The Investment Dar - More on 2008 Financials: No Audit Opinion

TID released a formal announcement on the KSE today (text below, Arabic only) about its fiscal 2008 financials.

The major piece of new "news" was that TID's auditors had not given an audit opinion.  Technically, what they've done is issue a "disclaimer" stating that they were unable to obtain sufficient information in order to render an opinion.

Two reasons cited:

1. TID's ability to function as a going concern depends on the rescheduling and it is unclear whether that will go forward.
2. TID is engaged in a dispute over ownership of shares in a bank listed on the KSE (that's Boubyan Bank) with another Kuwaiti bank (that would be Commercial Bank of Kuwait).  TID's 2008 consolidated financials carry the BB shares at KD142 million while the value of the debt related thereto is KD75 million.   And TID's auditors have been unable to determine if an adjustment to TID's financials is warranted.  

Regarding the latter, in the worst case, if Commercial Bank of Kuwait were to be judged the owner of the BB shares, then TID would have to recognize a loss of some KD67 million (roughly one-third of its 2008 capital of KD201 million).  And of course if TID were judged to be the owner, then there would be no adjustment to its financials.

Of course 2008 is long ago and far away in terms of judging impact.  What will be critical will be the path of asset values since 31 December 2008.

Here's the KSE announcement.

[12:35:19]  ِ.مجلس ادارة (الدار) يوصي بعدم توزيع ارباح عن السنة المنتهية في 31-12-08 ‏
يعلن سوق الكويت للأوراق المالية بان شركة دار الاستثمار ‏
قد حصلت على موافقة بنك الكويت المركزي على بياناتها المالية
للسنة المالية المنتهية في 31-12-2008، بتاريخ 13-04-2010‏
وقد احيط بنك الكويت المركزي علما بمضمون البيانات المالية الختامية المجمعة
للشركة عن السنة المنتهية فى 31-12-2008 الواردة الى بنك الكويت المركزي ‏
وفق كتاب الشركة المؤرخ فى 15-03-2010 ،اخذا بالاعتبار ما ورد فى ‏
تقرير مراقبي الحسابات وكما هو مبين فى الايضاحين (2,16) من ان قدرة ‏
المجموعة على متابعة انشطتها طبقا لمبدأ الاستمرارية تتوقف على اعادة جدولة ‏
شروط التزاماتها مع الدائنين ،وكذلك ما جاء فى تقرير مراقبي الحسابات ‏
بشان "عدم القدرة على ابداء الراي" من انه نظرا لجوهرية الامور ‏
المذكورة بفقرات اساس عدم القدرة على ابداء الراي ،فانهم لا يبدون ‏
رايا على هذه البيانات المالية المجمعة .‏
وفقا لما يلي:‏
ِ1) نتائج أعمال الشركة:‏
البند             السنة المنتهية في 31-12-08   السنة المنتهية في 31-12-07‏
الربح(خسارة)(د.ك)              (80,313,260)        132,037,980 ‏
ربحية(خسارة)السهم(فلس كويتي)   (87,45)               140,58 ‏
اجمالي الموجودات المتداولة     365,796,380       659,501,254 ‏
اجمالي الموجودات              1,200,531,431    1,259,618,796 ‏
اجمالي المطلوبات المتداولة      817,461,744       644,627,427 ‏
اجمالي المطلوبات                999,118,504      871,989,478 ‏
اجمالي حقوق المساهمين         201,412,927       387,629,318 ‏
بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 8,135,295 د.ك
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 4,560,000 د.ك
ِ2-التوزيعات المقترحة :‏
قرر مجلس ادارة الشركة عدم توزيع ارباح عن السنة المالية المنتهية فى ‏
فى 31-12-2008 ،علما بان هذه التوصية تخضع لموافقة الجمعية العمومية ‏
والجهات المختصة .‏
علما بان تقرير مراقب الحسابات يحتوي على اساس عدم القدرة على ابداء الراي:‏
ِ-كما هو مبين في الايضاحين (2.16) من هذه البيانات الماليه المجمعه : بتاريخ
ِ8-10-2008 تخلفت الشركة الام عن سداد تسهيلات وكاله ولاحقا توقفت عن
سداد كل الديون و الارباح المتعلقه بها المستحقه لصالح الدائنين ( البنوك و ‏
المؤسسات الماليه و اخرون ) بعد تاريخ التخلف عن السداد اعلاه : و قد أدى ‏
ذلك التخلف عن السداد الى ان اصبحت الشركة الام متخلفه عن سداد ديونها
وفقا لشروط التخلف عن السداد المنصوص عليها في اتفاقيات الديون الاخري
و بالتالي ادي ذلك الى عجز المجموعه عن الوفاء بإلتزامات ديونها بالكامل .‏
كذلك قام بعض الدائنون برفع قضايا لدى محاكم الكويت متضمنه اشهار افلاس ‏
الشركة الام للحصول على مستحقاتهم بالاضافه لذلك بلغت صافي خسائر ‏
المجموعه 80 مليون د.ك تقريبا عن السنه المنتهيه في 31-21-2008 كما توجد
مخالفه لشروط الاتفاقيات المبرمه مع الممولين مما يقتضى السداد الفورى لتلك
الالتزامات .‏
هذا و تعمل المجموعه حاليا على التفاوض مع الممولين لاعادة هيكله ديونها ,‏
و قد اصبحت قدرة المجموعه على متابعه اعمالها على اساس مبدأ الاستمراريه ‏
تستند بشكل كبير على النجاح في هذه المفاوضات . لم نتمكن من الوصول الى
أدله تدقيق موثوق فيها و كافيه لتحديد مدى قدرة المجموعه على الوصول الى ‏
اتفاق بشأن اعادة هيكلة الديون المستحقه عليها .‏
ِ- كما هو مبين في ايضاح رقم (12) من هذه البيانات الماليه المجمعة , يوجد
نزاع قضائي مع بنك محلى لإسترجاع ملكية المجموعه في بنك كويتي مدرج ‏
في سوق الكويت للأوراق الماليه و مصنف ضمن الاستثمارات في شركات
زميله بقيمة دفتريه بلغت 142 مليون د.ك تقريبا في البيانات الماليه المجمعه ‏
و قد بلغت الوكالات الدائنه المتعلقه بذلك الاستثمار بالبيانات الماليه ‏
المجمعه 75 مليون د.ك تقريبا . لم نتمكن من الحصول على ادلة تدقيق كافيه ‏
و موثوق فيها لتحديد ما اذا كانت هناك اية تسويات قد تكون ضروريه على ‏

البيانات الماليه المجمعه نتيجة لذلك .‏

The Real Nick on The Real Estate Sector in Dubai

A comment from The Real Nick to one of my posts that deserves a bit more prominent place here at this blog.

