be some retiming of payments one way or another.  Either extend the tenor of the facilities.  Or change the amortization schedule by reducing the early year payments and pushing larger amounts to later years.   We'll have to see when the details emerge. 
   
3. Ms. Ghunaim said that GIH is hoping to persuade the remaining two lenders and sign a restructuring agreement before the end of the year.  AA:  This should be doable unless the two lenders are particularly obstructionist.
4. Some details on the US$ 2 billion in "suspended" debt.  15% by amount is "Islamic".  GIH has been paying interest throughout the period.  AA:  Something usually highly appreciated by lenders.
5. There is some analysis of expenses.  Personnel expenses in 2009 are 49% of what they were in 2008.  Other expenses are higher (percentage change unspecified).  This is attributed to the costs of the restructuring.  AA:  Lawyers, advisors and other professional service providers enjoy a bountiful feast on such occasions. 
6. The article ends with some commentary on how this experience has made GIH a better firm and a gratuitous slap at other Kuwaiti investment companies.   AA:  Adversity is no doubt a great teacher as long as one remembers the lessons after the time of trials has ended.  However, as a personal observation, I would suggest a bit of humility.  As life has shown in this case, and others the high flying often fall to earth.  Refraining from denigrating the competition is a wise course.  Future performance will tell who's doing a good job (as well perhaps who's been lucky).  Often the two are confused not only in the minds of those directly involved but as well as the minds of spectators. 

DEWA US$2 Billion Sukuk 1Q 2010

Financial press reports that Dubai Electricity and Water Authority ("DEWA") is planning a bond and/or sukuk issue for 1Q 2010.

This source says that Citibank, Barclays and Dubai Islamic Bank have been tipped to do the deal.  Other market discussion is that the UK bank is Standard Chartered.  Perhaps both are involved?  Stan Chart had a major role in the syndicated loan earlier this year.

A bold move in the midst of a request for a standstill, particularly when DEWA is not a sovereign borrower as outlined below.

The sukuk/bond appears to be new money financing. That is, it is not designed to refinance a maturing obligation.  But rather to secure additional funding.

On 8 April 2009 DEWA announced the closing of a three-year US$2.2 billion equivalent syndicated "Islamic" refinancing loan at 300 basis points over Libor.  This  facility refinanced a one year  "Islamic" loan which had a margin a fraction of the replacement loan.  Later in May DEWA announced a thirteen-year ECA backed US$ 1 billion loan.   Both without a sovereign guarantee.

Also in June 2008 DEWA issued a five-year AED 3.2 billion (US$880 million) with Citi, Barclay and DIB as lead managers.  Again no sovereign guarantee.

From the Sukuk prospectus page 17:

"DEWA’s financial obligations are not guaranteed by the Government
Although DEWA is a wholly owned Government entity and also functions as a Government department providing an essential public utility, it is still an independent commercial enterprise and its financial obligations (including its financial obligations under the Transaction Documents) are not guaranteed by the Government. Therefore, DEWA’s ability to meet its financial obligations under the Transaction Documents, and consequently, the Issuer’s ability to pay Periodic Distribution Amounts and Dissolution Distribution Amounts to Certificateholders is solely dependent on DEWA’s  ability to fund such amounts from its business and operations."

In case you're still catching a glimpse of an implicit guarantee, here's an extract from Note 1 to DEWA's 2008 financials:

"Dubai Electricity and Water Authority (“DEWA” or “the Authority”) was incorporated on 1 January 1992 in the Emirate of Dubai by a decree (“the Original Decree”) issued by H.H., the Ruler of Dubai, effective 1 January 1992, as an independent public authority having status of a body corporate, and financially and administratively independent from the Government."

Just recently Fitch downgraded DEWA to BBB- based on an assessment that Government support cannot be counted on.

If you still see an implicit guarantee, AA suggests a visit to your opthalmologist is in order.

The question is what rate DEWA will have to pay on the new Sukuk.

As of today, Dubai Sovereign US$ Sukuks (DEWA is not Sovereign) are trading very roughly at a spread of 550 to 570 basis points with AED denominated issues somewhere around  80 to 100 basis points less.  Jebel Ali Free Zone (which is B+ note DEWA is BBB-) is trading at more than twice the Dubai Sovereign spread.  That suggests a range.  One would expect if priced today that logically DEWA a non Sovereign Dubai obligation would carry a higher rate than the Sovereign.  That implies something over  600 basis points. 

Some caveats:

1. As mentioned earlier, most bond markets (except US Governments) are thin.  Prices accordingly have less "precision" than in more liquid markets.  The GCC bond market is relatively anorexic compared to other thin markets.  The true test of a quote is when you try to hit it as screens do not trade institutions do. 
   
2. Pricing in 1Q 2010 will reflect (a) what has happened and how it has happened on the Dubai World restructuring of Nakheel and (b) macro economic factors/investor preference.
3. It's also important to remember that financial markets are not always logical. 
   

I wouldn't expect that market sentiment is going to improve that dramatically.  And probably not much progress is going to be made on the Nakheel restructuring with the various holidays coming.

Bankers and investors don't like uncertainty so I'd anticipate higher rather than lower prices.   DEWA has an ambitious capital spending program and constraining it will be more difficult than not building another 1 km tall sky scraper.  So it needs the money.  And Dubai does not have a lot of financing alternatives in the market.   The market knows this. 

Dubai and British Horse Racing Latest Line: Better Than Bottle Odds

Copyright Emiratesi Racing Association  

 

To those alarmed about the state of horse racing after today's earlier post, I'd offer this bit of encouraging news carried today by WAM. And a picture of the track. 

Shaykh Mohammed toured the race course at Nad AlSheba earlier today.

Me, I'm about to nip down to the LBO and place a wager.   The Shaykh is going to win and it won't be by a "short head" as they say over there.

Nahkeel Bondholder Group Opposes Standstill

Today's Financial Times article.

I'm not sure if this is "news" in one sense.   Like haggling for a rug in the suq, the smart buyer doesn't take the first price offered. 

