Shuaa Capital on Gulfinvest Kuwait and Ahlia Holding Company

Since I posted on this topic yesterday, it's only fair to note that Shuaa has made an announcement on the DFM today.

PRESS RELEASE

SHUAA says no impact from Gulfinvest default

Dubai, 5 April 2010 – SHUAA Capital expects no major financial impact resulting from the statement by Gulfinvest to the Kuwait Stock Exchange regarding its default on a AED 200 million loan to Abu Dhabi Commercial Bank. SHUAA had entered into a guarantee in respect of this loan in 2007, and confirms that it will fulfill its obligations as they become due. As part of SHUAA's diligent risk management process, the Firm took prudent action and made a provision for the loan guarantee at the end of the year 2009. This information has been made available to the market in the financial statements which are available on SHUAA's website.

Since September last year, SHUAA's new management has taken decisive steps to reduce risk exposures emanating from non-core businesses and expects no further material impact or downside risks arising from legacy issues of the Firm. SHUAA has a clear focus on maintaining and developing its leadership positions in its core fee generating businesses.

- ENDS-

The last paragraph is of course true.  

However, I'd like to give a tip of AA's virtual tarboush to the term "legacy issues".  Like "legacy assets" and "non-core" assets, it's one of my favorite financial terms. 

UAE Banks Seek to Change Liquidity Measure - Not A Smart Idea

This sounds like a bad idea.

The fundamenal business of commercial banks is borrowing short and lending long.

If customers suddenly want their deposits back or if interbank money gets hot, it can cause  a world of trouble for an unprepared bank.

So a safety margin needs to be maintained.  

Trusting bankers to do the sensible and prudent thing has been proven false so many times that it should be clear that regulations are required.  On this issue and many others.   And that many times the regulations  will restrict business to prevent bankers from getting themselves into trouble.

What's even more at issue here is that in aggregate UAE banks are already over lent in comparison to core customer deposits.   

Here's Kamco's report with some statistics.  

Also note the very high compound annual growth rate in loan portfolios - a sign of credit distress to come.  Another reason for prudence on this issue.

Shuaa Capital Gulfinvest Kuwait and Ahlia Investment Company

You've probably seen the press reports that Gulfinvest had defaulted on a AED 200 million loan extended to it by Abu Dhabi Commercial Bank which Shuaa Capital had guaranteed. The loan was to partially finance Gulfinvest's purchase of  19.2% of Ahlia Investment Company (since 2007 Ahlia Holding Company) from Shuaa.  As a result of the default, Shuaa is now obligated to pay ADCB AED 200 million.

How did Shuaa get in this situation and what are the consequences?

Sixty second summary:

1. Shuaa has already taken an AED156.6 million provision (in its 2009 annual report) so the financial pain is already felt.
2. Recovery prospects are probably best characterized as difficult given that Ahlia represents roughly 73% of Gulfinvest's assets. 
3. The story of the sale is complicated.  Shuaa seems to have been motivated to provide the guarantee so that it could close the sale.  The profit on which was 26% of 2006 net income.
4. Gulfinvest appears to have paid a significant premium over "market" price for the acquisition.  Almost twice market!

Now the details.

Those with long memories will recall that Shuaa's 2005 acquisition of Ahlia had been controversial in some quarters.  As far as I know, no regulatory action was taken against Shuaa for the transaction.  Here's one article about the ESCA.  And there is nothing on file against Shuaa at the DFSA for this transaction.

In 2006 it sold all of its shares in Ahlia to Gulfinvest, in whom Ahlia was a significant shareholder.

As the below press release from the KSE 29 July 2006 discloses Gulfinvest bought 100% of Emirates Company for Opportunities Ltd #3 which owned 115,730 shares of Ahlia for KD51.9 million.   This is what the press release states but it's clear from Ahlia's 2006 financials that the purchase must have been for 115.73 million shares. As an unrelated (to this story) comment, you might find Note 27 (Related Party Transactions) and 32  (Regulatory Violations)  in Ahlia's report interesting reading.

Here's Gulfinvest's 29 July 2006 press release on the transaction.

[7/29/2006-7:58:14]  ِ(غلف انفست) تشتري "شركة الامارات للفرص المحدودة 3" بمبلغ 51,9 مليون د.ك

يعلن سوق الكويت للأوراق المالية أن الشركة الخليجية الدولية للاستثمار
ِ(غلف انفست) قد قامت بشراء "شركة الامارات للفرص المحدودة 3" بالكامل،
وذلك بمبلغ قدره 51,9 مليون د.ك (واحد وخمسون مليونا وتسعمائة ألف
دينار كويتي).‏
علما بأن "شركة الامارات للفرص المحدودة" تمتلك عدد 115,370 سهم
من أسهم الشركة الأهلية للاستثمار.‏
وعليه، تصبح ملكية (غلف انفست) في الشركة الأهلية للاستثمار 30,17%‏
بشكل مباشر وغير مباشر، وذلك بدل ملكيتها السابقة البالغة 11,03%.‏

If we look at the 2006 annual audited 2006 financials for Shuaa Capital Note 8, we get more details. The sale price was AED 656.744 million and Shuaa recognized a gain of AED 67.821 million.  This represents roughly 26% of Shuaa's 2006 net income of AED 262,43 million.   Strong incentive to "close the deal"!  And maybe take a bit of credit risk.  And maybe in retrospect a bit too much.

What motivated Gulfinvest is less clear.  In the period around the end of July 2006, Ahlia was trading at KD0.240 or so.  A glance above shows that Gulfinvest paid almost twice market price for the shares!!!

Let's go a bit deeper.

In Gulfinvest's 2006 Annual Report Note 2, we see that it actually only paid cash of KD37.9 million.  It financed the remaining KD 14 million by using KD1.7 million in dividends from AIC to pay Shuaa and KD12.3 million though a note payable (presumably to Shuaa) which carried interest of 7.75% p.a.   It also recognized some KD15 million in goodwill on the purchase.

In its 2007 Annual Report, Gulfinvest disclosed in Note 8 that this receivable was settled during 2007 by utilizing a portion of the term loan "availed from a bank in the UAE".  The term loan is for KD14.96 million.  The term loan appears to be some KD2.697 million larger than required.  