And considering my last few posts, perhaps a new feature here at SAM - informed commentary.

TRN's commentary is immediately below.

The fear of losing face seems to be stronger than reason (nothing new there..). There is no way Nakheel can resurrect the 'vision'. Even if the guy who "wrote [a poem] on water" around Palm Jebel Ali continues to wish it...It's over, and out.

The consolidation may not look brutal to you, from a distance. Here on the dusty ground, it looks scary: Thousands in the real estate and construction have lost their jobs and continue to lose. Contractors have stamina. They'll not shut up shop at the first hiccup but should be able to sustain one or two years without work. Many have done that, but the two years are over now and Abu Dhabi for one hasn't pulled the finger out. Watching AD make decisions is like watching paint dry. Only less fun.
And one has to remember that this industry accounted for way more than 30% of Dubai's economy. My boss, who's been around the Dubai construction /development business for thirty odd years, reckons that we are staring into an abyss of seven to ten lean years (supermodel style lean; anorexic style lean).
You can make this up on your fingers: Add the tidal wave of oversupply which is about to break on our real estate shores and swamp if for years, and the pre-contract (pre-construction) timeline of any new substantial projects of two/three years and then a construction period of three years. I.e to do big things you need 5/6 years and you'd be a fool do start even thinking about anything before 2012/2013 /2014...

Nakheel, khallas!

Global Investment House Strongly Denies Khalid AlWazzan Resignation

As noted by a reader in a comment to my original post, GIH has strongly denied news of Mr. AlWazzan's resignation.

Below is the announcement on the KSE.

[9:5:1]  ِ.(جلوبل) تنفي ما نشر فى احدى الصحف المحلية ‏
يعلن سوق الكويت للاوراق المالية بان شركة بيت الاستثمار العالمي ‏
ِ(جلوبل) تنفي ما نشر فى احدى الصحف المحلية حول استقالة ‏
السيد خالد الوزان من عضوية مجلس الادارة ،وتفيد الشركة بان الخبر ‏
عار عن الصحة جملة وتفصيلا .‏

Burgan Bank Capital Increase

Here's the straight story on Burgan's capital increase regarding the remaining 15% not placed earlier.

Existing shareholders were given the right to subscribe between 13 April and 27 April.

The general public can subscribe for any remaining shares 2 May through 15 June.

And here's a link to a BB Investor Presentation on itself and its strategy.

Idiocy Knows No Borders: Guide Dog Denied Access to Restaurant Due to Imagined Sexual Preference

You cannot make this stuff up.

At least I suppose an earthquake may have been avoided.

Global Investment House - Khalid AlWazzan Resigns from Board

Update 27 April: GIH denies resignation story.  New post here.

AlQabas reports that Khalid AlWazzan is resigning from Global.  He's been on the Board for at least 10 to 12 years - and Vice Chairman for at least 2 to 3.  Ostensibly, stepping down now that the ship has sailed safely through the storm. 

Anyone out there with any thoughts on the reasons for his resignation, please post a comment.

The article also notes that GIH has been negotiating with creditors to participate in its capital raising exercise through a debt conversion.

And that other changes in the Board are expected following the capital raising.  

The Board is currently rather a select group of only five:  Ms. AlGhunaim, Mr. Al Wazzan, Shaykh Abdullah J.A. AlSabah,  Mazouk N. AlKharafi, and Alan Smith (an old China hand).

Gulf Bank - 25% (?) of Loan Portfolio Doubtful

Update 27 April:  A reader has pointed out that I overlooked the collateral held by GB and outlined in Note 26 of the 2008 fiscal year end financials.  "Problem" solved.  Clearly, it really pays to read the entire financial report.

AlWatan carries remarks from Michel Accad, CEO of Gulf Bank, in which he states that 25% of GB's loan portfolio is doubtful of collection.  On the positive side GB has reserves equal to 87% of the doubtful amount.

In discussing 1Q10 results he noted the that the operating results included KD14 million from the sale of the investment portfolio, making GB's recurring earnings about KD30 million, noting that KD25 million  to KD30 million was an expected quarterly run rate.  

He also said that he anticipates that GB won't require provisioning (presumably heavy provisioning) in the second half of the year.

I must confess I don't follow the math here. 

Using 25% doubtful portfolio, GB has heavy provisioning for at least the rest of the year. Unless Michel is referring to only a part of the portfolio.  Using 87% cover also suggests that provisioning will require more than one quarter.  If we assume that devoting 2Q10's projected KD30 million brings provisions to 100%, then doubtful loans are roughly 15% to 16% of the gross portfolio.  I suppose another explanation could be that GB is not targeting 100% cover of doubtful loans.

Here's the analysis.

Since detailed information on the loan portfolio at 31 March 2010 is not available in GB's 1Q10 interims,  we'll have to use Fiscal 2009 data as our analytical starting point.  

At 31 December 2009, GB's gross loan portfolio was KD3.787 billion and Loan Loss Reserve ("LLR") KD0.522 billion.  So net loans were KD3.266 billion. 

At 31 March 2010 the net loan portfolio was KD3.163 billion.  GB added roughly KD43 million to its LLR, thus a reasonable assumptions is that the LLR at 31 March was KD0.565 billion.

If this represents 87% cover of doubtful loans, then doubtful loans are some KD0.649 billion.  However, 25% of Gross Loans (estimated as the sum of  KD3.163 billion net loans plus the LLR of KD0.565 billion) = KD0.932 billion.

