Global Investment House - Restructuring Agreement Signed

Global Investment House issued a press release to announce that it has signed an agreement with its bank lenders for a rescheduling. You'll recall that there is no restructuring for GIH's bonds, though GIH has provided collateral.  But see the "devil in the details" below regarding pro-rata application of repayments.

Here are some of the points from the press release that caught my eye along with my comments in blue italics.

1. There has been a fundamental change in GIH"s business away from more capital intensive  proprietary and real estate investments.   AA:  The new GIH is going to be a much different entity focused on client services:  asset management, investment banking and brokerage.  It will have a much smaller balance sheet.  As a result it will require less debt.   
   
2. Assets from the discontinued lines of business have been segregated into two separate companies., structured as funds.  One in Bahrain to manage equity investments (proprietary investments) and one in Kuwait to manage real estate investments.  AA:  The fund structure allows GIH to sell off shares to investors - which could prove another way to secure funds for debt repayments.   As well, the entire companies could potentially be sold to another fund manager.   That being said, the most likely scenario is asset sales.  Looking at GIH's 30 September 2009 financials Note 26 Segmental Analysis, you'll see that these two areas account for KD866 million or roughly  88% of GIH's total assets.  While accounting rules require that assets be allocated to business segments, management has some discretion in the allocation. And every asset has to have a segmental "home" so this is an approximation - though probably reasonably close to actual.
   
3. These two companies, the proceeds of their activities, and other assets have been pledged to the lenders. As well there is a telling phrase near the end of the description of the new facilities - that   "certain of Global's other income streams" have been pledged.  AA:  I'm reading that latter comment to mean that revenues from asset management, brokerage, etc. have been pledged.  Lenders who are owed roughly KD615 million (KD500 million in  loans and KD115 million in bonds) want to have a sufficient over collateralization in case asset realizations fall short.
   
4.  The new facilities have a three year tenor and are amortizing.  AA:  This is a relatively short period.  If markets recover slowly, GIH may be forced to sell assets at less than ideal prices.  It would have been better - and I think not represented a material increase in risk - to give Global a four year tenor.   Also note that there is a 1% step up in the interest margin on the loans each year from the first year's margin of 1.5%.  The idea is to create an economic incentive to GIH to pay.  And to compensate lenders for additional risk.
5. Lenders and bondholders share pro-rata in the asset realizations and other payments.  AA:  I think the three year tenor of the loans and this mechanism answer why the lenders agreed to let the bondholders keep their original maturities.  The banks have a similar maturity - the bond payments are heavier in 2012 and 2013.  And payments are going to be applied pro-rata.
6. GIH has shareholder approval to issue 1.5 billion new shares at KD0.110 per share (a KD0.010 premium to the nominal value).  A share issue is not planned immediately, but later when market circumstances are favorable.  AA:  Shareholders would naturally be reluctant to put additional capital into Global unless they were sure the funds were going to be used to develop the business and not merely to pay off the lenders. 
   

GIH has a restructuring deal with its lenders.

The terms are tight:

1. GIH's business model has been changed.  I think this has more to do with the lenders than with a change of strategic heart at GIH.  It's hard to imagine the lenders allowing GIH to conduct business as usual, particularly in areas that demand significant new capital during the three year rescheduling period.   
2. The company has been effectively mortgaged to the banks.  
3. The three year tenor and increasing interest margin place pressure on the company to liquidate assets.  I think these two elements are potentially onerous.  Creditors have a duty to their stakeholders to get their money back.  They also have a duty not to harm their borrower if they can.  
4. GIH's strength has been its asset management business (seeded by the KIA where Ms. AlGhunaim worked before joining the firm).   At 30 September Global had some KD2.2 billion in assets under management.  It also has a reasonably good track record with its funds.  So there is a solid basis on which to base a continuing business.
   
5. It's likely that Global will emerge from the restructuring.  However, it will be a much different and slimmer firm than it was in 2007.