Could the difference be interest?  And how can we put a boundary on the interest calculation?  The convenient thing is that Shuaa's fiscal year 2006 ended  31 March 2007.  At that point as per  Note  33 in its 2006 annual financials it is showing an AED 207 million guarantee.   It's a safe bet that this is this loan.  So the maximum period for interest is from August 2006 through March 2007 or 8 months.  At 7.75% that's KD0.634 million.  In rough numbers leaving KD2 million or AED 26 million of apparently extra  (note the qualifier "apparently") debt which Shuaa has guaranteed.

The press reports that Shuaa helped Gulfinvest get the loan from Abu Dhabi Commerical Bank.  The loan was secured by  the pledge of the 19.2% stake in  Ahlia bought by Gulfinvest.  But ADCB also wanted and got Shuaa Capital's guarantee.  Perhaps a sign to Shuaa that it was taking on more credit risk that it bargained for.

With the default and the legal obligation of Shuaa to pay ADCB, some press articles have remarked that this is yet another headache for Samir Ansari, Shuaa's CEO.  However, a glance at Note 33 in Shuaa's 2009 financials (now a December Fiscal year end) shows that it already took an AED 156.643 million provision.   So the headache was recognized long ago and preparations made.  The financial pain has been taken.  Or largely taken.  If the provision proves later to be insufficient, the likely additional amount seems clearly manageable - and not life threatening to Shuaa.

Once it pays off the ADCB loan, Shuaa will step into the shoes of ADCB  with Gulfinvest's  other creditors  to negotiate the debt rescheduling.  

From a quick glance, recovery looks difficult.

As per Gulfinvest's 30 September 2009 financials (the latest I can find) Gulfinvest has KD63.4 million of assets.  Of this total KD46.1 million is represented by Ahlia.   It's now trading at roughly one-tenth of its value on 29 July 2006.  And roughly KD20 million of that now belong to Shuaa.  Other creditors (excluding Shuaa) are some KD34.6 million.

No Motley

"I write it out in a verse -
MacDonagh and MacBride
And Connolly and Pearse
Now and in time to be,
Wherever green is worn,
Are changed, changed utterly:
A terrible beauty is born."

WB Yeats

Aabar Investments - Behind the 2009 Earnings Press Release

You've probably seen press reports on Aabar's 2009 performance.

1. Comprehensive income of AED2.075 billion versus AED727 million in 2008.  Roughly 2.9x.
2. Shareholders' equity up 5.5x to AED12.7 billion versus AED 2.3 billion at FYE 2008.
3. Total assets up 11.7x to AED37.3 billion from AED3.2 billion at FYE 2008.

Let's look a bit closer at Aabar's 2009 performance.   Not a full credit or investment analysis but just some points that caught my eye.

And what better place to look than its 2009 audited financial statements.

Income

1. The company's 2009 income was largely driven by non cash changes in fair value in one investment, Daimler.  That resulted (Note 8) in some AED 9.1 billion of income.  Interestingly as disclosed in Note 9 Aabar incurred an expense of AED6.8 billion from derivatives on the Daimler shares - put options and a collar.  Note 22 (i) describes the collar range.    I'm guessing that  the hedge is in place at the request of the lenders of Term Loan 1 and 2 who financed some AED10.7 billion equivalent for the purchase price.  
2. What's a collar?   Here's a simple definition.  In short a technique to reduce the cost of buying downside protection (buying a put)  by giving away some of the upside (by selling a call).
3. Aabar acquired its 9.1% stake in Daimler in March 2009.  A glance at a stock price chart for 2009 will show that this was the absolute ideal time.  During that period Daimler's shares were at their lowest - in fact at their lowest in the past five years.  Aabar got the shares at Euro 20.27.  At YE the shares were Euro 52.95 and are trading currently at about Euro 36.00. And I suppose in this context one might be tempted to remark that at least it didn't buy Chrysler or GM.
4. In essence then from an income statement perspective, Aabar is currently a "one trick" pony.   As Note 38 states a 10% change in European equity prices results in a change of AED2.04 billion in its income statement.
5. For 2008, the company's income was driven by one event, the sale of Pearl Energy Limited.
6. Of course balancing this fact is that the company adopted a completely different strategy in 2009 so one would not expect it to have fully achieved  its goals in one year. But this is definitely a point for lenders and investors to keep their eyes firmly on.

Equity Increase AED10.4 Billion

1. AED6.7 billion was from the conversion of a mandatory convertible bond issued to IPIC (Aabar's 71.23% shareholder and an Abu Dhabi Government company).  
2. AED1.6 billion from a shareholder loan - also from IPIC.
3. AED2.1 billion from income and related events.

Debt

1. Borrowings increased from AED893 million to AED 15.1 billion or AED14.2 billion.  And since we're keeping score that's 16.9x the level in 2008.
2. What's even more important to note is that on a net debt basis Aabar went from a negative debt (it actually had cash in excess of its debt at FYE 2008) to a debtor position.  Now having debt is not in itself bad.  One would expect an investment company to use leverage.  But leverage is something to watch if one is an investor or creditor.  Especially where investment values are volatile.  Or where they may prove to be illiquid.
3. On that latter point, of the company's six borrowings, five were secured by its investments (Note 22).  Some brave lenders extended a US1.6 billion short term loan facility repayable in 2010.   At a lower rate  than that on the company's secured debt!  ?  Against which Aabar had drawn USD0.6 billion.  As a general rule, it's not the wisest of ideas to be an unsecured lender when the borrower's most liquid assets are pledged to other creditors, including the asset that generated the company's income.   The unsecured creditor is the one who gets "squeezed" first and hardest if there is a problem.  

Other Assets - Advances on Properties

1. Aabar has roughly AED7.8 billion in Advances on Investment Properties.  That's roughly 24% of assets.  There's no descriptive footnote to explain what these assets are and where they are.  I also note that the company depreciates buildings over 67 years (Note 3, page 20) on a straight line basis. 
2. There are some "banking assets" in the consolidated financials related to Falcon.  But creditors and depositors at Falcon have first claim on these.  Probably to the tune of approximately AED4 billion (Due to Banks and Customer Deposits).