Using the lower estimate of doubtful loans of KD0.649 billion, then GB is KD84 million short.  Which would seem to imply provisioning away most of the rest of the year's income using a KD25 million to KD 30 million quarterly run rate.  Obviously with the higher KD0.932 billion estimate, heavy provisions continue into next year.

If we assume one more quarter of provisioning income will do the trick, (as implied by Michel's statement) then that would take loan provisions to KD0.595 billion.  That's more like 15% to 16% doubtful loans.

Anyone out there with an explanation or comment, please post.

Adeem Investment Company - The Work Goes On (and On and On)

The work goes on, the cause endures, the hope still lives, and the dream shall never die.

Since last November.   From the time this is taking, this is indeed a monumental project.  And AIC is working quietly, I can't find a news report at all about them.

Anyone "up North" who can shed some light?

ALZumorrodah Investment: Gulf Bank and Oula Fuel

AlWatan has a report in its Monday issue about the heavy trading in Gulf Bank and Oula Fuel shares. On Sunday some 7.5 million GB shares worth roughly KD2.8 million were traded in 130 contracts while 7.2 million shares of Oula worth KD3 million in 206 contracts.

AlZumorrodah (literally Emerald) denied any connection with the deals in GB yesterday saying that it was a strategic investor in GB.  And would be asking the Central Bank next week to allow it to increase its share from 8.6% to 15%.

The company noted that it had undertaken some large trades last week between two investment groups - essentially shares in GB against Oula Fuel.  Yesterday AlZ was again trading apparently for that same group but this time selling shares in an investment company to buy shares in Oula Fuel for that group.

As per AlZ's website its main shareholders include AlZumorrodah Holding, Gulf Bank and Kamco.  Respective percentages are not disclosed.

AlZumorroda Holding discloses its shareholders as:   

1. Dr.Maytham Mahmoud Haji Haider
2. Mansour Mahmoud Haji Haider
3. Murdiah Mahmoud Haji Haider
4. Mahmoud Haji Haider Abdullah  

Neither company has current financials on its website.

Gulf Bank First Quarter Earnings - Massive Provisioning

AlQabas carries comments by Mr. Ali Rashid AlBadr, Chairman of GB in its Monday issue.

He said that 1Q10 operating profit was some KD44.3 million versus KD15.6 million in 1Q09.  This year's operating profit included KD14 million from the sale of investments.  Mr.AlBadr said that the Board decided to devote almost all of the first quarter's operating profit to strengthening the loan loss reserve to cover certain existing facilities.  Average capital adequacy is up to 17.4% from 15.9% at FYE 09.

He noted that the economy was turning and that the bank's prospects for the remainder of the year looked good.

During 2009, GB took net provisions of some KD111.1 million = KD148.7 mm specific provisions (for identified weak credits) less reversals of KD 39.6mm from general provisions and loan write offs of KD2.1 mm.  1Q10 provisions are roughly 30% of full year 2009, which suggests that GB has some provisioning catch up to do.  Perhaps, the remainder of its AlGosaibi/AlSanea exposure which the Central Bank has mandated must be provisioned at 100% by FYE 2010 as well as local Kuwaiti companies.  FYE09 LLR to Gross Loans stood at 13.8%.  So there is some real pain there.

Gulf Bank First Quarter Earnings Much Lower Than Expected

Gulf Bank announced its 1Q10 earnings on the KSE today (announcement, Arabic only, below).

Most news reports have focused on the sharp drop in net income from 1Q09:  KD524,000 for 1Q10 versus KD1,593,000 in 1Q09.  As of yet unexplained.

Quite a dramatic drop.

But, a couple things more.

1. Even at its old 1Q09 run rate, the ROE is rather dismal. And this is perhaps the more important story than the fluctuation.  How and when does GB achieve a reasonable ROE?  I'd note that NBK (and perhaps that's an unfair comparison) has a pro-forma projected 2010 ROE of more than 10 times GB's 2009 run rate.  And 32x 2010's projected run rate.
2. What appears not to have been noticed is that despite recording a modest profit in 1Q10, GB's shareholders' equity is down roughly KD9,977,000 from 31 December 2009.  Not a large amount as a percentage of equity, but 19x 1Q10 profit!

  

[8:45:52]  بلغ ربح (خليج ب) 524 الف د.ك لل3 أشهر المنتهية في31-03-2010‏

يعلن سوق الكويت للأوراق المالية أن مجلس ادارة بنك الخليج (خليج ب)‏
قداعتمد البيانات المالية المرحلية للبنك للفترات المنتهية  في 31-03-2010 ،
وفقا لما يلي:‏
ِ1) الفترات الحالية:‏
البند      ال3 أشهر المنتهية في 31-03-10    ال3 أشهر المنتهية في 31-03-09‏
الربح (د.ك)                      524.000                   1.593.000‏
ربحية السهم(فلس كويتي)           0                                   1‏
اجمالي الموجودات المتداولة    2.877.635.000            3.680.674.000‏
اجمالي الموجودات           4.515.779.000              5.134.144.000‏
اجمالي المطلوبات المتداولة    3.966.175.000             4.462.353.000‏
اجمالي المطلوبات            4.118.427.000              4.710.893.000‏
اجمالي حقوق المساهمين      397.352.000                  423.251.000‏
علما بأن بنك الكويت المركزي قد وافق على هذه البيانات المالية بتاريخ ‏
يوم الخميس الموافق 22-04-2010.‏
بلغ اجمالى الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 1.596.000د.ك ‏
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 5.007.000‏
د.ك .‏

Boubyan Bank - Time to Sell?

So say Saud and Naser at AlphaDinar.

Some very interesting implications for 

1. TID, CBK and the creditors of TID
2. Existing shareholders with the upcoming Rights Offering

Aref Investment Company Putting Final Touches on Restructuring Plan Lauds KFH's Help

AlWatan quotes Ibrahim AlKhazzam, Managing Director, of AIG that they are putting the final touches on their restructuring plan.  As envisioned AIG will make its first principal repayment 18 months from signing to give the company sufficient time to recover and implement its restructuring.  The plan is to restructure both liabilities and assets (AIG is a significant creditor as well as a debtor).