The Gulf Curve Blog: Interesting Analysis on GCC Bonds

The GulfCurve blog has a very interesting analysis of GCC credit spreads with a focus on the impact of the Dubacle.   Well worth a read.

Ibn Kalb Ends Piracy

The National reports on a low tech way to prevent pirate attacks.

“Fear will spread throughout the community and young men will not volunteer to join.”

Except for the ships' crews.

Istithmar World Loses New York Hotel

The National reports that lenders foreclosed on Istithmar World's Union Square Hotel in New York City.  This is related to problems with debt service at the hotel.  It is not directly related to any problems at the parent, Dubai World.

However, as funds available to Dubai World become more scarce, it will not be able to provide funds to its subsidiaries.

Lenders to standalone projects like the hotel are likely to react to the commercial circumstances of each transaction.  If the equity holder is unwilling or unable to provide additional funding and if it makes sense to foreclose, they will.  Since many of these deals are structured as separate legal entities, they can easily do so.  The assets are to use a term popular in the financial press these days "ring fenced".

This puts more pressure on Dubai World.

As the market denies it new lending, it will need to husband cash to prevent problems like this from occurring, presuming  it makes commercial sense to support a project.  

And  such a need could possibly be a motive to compel them to seek a wider restructuring than just Nakheel and Limitless.

Dubai World - AlQabas Report - Commercial Bank of Kuwait Denies Any Exposure (Again)

Today's AlQabas - published last night  on the Internet - contains an article suggesting that banks may have overlooked some exposure to the Dubai World group.  It's based on a table compiled by City Research using Dealogic (a financial sector publication specializing in reviews of transactions).  Commercial Bank of Kuwait was named as having a large exposure.

This morning CBK issued a press release denying any such exposure and that it had contacted City Research.

[11:28:51]  ِ.ايضاح من البنك التجاري الكويتي(تجاري) بخصوص ما نشر فى احدى الصحف المحلية
يعلن سوق الكويت للاوراق المالية بان البنك التجاري الكويتي افاد بخصوص ‏
ما نشر فى احدى الصحف المحلية اليوم تحت عنوان 293 مليون دولار لبنك ‏
محلي بذمة شركات متصلة ب"نخيل"و"دبي العالمية" ودعمت الخبر بجدول صادر ‏
عن مركز ابحاث سيتي بالتعاون مع "ديلوجيك" ودرءا للشائعات التي قد تثير ‏
البلبلة وتؤثر سلبا وتمس القطاع المصرفي الكويتي،يود البنك التجاري الكويتي ‏
ان يبين بانه هو البنك المعني بهذا الخبر وان هذا الخبرعاري تماما عن الصحة ‏
حيث قام البنك التجاري الكويتى فور اطلاعه على التقرير الصادر عن جهة ‏
الابحاث المذكورة بمخاطبة هذه الجهة التي قامت على الفور بالاعتذار للبنك .‏

Aidan Birkett - Dubai World & The "Profligate" Locals

Earlier I posted on an article reciting the impediments Aidan would face in  discharging his responsibilities. 

I pointed out that there was a strong undercurrent of cultural bias in the article. In effect the article's point was the "locals" had created the mess and would resist letting Aidan "set them straight".  The article detailed  the possible tactics they might use to frustrate his mission.  Things like speaking in their native tongue.   

I wonder how he'll deal with this "local"?

It would appear that we may need more an expert from the East to help sort out the Dubacle. 

Dubacle: $46 Billion and 40% Haircut?

Bloomberg is reporting that Mohammed Jaber and Paolo Batori of Morgan Stanley have issued a report that as much as US$46.7 billion of Dubai World debt may need to be restructured and that haircuts of 40 to 50% are likely to be required.

The press has as usual seized on the most sensational element.  Without the full report  - which I am trying to get - and all its details and nuances, tt's hard to evaluate the analysis. 

My own guess is that there is more pain out there in Dubai.