Cashflow

1. You knew I'd get here eventually.
2. On a cash operating basis Aabar was negative for both cashflow from operations and cashflow after working capital changes.  Considering the latter (AED1.1 billion)
3. Investing Activities and Financing Activities were in a roughly balance at (AED21.4 billion) and AED22.2 billion. 
4. Leading to an overall decline in cash of very roughly AED300 million.

Other

1. The company has advised that its Board is recommending to the shareholders that they authorize the issuance of AED7.3 billion in convertible bonds  with a AED2.5 per share conversion price (roughly the current trading price).  The bonds would be issued to IPIC.  If the bonds are converted in full,  IPIC will own 85%.
2. Since the bonds are not mandatorily convertible, they do not appear to be legally subordinate to other creditors.  Maybe some attorney out there who practices in the UAE can say if equitable subordination is a UAE-law concept.  (Editor's Note: The mere fact this question is posed here is perhaps a fairly clear sign of a bit of manifest delusion by the writer about the readership of this blog).

Summary - Trends to Watch

1. Ability to diversify income.  Right now as described above the company is a one trick pony. Not something that realistically can be  changed overnight.  But something that should be worked on.
2. Diversification in investments.  Beyond single name concentration (Daimler), the company is heavily skewed to the auto industry and has made some additional investments in this space  - though it has also diversified since then with an investment in Virgin "Space"! 
3. What the additional AED7.3 billion in convertible bonds are used for.  Replacement of debt? Additional investments?    
4. What is the investment philosophy of Aabar?  What sort of portfolio is it building?   Does the portfolio exhibit a common theme?  Or competence resident at the company (Aabar) level?  Is Aabar merely a financial investor?  Or somehow will it be involved in developing value?  Or is it just  buying "stuff" that looks good at the time?  And which might later be discovered to be "non core" assets? There doesn't appear to be a clear statement on investment strategy on Aabar's website.  The last analyst presentation posted on the site dates from 2007.
5. How do Aabar's investments fit in with IPIC's mandate?  As per its website, "The International Petroleum Investment Company, IPIC, was formed by the Abu Dhabi government in 1984, tasked with an ambitious mandate to invest in hydrocarbons industries across the globe."  And how  might that affect its contribution of future cash to Aabar in the future?
6. Use of secured debt.  Are the key cash generating liquid assets pledged to creditors?  What does that mean for investors and unsecured creditors?
7. Cashflow, cashflow cashflow.  The life blood of companies.  "Man" does not live by capital appreciation alone.

Global Investment House Arbitration Award - Madina Says Just the "First Round"

AlMadina and GIH traded press releases today on the KSE re the US$10,011,224 arbitration award in GIH's favor.

AlMadina stated that it was merely a preliminary ruling which it would appeal.  And that the ruling is one for specific performance - that is in exchange for the payment GIH would give AlMadina some assets.  AA;  I'm presuming that AlMadina would rather not have these assets otherwise why the fuss?  That implies a lack of cash or a lack of interest.  The latter presumably over value.

GIH"s press release specified the assets it would transfer:

1. Case 40/2010 with Madina Al Kuwait (City of Kuwait) Holding - All its shares in Saif Company for Project Management in exchange for KD11,575,175 and the KD400,000 penalty/compensation.
2. Case 41/2010 with Al Madina  - 5,000,000 Class B Shares and 1,122,450 Class A Shares in Haits Africa in exchange for the  US10,011,224 and the US$300,000 compensation/penalty.

AlMadina's KSE press release.

[8:41:19]  ِ.ايضاح من (المدينة) بخصوص منازعة التحكيم رقم 2010/41‏
يعلن سوق الكويت للأوراق المالية ان شركة المدينة للتمويل و الإستثمار تود
أن توضح بأن القرار الصادر من هيئة التحكيم في مركز الكويت للتحكيم
التجاري بإلزام شركة المدينة للتمويل و الاستثمار بأن تؤدي لشركة بيت ‏
الاستثمار العالمي (جلوبل) مبلغ و قدرة 10.011.224 دولار أمريكي هو بمثابة
حكم ابتدائي ، و سوف تتخذ الإجراءات القانونية للطعن عليه أمام محكمة ‏
الاستئناف العليا و بالتالي توقف كافة إجراءات تنفيذه لحين البت فيه بحكم ‏
نهائي .‏
هذا و أفادت الشركة بأن المبلغ المشار اليه اعلاه (محل الخلاف) في حال سداده
لن يكون له تأثير مالي على البيانات الماليه للشركة لأن شركة المدينه ‏
للتمويل و الاستثمار سوف تحصل على اصول مملوكة حاليا لشركة جلوبل
مقابل ذلك المبلغ وفقا للاتفاقيه الموقعه معهم في ذلك الشأن ، و هي اتفاقية ‏
وعد منا بالشراء مستقبلا لأصول مملوكة حاليا لجلوبل .‏
هذا و سوف تقوم ادارة الشركة بموافاة ادارة السوق بأي تطورات في هذا الشأن
في حينه .‏
و عليه سوف تعاد الشركة الى التداول اعتبارا ً من اليوم الاحد الموافق
ِ4-4-2010 .‏

GIH's KSE press release.