Dubai World and Nakheel may be forgiven (at least initially)  if they made certain assumptions about the bondholders' reaction.  Many previously successful borrowers actually believe that they hold a privileged place in the market even if they have bad news of a  standstill or rescheduling.   Our lenders will understand they think.  They don't realize that the lenders' knee-jerk reaction  to such news will take them from hero to zero.   Another complicating factor is there have been changes in the composition of  sukuk holders.  The heavy selling of the certificates between the end of August and November (just prior to the announcement). was not relationship banks buying additional certificates.  Rather they were unloading  what they had.  Many of the new faces - as I presume QVT is - are  likely to be  transaction oriented investors with no relationship to protect vis-a-vis Dubai.  And so less likely to be as sympathetic as the former.  They could well be a convenient screen for relationship banks to hide behind.  Though as well they could be a thorn in  the banks' side.  The banks have other exposure which will have different conditions and legal protections.  So they will have an entire "package" to consider where the transaction oriented investors with only a single bond to worry about will have a different set of priorities and considerations.

In any case, it seems a group representing 25% of the bondholders (by amount) has formed to oppose the standstill.  As per the typical contract, if 25% vote for an early termination of the sukuk,  repayment is accelerated. So despite its small number, this group has significant power.

I'll be taking a look at the Offering Circular for the issue to see if there's anything in the sukuk that gives them leverage.   Of course, one leverage creditors always have is to complicate the life of the obligor via bad publicity and obstruction if nothing else.  This is particularly important when a borrower needs to raise new money or roll over existing debts - as is the case with Dubai. 

On that score later today, I'll be commenting on the proposed 1Q 2010 US$2 billionn DEWA sukuk after I've stoked the engines with some Cafe Najjar.

The True Impact of the Dubacle

Leave it to the Financial Times to get to the heart of the potential real impact of the Dubacle:  the effect on British horse racing.

From the amount of column space devoted, it appears that indeed between the alarm and realism, alarm has carried the day.  Not only are the financial problems of Dubai World an issue, but the mortality of the Shaykh himself a grave concern. 

One senior British racing executive who preferred not to be named "does not dare contemplate a racing world without the Maktoums".   From this comment and his aversion to confronting reality, I'm guessing he's probably also an early and persistent investor in Dubai financial paper.  He may be buying even now.  He probably has a horse named "Implicit Guarantee".

What appears to have happened is that at one auction, the Shaykh's representatives didn't (as we say here in the colonies) "pony up" for another purchase. 

Before the gloom and despair spreads too deeply, AA would like to weigh in or at least neigh in. 

Shaykh Mohammed indeed is likely to "ride out" the debt storm - no doubt on one of his thoroughbreds.  One thing for certain whatever the results of the debt rescheduling, the personal lifestyle of the Shaykh is unlikely to be affected in any meaningful financial way.

So, there is no need for "Last Post" for British horse racing.  Stiff upper lip and all that.  It certainly helps keep the bit in place.

SAMA: Saudi Banks Exposure to Dubai Very Limited

Saudi Arabian Monetary Agency Governor Dr. Muhammad Bin Sulayman Al Jasser said that Saudi banks have very limited exposure to Dubai less than 0.2 percent.

Again this is not a big surprise.  Saudi is a large market and its banks are not forced to go outside the Kingdom to find business.

The Emirates Economist

Now added to the list of Blogs and Other Interesting Sites.

By way of amendment, he notes that it's highly useful to provide a link when you recommend a site.

The DRR Scale - The GulfBlog

David Roberts over at the GulfBlog has made a major contribution to analyzing (or in his case, would that be analysing?) the Dubacle with  the Dubai Ridiculous Rating or "DRR".

One wonders (well, at least AA does) just how "sober" "bankers" and "investors" were persuaded to finance some of these schemes.

I guess the implicit guarantee can cover a lot of financial sins of omission as well as commission.

The chap at my local market (one that sells whole foods or so the sign says) offered to wrap a piece of fish for me in an implicit guarantee.  I declined as I wanted some sort of paper around the fish for the transport home.

Carlyle Guarantee Watch - Third and Final Day

If you've been reading this blog over the past few days, you're not only a member of a rather select group, but you've also noticed that I've been musing on why the Financial Times  hasn't called on Carlyle to provide a guarantee to holders of investments in Carlyle Capital Group as it did to Dubai and Abu Dhabi for Dubai World.  Earlier posts here and here.

Suddenly last night I had a flash of insight and realized I had overlooked two critical things. 

First, from the "free market" (yes the quotes mean the same as they when around "banker" here) doctrinal perspective it would be a direct violation of the teachings of Adam Smith for Calyle to provide a guarantee.  Market participants are supposed to exercise careful due diligence and then bear responsibility for their actions.  Interference with this sacred principle would of course undermine the very workings of the "free market" and in so doing undermine our very way of life. 

This clearly explains why Carlyle isn't going to be asked to provide a guarantee.

But what about Dubai or Abu Dhabi in the case of Dubai World?  How do we explain this apparent inconsistency?

Darwin's observation about the need for organisms to adapt to their natural environment or become extinct is also applicable to the financial world.   UK banks (home of the FT by the way) are owed some US$ 5 billion by Dubai Inc.   These banks constitute the largest foreign creditor group.  If not a potentially existential threat, at least an existential inconvenience.  Thus, the necessity - as with the BBA letter to Lord Davies in re Saad and AlGosaibi -  to adapt certain elements of Adam Smith's teaching to the new environment. 

But it would be wrong of course to ascribe purely mercenary motives.  Both initiatives would also protect the reputation of the borrowers.  One's good name is treasure.  And this kind solicitude  of lenders for the borrower is certainly evidence of purity of motives.  Isn't it?

0-3 or 3-0 Yet Again and Yet Again Still With Red and White

Abu Arqala has written another letter to Santa - after all he wears the colors.

More Hysteria on Islamic Finance

In case you're not familiar with with the fine blog Aqoul, you should be.

An interesting article dissecting political hysteria regarding "Islamic finance".

Emirates Airlines - No State Guarantee

Maktoob reports that Emirates Airlines has confirmed that there is no Government of Dubai guarantee on any of its obligations.

This points up one of the many benefits of the explicit guarantee.  You know when you've got one.

With the implicit guarantee, well, you're really never sure.

And often it turns out to be worth less than the paper it's not written on.

Anyone out there want to guess how many self-proclaimed bankers and investors thought they had a guarantee?  They probably did but I think Sasquatch may have taken it with him last time he was at the credit or investment committee meeting.  And he's quite a difficult fellow to locate when you need him.