Heedless lenders and investors were throwing a lot of money the Emirate's way.   A lot of it short term money.   There's nothing that feeds a speculative boom like easy money.    And nothing that  causes a faster crash than suddenly sober bankers refusing to roll over short term loans. 

Dubai Inc wasn't just on a spree back home but in Las Vegas, New York, etc.  And most of that with borrowed money and leverage.  A potentially dangerous combination when asset values go down.   As indicated in my Aidan Birkett post here.

Dubai: Six Months Is Not Enough

Not unexpectedly comes the news that a six month payment delay won't be enough time to complete the restructuring of Dubai.

In a situation like this the market craves certainty. 

But it's not possible to give certainty. 

Realistically, it will probably take at least three to four months for the Company to assess its situation and begin to craft the first stage of its initial plan.

Workshop on Government Openness Closed to Public

Implicit openness I suppose.

Tie Your Camel First, Then Trust in God - Part V Maintenance Fees

I thought every developer and property owner knew that maintenance was one of those really important things.  

1. Be sure that you understand the costs of maintenance, and
   
2. Make sure you make provisions for the payment of the same.

Especially if you live in a part of the world where the climate was particularly harsh on buildings.

I wonder if there's implicit maintenance.

Sort of like the famous implicit guarantee.   The Rene Descartes philosophy of maintenance: "I think the property is being maintained, therefore it is".

Or then again maybe Shaykh Khalifa is supposed to take care of this.  This is another thing I don't think he said he'd never do. 

Kuwaiti Banks Exposure to Saad and AlGosaibi - Update

AlQabas has an article 8 December noting that despite all the other issues in the market - Dubai, the world economic crisis - this one remains a major issue for Kuwaiti banks.

Here are the main points from the article along with my commentary in blue italics.

1.  Total exposure is not less than US$1.5 billion.  AA: Maan AlSanea is Kuwaiti by birth, former KAF pilot.  He would have the sort of connections that would overcome the general "silo focus" of local banks on their home markets.
2. Roughly 50% has been reserved to date according to sources at the Central Bank of Kuwait.  AA:  You'll recall this is the general level of provisions that the Central Bank of the UAE mandated for the non bank exposure to the two Groups - saying that it represented a consensus view of both local and international regulators.
   
3. Kuwaiti banks with exposure - save one it appears -  have formed a committee which reportedly includes Gulf Bank, Kuwait Finance House, Commercial Bank, Burgan Bank to conduct negotiations with Saad and AlGosaibi.  Efforts are said to be well co-ordinated.  The banks are speaking with one voice.
4. With respect to Saad, they have written to Saudi banks asking if a separate deal has been signed with Saad.  The existence of a deal has been mooted in the press several times.  The Kuwaiti banks reportedly are threatening legal action which they note in their letter they could direct at the branches and offices of Saudi banks in the West, e.g., London or New York.   This is similar to a letter that international banks have written to Saudi banks.  The Governor of SAMA has denied any side deal.  AA:  The fact that the letter was written even after the denial is an indication of lingering concern that there is some side deal for the Saudi banks.  As I've noted before, I was told there was a  similar side deal for Saudi banks in Redec rescheduling.  Certain government receivables were reportedly assigned to Saudi banks.  The foreign banks complained to no avail and eventually quieted down. So a similar fear that history will repeat itself.   As to the basis for the lawsuit, generally each creditor is on his own.  If he can get repaid, he doesn't have to worry about others.  The one exception to that rule is syndicated loans where banks pledge to share payments pro-ratably among themselves.  The only other avenue would be a general liquidation scenario where creditors should be treated on an equal basis.  I don't think most of the local jurisdictions have a well-defined concept of fradulent conveyance - preferring one creditor over another in some set period prior to a bankruptcy.  And even if they do, there has to be bankruptcy.  If the company keeps going, then it is merely negotiating individual deals with creditors about existing loans, just as it did when it took the loans out.
   