[8:48:1]  ِ.ايضاح من (جلوبل) بخصوص المنازعات رقم 40/2010 ورقم 41/2010 ‏
يعلن سوق الكويت للاوراق المالية بان شركة بيت الاستثمار العالمي ‏
ِ(جلوبل) افادت بما يلي :‏
بالاشارة الى الكتاب المرسل بتاريخ 14-03-2010 اشارة رقم ع/ب/س/902 ‏
بشان منازعة التحكيم المقامة منا ضد شركة مدينة الكويت القابضة والى كتاب ‏
افصاحنا المرسل بتاريخ 14-03-2010 اشارة رقم ع/ب/س 907 بشان منازعة ‏
التحكيم المقامة منا ضد شركة المدينة للتمويل والاستثمار ،نود الافادة انه ‏
عند تنفيذ قرار لجنة التحكيم وتحصيل جلوبل جميع المبالغ التي اقرتها لجنة ‏
التحكيم فسوف يترتب على ذلك ما يلي:‏
ِ1- المنازعة ضد شركة مدينة الكويت القابضة :‏
الاصل بالحكم تحصيل مبلغ 11,575,175 د.ك متمثل باصل الدين ومبلغ ‏
قدره 400,000 د.ك على سبيل التعويض ،بالمقابل تنقل شركة بيت الاستثمار ‏
ِ(جلوبل) ملكيتها فى حصص شركة السيف لادارة المشاريع (ذ.م.م) المملوكة ‏
بالكامل لشركة بيت الاستثمار العالمي الى شركة مدينة الكويت القابضة ‏
وفى حال تخلف المدين عن الوفاء بالمبالغ المشار اليها عالية ،ستباشر ‏
الشركة باجراءات الحجز التنفيذى على المدين .‏
ِ2- المنازعة ضد شركة المدينة للتمويل والاستثمار رقم 41/2010 :‏
الاصل بالحكم تحصيل مبلغ 10,011,224 دولار امريكي متمثل باصل ‏
الدين ومبلغ 300,000 دولار امريكي على سبيل التعويض ،بالمقابل ‏
تنقل شركة بيت الاستثمار العالمي (جلوبل) ملكيتها فى اسهم شركة هيتس ‏
افريكا ليمتد والبالغة 5 مليون سهم من الفئة ب ومليون ومائة واثنان وعشرون ‏
الف واربعمائة وخمسون سهم من الفئة أ الى شركة المدينة للتمويل والاستثمار ‏
وفي حال تخلف المدين عن الوفاء بالمبالغ المشار اليها عاليه ،ستباشر الشركة ‏
باجراءات الحجز التنفيذي على المدين .‏
 

1-0

On to Tuesday.

Boubyan Bank - Legal Struggle Between Commercial Bank and TID

Two articles in AlQabas today on the latest developments.

To recap late in December 2008, TID and Commercial Bank of Kuwait engaged in a US$200 million repo transaction. involving TID's shares in Boubyan Bank.  TID sold the shares to CBK against US$200 million and was to buy them back in 2009.   TID failed to settle the buyback.  In May 2009 CBK declared tthat he shares were now theirs.  Later they were on the verge of selling them to National Bank of Kuwait for a price reported to be US$420 million when TID got a "restraining" order.

What's at stake here?

1. For CBK an apparent tidy profit.  Also putting aside the profit, it has to be concerned that if this transaction is unwound, it could become part of TID's restructuring.  Not a happy outcome.
2. For TID a loss of highly liquid asset with significant value.  You'll recall that KFH has sued CBK trying to overturn the "sale".  As a participant in TID's restructuring, KFH has a clear self interest in getting as many good assets into TID's estate as possible.
3. For NBK in either case a motivated seller (TID or CBK) and the chance to increase its stake in Boubyan to 60%.   And, as one of my Kuwaiti friends said the other day,  probably the quickest way to increase both prudent business conduct and good corporate governance in the Kuwaiti financial sector is for NBK to purchase a firm.

The first article says that TID announced that the Supreme Court Commercial Circuit refused to hear its appeal of the earlier judgment against TID over the sale of the shares of Boubyan Bank to Commercial Bank of Kuwait.   TID intends to appeal noting that the judgment against it was in the Court of First Instance.  Also it noted that it had succeeded in the past in getting a freeze order on the further disposition of the shares pending resolution of the larger case, though the shares are temporarily registered in the name of CBK.  Some 221,425,059 shares.  At yesterday's closing price of KD0.520 per share, the stake is worth roughly US$403 million.

The second article says that NBK is "open" to working out a solution to the struggle between the two parties.  Apparently, the Central Bank "Monitor" appointed at TID, Ayyad Thafiri (Dhafiri in Kuwaiti dialect) has been exploring a solution.  CBK is reported to say they don't want anything but their money.   NBK is an eager buyer.  Time will tell if this account is correct and if the parties can work out a settlement.

The Investment Dar - Creditor Files Objections to Resort to Financial Stability Law

AlQabas reports that Al Masar Leasing and Investment Company  has filed a formal objection with the special Circuit Court at the Kuwaiti Court of Appeals to TID entering its restructuring plan under the aegis of the Financial Stability Law.

As you'll recall (and if you don't here's the link), any interested party may object to an investment company's use of the FSL within 15 days of receipt of formal notice that the Court had provisionally accepted the debtor's request.

AlQabas says that perhaps other companies will also object -  though it seems to the window for objections should be closing soon.  TID filed its request around 10 March and announced the Court  had accepted its request on 11 March.  Even though it would take some time for the Court to prepare the necessary notification letters and for creditors to receive them, there can't be that much time left.  

The Court gets to make the final decision on any objections. 

As a side note, it appears that the Central Bank of Kuwait has not yet approved TID's 31 December 2008 financials.  From the above link on the FSL, you'll see that the CBK plays a key role in the FSL implementation process.

Saudi Arabia Courts - Beyond Inconvenient

This FT article I suppose settles the debate over whether NY or Saudi Arabia is less convenient.

In one incident in January, a woman, Sawsan Salim, brought a harassment complaint against government officials, including a particular judge. He responded by sentencing her to 300 lashes and 18 months in prison for allegedly visiting a court without a male guardian and making “spurious complaints”. 

Hissa Hilal - Poem on Fatwas and Intolerance

شفت شر يتوايق من عيون الفتاوي ... في زمانٍ حلاله ملقحينه حرام ..
عن وجوه الحقايق لارفعت الغطاوي  ..  بان مسخٍ تخفى تحت ستر اللثام ..
وحشي الفكر ساخط بربريٍ عماوي ..لابس الموت لبس وشد فوقه حزام ..
في حزوم السياسة يرعب الناس عاوي ... يفترس كل نفسٍ طامحة للسلام..
لاذ صوت الحقيقة وانزوى الحق ثاوي ... يوم عند المصالح ذل حر الكلام ..
أمتي لاغديتي بين عاوي وهاوي ... كن عيني تشوفك في شعيب الظلام ..
لا تشبين نار ولا حميتي جلاوي ... ملبدة ما رفعتي بالمواجيب هام ..
بين قومٍ مخيفه مابها حي ياوي ... ما بها إلا ضواري قضمها بالعظام ..
أنتي القصعه اللي تشبعين المقاوي ... كل جارح وضاري فيك يلقى طعام ..
يوم طاوي محبك بالهفا كل طاوي ... فيك ألذ الولايم لـ المنافق تقام ..
هاب راع البعير وذل ولد الشواوي ... جالبك كل جالب يوم سايمك سام ..
آه يا طول ضيمك يا جزور الشفاوي ... يوم الأسحم يقودك لأبرقٍ بالخطام ..
بالجراب المصرصر غاية لكل حاوي ... حيث رقط النوايا لاويه بالهمام ..
نزلوا سهمك اللي ياكلون الرشاوي ... وسط سوق السياسة لين عود حطام ..
كم محبٍ ومخلص لو يزج النخاوي .. عند عينك تغطرس قل شوفك وشام ..
يجي يومٍ يبين فيه صدق الهواوي .. لا بجد كل خاين في نهار الزحام ..