Unusual Trading in Nakheel US$3.5 Billion Sukuk Shortly Before Restructuring Announcement

AlQabas reports (apparently quoting a Dow Jones item) that there was an unexpected bout of trading in Nakheel's US$3.5 billion sukuk.

The source is Data Explorers (a company that tracks pledged stocks and bonds) who noted that approximately 75% of the holders of the sukuk sold their positions between the end of August and end of November - when markets still anticipated payment December 14th.   At this point the sukuk was trading at 110% of nominal value (there is a 9.5% premium over the "face" amount at redemption).   There were no visible signs of distress.  All the talk was that the bond would be settled at  maturity. 

The question then is why the persistent selling.  How did owners know it was a good time to sell?

After the announcement, the price of the sukuk fell to 40% of nominal.

It would be very interesting to know who the buyers were. 

The article also goes on to say the QVT Financial LP had hired the law firm of Ashurst to represent them.  When placed in 2006, 100 or so investors purchased the sukuk.  Half of whom were banks.  40% from the Middle East and 40% from Europe.

Qatar Islamic Bank QR54 Million Exposure to Dubai World

QIB announced on the Doha Stock Exchange that its exposure to Dubai World is QR 54 million  (US$ 14.8 million) reflecting participation in an "asset backed" Sukuk issued by Dubai World with maturity 2017.

At 30 September 2009, QIB had roughly QR7.8 billion  in shareholders' equity.   This exposure is then not problematic.

Three comments.

1. I believe this may be the Dubai Ports 6.25% Sukuk.  If so, this is probably a better obligation to hold than say Nakheel.  It's surprising that QIB wasn't more specific.
2. As we've seen from some of our forays into Sukuk analysis, there is not always recourse to the underlying assets.  So the term asset backed should not be read to imply that necessarily there is collateral.
3. The comment about financial impact means that QIB is taking changes in value in the sukuk directly to its equity in the "fair value reserve" account there.  Thus, these changes do not pass through its income statement.
   

Advisors on Dubai Inc Debt Announced and the Implications

Here's an article on Moelis and Deloite roles.

The clear message from this is that this exercise is not going to be just a six month payment delay.

The presence of financial as opposed to solely corporate restructuring advisors is also another sign of the likely direction this will take.  There will probably be haircuts as the debt repayments are matched to the companies' cashflows - either from operations or from asset sales.  

On that latter topic, I expect there will be an attempt to ring fence the good bits (Jebel Ali Free Zone, Dubai Ports) from the not so good bits.   Just as there is no government guarantee.  If there is no written Dubai World guarantee for Limitless or Nakheel, DW can similarly say to creditors to look solely to these companies for repayment.

Dubai Crisis - Humor

Three things caught my eye and I just couldn't resist commenting.

1. The Economist Intelligence Unit has an analytic piece whose headline uses the term "Dubacle" to describe the crisis.  That deserves a tip of the AA's virtual tarboush.
   
2. Shaykh Mohammed has pointed out that the "World lacks understanding of what is happening in Dubai"  There is a lot of merit in his statement, though this observer would note that perhaps more importantly the "world" particularly the financial world didn't show much understanding of what was happening in Dubai in the run up to the crisis.  If they had, the current problems of all those self-proclaimed sober bankers and investors now crying out for a bail-out could be much less.  But I suppose there's something to be said for consistency.
   
3. An article in GulfNews about the necessity of debt planning and management: "Manage Debt Before It Hurts You."  The problem is that a lot of these self help columns come out a bit late in the game.  But a wise caution to borrowers everywhere and  to every sort of borrower. - sovereign and non sovereign  (By the way, Lloyds Bank reportedly has somewhere around US$ 1 billion out to Dubai Inc so they are particularly well placed to draw on their own direct experience on this topic in framing advice).  Abu Arqala has already penned his advice column to would be bankers and investors as one of the many public services of this blog.
   

Dubai Sovereign vs Dubai Inc Debt

Today's Financial Times also has an article on the price differential between Dubai sovereign debt and that of its non sovereign companies.

The key point here is that market pricing  has reduced after the precipitous increases occasioned by the debt standstill announcement by Dubai World/Nakheel.   In response the markets reacted by treating all Dubai debt the same. 

A more careful subsequent look at the actual legal agreements (something more "advanced" bankers I am told are wont to do) and the Government of Dubai's clarifying statement that they would not be providing a post-default guarantee, more distinction in pricing occurred.  While Nakheel bonds are reported to trade at 50 cents on the dollar, sovereign Dubai debt trades at 90 cents.

It's important to know when looking at market prices for bonds (other than US Government bonds) and CDS that in general these markets are thin.  A relatively small number of transactions can affect price, especially if the prevailing sentiment is all one way.  The risk that the herd (of investors) is all running the same way.  So, it's natural that markets overshoot - as there is nothing more characteristic of "efficient" and "rational" markets than sheer unreasoning fear at the first whiff of bad news.

And no post of mine would be complete, I suppose, without a report of a sighting of that mythical financial instrument, the implicit guarantee.   Mythical in that the only guarantee that one can be reasonably certain about enforcing in court is one that is written down in carefully crafted legal language and signed by the guarantor before the loan goes bad. 

The FT article quotes a "banker" as saying:  "The question is whether this will spread to Abu Dhabi Inc and Qatar Inc." a banker said.   "If this shows that investors cannot trust an implicit government guarantee, we might see a wholesale credit repricing across the region".

You'll notice I've put the word banker within quotes. 

Just as I would if an individual claiming to be a chemist were explaining combustion by reference to phlogiston.

The fact that this chap seems to seriously believe in implicit guarantees calls into question (at least in my mind) the appropriateness of his calling himself a banker. 

UK Bank Exposure to Dubai Inc

The Financial Times today carried a story that UK banks held US$5 billion or so out of the US$40 billion or so at Dubai World.   That gives them the dubious distinction of being the largest foreign creditor group.

US$ 2 billion at Royal Bank of Scotland, and US$ 1 billion a piece at HSBC, Lloyds, and Standard Chartered.  The article also identifies BNP Paribas, Societe Generale, and Calyon as large creditors.

The article goes on to say that their exposure is focused on the "still functioning" parts of Dubai World e.g.,  Jebel Ali Free Zone and Dubai Ports World.