5. With respect to AlGosaibi, the Kuwaiti banks - along with others -  rejected the Group's offer to pay 9% with the rest of the debt forgiven as "sakhiif" - ridiculous/inferior. Apparently, some dismay that AlGosaibi didn't acknowledge the debts as a first step in the negotiations.   Also an assessment that negotiations - with both AlGosaibi and Saad - would be very difficult and might take three years.  AA:  I'm told in the previous great debt crisis of the mid 80's many Saudi borrowers did not earn high marks for ethics and fair dealing in their negotiations with lenders.  One of my mentors could be set into a tirade by the mere mention of the names of Shobokshi, Baroom, and AAA - where recoveries were pennies on the dollar while the obligors managed to protect their wealth.  Some of the assets were quite well protected from creditors.  The three year timeframe may be predicated on the time taken for the "oxygen strategy" described below to take effect.  Recall that Maan AlSanea is allowed a living expense by one Western court from his blocked assets.
   
6. Ahli Bank of Kuwait has chosen to pursue legal action against Saad in New York.  AA:  A court judgment is most easily used to attach assets in the jurisdiction of the court.   Otherwise the lender marches into a foreign court with his judgment and asks the local court to enforce it.   That doesn't work particularly well with the GCC.  Back in the USA, probably all of Saad's  major assets have been  identified and many banks are pursuing them.  The court appointed "administrator" for SICL (Caymans) has already been active in US courts blocking Saad assets.  Unless Ahli knows of something that others don't and can prove it belongs to Saad, it will be in a very long line.  Perhaps the suit is an attempt to pressure Saad for a settlement.
   
7. That the Central Bank of Kuwait is providing "every support" to the Kuwaiti banks.
   
8. The target will be to block the two Group's assets in Saudi Arabia first and then around the world.  An effort that is expected to be very complicated.  AA:  The idea is to cut off the borrowers' oxygen and force them to do a deal to unblock some of their assets and to be able to conduct their operations.
   

Assuming regulators are basically right about the level of provisions, creditors are in for a long and difficult process.  And probably substantial losses on these two names.

If you use the labels Maan AlSanea, AlGosaibi, Awal Bank and The International Banking Corporation, you'll be able to track back previous articles to get a more detailed picture.

Local Commentators: UAE Central Bank Unlikely to Require Provivions for Dubai World

The 8 December issue of AlBayan Newspaper Abu Dhabi contains an interesting article on Dubai World.

Looks like a piece designed to steer towards a goal:  no provisions for Dubai World.

The argument builds its case through a series of steps.

It begins by quoting unnamed British bankers as saying that the current negotiations would lead to a mutually satisfactory solution of a rescheduling.  AA:  As this story goes, it's a simple matter of coming to an agreement to re-time payments.  And such a mutually satisfactory agreement is close at hand.   No real problem.

Then Abdul Rahman Al Saleh, Director General of the Emirate of Dubai Finance Department, is quoted  that the Emirate of Dubai is fully capable of discharging its obligations.  AA:  A bit of misdirection.  The issue isn't the Emirate's capacity to service its debts but its commercial companies'.

Then he's quoted strongly refuting the assertion that the Government of Dubai had recently announced that it would never guarantee Dubai Group's debts as though it were a surprise.  He noted that the fact that Dubai Group's constituent documents clearly state that there was no guarantee and that it's appropriate to make a distinction between the Government and these companies such as Nakheel and Limitless.  AA:  If you thought you had a government guarantee, you were mistaken.  It's your own fault.  No quibble from me on this point.  Even though you might have noticed the Government of Dubai "logo" on the prospectus for the DEWA Sukuk (with the Government in the honored "on the left" position.  But buying financial instruments is just like buying toothpaste.  One has to be able to distinguish among the claims made.  Will this toothpaste really improve my social life?  Does this sukuk really have a government guarantee?  If you read the prospectus, you saw that it didn't!

Then Moody's is quoted that Dubai World and DEWA are fully capable of attracting new investments once the current hubbub quiets down.  AA:  I'd like to see the original.  I'll bet there are all sorts of caveats.  Higher pricing.  Limited amounts.