He noted that liabilities were only 1.9x equity - what he described as a low ratio.  Asset values were increasing.  He cited a particularly bright future for Aref Energy - with more than KD30 million in cash and no debts - ready to participate in the Government's Five Year Development Plan.

He expects to finish the restructuring in two months - noting that international consulting firms were helping in the process.

As I noted in an earlier post, KFH owns 53% of AIG and to the extent that it puts its financial and market muscle behind AIG, the company should be able to move forward.

Mr. AlKhazzam outlines in this article just how much KFH has done.  

First, there was the KD132 million loan extended so that AIG could pay off foreign creditors and investment funds - greatly reducing the complexity of negotiations by eliminating a potentially troublesome set of creditors.  And as well demonstrating a very strong vote of confidence by KFH.

What was news to me was that KFH has been not only supporting AIG but its associated companies.  Specifically named were Munshaat Real Estate Projects (25% ownership by AIG.  KSE Stock #433), Aref Energy Holding (72%, KSE #627), Sukuk Holding (49%, KSE #239).  He mentioned that KFH's 100% subsidiary Liquidity Management House was helping AIG negotiate with lenders.

Boubyan Bank to Reopen Rights Offering

AlWatan reports that BB's shareholders will be asked to approve the reopening of its partially successful Rights Offering for the roughly 15% shares that weren't placed earlier.  This at an ordinary general shareholders meeting 29 April.  The subscription period will be 2 May through 9 May for shareholders of record as of 12 January 2010.

Earlier post here.

Commercial Bank of Kuwait Weekly Board Meetings -- Priority Negotiations with Distressed Clients

AlWatan reports on the dynamic goings on of Commercial Bank of Kuwait's new board.  Almost weekly meetings to discuss and implement strategy.  A new temporary CEO, Luay Fadhil Muqamis, has been appointed.  Priority given to negotiations with distressed clients (unable to pay).

After reading this, it seemed to me as though the Chief Editor of AlWatan has a friend inside CBK. Or some other close relationship.

The Investment Dar Clears Another Hurdle in Its Restructuring

Citing a well connected but unnamed source, AlQabas reports that the Financial Stability Law Court has issued a decision halting all legal cases against TID.  As you'll recall the FSL procedure is that upon the receipt of a request from an investment company (accompanied by all necessary documents), the FSL Court issues a temporary stay and notifies creditors who have a limited time in which to submit their objections.  That step has come to an end with the Court upholding TID's entry under the FSL process.

So while as AlQabas headline says "TID Breathes a Sigh of Relief After the Freezing of Court Cases Against It".  The next step is for the Central Bank to study the proposed restructuring plan and report back to the Court on whether it supports it or not.

I think the CBK will approve the plan.  It's an important step in restoring financial stability to the country.  So if it has a reasonable chance of success, the CBK will probably approve.

As well, a decision by a Kuwaiti Court does not necessarily stay court actions in other jurisdictions unless those jurisdictions are convinced that the proceedings in Kuwait under the FSL are equivalent to their own bankruptcy/insolvency/restructuring regimes.  Again I think other jurisdictions will give Kuwait the benefit of the doubt.

AlQ notes one wrinkle and that is that ("Islamic") murabaha holders had conditioned their acceptance of the restructuring on their being given priority of payment over other creditors given the difference of their position versus other creditors.  Essentially that argument was that they had deposit or trust arrangements as discussed in an earlier post.

The article goes on to note that the recent travel disruptions in Europe had caused the postponement of Creditors Co-ordinating Committee meetings.  The CCC will meet on Monday and then with TID with on  Tuesday.  Venue Dubai.

Topics are the possibility and modality of the accommodation with Commercial Bank of Kuwait regarding the Boubyan Bank shares.  Creditors are reportedly concerned about two things.  First, that time is a factor.  A key concern is that if a fixed price contract is struck, BB shares may decline in value before implementation.  Then the parties interested in buying (note the use of the plural) will decide to pick up the shares in the market rather than pay above market.  Second, the creditors want to discuss getting their cut of the proceeds from any sale. 

Other topics are the role of the CCC in the period while the FSL process moves forward (CBK review, approval, etc). A process expected to take several months. And whether the Chief Restructuring Officer should be given additional duties for the implementation phase.

Previous posts can be accessed using the labels "The Investment Dar" and "Financial Stability Law".

Aref Investment Company KD127 Million in 2009 Losses Restructuring Ahead

AlQabas reports that reported Fiscal Year 2009 losses of some KD127 million (which is roughly KD20 million more than Aref's paid in capital).

The latest financials on the KSE are 30 September 2009.  At that point it had KD57 million in losses for the year.  Adding another KD70 million takes shareholders' equity to roughly KD175 million as opposed to KD304 million at fiscal year end 2008.  There are sufficient reserves to offset the losses and thus eliminate the legal problem of retained losses exceeding a substantial amount of paid in capital.  The possibility of a capital increase is also mentioned.

More troublesome for the company is the fact that current assets are only KD41.7 million versus current liabilities of KD347.6 million.

Current management is said to be working hard to clean the books. To draw a line between the old board and the new so that responsibility can be established.

KFH is credited with helping solve the problem of foreign debts by lending KD130 million.  Local debts (before the KFH loan) were reported at some KD73 million.  It should be noted that KFH owns some 53% of Aref. 

With KFH behind it and presuming that KFH is committed to using its financial resources to help, Aref should be able to work its way through the restructuring process.

White Knight for Shabka Holding: The Saudi Investor

If you don't recall the rather sad story of Shabka Holding, here's the earlier link.

Earlier this week, Shabkha held its annual general shareholders meeting.  There were reports in several Kuwaiti papers.  Let's go to the largest circulation paper in Kuwait (and a princely one at that) for the details. 

The meeting proceeded with 63% of shareholders present.  Not a hard trick since Nayef Abdul Aziz Abdullah Al-Enezi, Chairman and Managing Director, holds 40.65% and Dr. Badr Abid AlThafiri, CEO holds 12%.  Both bought sometime in early 2009 if I'm not mistaken.

To get an idea of the problems that Shabka faces, let's review some details provided by AlThafiri who spoke to reporters at the meeting. 