All posts on Hissa now have the label "Hissa Hilal".     

Hissa Hilal Speaks - A Powerful Voice

More on her life story.   Here.

Sometimes the human spirit triumphs over oppression.   Often it does not.

How many bright minds and great talents have been stifled by the Jahiliyya posing as Islam?

All posts on Hissa now have the label "Hissa Hilal". 

New IMF Report on "Topography" of GCC Banking System

Available here.

Zain's Large Dividend - Bailout for Cash Strapped Shareholders

Copyright Stahlkocher

GNU Free Documentation License

You've probably heard about Zain's Board's decision to pay out a dividend three times 2009's profits using the cash from the sale of a substantial portion of its African ventures.  Here's The National's account.

“It looks to me like Zain will increasingly be used as a cash-generation machine,” said Irfan Ellam, a vice president of equity research at Al Mal Capital in Dubai.

Mr Ellam said the “highly unusual” payment of a dividend larger than annual profits illustrated that the priorities of the company were shifting from rapid growth to paying returns to shareholders.

And what has prompted this sudden reversal of corporate strategy?  Why is Zain doing this?

A sudden change in the nature of its cash intensive business?  Are capital expenditures no longer a major need in this business?  No.

A sudden change in plans for expansion outside of Kuwait?  A retreat to a Kuwait only strategy ? No.  At least if I've understood correctly.  I though new management's  new strategy was to focus on expansion in the GCC region.   But maybe the plan is to finance regional expansion with high amounts of debt?  This is after all a Kuwaiti company - and national traditions are important.

So what then is the  answer.

Actually it is much much simpler.

In true Kuwaiti style some of Zain's largest shareholders have overextended themselves in "wise" investments.  They now urgently need cash to bail themselves out. The usual source - more  leverage - is not available for a variety of reasons. 

What does one do when one needs cash but one's friendly banker is sitting on his wallet?

Of course, sell an asset.   And generally that means selling the better ones.  Not much market for those assets with great but yet undemonstrated potential.  And no discernible cash inflow.  In fact, it's probably those latter assets which are the source of one's current cashflow problems.

You know those beloved (to Kuwaiti "investors") investments that are long on hockey stick capital appreciation, short on cashflow and which, of course, have been leveraged to the hilt.  "Wise" investments that require cash to unlock those remarkable returns.  And which require cash to service the loans supporting them.

And so real value, tangible value is destroyed in the (as usual) vain hope of creating value in a cloud.  Or in dealing with the torrential financial rain caused by a cloud "burst".

AlGosaibi v Maan AlSanea - Forum Non Conveniens?

Conveniens or Non?

Supreme Court of New York State 60 Center Street Manhattan New York City

Copyright Djmutex 

GNU Free Documentation License

 

The National has a report today that Judge Lowe seems to be leaning towards accepting Mr. AlSanea's argument that New York is a forum non conveniens.

One of the key arguments for that is that the principals in the case don't speak English well enough to participate in a US Court Case.  One wonders how they managed to conduct their global businesses,  though SMS is known to strike in the most unlikely places.

But could not a counterargument against forum non conveniens be made on similar grounds, arguing from the technical nature of the  matters before the Court.  This case involves rather complicated financial transactions that are relatively rare in occurrence.  Matters that are very likely not to be self evident.  Lots of complicated transactions to boot.

That has two major consequences.

First, with respect to the analysis of and  presentation of evidence.

1. A variety of experts are going to be required to testify on the data and give their analyses.   Many, if not most,  of these documents appear to be in the English language.  Not Arabic. Deal tickets for FX transactions, confirmations of those deals, records of conversations over the Reuters Dealing System.  Applications for letters of credit.  And note the application forms supplied by a Kuwaiti bank to its client in Saudi Arabia are in English!  And the correspondence between The International Banking Corporation (a bank in Bahrain) with the applicant on that letter of credit are again in English!   Copies of documents presented under those letters of credit.    Copies of instructions to transfer funds.  By the look of it The International Banking Corporation ("TIBC") had a high volume treasury.  US$ 6 billion or so  just in April 2009. More than 100 loan and customer files at TIBC.  No doubt multiple loan requests, interest payments, and other correspondence for each client and each loan.   Borrowings by TIBC or other entities with major international banks.  Complicated loan agreements subject to NY or English law.  Billions of dollars worth.   One might argue all highly technical documents.  And lots and lots of them.  Reams of pages.  Few in Arabic.
2. As well there are allegations that  signatures and documents were forged.  That transactions were fraudulent in the inception.  That what appear to be foreign exchange deals are in effect disguised loans.  That letters of credit were really not for trade transactions.  All matters requiring expert testimony to help determine if the allegations have merit.  Matters requiring the utmost precision in analysis. And clarity in testimony.
3. The experts with the greatest ability to speak to these issues are likely to be from the USA or Europe.  Why?  Sadly, these events occur more frequently here.  And thus US or European experts have more experience with these cases.  As a result, they have had more chances to develop their analytical techniques and skills.  And refine them including in the crucible of a courtroom setting.  One thing is for sure.  These witnesses do not speak fluent Arabic.   I'm willing to bet their Arabic is much worse than the purported unfamiliarity with English of some of the witnesses.  If the evidence is not properly presented, what chance is there of a fair trial?  And that applies of course to both parties - defendant and plaintiff.  And it's very likely the questions directed at them and their answers going to be at a much more technical than the questions posed to other witnesses.
4. One might also wonder about the translation of  these highly technical reports and testimony into Arabic.  Is the technical vocabulary as advanced as in English?  Is there an exact word in Arabic for the English term?  Will something be "lost in translation"? A subtle nuance glossed over? A technical explanation as to why a particular finding is justified made incomplete?  Will the translations reflect the specific limits of  the expert's analysis?