Then Jean Claude Trichet, Governor of the European Central Bank, that Dubai does not pose any sort of a real crisis to the world economy.  AA:  The collectability of the debt and its impact on the world economy are two different things.  The world economy does not have to collapse for a lender to lose a good portion of his loan to Borrower A.  Or Borrower "D".

Bankers and financial experts consider it unlikely that the Central Bank will require local banks exposed to Dubai World to take any provisions since it is a large company and still continues to enjoy the confidence of local and foreign investors.  As well since the company merely asked for an extension of payments and not any cancellation of its debts.  AA:  This is the heart of the argument.  Not sure the too big to fail argument works w\ithout a government guarantee.  Usually too big to fail is the argument for getting one.  Many large companies have gone "south".   Enron for one.   From the rush by various financial institutions to make it clear through public announcements that they have not extended credit to Dubai World, I'm guessing there's a strong argument against the maintenance of confidence by investors.  From the reaction of local stock markets, there's a similar indication.   Finally, let's wait to see the final restructuring package before we rush to determine that there is no haircut - either direct or indirect.  There are rumors that Nakheel and other companies were offering construction companies 75% payments as final settlements with a confidentiality/non disclosure agreement part of the package.   If they can't pay suppliers why should we think they can pay bankers?  To be fair as well we shouldn't yet be assuming there will be haircuts.

Of course the Central Bank will make up its own mind and will speak for itself. AA:  And here there will probably be public policy considerations mitigating against significant provisions unless the situation  becomes obviously desperate.  Likely outcome is to put a bandage on the wound and hope that a miracle cure is found in the not too distant future.

The Investment Dar - Press Release on Restructuring

The Investment Dar has issued a press release on the restructuring.

The tone here is quite different from that in the AlQabas article I commented on.

That of course is not unexpected.  There is always a great deal of sturm and drang in these negotiations.  Having been the "best" customer when times were good, the borrower becomes a veritable pariah when he advises the banks he cannot pay.  Restoring confidence takes a while and punctual performance of the restructured obligations.

And management's natural inclination is to put the best face on any development.  To appear to be leading the process and making necessary adjustments/concessions rather than being forced to do so.

Some similar points sounded in the press release to that in the earlier article:

1. A commitment to total transparency.  (That theme was sounded more than once in the AlQabas article).
2. An enforceable security package.  (The best kind of security package to have if you're a lender).
   
3. The Chief Restructuring Officer  will serve for the entire five-year repayment period.  (A minder since the creditors have evidenced some concern about existing management - enough so that they asked the Central Bank to appoint a monitor).

We'll get a better sense of the atmosphere when the creditors respond and when we learn more about the final shape of the restructuring deal.

Lending 101 - Cost of Tuition AED500,000 + AED2,000 Legal

The UAE Supreme Court has ruled against a local bank for unsound lending practices in a recent case.

“All banks should stop granting loans to limited-income people, unless within the limits of their capabilities,” the court said.

Sometimes one has to pay a price to learn the obvious.

UAE Market Volatility Continues

Contrary to reports this week that everything was just fine in local stock markets, there's been a reversal today.

Frankly, there's nothing surprising about this. 

Until there is more clarity on the restructuring and some progress has been made with creditors, market volatility should remain high.  Especially since this market and other GCC markets are largely dominated by retail trade.  

Qatar National Bank - No Exposure to Dubai World

QNB joined the parade of financial institutions disavowing any relationship with Dubai World with a one liner at the Doha Market this morning.

Central Bank of Bahrain - Dubai World Exposure Less Than 1% of Total Assets

 

HE Rashid AlMaraj, Governor of the CBB, said today as per Reuters that Bahraini banks' exposure to Dubai World was less than 1% of consolidated assets.

Deutsche Bank - No Exposure to Dubai World

As per Reuters, Henry Azzam disclosed at a conference today.