Thus, of the Dubai World debt which the government has to date announced will be rescheduled, their exposures are a more modest US$700 million (RBS) and US$350 million for Stan Chart.

Some thoughts:

1. It would be natural for big foreign banks to lend to what they perceived to be major companies.
2. It is usually the tenderfoots in the market as opposed to the grizzled veterans who are most likely to see Bigfoot or its financial equivalent the "implicit guarantee".   As I noted earlier the implicit guarantee is not worth the paper it isn't written on.
3. That being said some of the grizzled veterans in the market sometimes make mistakes.  It looks like the market and S&P are pretty much convinced that Abu Dhabi Commercial Bank, Emirates NBD have massive exposures.   Local banks especially those owned by governments often step up to lend government entities, especially when in cases like Emirates NBD the same government owns both the lender and the borrower.
   

NIG Carlyle Group - Guarantee Watch Day #2

As promised earlier, AA has been scouring the financial press looking for one of our respected financial journals to call upon Carlyle Group to guarantee CCG. 

I'm sure if we asked Abu Muhammad he probably had the impression that Carlyle wouldn't let its subsidiary down.  And I'll bet just like the Shaykh in Abu Dhabi Carlyle never said it wouldn't.   If it's good enough for the Financial Times with Dubai, it sure ought to be good enough with CCG. 

Come to think of it, Shaykh Khalifa never said he wouldn't guarantee CCG.  So maybe he should step up and accept responsibility for not doing so.

BNSL Puts Zain Deal on Hold

There's no joy in Kuwait tonight as some important people up there were counting on this sale to help them with urgent cashflow needs.

And even less joy if they read this account.  The parties to the sale might not be serious in terms of intent.  Even more disturbing some of them might not be serious players in terms of capacity.  AA once broke a  financially strapped client's heart by telling him that his rich Arab white knight had only one of those three attributes.

Why this sale is important for a variety of reasons in explained in my earlier post here.

Bahrain Sand Shortage: Help (Sand) is On the Way

Picture Copyright Gulf Daily News

Good news for the Bahrain construction industry.

Bahrain Women Lead the Way

And on a sirat salim.

Honors well deserved.

AlYaum AlWatany - UAE

It's the National Day of the UAE. 

Alf mabruk wa mabruk.

Dubai: When the Going Gets Tough, Yet Another Goat

A follow-up to my earlier post "Dubai:  When the Going Gets Tough, The Tough Find Scapegoats".

And another addition to my flock.

A few more goats and I may add the honorific Shaykh to my nom de net.

Here's one I hadn't thought of --  consultants.

I should have given what I've seen.

Of course, sensible people don't believe everything they're told.

And consultants are usually hired for the purpose of telling one what one already believes. 

Dubai and Banking 051

I had posted a bit earlier about Banking 101.   After reading the press the past few days, I've decided that this approach was wrong.  Banking 101 would be a freshman course.  As in our great universities these days, we often discover that the entering class is not yet equipped to take the freshman courses.  So we offer remedial courses.

Sadly, in our financial world, it is fairly obvious that bankers and investors weren't ready for the freshman courses.  How they passed to get to the check writing stage is an educational mystery.  

Today while reading a rather prestigious foreign financial publication printed on salmon colored paper as well as what is considered the best newspaper in the United States, I was struck by the manifest claptrap that was being peddled.  It's clear that our financial journalists also need a bit of remedial tuition as well.

Some of the assertions that caught my eye and prompted this post:

1. The existence of a new financial instrument:  the implicit guarantee.  Like Bigfoot, the implicit guarantee is discussed around the bankers' and investors' campfire at night.   As well in credit or investment committee meetings.  Often glimpsed from afar or perhaps just imagined.  But nonetheless apparently real.  Or real enough to serve as a "sound" foundation for an extension of credit.   One that no doubt sounded "sound" to credulous ears at the time.  Sadly, the implicit guarantee more often than not pays off with implicit cash.  And implicit cash is not much use for settling transactions unless of course you made an imaginary loan or investment.
2. A case of mistaken identity.  We thought Dubai World was the government, despite the fact that it is separate legal entity.  A small fact noted in its constituent documents.  Yes, but we know that the parent will always bail out the subsidiary to protect its good name.  This is a real howler to anyone familiar with lending to subsidiaries of multinational firms or holding companies.  But perhaps the financial press believes the punters were suffering from sun stroke - Dubai is after all a bit warm in the summer and the sun is mercilessly blinding.  It is so easy to get confused in foreign lands as well. Strange food. Unfamiliar dress.  Why in many of these countries they speak another language! And again no one told us we were mistaken.  So it's clearly not our fault.  It's the fault of some local chap or Shaykh who didn't say anything.  This is not only not polite, it's downright irresponsible.
   
3. Guilt by association.  Well, there's this rich Shaykh in Abu Dhabi.  We all thought he was the lender of last resort.  He sure looked like one.  He certainly never said he wasn't.  So it's his fault that we thought he was.  We never bothered to ask him or to confirm his obligation in writing because well that wouldn't be polite.  And it pays to be polite. 
   
4. "Toto, we're not in Kansas anymore".  You mean the legal system here is different from that back in [insert name of lender's home country]?  Quelle surprise!   Another howler.  There have been enough debt crises since the first cross border loan where local laws have proven problematic  that anyone who makes this statement should expect to be hooted off the podium.  Yet despite abundant and painful history, this is a mistake the lenders and investors make over and over.  Sadly, while the right time for rigorous due diligence is much earlier, there is a lot of Monday morning quarterbacking after the loan goes bad.  Then legal defects are noticed.  The economics of projects are scrutinized in detail.  It's even said that offering circulars are read carefully.
   

So, let's start the class.

Here are ten basic and quite timeless rules for good lending and investing.  You will not require an MBA to understand them.  Nor the assistance of Philippe Jorion, sophisticated mathematical models or a Cray computer to implement them. Those skills - while highly useful - will be acquired in the senior year or graduate level courses.

1. Develop a reasonably firm grasp on reality so that you may distinguish fact from fiction.   "What is" from "what is not".  Or what you'd like to be.  My own experience suggests that this critical faculty is highly useful in other aspects of life.  In finance, it is the basic precondition for intelligent decisions.
   