Second on the familiarity of the Courts with this sort of evidence.

1. I'd bet that more cases of this nature are held in New York State (USA#1!) than in the Saudi Courts.
2. As a result, NY Judges sitting in the Supreme Court of New York are going to be more familiar with the concepts, with the testimony and the ability to evaluate it.  As are the counsel of both parties and so better able to defend their clients' interests.   All officers of the court well versed and equipped to evaluate the case.  Experienced hands and minds.
3. Will a judge in Saudi Arabia or one of the parties' Saudi counsel have that same knowledge.? I think that's highly unlikely.  In the interests of justice would a judge in New York with  good old Midwestern common sense want to take that chance? 
4. In fact, it's a pretty well known that King Abdullah is engaged in an effort to bring the Saudi Court system out of the Middle Ages.  The Saudi Consultative Council just spent the early part of this year reviewing a comprehensive plan for such reform.  And here I'm talking about competence, training,  systems and equipment, etc.  Not the law to be applied.  But the ability to apply the law.  Judges are being sent abroad for training because they are not felt by the King to be up to the level he believes appropriate.  Additional resources are being provided to ease the burden of judges.  More and trained assistants.  Modernization of facilities, equipment and systems. 
5. Of course, neither of the two parties wants to disparage the Saudi Courts, though I suppose counsel have reviewed closely the comments on Saudi Law and enforcement in the Offering Circular for Golden Belt Sukuk #1 a US$650 million offering undertaken  for the benefit of Mr. AlSanea's company.  They are  after all good Saudi citizens.  Perhaps, one day they might well wind up in Saudi Courts on this or another matter and don't want any excess baggage in the courtroom with them.  Major law firms no doubt don't want to needlessly burn any bridges with negative comments.  But who could argue with the concept of greater familiarity with technical matters?  Familiarity which will give the NY judges an advantage in sifting through the evidence.   If a Saudi has a heart problem and needs mitral valve surgery, his decision to go to Cleveland for an operation would probably be considered a wise one.   The Cleveland Clinic has a world renowned reputation in that field.   Not a condemnation of Saudi medicine.  Just a choice of of the surgeon and hospital with greater experience.  More successful operations performed.
6. What might give pause to the forum non conveniens argument is the famous case in a neighboring Kingdom where when confronted with a forward FX transaction the learned judge asked "Who buys fish in the sea?"   A country whose judicial system is considered more advanced than that in Saudi.

Hissa Hilal - Million's Poet Update - Wednesday's Competition Deferred to 7 April

 

In case you're wondering about the results of last night's competition and the fate of Hissa Hilal.  The competition was postponed out of respect for the passing of Shaykh Ahmed, the brother of the Ruler of Abu Dhabi.  

I understand 7 April is the new date.

All posts on Hissa now have the label "Hissa Hilal". 

Kuwait Stock Exchange Suspends Trading in 15 Additional Companies For Failure to Provide Financials

At 8:48 AM Kuwaiti time the KSE issued the below list of companies whose trading was suspended due to failure to provide financial statements for the period ending 31 December 2009.

While 21 companies appear in the list, 6 of them were previously suspended for failure to provide earlier financial statements.   That means an additional 15 companies have been suspended.

If and when these companies provide the missing financials to the KSE, their trading will be resumed.

In order the companies are:

1. AlAhlia Holding
2. AlBayt/Securities House
3. Industrial and Financial Investments Co.
4. International Investments Group
5. Aref Investment Group
6. The Investment Dar (previously suspended)
7. Aayan Leasing and Investment
8. Gulfinvest International
9. KFIC (Kuwait Company for Financing and Investment)
10. International Leasing and Investment (previously suspended)
11. National Real Estate Co (NREC)
12. Pearl Real Estate (Lu'lu)  (previously suspended)
13. Investors Group 
14. Grand Real Estate  
15. Safat Global (previously suspended)
16. Agility
17. The Sultan Center
18. Saftec
19. Villa Moda (previously suspended)
20. Shabka Holding Company (previously suspended)
21. UFIG (United Food Industries Group)

Using KSE definitions of the main economic sector of activity as per the company's stated purpose, of the suspended companies:

1. 10 are from the Investment Company Sector
2.   5 from the Real Estate Sector.

Though it's a reasonably good assumption that the problems at the other companies - save Agility - are probably largely related to securities or real estate investments.

[8:48:12]  ِ.وقف التداول باسهم شركات اعتبارا من اليوم ‏
يعلن سوق الكويت للاوراق المالية انه قد تم وقف التداول باسهم 21 شركة ‏
وهى الشركات التالية :‏
الشركة الاهلية القابضة (اهلية) ‏
شركة بيت الاوراق المالية (البيت)‏
شركة الاستثمارات الصناعية (ا صناعية) ‏
المجموعة الدولية للاستثمار(المجموعة د) ‏
شركة مجموعة عارف الاستثمارية ‏(عارف)‏
شركة الدار للاستثمار (الدار)(موقوفة) ‏
شركة اعيان للاجارة والاستثمار (اعيان) ‏
الشركة الخليجية الدولية للاستثمار (غلف انفست) ‏
الشركة الكويتية للتمويل والاستثمار (كفيك)‏
الشركة الدولية للاجارة والاستثمار(د للاجارة) (موقوفة) ‏
الشركة الوطنية العقارية (وطنية) ‏
شركة لؤلؤة الكويت العقارية (لؤلؤة) (موقوفة) ‏
شركة مجموعة المستثمرون القابضة (المستثمرون)‏
شركة المشروعات الكبرى العقارية (جراند)‏
شركة الصفاة العالمية القابضة ‏(صفاة عالمي)(موقوفة) ‏
شركة المخازن العمومية (اجيليتي) ‏
شركة مركز سلطان للمواد الغذائية (م سلطان) ‏
شركة الصفاة تك القابضة (صافتك)‏
شركة فيلا مودا لايف ستايل (فيلا مودا) (موقوفة) ‏
شركة الشبكة القابضة (الشبكة)(موقوفة  ) ‏
شركة المجموعة المتحدة للصناعات الغذائية (الغذائية) ‏
اعتبارا من اليوم الخميس الموافق 01-04-2010 ،وذلك لعدم تقديم ‏
البيانات المالية السنوية للسنة المالية المنتهية فى 31-12-2009 ،فى ‏
الموعد المحدد لذلك.‏

Global Investment House Wins Arbitration Cases

GIH announced on the KSE today that it had won both arbitration cases.