There is an ongoing dispute with International Leasing and Investment.  Shabka has asked the Islamic Development Bank (Jeddah) which holds shares in both Shabka and International Leasing (roughly 28% in the latter!) to mediate.  

The dispute relates to related party transactions in the amount of KD22 million which are in the form of "wakala investments".  In addition to a contract to buy 7% of the shares of Athman  (Athman Investments in which I believe International Leasing was and may still be a shareholder) which led to additional losses of KD19 million.  

As a side note, you'll recall that in late March AlEnezi accused International Leasing of selling assets to Shabka at above market prices.  The sales he asserted were not ratified by the shareholders annual general meeting but approved at the board level (which IL controlled).  His assertion is that if these contracts were unwound, Shabka's losses would be KD5 million less than current.  

Back to the article, he says that current losses are some 68% of total capital as of year end 2009 and that this is an improvement from 233% as of year end 2008.  Shabka's 2009 financials aren't posted on the KSE yet.  Its 31 December 2008 financials show negative equity of KD7 million - the 233%. That would make the losses roughly KD10 million at 2009 year end.

Back to the article, during 2008, the previous shareholders increased the capital in the company from KD5 million to KD15 million (this refers to the legal capital - par value times the number of shares outstanding).  Since the shares were offered at KD0.250 per share (a KD0.150 premium per share), the gross amount of the capital increase would appear to be some KD25 million - though surprisingly elsewhere in the article AlThafiri says the the share premium account only holds KD9.93 million - leaving roughly KD5 million not accounted for.  Since Shabka has not yet published its 2008 financial report, one cannot come to a firm conclusion with what happened.  In any case, AlThafiri says that once the new board took over, they discovered the firm's assets were KD400,000.  He attributes the difference to use by some members of the previous board to acquire control over Abraj.  (AA:  This could be AlAbraj Holdings, which by the way owns 39.3% of International Leasing.)  And that there was only KD7 in Shabka's accounts.  That's not a typo.  Seven dinars.

To deal with its problems, the shareholders agreed at the AGM to:

1. Use the KD9.93 in the Share Premium account to cover some of the losses. This and other amounts appear sufficient to cover the 2009 losses.
2. Increase paid in capital from KD15 million to KD50 million.  No discussion of the price of the offer.  Shabka's shares have a nominal value of KD0.100.
3. An unnamed Saudi investor is willing to step up for 70% of the capital. 

Two puzzling things from that latter point:

1. Who the investor is?
2. Why he is stepping up?  It's not as though Shabka has a lot to offer, except for its license.

One final point, as disclosed in its 30 June 2008 interim financials, IL bought 70% of Shabka during the first six months of 2008 for some KD32.4 million. During that same period it sold 15.1% of the company for KD23.2 million.  You can do the math.  A good return.  And I suppose a "wise" investment for someone.  And also as disclosed, was in the stages of selling the rest of its investment. Shabka traded as high as KD0.590 in the second half of 2008.  Its last trade was at KD0.044 on 31 March 2009 before it was suspended by the KSE for failure to provide financials.

New Graft Case at Nakheel

As reported by the Khaleej Times.  Some rather expensive non existent pens.

Mubadala US$2.5 Billion Refinancing

As announced yesterday, Mubadala successfully refinanced its US$2 billion loan.  Some additional details today courtesy of Gulf News.

While the margin increased from 17.5 basis points to 75, this is still a comfortable margin especially given current market conditions.  And as well the downgrade by Moodys in March to Aa3.

The facility was also well received.  US$4 billion in demand.  And it was up-sized (I just had to use that word) by US$500 million to provide a back-stop for refinancing under Mubadala's ECP program.

Dubai World Rescheduling - Nakheel Trade Creditors Offered 10% on Settlement Bonds

There's been some commentary on the princely interest rate that Nakheel was reported to be offering its trade creditors - 10% - compared to the much smaller 1% to financial creditors.

This article from Maktoob Business outlines the rationale. 

It's all a matter of devoting resources to those parties that benefit the company and the national economy the most.

Simply put there is more bang for the buck locally in paying our trade creditors.

Something discussed in an earlier post here.

Oula Fuel

 

Following up on my earlier post, I noticed that today there was an announcement on the Kuwait Stock Exchange that the Chairman and Managing Director of Oula, Mr.Ahmad Abdul Aziz Al Ghannam, had resigned.

[9:13:10]  ِ.استقالة عضو في مجلس ادارة شركة الاولى للتسويق المحلي للوقود
يعلن سوق الكويت للأوراق المالية بأن شركة الاولى للتسويق
المحلي للوقود افادته بأن مجلس ادارة الشركة وافق على استقالة ‏
كل من السادة شركة عبدالعزيز احمد الغنام واخوانه وممثلها
السيد / احمد عبدالعزيز الغنام رئيس مجلس الادارة والعضو المنتدب ‏
من عضوية مجلس ادارة الشركة.

International Investment Group Issues Clarification - It's Business As Usual

Today IIG issued a press release on the Bahrain Stock Exchange (Arabic) and NasdaqDubai (English).

The press release notes that in addition to engaging KPMG Advisory WLL IIG has hired the Law Office of AlWaqayan, AlAwadhi and AlSaif (local Kuwaiti law firm) and DLA Piper (international law firm).  It is also looking to set up a committee (the NasdaqDubai press release uses the more elegant word "forum") to negotiate with creditors.   

As noted before, an interim report from KPMG is expected at the end of May with the "final" at the end of June.  As per my earlier post, this appears to be a rather preliminary report.

Now creditors would be naturally concerned when their obligor misses  the payment of what some might characterize as  a relatively trivial sum of US$3.4 million for interest. 

Notwithstanding the above announcement IIG wishes to confirm that IIG's and its associated businesses continue to trade on a normal basis and the day to day operations of such businesses have not been effected by the above event.

While an interesting definition of what is "normal", this belated entry into our competition is clearly not strong enough to cause our distinguished panel of judge (AA) to reverse the earlier award to Dr. Adnan Musallam and TID.   Though I suspect there will be additional opportunities for further entries as time passes.