2. Understand the environment in which you propose to do business:  the legal system and the enforcement mechanisms, the robustness of both regulation and regulators, business ethnics, availability and reliability of information, etc.  If you can't get a fair shake, (or a fair shaykh) you probably shouldn't be in the market.  You  might try to compensate by adjusting your lending strategy:  smaller loans, more collateral (ideally offshore) and higher pricing.  But be aware that prophylactic measures don't prevent disease.  They merely lessen the chances of an infection.  Ask yourself if you can afford to get sick.
   
3. Know your customer and his business: legal status, ownership, business model, corporate culture, management competence, style and ethics and so on.  Adversity is the true test of character.  When the chips are down and your bluechip customer has become a financial cowchip, it's nice to have someone with integrity on the other side of the table.
   
4. Appreciate the relative (legal and business leverage) positions between yourself and your customer.  Sovereign borrowers are indeed different than non Sovereign ones.  Members of a local elite may have certain advantages.  And so on.  If you can't fight City Hall at home, you may have even less chance overseas.
   
5. Analyze the transaction and its economics.  Distinguish between productive and speculative transactions.  Basic Level Hint:  Speculative transactions are generally more risky.  Intermediate Level Hint:  Risky transactions generally have a higher incidence of failure than less risky ones.   Advanced Level Hint:  When projects fail, lenders and shareholders can get hurt.  Post Graduate Level Hint:  Speculative transactions are easier for a borrower to walk away from.  Rather abstruse and profound concepts it appears.
   
6. Make sure the primary way out is cashflow from the project not the assumption that a greater fool is going to refinance your loan or buy your investment.   Or that the government will step up with a post-default guarantee.  Have a second way out if possible.  And, no, looking for a bail-out or a hand-out after the problem occurs is not a credible second way out.   Transaction structuring can mitigate risk.  Many "advanced" financial thinkers suggest it is a wise idea to match the repayment on a loan to the cashflow of the project or borrower.  If there is no discernible cashflow, adjust your loan amount commensurately, i.e., reduce it to zero.
   
7. If you need credit support, the time to get it is before you write the check. As I am told one Saudi borrower said in 1984 to his lenders who were requesting he personally make them whole for loans they had made to his flagship company, "Gentlemen, the time to ask for the guarantee is when you initially negotiate the loan not after it goes bad". 
   
8. Take a lesson from the auditor's rulebook.  "If it ain't written down, it doesn't exist."  If you have a guarantee, you will have a piece of paper carefully drafted by your legal counsel and with the guarantor's signature on it.  If you don't, what you don't have is not worth the paper it's not written on.  If you have an implicit guarantee, you may be in the position of  attempting to use imaginary proceeds  from the implicit guarantee to pay off your real loan.  
9. Read the prospectus or offering circular or loan proposal.  Read it carefully.  If you don't understand the transaction or it doesn't make sense to you, pass.  Borrowers and great investment opportunities are like the Dubai Metro.  If you miss one, the next will arrive in no more than 15 minutes.
   
10. If after all the above, you are satisfied, make sure that the reward you're getting is commensurate with the risk.
    

And be sure you perform these steps before you commit to the loan and for heaven's sake before you cut the check.

Because while hindsight is 20:20, usually at the point it is clear there is a problem,  it is really difficult to undo a bone-headed decision.  Not to mention very, very costly.

Dubai: When the Going Gets Tough, The Tough Find Scapegoats

As is typical in a crisis, there is an urgent need to find those responsible.

If we can identify those guilty of creating this crisis, we can not only mete out suitable punishment for this sin but also in so doing prevent future transgressions.  And sins these are if one looks at the scathing rhetoric in the press about integrity, responsibility, maturity, and so on. 

It appears to be a general law of nature, at least of human nature, that  such inquiries are best conducted far from home.  There is nothing more comforting in the midst of tribulations than finding out that one's misfortunes are someone else's fault.  Discovering one's own role in the debacle would be to needlessly pile sadness upon disaster.  

So far the culprits have been identified as:

1. Misinformed journalists distorting and exaggerating a non-story.  It's really not a problem at all.  This elegant solution neatly simplifies the whole exercise. 
   
2. Panic prone investors. The over reaction theory.
   
3. Imprudent, incompetent, and perhaps even shifty borrowers.
   
4. Alleged sober bankers and investors who thought they had a guarantee from Dubai.  Titans of finance unable to distinguish between legal entities.  Who thought an imagined guarantee (implicit guarantee) was the same as a real one.
   
5. Abu Dhabi who these self-same sober bankers and investors were sure was the guarantor of last resort.  Well, the Sheikh there is rich and he's next door and never said he wasn't a guarantor, so he must be.
   

In this noble endeavor, one's ideology is often a  highly useful forensic tool in expediting identification of the culprit and his accomplices - both the witting and the unwitting.  The fellow travelers and the dupes.

Today I saw that a new suspect - Islamic banking - had been picked out of the line-up.   Here's one example from the less conventional press (Counterpunch).

The confusion as Sh. Mohammed might say is between the instrument and the person wielding the instrument.

A chap in a Saville row suit making a bone-headed loan or investment according to Western principles is no different than a chap in a thaub and ghutra doing the same thing according to "Shari'ah" principles.  A suit against the government in Dubai (and many other places) has probably the same probability of a decision against the government - whether the suit concerns "Shari'ah-based" or conventional financing. 

In any case, I guess we can take some small comfort that Acorn has yet to be blamed, though there is still time. 

Arab Banking Corporation - No Exposure to Dubai World or Nakheel

ABC disclosed at BSE today.

Arab Bank Ltd Exposure to Dubai Holding US$100mm

AlQabas reports that ABL issued a press release today disclosing that its exposure to Dubai Holding equivalent to US$100 million from its participation in an AED denominated syndicated loan.  The loan matures in June 2013.

ABL said that the loan was performing and had just made an interest payment.  It also noted that given its maturity, it would not be part of debts to be restructured.

The danger of course when a borrower restructures is that all debt eventually gets caught up. 

Islamic Financing & Restructuring Part III - Golden Belt Sukuk 1 (Saad Group)

This is the third installment in my series on Islamic Financing and Restructuring.

