Dubai Holdings: Detailed Comments on DHCOG 2009 Audited Financials

Further to my post of 5 June, it's time for a closer look at DHCOG's 2009 audited financials.

Before getting into my usually overly detailed analysis, I'd like to highlight some big picture themes that emerge from a review of the Company's 2009 financials.

1. Most commentary has focused on DHCOG's AED15.2 billion in Borrowings. But as with Nakheel, Trade Payables (AED32 billion) and Customer Advances (AED14.2 billion) are more critical obligations. Both in terms of amounts as well as their greater direct impact on the future of the company and the local economy. When various expenses of AED4.7 billion associated with the restructuring/reduction of its projects in process (termination payments, legal claims, etc) and AED1.7 billion in Contractor Retentions (primarily due in the next 12 months)  are added in, it's clear where the potential cashflow stress really is. 
2. As noted earlier, the Company is heavily dependent on Government Subsidies for its profitability. 
3. Severe deterioration in Trade Payables – only 31% of gross receivables are fully performing as compared to 73% the year earlier. In itself this is a relatively minor problem since these represent a small "slice" of total assets. What's more important is that they reveal the profound distress in local markets. 92% of DHCOG's Receivables are denominated in AED and so are with local companies. If you think about it, the last company a local debtor is likely to "stiff" is this Company which is owned by the local Shaykh. Either DHCOG was reaching for business – doing marginal business or these companies are in very dire straits. 
4. DHCOG also seems to have engaged in a rather large amount of investment activity unrelated to its core activities. And with significant amounts committed to other entities within the Group. A clear sign that the companies were not managed in a disciplined fashion but rather as part of a "Group" – similar to the pattern in Kuwait.
   

Now to the detailed comments. (Warning:  A cup of caffeine may be required to remain awake as you read what follows).
 

Balance Sheet

Investment Property (Note 6) (page 45) is carried at AED56.5 billion in 2009 down from AED60.3 billion the year earlier. In 2009 DHCOG recognized an AED27.2 billion impairment charge against Investment Property. AED6.9 billion of this was reflected in the income statement. The remaining AED20.3 billion was reflected as a reduction in Government Grants. Thus, bypassing both the income statement and equity. (More on that topic a bit later).

While DHCOG carries its Investment Property at cost less impairment, it also provides details on fair value. Based on an open market valuation, the fair value of Investment Property at FYE 2009 is reported as AED 81.6 billion down from AED141.8 billion at FYE 2008. Clearly, there is a very serious disconnect between the value of the property calculated using discounted cashflow ("DCF") (which is the basis for the impairment) and the market price (based on what some "wise" investor is believed to be willing to pay for the property). That gap is AED25.1 billion. 

The "market" price is 144% of the price determined using discounted cashflow. Even allowing for the impact of some conservatism in the DCF, the gap is too large. What that suggests is that market price remains high. Essentially when market values like this occur, the implied "capitalization rate" ("cap rate") of the rental streams is very low.   Unrealistically low.

Turning to the liability side of the balance sheet, it's clear that Borrowings (Note 28) (page 69) at some AED15.2 billion are not the Company's major liability problem. Current and non current payables of AED32.1 billion are more than twice Borrowings (Note 32 (a) page 74). Customer Advances of AED14.2 billion (Note 33) (page 75) represent much more significant and potentially critical demands on cash. Of particular note is that all Customer Advances are carried as Current Liabilities – meaning DHCOG has to complete projects within the 2010 to satisfy its obligations to customers. As it builds and hands over properties, then these obligations are extinguished. If it fails to do so, there is potential (note that word) requirement to reimburse customers or renegotiate with them.  And these are not all the liabilities towards the "trade" that the Company faces.  There's an additional AED4.7 billion for Provisions and Other Charges - largely related to termination of contracts.

Another key liability account is the AED36.8 billion in Government Grants (Note 29) (page 72). As discussed in my earlier post (referenced above), DHCOG's profitability and cashflow is essentially based on generous subsidies from the Emirate of Dubai. Strip these out and the Company's performance is much diminished. Notes 2.22 (a) and 6 also discuss Government Grants.

Income Statement

Here the role of Government Subsidies is directly obvious. In 2008, the Company had AED19.2 billion in subsidies and had net income of AED9.8 billion. In 2009, subsidies were only AED0.6 billion. That and substantial provisions led to a loss of AED23.6 billion.

As a side comment, I'd note that there are provisions of some AED2.2 billion included in "General and Administrative" expenses (Note 38) for trade and other receivables as compared to a mere AED0.1 billion in 2008. A strong indication of the distress in the local market.

Consolidated Statement of Cash Flows

See the comments in my earlier post. Cashflow generation is constrained. And to flog a downed horse highly dependent on government subsidies.

Detailed Comments

Here are some items that caught my eye.

Note 2.1 (page 8) – The auditors did not raise a matter of emphasis on management's assumption that DHCOG as a "going concern" because of the availability of external support from the Holding Company and the DFSF.

"As a result of the sudden and sharp downturn in the Dubai real estate market, the Group's cash flows have come under severe pressure. The Group is currently considering various means to manage its cash flows which include roll over of maturing loans, sale of certain assets and renegotiation of trade and contractors balances. The holding company has confirmed its willingness to provide such financial support as may be required to manage the process and has confirmed that it has access to funds from the Dubai Financial Support Fund for the specific purpose."