DIFC Court to Hear Case by Amwal AlKhaleej Against Abdullah Brothers

The National reports that the DIFC Court has rejected a motion by counsel for the Abdullah Brothers to the DIFC Court to dismiss the case for lack of jurisdiction.

Earlier post here.

Agility Wins Kuwaiti Court Case

Agility announced on the KSE today that the Kuwaiti Cassation Court (the highest court in the land) had ruled in its favor in the case brought against it by Kamal Sultan.  KS was asserting a right in the contracts signed between Agility and the US Defense Department.  This is a final judgment against which there is no appeal.

Agility may have preferred a victory in another venue, but this is a victory nonetheless.

English language press release here (from Dubai Financial Market).

Press release from KSE below.

[8:44:28]  ِ.ايضاح من(اجيليتي) بخصوص صدور حكم لصالحها ضد "شركة كمال السلطان"‏
يعلن سوق الكويت للاوراق المالية بان شركة المخازن العمومية (اجيليتي) ‏
افادت بان محكمة التمييز قضت برفع الطعن بالتمييز رقم 1234/2008‏
المرفوع من شركة كمال مصطفى السلطان ضد شركة المخازن العموميةواخرين بجلسة
ِ20-04-2010وبذلك يكون النزاع القائم بشان الادعاءبوجود عقد محاصة بين شركة
كمال مصطفىالسلطان وشركة (اجيليتي) وادعاء شركة كمال مصطفى السلطان بان لها ‏
حقوق مالية مرتبطة بهذا العقد قد انتهت بصورة قطعية ونهائية.‏
وقد انتهت عدالة المحكمة برفض الطعن وبتاييد احكام القضاء التي قطعت بان ‏
هذه الشركة لا وجود لها فى الواقع ،وانه قد تم التقايل عنها وان شركة كمال ‏
السلطان لم تنفذ اى من التزاماتها الخاصة بالشراكة على النحو الموضح تفصيلا ‏
بالاحكام القضائية المؤيدة بالحكم اعلاه ،وبذلك تكون القضايا المرفوعة من ‏
شركة كمال السلطان ضد شركة المخازن العمومية قد انتهت بحكم نهائي وبات وجائز
لحجية وقوة الامر المقضي فيه بما يمنع اعادة طرح الموضوع على القضاء مجددا .‏

2-3

Isn't Wiggum a character on The Simpsons?

Neat Ad

Nothing whatever to do with the GCC or the financial markets, at all.

The Long Wait is Over - Finally

From Ithmaar's press release on the BSE this morning.

“The CBB’s formal approval allowed Ithmaar to immediately implement its highly anticipated plans for a comprehensive reorganization with its wholly-owned subsidiary, Shamil Bank,” said HRH Prince Amr. “The reorganization involved both banks pooling their resources together to create a single, more efficient and significantly stronger retail- focused bank with an Islamic license under the Ithmaar brand. Although the Shamil Bank brand now no longer exists, the reorganization is entirely seamless and there is no change, whatsoever, in customer, depositor or investor accounts or relationships,” he said.

The unbearable suspense ends with one quick stroke, a seamless stroke at that.

Kuwaiti Banks to Sue Saad and AlGosaibi This May

Following up on an earlier story, AlQabas reports that the lawyers for four local banks (named earlier as Kuwait Finance House. Commercial Bank of Kuwait, Gulf Bank and Burgan Bank) are putting the finishing touches on the "files" (cases) which will be filed in London and Riyadh.  Apparently, some of the loans (which are described as being no less than US$1.5 billion) are subject to Saudi law!

According to the article, the motive for pursuing the cases in Court is that negotiations weren't fruitful.

The article also mentions the ongoing suit by AlAhli Bank of Kuwait against Saad in the New York Supreme Court.

AlKhorafi Group Moves on Oula Fuel and Gulf Bank

AlQabas reports that the AlKhorafi Group has increased its stake in two Kuwait companies.

1. Oula Fuel (KSE Symbol 645):  A 40 unit gas and service station chain.  Shares were bought from National Investment Company by companies owned by Mahmoud Haidar (Emerald Group) in the amount of 38.2 million shares at KD0.420 per share (roughly KD16 million).  But shares were for the AlKharafi Group and other allied investors.
2. Gulf Bank (KSE Symbol 102):  A major commercial bank in Kuwait.  Major owners are the AlGhanem Family, Behbehani, KIA and now shown on the KSE website "Emerald and others".  Reportedly, AlKharafi has been buying shares in the KSE and is one of the major shareholders.  

AlQ reports that directors at both Oula and Gulf are expected to resign shortly so that AlK and his co-investors can appoint their own candidates to the Boards.

Kuwait Court Delays Action in Boubyan Bank Case Against AlAbraj Holding

AlQabas reports that legal sources informed it that the Court decided on 20 April to postpone action in Boubyan's bankruptcy case against AlAbraj until 6 June.  This appears in part to be to allow the addition of a fifth defendant, an unnamed local bank, in the case.  The article also notes that Boubyan had filed a motion to compel other Kuwaiti banks to disclose any AlAbraj assets they held.  No doubt in an attempt to block these and eventually realize them.

Boubyan's attorney reportedly asked the Court to set the future hearing as soon as possible given the long and persistent delays so far. (Welcome to the GCC court system!).  On a closing note, AlQ comments that Boubyan's (separate) case against the Board of Directors for temporary compensation is scheduled for a hearing on 27 April.

Idiocy Knows No Borders: The Great Microchip Danger

At times of national danger, it's particularly comforting to know that there are those out there ever vigilant to manifest threats to our way of life and wise enough to develop workable solutions.

The Georgia Legislature has stepped up to take decisive action to criminalize the involuntary implanting of microchips in its citizens.

And from the testimony of the lady in the article apparently not a moment too soon.

Three troubling thoughts though:

1. If evildoers out there (if I may be allowed to coin a term) decide to plant a microchip in the unsuspecting citizen, is a misdemeanor penalty likely to deter them?
2. If fact since the crime is involuntary implantation, won't that just lead them (and if you have to ask who "they" are, well you may already have been implanted) to refine their mind control techniques?
3. The two main sponsors of the bill are Majority Leader "Chip" Rogers and "Chip" Pearson.  And that is perhaps the most troubling fact of all.  And may be the only fact in relation to this bill.