1. Against Madina Al Kuwait (City of Kuwait) Holding Company KD11,575,175 plus KD400,000 in compensation.
2. Against AlMadina For Finance and Investment for USD10.011,224 plus USD300,000 in compensation.

KSE announcements (Arabic only)  below.

[11:55:25]  ِ.صدور حكم لصالح (جلوبل)فى المنازعة رقم 2010/40 ‏
يعلن سوق الكويت للاوراق المالية بان شركة بيت الاستثمار العالمي ‏
ِ(جلوبل) افادت ‏بان هيئة التحكيم فى مركز الكويت للتحكيم التجاري فى ‏
غرفة تجارة وصناعة الكويت ،قد اصدرت حكمها بتاريخ اليوم الموافق ‏
ِ01-04-2010 بالزام شركة مدينة الكويت القابضة بان تؤدي لشركة ‏
بيت الاستثمار العالمي (جلوبل) مبلغ وقدره 11,575,175 دينار كويتي ‏
قيمة اصل الدين ،ومبلغ 400,000 دينار كويتي على سبيل التعويض ‏
وستعمل الشركة على تنفيذ هذا الحكم لتحصيل جميع المبالغ التي الزمت ‏
لجنة التحكيم شركة مدينة الكويت القابضة دفعها لجلوبل علما بان ‏
التاثير المالي على بيانات الشركة المالية لا يمكن تحديده فى الوقت الحالي ‏
لانه يعتمد على على ما سيتم تحصيله فعلا .‏
وعليه سوف تعاد الشركة الى التداول بعد عشر دقائق من نزول الاعلان .‏

 

[11:52:35]  ِ.صدور حكم لصالح (جلوبل)فى المنازعة رقم 2010/41 ‏
يعلن سوق الكويت للاوراق المالية بان شركة بيت الاستثمار العالمي ‏
ِ(جلوبل) افادت ‏بان هيئة التحكيم فى مركز الكويت للتحكيم التجاري فى ‏
غرفة تجارة وصناعة الكويت ،قد اصدرت حكمها بتاريخ اليوم الموافق ‏
ِ01-04-2010 بالزام شركة المدينة للتمويل والاستثمار بان تؤدي لشركة ‏
بيت الاستثمار العالمي (جلوبل) مبلغ وقدره 10,011,224 دولار امريكي ‏
قيمة اصل الدين ،ومبلغ 300,000 دولار امريكي على سبيل التعويض ‏
وستعمل الشركة على تنفيذ هذا الحكم لتحصيل جميع المبالغ التي الزمت ‏
لجنة التحكيم شركة المدينة للتمويل والاستثمار دفعها لجلوبل علما بان ‏
التاثير المالي على بيانات الشركة المالية لا يمكن تحديده فى الوقت الحالي ‏
لانه يعتمد على على ما سيتم تحصيله فعلا .‏

ABC US$1.11 Billion Rights Offering: Libya Takes 70.9%

As per the announcement on the BSE today, ABC's Rights Offering was successful - the full US$1.11 billion was raised.

No surprise there.  The Libyan Central Bank underwrote the Offer.  In addition to its own entitlement under the RO of 327,738,545, it purchased an additional 376,979,361 shares - which were not taken up by other shareholders under their entitlements.

All in all the Libyan shareholders in ABC (Central Bank of Libya, LAFICO,  and LFB) purchased 70.9% of the total offer.

It would appear from that announcement that LCB took up ADIA's full 305,889,306 share entitlement plus 99.9% of the 71,180,797 offered to non founding other shareholders who are mostly retail investors.

Since ABC trades below nominal value and by Bahraini Law Rights Offerings must be at nominal value, there was little likelihood that this latter group would take up their allotments under the RO.  Why pay US$1.00 for shares trading in the market at US$0.605?

From the data presented it appears that KIA bought its full allotment of 329,534,084 shares. 

As a result

1. Libyan entities will now own roughly 48.5% of ABC versus 36.3% prior to the Rights Offering.  
2. ADIA's share will drop from 27.6% to  17.7%.   
3. KIA's shareholding remains 29.7%.

A copy of the Rights Offering Prospectus is here.  Page 12 provides details of pre RO holdings and some projections for post RO holdings - which have turned out to be essentially correct.

In terms of effective purchase price (considering the CBL's US$110,000,000 underwriting fee - to be paid from the proceeds),   the Libyan entities (considered as a group) got their 780,375,173 shares at roughly US$0.86 per share.

As noted above, ABC is currently trading at US$0.605 per share., though this is not really reflective of intrinsic value.  The BSE is not a liquid market.  Compounding that fact is that the free float on ABC was 6.4% pre Rights Offering.  So on both scores there's not much price discovery in the market.  Relatively minor transactions on either the buy or sell side can move the price dramatically.  The situation will be even worse after the Rights Offering.  The free float will drop to roughly 4.1%.

Earlier post here.

1-1 and Now 2-2

It sure beats losing.  But not much else.

Potential Merger of the ADX and DFM - Beginning of the End of Dubai as a Financial Center?

You've probably seen the press reports about the discussion of a potential merger of the Abu Dhabi Exchange and the Dubai Financial Market.  Those I've seen outline the compelling economic case for the merger.  There just isn't enough volume to support two markets in the UAE.  While not as dire a case as that for the merger of Nasdaq Dubai with the DFM, there is strong rationale:  consolidation will lower costs.

Not as often directly emphasized but much more important is that a merger would increase liquidity for both issuers and investors.  A robust capital market in both equity and debt will foster greater economic development.

All well and good. 

But I haven't seen any discussion of what perhaps is another key issue.  Who will control the merged entity?   And  the consequence of that control.

The old saying is that cash is king.  And the guy with the cash  is primus inter pares among royalty. 