Today's it's the Saad Group's turn, specifically, Saad Trading Contracting and Financial Services Company (a limited partnership formed in Saudi Arabia) ("Saad") and Mr. Maan AlSanea.

Our "kit" is a bit lighter than our last excursion (TID Global Sukuk 1) as all I could find was the Offering Circular ("OC").   The OC is well done - no doubt a combination of Bahrain legal requirements and the professionalism of the parties involved in the transaction.  The Risks Section is  particularly robust and clear. 

Just in case, you left the AAOIFI principles behind on our last journey, here's another copy.

And before we start, just one disclosure.  While I watched Boston Legal carefully, I am not a lawyer so don't rely on this or earlier comments as legal advice.  What follows is based on practical business experience not legal training.  If you want Denny and Alan, you will have to hire them.   And probably for this transaction you'd be better served by Nigel or Neale.

Short details on the transaction:

1. US$650 million in principal.
2. Five year maturity with Periodic Distribution Amounts (in a non Shari'ah compliant transaction that would be called interest) paid every 15 May and November at Libor plus 0.85%.
3. Final maturity 15 May 2012.  Single bullet payment of principal on that date.
   
4. Islamic Structure:  Ijara (rent transaction).  Maan AlSanea as Chairman of Saad leases  (the Head Lease) certain land (ex buildings) in Saudi Arabia to the Issuer (a special purpose Bahraini company)  who in turn sub leases it back to Saad.  The net proceeds of the Sukuk issue (keep the word "net" in the back of your mind as it will come up again) are paid to Saad as the advance lease rental for the Head Lease.  A single payment up front.  This gets him his "loan" if we were using non Shari'ah financing. The payments under the Sub Lease are the origin of the debt service for the Sukuk.
   
5. Legal Structure:  Limited recourse certificates (Trust Assets only) with a Saad purchase obligation.  Under the Sub Lease Agreement, the certificates are redeemed at face value plus any unpaid Periodic Distribution Amounts.  See the OC Section 9 "Termination Sum" on page 38.  Such purchase can take place either at maturity (scheduled dissolution) or prior thereto in certain cases (unscheduled dissolution after the occurrence of dissolution events and a vote to terminate by holders of at least 25% of the sukuk amount).  In effect this is a form of guarantee just like the structure in TID Global Sukuk 1, though we won't call it that.
6. Governing Law:  English Law for the Head Lease, the Sub Lease, Certificate Purchase Agreement (agreement with banks who placed the deal), Service Agreement  (Saad to maintain properties including any major maintenance) and the Costs Undertaking (Saad to pay the various service providers, e.g., Ohad, Citicorp).  All these documents are part of the Trust Assets.  The Corporate Services Agreement (Ohad and the Issuer for Ohad's services) under Bahrain Law.   And finally Saudi Law for the Promissory Note and Note Issuance Agreement and each Payable Rental Promissory Note (for the next rental payment due under the Sub Lease).
   

Let's turn to the detail.

(1) The Trust Assets

As per the OC page 19 "Recourse to the Issuer is limited to the Trust Assets and the proceeds of the  Trust Assets are the sole source of payments on the Certificates. Upon the occurrence of a Sub-Lease  Termination Event which constitutes a Dissolution Event, the only remedy available to Certificateholders will be to require the Sub-Lessor (or the Delegate acting on its behalf) to invoke its rights against the Sub-Lessee to pay the Termination Sum due pursuant to the rights granted in favour  of the Sub-Lessor under the Sub-Lease Agreement."

So what are the Trust Assets?

Title to land parcels in Saudi?  No.  As per the OC page 26, the land parcels are recorded in the name of Mr. AlSanea.   And there they shall apparently stay.

As per the OC page 17  "The ‘‘Trust Assets’’ consist of all of the Issuer’s rights, interest and benefit, present and future, in, to and under the Head Lease Agreement, the Sub-Lease Agreement, the Promissory Note, each Payable Rental Promissory Note, each of the other Transaction Documents, all monies standing to the credit of the Transaction Account, and all proceeds of the foregoing." 

The investors' security then is in the strength of these contracts. 

(2) The Purchase Obligation

Under the Sub Lease, the Issuer may call upon Saad to redeem the certificates prior to maturity if there is a Dissolution Event and at least 25% of Sukuk holders vote to terminate.  OC Section 9.2 page 38.

Dissolution Events (in a non Shari'ah compliant financing "Events of Default") are detailed in OC Section 12 page 39.   These contain the normal non payment (7 day grace). as well as several others . This Section does not contain any general covenants on Saad nor any cross default language.   However,  Section 12 (c) contains reference to Sub Lease Termination Events also triggering a Dissolution Event.  Flipping to Section 3.5 pages 68-71 we find the usual event of default matters covered under Sub Lease Termination Events.

(3) Promissory Notes

To support the purchase obligation there is a note for US$650 million.  Note that is for the gross proceeds of the issue not the net proceeds.  It will become clear why I keep hitting this point later.

At the beginning of each rental period, Saad will execute an additional promissory note for the Payable Rental Amount which is the funding for the Periodic Distribution Amount (in a non Shari'ah compliant transaction that would be called interest).

This is a "neat" drafting approach.  In the event that Saad doesn't pay, instead of  hauling a stack of complicated documents subject to English Law into a Saudi Court, the intent appears to be to have a straightforward and simple document that clearly evidences Saad's obligation to pay.  Of course, the borrower would very likely try to get all the documents into court to prolong the case and seek whatever advantage he could. 

(4) Restructuring Issues

First, some background points from the OC.

(a) Page 25 - "The calculation of the Payable Rental Amounts is not directly linked to the value of the Land Parcels, and as a result should the calculation of the Payable Rental Amounts be challenged by the Sub-Lessee there is a risk that the Saudi courts may apply the principles of equity."  Recall that the rental payment is being reverse engineered.   We know where we want to get.  The investors want a return of Libor plus 0.85% per annum paid to them.  The borrower wants US$650 million.   This issue arises strictly because of the "Islamic" nature of the transaction.  There can be no interest, but the investors want a certain return.  The Promissory Notes are designed to overcome this issue in a Saudi Court by reducing the "case" to one of an unpaid debt acknowledged by Saad for a sum certain.