Capitalism and Bad Investments

An absolutely brilliant letter in the FT today from Mr. Peter Berchtold.

Investors know there are two opposite sides to every transaction. If you fail to understand what you are buying don't go blaming the seller. I am always amazed to see big, so-called sophisticated investors try to litigate themselves out of a bad investment.

Or sometimes look for the Shaykh up the road to bail them out.   Or request a bail-out from their governments not mind you to save their profits but out of a selfless concern for the good of their respective national economies.

Damas Elects New Board

As you've probably seen in press reports yesterday, Damas held an Extraordinary General Meeting of shareholders yesterday at which a new board was elected.  Here's the press release on NasdaqDubai with more details

As to the new board, the new members are:

1. Abbas G. Ameeri
2. Abdullah Fadhel Ahmed AlMazrui
3. Anan Fakreddin
4. Ehsan Abbas
5. Ibrahim Belsalih
6. Nicholas G. Hegarty
7. Simon Copleston
8. TN Pratap
9. Tariq L. Ali

The EGM also approved:

1. Dual listing of shares in both US$ and AED.  (Previously, Damas was listed only in US$ on NasdaqDubai).
2. The resignation of the former directors.

As you'll recall the DFSA settlement required a change in the Board along with other measures outlined here.

Dubai World Restructuring – Why Interest Rates Matter

You may have seen the news reports that DW and its creditors were haggling over the interest rate on the rescheduling.  DW reportedly having offered 1%.  And its creditors (or some of them) insisting on 5%. From the context it seems that this is a fixed rate and not a margin over a benchmark like Libor. I can't imagine that Reuters would confuse "margin" with "rate".

Of course, both parties are negotiating so it's probably safe to bet that neither side is expecting to get what it is asking for.

What do these levels mean in terms of a haircut? What's the appropriate discount rate to use for a net present value calculation?

Let's turn to the second question first.

There are two discount rates we can use. 

The creditors' proposed rate of 5%.  This rate is most likely designed to minimize/eliminate the haircut that will arise from an IAS #39 impairment test due to the new rate being lower than the contractual rate.  (Recall the assumption is that lenders are carrying their DW exposure at historical cost.  If they're not, then IAS mandates they discount estimated cashflows based on a market rate.  Also we're making a critical assumption here that the banks are estimating they will receive all their original principal back plus interset).  Why this focus on an accounting haircut as opposed to looking an economic value?  Banks will be most concerned about accounting losses as these are the most visible. 

How do we estimate the economic (real) haircut?  We can use a recent market rate. DEWA just raised a US$1 billion five-year bond at 8.5%.  Some caveats.  It's important to note it's highly likely that the DEWA bond was deliberately priced above market. Why? First of all, Dubai cannot afford to have a major transaction fail in the market. So the bond has to be priced to ensure success. Second, the issue was reportedly 11x oversubscribed. That in itself is a pretty good indication that the price could have been tighter. Of course, Dubai would not only like the deal succeed but also to have a very strong display of market appetite for its paper for this highly visible post crisis issue.  So another reason to overprice.  While the rate might not necessarily be the right market rate for DEWA credit,  the Dubai World rescheduling is not a BBB- credit like DEWA. So we can argue that 8.5%  is probably a more reflective market rate than the 5% rate and thus a better measure of economic loss.

It's important to note that neither rate is completely accurate.  But we're not after what is fundamentally elusive precision here as much as we are interested in a directional measure of the haircut.

Now that we have our discount rates, we need cashflow scenarios.

The actual proposed cashflows on the rescheduling aren't known so we'll use two proxy "worst" and "best" cases to set bounds - much as we did with the interest rates.

First, a bullet repayment at the end of the repayment term with interest at 1% being paid annually. This represents our worst case from a calculation of discount.   While this would be the ideal debt restructuring from DW's perspective, it's highly unlikely this could be sold to creditors.

Second, equal amortization of principal with interest at 1% being paid annually. This represents our best case. The ideal case from the lenders' perspective (absent of course an even better case of a generous neighboring Shaykh paying off the entire debt today).  But not very realistic and certainly not what DW would want.  It is highly likely that restructuring principal amortization will be back ended as is typical in debt restructurings. 

And finally to conform to the details of the restructuring – we'll model a 5 year and 8 year tranche.

To summarize, these two scenarios give us a reasonable approximation of the best and worst discounts. Results are rounded to the nearest percentage. The discount can be figured by subtracting the NPVs shown below from 100%.

Bullet Principal Repayment 1% Interest Rate Paid Annually in Arrears

Discount Rate	5 Years	8 Years
5%	83%	74%
8.5%	70%	58%

Equal Principal Amortizations 1% Interest Rate Paid Annually in Arrears

Discount Rate	5 Years	8 Years
5%	89%	85%
8.5%	81%	74%

On the 5 year tenor, the banks are trying to avoid an accounting "haircut" of between 11 and 17%. And on the 8 year tranche between 15% and 26%. 

From an economic perspective the haircut is even more 19% to 30% on the 5 years and 26% to 42% on the 8 years. As stated above, the banks are going to be more concerned about the visible accounting haircut. 

These are fairly crude approximations - the compound effect of uncertain cashflow patterns and inexact discount rates - but they give an idea of what is at stake here.

Global Investment House - Proposed KD100 Million Increase in Capital

Today GIH announced on the KSE that it would hold its Annual General Meeting and Extraordinary General Meeting of Shareholders on  5 May 2010.

3 key agenda items were listed:

1. Shareholder agreement that no dividends be distributed for Fiscal Year 2009.
2. Cancellation of the previous shareholder approval to issue KD150 million in new shares at 100 fils each (nominal value) with issuance expenses to be no more than 10 fils per share.  This was granted on 15 June 2009, but was never used.
3. Shareholder agreement to issuing KD100 million in new shares at 100 files per share with issuance expenses to be no more than 5 fils per share.  This would be a priority rights offering for existing shareholders with the approval covering the entry of new shareholders for any shares not taken up by the existing shareholders.