The Tail of Two Investments: Citibank and ADIA and KIA

No, AA's spell checker isn't off this morning, though it may take one more cup of Cafe Najjar to bring all the lights fully on.

Tail is a deliberate choice: 

1. Barring a miracle or a negotiated settlement with Citi, one is facing a substantial loss beginning next March.  
2. Another has just exited an from investment in Citibank at a hefty profit.   So we are at the tail of the investments.

The first is ADIA who back in November 2007 invested US$7.5 billion in Citibank mandatory convertible bond with an 11% coupon and conversion to take place between US$31.83 to US$37.24.  Around the time the deal was struck Citigroup was trading at $32 to $33 per share.  ADIA in effect sold Citi a put option (the right to sell Citi shares to ADIA at a fixed price).  As well  ADIA also gave Citi the first 17% of the upside (the movement in share price from $31.83 to $37.24).   ADIA only gets the upside  if the share price goes higher when for example say it would get Citi shares trading at $41 for $37.24.   An investor would do a deal like this if  its expectations for volatility in Citi's stock was low for  the option period. Or if it believed that volatility was all one way -- the upside.  ADIA recently was cashed out by Citi at the lower $31.83 price.  Citi's stock price is roughly US$4.00 now.  You can do the math on the  impending loss based on market price.   Here's an article from The National.  Recall AA's earlier post on the AED 1 billion camel.

The second are KIA who bought US$ 3billion  (I think Series B 1) from the US$12.5 billion convertible issue in January 2008 - roughly two months after ADIA's investment  The conversion price  was US$31.62 per share.  KIA has recently claimed a profit of US$1.1 billion.  Just in time for the interpellation sessions with the Majlis Al Umma.  You'll recall that earlier the MPs objected to the investment.   They say timing is everything! And that's not just investments but also politics.

Here's the WSJ article on KIA's US$1.1 billion profit.

So what happened?

As you'll recall, Citibank had an exchange offer mid year in connection with an "investment" by the US Government in its stock via the conversion of preferred shares.  Other preferred security holders were given the option of joining the deal. In fact it was a condition.  Uncle Sam agreed to match US$ for US$ any private sector conversions on these terms.  Some background here and here  and here.  In summary,  preferred securities could be exchanged for common shares at US$3.25 per share.  Citi was trading at approximately half that price at the time.

ADIA didn't participate in the exchange.  KIA did.

For the nominal value of its US$ 3billion of preferred stock, KIA would have gotten 923 million shares.   To reach the US$4.1 billion in sales proceeds mentioned in the articles, KIA would have had to sell at higher than the current US$4.06 per share.  Or  sell something over 1 million shares.  Perhaps it had an additional 86.8 million shares from capitalized preferred dividends?

Two questions remain:

1. Who bought KIA's stock?  At what price?
2. Can ADIA renegotiate its deal with Citi?  (It's unlikely the Citi's price is going to $31 in four months).
   

Global Kuwait to Sign Restructuring Agreement 10 December

AlQabas reports that Global reached agreement on the restructuring with its lenders 6 December.  A formal signing ceremony is slated for 10 December to be accompanied by a party and press conference.  The Governor of the Central Bank of Kuwait, Shaykh Salim AbdulAziz AlSabah,  has been asked to attend.

You'll recall that in yesterday's post on Global Ms. AlGhunaim had said that GIH had reached agreement with all but two of its creditors.

Good news for Global.

2-0 And I Am All "Stoked" Up

A victory and our backs to the 'Spurs.

Perhaps, Santa is responding to my latest letter.

Whatever the case,  another appeal. 

Red and White.

Aidan Birkett - Dubai World - Chief Restructuring Officer - Cultural Biases

An article from Maktoob Business on the cultural and other constraints to be faced by Birkett in Dubai.

If you read the article closely, you'll notice a strong undercurrent:  having made such a hash of things, the locals obviously can't be trusted to work their way out of the problem.   Culturally, they are just not up to it is the message.