(b) Page 28-29 - There is a good description of enforcement of obligations in Saudi Arabia.  This is key because as the OC's Risk Section points out, most of Saad's assets are in Saudi Arabia.  The key sentence in this section is "The courts and judicial committees of the Kingdom of Saudi Arabia have the discretion to deny the enforcement of any contractual or other obligations, if, in their discretion, the enforcement thereof would be contrary to the principles of Islamic law."  An issue that faces every creditor whether he extends under Shari'ah compliant or non Shari'ah compliant structures.

(c) Page 30 -  Another key sentence:  "The concept of trust as deemed in common law jurisdictions does not exist in Saudi Arabian law."

(d) Page 45 Use of Proceeds - The net proceeds are estimated to be US$645,750,000 or US$4,250,000 less than the gross proceeds.  The difference is for the banks' placement fees as well as legal and other costs.

Second, as the Lease and Sub Lease are the heart of the security for the transaction, these would be a target for an attack.  Can a party overturn the Sub Lease contract on the basis of equity using an argument that the rental is not fair given the value of the land? If Saad is insolvent, can a creditor argue that the rental payments are a lesser obligation than that creditor's debt and that the creditor should be paid first.  Here again the Promissory Notes are a defense that the rental payment is just as valid a debt as the creditor's loan.

This is also where the difference between gross and net proceeds finally comes in.  The Promissory Note is for US$650 million.  But the amount Saad received was US$4.25 million less.  In Saudi Courts borrowers have been known to produce an accounting of all cash flows in an effort to reduce the amount they owe the lender.  The bank gave me a $100 loan and over the years I paid them back $100 (the borrower would list all payments to the bank irrespective of whether they were principal or interest).  Since the Shari'ah doesn't recognize interest, the Court could assume that all cash flows were principal.   Once a banker from a neighboring country told me that a borrower had pulled this ploy and the court ordered his bank to refund the overpayment!  That is, the bank wound up owing money to a non paying borrower.  If  Saudi courts still might  take this stance, then Saad could charge that he only received US$645.75 million not US$650 million -  and therefore there was something wrong with the Note and the transaction.  I think if the gross proceeds were desposited to Saad account and he paid the US$4.25 million in fees, there would be a stronger case than if  he only received the net.  This is not an issue particular to this transaction, even a conventional non-Shari'ah bond could run aground on this shoal.

(6) Other Interesting Points from the OC 

(a) OC page 14 Ownership of the Issuer.  AlGosaibi Investment Holding EC  Bahrain ("AGIH")  owns 99%.  Those of you who have been following the legal battle between AlGosaibi and Mr. AlSanea know that AlGosaibi has accused him of undertaking transactions in AlGosaibi companies without their knowledge.  It would be very interesting to know who at AGIH authorized this transaction.  Without that information, we can't draw any conclusions.

(b) OC page 22-23 Shari'ah Opinion.  The last paragraph gives an insight into the practical approach taken:  "The Shari’ah Board also took into consideration (i) the legal constraints under which this product is being developed; (ii) the need to facilitate and bring ease to the Islamic financial institutions and others who are determined to raise financing according to Shari’ah principles; and (iii) the prevailing conditions and a¡airs of the Ummah and the need to remove them from the shackles of riba. And Allah Knows Best."

For those interested there is a description of the Saad Group  as well as some now dated financials at the end of the OC. 

If there are any trained lawyers out there, I'd love to hear your thoughts on Golden Belt as well as on my previous post on TID Global Sukuk 1.  All without attribution and as well pro bono.

Moody's Estimate: Dubai Debt US$100 Billion?

Supposedly today in London Moody's gave out an estimate of Dubai Inc's debt as US$100 billion.

As well one of their senior staff reportedly described the Emirate as "high yield" territory.

If I find a link, I'll update this post.

HH Shaykh Mohammed Bin Rashid AlMaktoum Press Conference

WAM has just published a press release  relaying details of a press conference held by HH Shaykh Mohammed Bin Rashid AlMaktoum, Ruler of Dubai and Vice President and Prime Minister of the United Arab Emirates.

Here are some salient points from the release - though I encourage you to read it in its entirety.

1. Sheikh Mohammed sat in a chat session with the journalists to talk about so-called crisis of Dubai World and the media buzz around this problem, as well as the confusion and exaggeration in conveying the right image of this topic across a section of the media.
2. He asserted that he is not worried about the hype the media had created.
3. "(In fact) we wanted this reaction, which has proven that we are the difficult figure in the equation of the global and regional economies as I had said earlier. This is what makes us feel satisfied and proud that we work, and play an important, vital and positive role in the international economy, which has suffered a strong jolt as the result of the announcement of the restructuring of a company".
4. "People try to pelt stones or anything else within their reach at a fruit bearing tree. Then how it will be when we have seven fruit-bearing trees or more? It is natural that we are exposed to all these exaggerations, which are far from reality".
5. He added: "The diligent waves have amazing patience.. amazing".
6. At the end of the meeting, Sheikh Mohammed expressed his hope that the media will convey the truth, saving the people from falling into quagmire, and reminded that transparency and credibility are the most important attributes of successful media.  He called on the journalists to search for the truth, to uphold credibility and judge by conscience above all, so as to earn public trust and respect.

As I go forward I intend to report on this so-called story without hype and with minimal buzz, paying particular close attention to Point #5 above. (Tafsir on the waves comment:  long term versus short term).

National Industries Sues Carlyle Group

AA saw the news item in the Financial Times this morning.  Hard to miss it's on the front page.

What a shock!

There was no editorial (lead or otherwise) calling for Carlyle Group to step up and guarantee Carlyle Capital Corporation so that NIG could get back its US$50 million investment. 

Nor even more surprisingly was there a call on Abu Dhabi to step up and accept responsibility.

What's capitalism coming to?

Of course, AA will be keeping his eye on tomorrow's FT.  The editorial may be there.  

Other Kuwaiti Companies Report on Dubai Exposure

Most of the notices on the KSE today were about exposure to Dubai World and Nakheel.

Company KSE numbers provided in case you need to look up more details on them.  As per KSE classification, Investment Companies are 200 series,  Real Estate Companies 400 series and Services Companies 600 series.

All of the companies report they have no exposure to either Dubai World or Nakheel.  You'd expect the companies with no exposure would be the quickest off the blocks to report.