Before its recent problems, Dubai had a constrained cashflow from resources and operations  (as opposed to borrowed funds).  That situation has been made even worse by the demands of the DW rescheduling and other likely problems already on the horizon or just below.  A merger offers Dubai the chance to monetize some of its foreign assets (LSE,  Nasdaq) to meet its cash flow needs as it deleverages.  

Abu Dhabi is flush with cash.  And its credit is sterling with bankers and investors.  It has a much stronger hand.  It can make significant new investments - acquisitions and build outs.  It can, if it wishes,  use this opportunity to accelerate a shift in the economic landscape of the UAE.  To become the financial center.

Control of the merged exchange would be more than a matter of prestige, though one shouldn't discount the ego factor as a motive in transactions.  Prior to the takeover by Chemical Bank, Chase Manhattan Bank  was in discussion with Bank of America about a merger.  The deal foundered on the "substantial" issue of where the merged entity's headquarters would be.  San Francisco or New York. Chase wound up as prey not predator.  BofA in less tender hands.

Control of the merged exchange will affect the financial landscape in the UAE.   In rather broad brush strokes we can characterize the current financial situation in the UAE as Abu Dhabi  for project finance and Dubai for more market oriented financial transactions.  

But  if the center of gravity for the  merged stock market shifts to  Sowwah Square  / Sowwah Island, then how seriously does this undermine Dubai's dream of being a full service financial center?

I think fundamentally. 

In such a situation what is the appeal of Dubai?

It's probably not going to be access to issuers at least for several years.  Access to investors?  Maybe.  But if the economy in the Emirate has a slow recovery as is anticipated and Abu Dhabi is relatively speaking booming, where will the interests of investors and bankers be focused? 

To be clear, this isn't a prediction of an immediate reversal of Dubai's role as a financial center.   A financial Armageddon.  Nor is it meant as the sole variable to explain a shift to Abu Dhabi from Dubai.  There are other factors as well.

Rather it's about a shift in emphasis and slower growth in Dubai vis a vis the financial center in Abu Dhabi.  Not the "End"  but the "Beginning of the End".

Think of  Philadelphia and New York.  Within a five minute walk in Philadelphia, you can see the impressive buildings of the first two Banks of the United States.  Once the undisputed financial and commercial capital of the USA, Philadelphia was eclipsed by New York.  Not overnight.  And it still retains its own role and stock exchange.

Nakheel Property Holders Seek Legal Help

The National reports that some 700 investors in Palm Jebel Ali are unhappy with the alternatives presented under Dubai World's restructuring plan and may hire a law firm to act as advisor.  

They seem to be looking to secure the following:

1. A firm schedule for completion to ensure a quick handover
2. Assurance that quality and design standards won't be compromised to save project costs
3. Recalibration of future installments to actual construction progress.  The article goes on to say that on average investors have paid in about 30% of the total purchase price.

Personally, I'd be concerned about the effects on maintaining project and building  quality in a stop-start project, particularly if there is a constraint to keep the costs within the original pricing.  Unless of course costs have come down significantly from then.

As well, it would seem natural that given the economic downturn some of the non residential attractions on the island might be scaled back or eliminated. 

Think I might be inclined to take my credit to an existing or almost built project, especially if the credit was against current market value instead of "rack rate".

Perhaps, The Real Nick could weigh in with a comment.

"Dubai World Property Plan Not a Quick Fix" UBS

Copyright The Truth About

Creative Commons Attribution-Share Alike 2.0 Generic License

The National has an article with the above headline and this lead paragraph.

If you thought the troubles in Dubai’s property market would be cleared up overnight if Dubai World successfully restructured its debt, you may want to think again.

Wise words indeed.  

To which AA might add, that if you did, you might want to consider turning over your financial affairs to someone more reality based.  That being said, if you do execute a power of attorney, choose your "wakil" wisely. 

In which case the following word's from the Bahraini Newspaper AlBilad may offer some helpful guidance:   لا تدع زوج ابنتك يقود سيارة عائلتك

Bahrain - Already Big Money Laundering Scandal to Get Even Bigger?

BrokenSphere /WikiCommons 

Creative Commons Attribution ShareAlike 3.0

You might wonder how the current money laundering investigation could get any bigger.  After all, a former senior member of the Government has been interrogated by the Bahraini authorities in connection with allegations of money laundering and has been removed from his ministerial duties.  Whether the latter is just for the duration of the investigation or is permanent is not clear to me.

A couple of things seem to be pointing that there's a lot more to come in this story.

Before we go too much further, this is an appropriate place to note that what follows is based on  accounts and rumors circulating in the market. So a healthy does of skepticism is warranted.

It seems the number of financial institutions and other entities alleged to be involved  in money laundering is fairly extensive. The Al-Seyassah article I quoted in an earlier post has this language:  دائرة موسعة من الجهات شاركت في غسل الاموال

A recurring theme in these accounts is that the current investigation directly resulted from the two forensic investigations that the CBB launched into TIBC and Awal Bank last year.  That in particular the investigation into Awal Bank provided the loose thread that when pulled led to larger revelations.   The nexus is supposedly a Bahraini bank with significant ownership by two banks from a country in the region through which Awal made some transfers reportedly through Azerbayjan.  If the accounts are correct (and there's no way to know for sure at this point), further checking of transfers through that bank uncovered other transactions the Bahraini Government decided to pursue.   And the current investigations concern those other transfers.

As you'll recall the Hibis Report which was filed in the Supreme Court of New York in support of the AlGosaibi's claim against Mr. AlSanea had Evidence Case File #3 redacted.  From a later exhibit which was not removed, it appears this section dealt with allegations of money laundering.

And here it is appropriate to note that Mr. AlSanea has vigorously denied any wrongdoing in any of his businesses or conduct thereof.  And that as well the former Bahraini Minister also denies any wrongdoing.  The legal process in Bahrain is the proper forum in which legal determinations will be made.  At this point, we should allow this process to proceed and defer any judgments until the Court speaks.

Dubai World Rescheduling - HSBC Supports the Proposal

The National quotes Stuart Gulliver, HSBC's Chairman for the Middle East and Europe as saying that HSBC would sign the proposed debt restructuring.

He also said that each bank knew the conditions applicable to the restructuring loans. 

Perhaps, the banks who claimed to be in the dark are being represented by the same officers who made the original loans.