So naturally we need to find an ex-region savior - preferably an expert from the West wearing a business suit.  To come in and sort things out.  To set the locals straight.  But will these incompetent locals let him save them from their follies goes the story?  Hence, the hand wringing over the obstacles in Mr. Birkett's path.  

But what should we then make of the recent "performance" in the more sophisticated financial centers  - the  subprime crisis, covenant lite loans, and assorted other manifest absurdities?  Where it should be  noted the amount of funds at risk in the Dubacle is but a rounding error in relation to the larger Western sums.

Will we soon be hearing calls for the dispatch of some sober looking chap in a thaub and ghutra to set the benighted fools in New York, London and other financial capitals straight?  Ever sensitive to the psychology of the less developed world, AA could suggest two Arab bankers who would arrive wearing business suits so as not to disturb local sensibilities in Europe or the States too much.  Dr. Naaman Al Azhari or Hassan Juma.   Let's hope that the locals' quaint but irritating folkways don't get in the way of  either of these khabir's work. 

It's important to be very clear about two things.

First, Mr. Birkett's position. 

He was hired as the Chief Restructuring Officer to come up with a restructuring plan. 

He is not the CEO to whom the CRO reports.  He is not the Board of Directors to whom the CEO reports.  He is not the shareholders to whom the Board reports.

He was not hired as a replacement for Shaykh Mohammad.  Nor did Shaykh Mohammad give him his shares in the company.

He is an employee.  He will give his advice and his client will either accept it or reject it.   In effect he is a mustashaar. 

Second, the capabilities of the locals in the GCC.

It's also important to understand that the people in the region and those in Dubai are no more a collection of incompetent fools than the financial titans in the West.  And no less able to take sage and sound advice.  And, yes, also subject to the same constraints that sometimes result in compromises between what should be done and what can be done.

Other Omani Banks Exposure to Dubai Inc

Again from Reuters.

1. Bank Dhofar - Nothing
2. National Bank of Oman - $22.6 million
   
3. Bank Sohar - US$4.3 million

Since HE Hamood Sangar AlZadjali, Governor of the CBO, said that the total exposure by Omani banks was US$77 million these disclosures plus that by Bank Muscat account for the total.   Again nothing here that will break any of these banks.

Abu Dhabi Commercial Bank US$2+ Billion Exposure to Dubai World

Reuters quotes an unnamed senior executive at ADCB:  "In the UAE, a senior executive at Abu Dhabi Commercial Bank told Reuters the bank had about $2.18bn to $2.45bn of exposure to Dubai World and related entities".

Strangely, this item was tucked away in one which described the US$77 million in exposure by Omani banks.

Ouch!  Painful but not fatal. 

At 30 September 2009 ADCB had some AED20.1 billion (US$5.5 billion) in capital.  It is also 65% owned by the Emirate of Abu Dhabi (which in case you don't know is the one with the money).    Message:  Abu Dhabi won't let ADCB fail.

Nothing on the ADX this morning from ADCB.  It would seem that having made this disclosure to the news media, ADCB would be following up with a public announcement.  Perhaps, this will occur before the ADX opens tomorrow?

Bank Muscat Exposure to Dubai - US$50 Million

OR19.25 million as per announcement on BSE.  Roughly US$50 million.

Not a major issue.  At 30 September 2009 the bank had OR709 million in shareholders funds.  It earned OR 20 million in 3Q09.

A bit of background on exposure of Bank Muscat and its Bahrain affiliate, Bank Muscat International,  to Saad/AlGosaibi.  If you look at Note #5 page 9 in the 3Q09 financials provided via the link above, you'll see a major increase in loans on which interest is being reserved from OR72.4 million  to OR196.6 million.  But this is only 5% or so of total loans.  And the loan loss reserve ("LLR")  covers 81% of this amount so the net uncovered amount is a mere 4% of equity. 

The Central Bank of Oman runs a rather tight ship - which is one of the reasons why Bank Muscat International in Bahrain was set up.  Expect additional provisions at Bank Muscat in 4Q09 to top up the LLR.

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.