1. Mansha'at (433)
2. Aref Investments (216)
3. Aref Taqa (627)
4. Sukuk Holding (239)
5. First Investment (219)
6. Usul Investment (225)
7. Arjan Global (431) - And despite it's name it states it has nothing in the UAE at all.

Link to earlier post on Kuwaiti bank exposure to Dubai. 

Golden Belt Sukuk 1 (Saad Group) Vote on Dissolution

Following the payment failure on 16 November 2009 and the earlier event of dissolution notified investors last August, the Delegate on the Sukuk has approached investors again asking them whether they wish to vote to dissolve the Trust and thereby collapse the Sukuk triggering Saad's purchase obligation. 

25% of investors have to vote for this to be effective.

So far 7.4% have. 

Notice posted on BSE here.

Kuwaiti Banks Dislcose Exposure to Dubai - Updated

As of yesterday evening, we hadn't heard from two of Kuwait's banks.  Today we have.

Gulf Bank of Kuwait - KD28 million (US$98 million) as a participant in an unfunded facility to Dubai World with expiry November 2010.

[12:13:22]  ِ.ايضاح من (خليج ب) بخصوص ديون "دبي العالمية "و"نخيل"‏
يعلن سوق الكويت للاوراق المالية بانه وردالينا الان من بنك الخليج (خليج ب)‏
ما يفيد بان البنك مشارك فى تسهيلات غير ممولة مشتركة لدبي العالمية تنتهي ‏
فى يونيو 2010 قيمتها 28 مليون د.ك ،وافاد البنك بانه بخلاف ذلك ليس ‏
للبنك اية تسهيلات نقدية او غير ذلك من التسهيلات المصرفية او استثمارات ،
سواء مع دبي العالمية او شركة نخيل التابعة لها .‏

Commercial Bank of Kuwait - No exposure

[10:21:43]  ِ.ايضاح من(تجاري) بخصوص ديون "دبي العالمية "و"نخيل"‏
يعلن سوق الكويت للاوراق المالية بانه وردالينا الان من البنك التجاري ‏
الكويتي على ضوء انباء تعثر شركة "دبي العالمية" وطلبها تاجيل سداد ‏
ديونها لفترة ستة اشهر ،افاد البنك انه ليس لديه اية انكشافات مباشرة او ‏
غير مباشرة على شركة "دبي العالمية" او على شركة "نخيل" التابعة لها .‏
 

This rounds out the Kuwaiti banks' exposure.  As expected, nothing of any real size.  Nor anything that poses a threat to the banks.

Link to earlier post on bank exposure.

Japanese Bank Exposure to Dubai - JPY100 Billion

Japanese banks' exposure to Dubai at JPY100 bln -Nikkei - as per Reuters.

DBS Bank Singapore US$1.28 Billion Exposure to Dubai Entities (Mostly in Asia)

SINGAPORE, 30 November 2009 - DBS said today its total exposure to the city-state of Dubai is approx SGD1.8 billion (USD1.28 billion). The bank believes that the situation is manageable as a substantial portion of this is to Dubai owned companies operating in Asia that are sound, such as Labroy and South Beach, which is collateralised.

As of today, the only credit that is captured under the standstill notice is a SGD558 million (USD400 million) bilateral loan to Dubai World Finance which represents 0.2% of DBS’ total balance sheet. The bank has no exposure to Nakheel.

DBS' exposure to the entire Middle East region accounts for around 2% of its balance sheet.

Original text here.

Kuwait Banks Disclose Exposure to Dubai

This won't be a big surprise to anyone out there familiar with GCC banking, but the Kuwaiti banking sector has little to no exposure to Dubai.

Let's run down the statements to date:

1. National Bank of Kuwait- No exposure to any company owned by Dubai Government.  NBK also pretty much avoided the Suq Al Manakh.  Abu Shukry was at the helm there then.
   
2. Boubyan Bank - No exposure to Dubai World or Nakheel.  
3. Kuwait Finance House KFH - No exposure to Dubai World or Nakheel. 
4. Ahli Bank of Kuwait - US$20 million in bonds.  No loans.
5. Kuwait International Bank - No exposure to any Dubai company which has announced a standstill.  This is the "old" Kuwait Real Estate Bank. 
6. Bank of Kuwait and the Middle East -  No exposure to Dubai World or Nakheel.
7. Burgan Bank - No exposure to Dubai World or Nakheel.

Not yet reporting Gulf Bank and Commercial Bank of Kuwait.

Also Arab African International Bank Egypt  - in which the Kuwait Investment Authority ("KIA") holds 49.4% or so - disclosed it had US$700 million in loans to companies in the UAE.

As a final word:  This doesn't mean that Kuwaiti banks don't have exposure to other entities or companies in the UAE including Kuwaiti companies and/or individual investors.

UAE Markets Lose AED33 Billion (US$9 Billion)

ADX down 8.2% and DFM 7.3%.  The ADX drop was the largest in is history.  The DFM hasn't had a drop like this for over a year.

On the ADX (Abu Dhabi) there was a broad decline with many stocks down 9% for the day.  While one would expect declines in the banking, real estate and construction sectors, there were also large declines in companies such as Aabar (AD Government owned energy company), Abu Dhabi National Hotels, Agithia Group (Food Company).  Clearly a general market sell-off as investors  rush to liquidity (cash).   Looking at individual stocks, the forward order books are one-sided - all "asks" (sell offers) and no "bids" (buy offers).  That suggests market pressure for tomorrow.

On the DFM (Dubai), essentially all of the market's drop was in the first 45 minutes of trading - from 1970.2 to 1942.6 with a further slight drop to 1940.36 in the last 45 minutes.  I couldn't find the forward order book summary.  But again a quick glance indicates a broad sell off as in Abu Dhabi.  I'd expect more selling pressure tomorrow at the DFM as well.

On Nasdaq Dubai, Dubai Ports lost 14.88% (and earned the distinction of being the stock with the largest drop and the largest trading volume).  You'll recall that the Government announced that DP would not be part of the debt standstill.

Trading patterns suggest an absence of buyers during today's session.  And as indicated above (at least based on ADX data), there don't appear to be many buyers waiting to jump in tomorrow morning. 

Nakheel Asks NasdaqDubai to Suspend Trading in Its Bonds

Apparently in a move to prevent price deterioration  and further negative sentiment towards Dubai World.