AlQabas has an article in its 19 April issue stating that:

1. Some local and regional banks are considering the advantages of participating in the share offering on the theory that there would be a capital gain from the entry price.
2. Foreign banks are said not to be evidencing any interest in the participating.
3. The article also notes that GIH needs the money.  Shareholders' equity was eroded during the crisis.  Additional capital would provide some support for the successful implementation of the restructuring.  What's interesting is the particular point made that while GIH should have no problem making the first year's debt service payment, it's expected that there will be difficulties with the second year payment.   
4. As I've written before, the problem with the restructuring was its short tenor (three years).  The main repayment of the facility is intended to be sales from the Global Macro Fund (its holdings of listed companies).  To expect markets to recover in that short period was to be charitable optimistic.    The deal also has a step-up interest rate structure with the rate increasing 1% per year from 1.5%.  Banks do really need to be responsible - not only in underwriting but also in working out problem credits.  I'm not advocating a  100 year deal at 0% interest.  But the banks could have structured a longer deal with a mandatory cashflow sweep for prepayments with triggers for asset sales based on market recovery.  That way, if markets recover early, the banks get paid.  And, if markets don't, there isn't a potentially fatal second default.  The goal is to milk the cow not kill it.    

Here's the announcement from the KSE (Arabic only).

[9:41:29]  ِ.اجتماع الجمعية العمومية لبيت الاستثمار العالمي في 5-5-2010 لبيانات 2009‏
يعلن سوق الكويت للأوراق المالية بأن الجمعية العمومية العادية
وغير العادية لبيت الاستثمار العالمي سوف تنعقد يوم الاربعاء
الموافق 5-5-2010 في تمام الساعة 11 صباحا في مقر الشركة
حيث سيتم خلالها مناقشة ما يلي: ‏
ِ1- عدم توزيع ارباح عن السنة المالية المنتهية في 31-12-2009.‏
ِ2- الموافقة على الغاء موافقة الجمعية العامة العادية للشركة المنعقدة
في 15-06-2009 عن نهاية السنة المالية 2008 بزيادة رأس مال
الشركة بما يعادل 150.000.000 دينار كويتي موزعة ‏
على 1.500.000.000 سهم وبقيمة اسمية تعادل 100 فلس للسهم
الواحد وعلاوة اصدار 10 فلوس للسهم الواحد ومصروف اصدار 5 فلوس
للسهم الواحد
ِ3- الموافقة على زيادة رأس مال الشركة بما يعادل 100.000.000 دينار كويتي
موزعة على 1.000.000.000 سهم وبقيمة اسمية 100 فلس للسهم الواحد
وعلاوة اصدار 5 فلوس للسهم الواحد على ان لا يتجاوز مصروف الاصدار 5%‏
من القيمة الاسمية للسهم الواحد وان يتم استدعاء زيادة رأس المال على دفعة
واحدة والاولوية بالاكتتاب للمساهمين المسجلين بسجل المساهمين في اليوم
السابق على تاريخ دعوة مجلس الادارة للمساهمين للاكتتاب كما يجوز دخول
مساهمين جدد بالفائض غير المكتتب فيه من قبل المساهمين وتفويض مجلس ‏
الادارة بوضع الضوابط والشروط والقواعد لاستدعاء رأس المال
كما سيتم مناقشة بنود اخرى على جدول الاعمال.‏
علما بأن هذه التوصيات تخضع لموافقة الجمعية العمومية والجهات المختصة.‏

 

International Investment Group Appoints KPMG Advisory WLL Kuwait as Financial Advisor

Today IIG Funding (the Issuer) and Deutsche Bank (the Delegate) issued separate announcements on Nasdaq Dubai related to the payment default on IIG's US$200 million sukuk.

Basically, these are as required by the legal documentation governing the transaction.  Both parties must notify certificateholders of their right to vote for a dissolution (a minimum 25% of certificateholders must so vote) in order for the two parties to be required to take action.  They must also receive indemnification satisfactory to them from certificateholders for taking such action as well.

Deutsche Bank mentions that IIG has engaged KPMG Advisory WLL Kuwait as a financial advisor.  Here's DB's quote of an extract from a letter it received from IIG.

The Obligor has appointed KPMG Advisory W.L.L., Kuwait ("KPMG") in relation to carrying out an independent business review exercise for the Obligor, preceding a detailed financial restructuring engagement at a later date. KPMG's scope of work will include preliminary assessment of the company's present financial position and the possible options to meet its obligations.

This will involve:

• a study of the cash position, debt obligations (servicing and repayments) and cash flow requirements (short to medium term); 
• understanding of the timing and extent of expected cash inflows; 
• analysing the Obligor's cost structure and investment portfolio and understanding the management's strategy and intent regarding the same;  
• carrying out a high-level desktop valuation analysis of the Obligor's significant group  companies/investments as at 31 March 2010 or as at any other agreed cut-off date;  
• performing sensitivity analysis on the base forecasts provided by the management;  discussing actions (if any) taken/planned by the management; and  
• identifying the key gaps and issues the business faces and recommending alternative options and next steps.

The intention is that an interim report will be provided by 31 May 2010 with a final report available by 30 June 2010.

Some comments.

1. First of all the scope of work is typical "accounting firm" speak.  All the major steps are set forth, including the initial understanding of the company's position. 
2. Right now what the above describes is the first stage in a two stage process with the second stage involving detailed advice on the formal restructuring. 
3. Since the sukuk is secured by certain investments (investments in affiliates and available for sale investments) more than a desk top study will need to be done at some point as these are a key source of cashflow to IIG.  

Bin Sulaiman NOT Released on Bail

17 April 2010 Update:  The Attorney General of Dubai has issued a statement that Dr. Bin Sulaiman has not been released.

Below is the original post which is erroneous.

According to the Gulf News, Dr. Omar Bin Sulaiman, Former Governor of the DIFC, has been released on AED 50 million bail.  This amount is equivalent to the amount he is being investigated over.

As you'll recall earlier Dubai had passed an anti corruption law, which among other things provided  for immediate release in the case of full restitution. 

Of course, according to the press article, the amount involved here is "bail" and not a return of the disputed funds.