Note 2.23 (a) (page 28): DHCOG primarily recognizes revenues from land and building sales on a "completed" contract basis as opposed to a "percentage of completion basis". What this means is that there is likely to be a greater mismatch between the timing of cash receipts and the recognition of revenues. When cash is received before the contract is completed, the contra entry to the receipt of cash is "Deferred Revenues". As per Note 32 (a) (page 74) DHCOG has some AED17.1 billion of Deferred Revenues as of FYE 2009. When these revenues are recognized in the Income Statement, there will be no accompanying cashflow. Something a careful creditor should have his or her eye firmly fixed upon.

 

Note 3.1 (c) (page 34): Of some AED24.7 billion in liabilities due within the next twelve months, repayment of borrowings represents only AED3.7 billion. Roughly 15%.

 

Note 4.2 (b) (page 39): Management has estimated its liability for contractor claims for termination or delay of contracts for construction and consultancy, demobilization of contractors, staff repatriation costs, etc., at AED4 billion. Up AED1.4 billion (54%) from 2008.

 

Note 12 (page 56): The Company recognized AED1.5 billion fair value loss in 2009 for its investment in a fund managed by a related party Dubai International Capital. This is in addition to AED1.9 billion fair value loss on the same investment in 2008. Also see Note 20 (a) page 65.

 

Note 15 (page 60): There is clear distress in DHCOG's Trade Receivables. At FYE2008 AED1.9 billion (83%) of DHCOG's AED2.3 billion in Trade Receivables and Advance Payments were "fully" performing. At FYE2009 AED0.8 billion (58%) of AED1.4 billion were. At year end 2009 AED0.8 billion of AED2.6 billion in gross Trade Receivables were fully performing. That's 31% fully performing. At 2008 the comparative numbers were AED1.9 billion out of AED2.6 billion. Or 73%. Past due but unimpaired receivables also showed a jump from AED0.4 billion at FYE 2008 to AED0.6 billion at FYE 2009. This is significant deterioration in a single year. And reflects widespread distress given DHCOG's comment that it "has a broad base of customers with no concentration of credit risk within trade receivables". Looking at currency composition of receivables, some 92% are denominated in AED. That indicates most of these are to local counterparties. So the distress is local. And it must be significant since it's highly unlikely that a local company would "stiff" a company owned by the Ruler. Generally, when there is a serious sudden deterioration in receivables, the suspicious banker takes a look for an APP scenario. Sales or other transactions against receivables can be a highly convenient way of spiriting value out of a company. Since there is no concentration in the receivables, this probably can be ruled out.

 

Note 28 (page 71): DHCOG failed to comply with 2 of 3 financial covenants as of 31 December 2009. It bankers waived these breaches. That means the covenants remain in place. Given the Company's financial condition, they are likely to be breached again. And the creditors will have another chance to use these to apply pressure.

 

Note 30 (page 72): AED1.1 billion of AED1.7 billion in Contractor Retention payments are due within one year. Two observations. The first is the contractual cashflow demand this represents – though contracts may be renegotiated. The second is that this shows that there have been no significant new construction activities undertaken. Another sign of the slowdown.  (Note:  These liabilities are included in Trade and Other Payables).

 

Note 32 (a) (page 74): AED17.1 billion of Deferred Revenues. As discussed above, when these are recognized, there will be no accompanying cashflow.

 

Note 32 (b) (page 75): Provision for Liabilities and Other Charges is at AED4.7 billion up from AED3.0 billion (2008). Important as another potential cashflow demand. As well, this amount has grown rather significantly in one year. Future trends in these provisions should be watched. Note 46 (page 82) has additional information.

 

Note 38 (page 77): General and Administrative Expenses of AED4.7 billion include AED2.2 billion for impairment provisions on Trade and Other Receivables.

 

Note 40 (page 77): Other Operating Expenses provides details on the composition of provisions.

 

Note 42(a) (page 82): The Company eliminated its commitments to invest in private equity funds from AED259 million in 2008 to zero in 2009. It's unclear why an Operating Company like DHCOG is investing in private equity funds. Nor why it was investing rather substantial sums in the DIC fund on which it has lost some AED3.4 billion.

 

Note 42 (b) (page 82): As DHCOG has scaled back its projects, Commitments for Projects in Progress have declined dramatically from AED34.2 billion in 2008 to AED10.9 billion in 2009. The trade-off is increased Termination Claims.   Clearly, one does not shrink oneself to greatness.  Reduction in contracts is a necessary step given the state of the real estate market in Dubai.  All well and good.  But the question then is what is the future for DHCOG.  If its real estate business is reduced to a more modest level what does this mean for the Company - particularly since its profitability was basically driven by selling real estate it acquired at zero cost due to the kindness of the good Shaykh.

Dubai Rents Continue to Fall

Emirates Business reports that rents in Dubai continue to fall with new supply responsible for the price pressure.  Lower rates in Dubai are tempting relocations from the Capital.  As if the Abu Dhabi - Dubai deathway isn't busy enough.

Given the number of new units coming on stream in the next two years - estimated here at 100,000 - it seems this trend is likely to continue.

"Tenants are increasingly seeking more value for their rental dirham and are able to leverage alternative options to negotiate very attractive deals. This is pushing up bid-ask spreads and illustrates that landlords are conceding in negotiations with ever more discerning and value-seeking tenants. More significantly, this is a trend now observed in high-quality units in prestigious locations, which is a segment that has experienced relatively minimal volatility in late 2009 and the first quarter of 2010 due to relocation trends.

The lower limits for a one-bedroom on the prestigious Jumeirah Lakes Tower (JLT) have fallen six per cent while one-bedroom apartments in JLT have fallen a further 10 per cent since publishing the previous lease guide."

The Investment Dar - Update on Implementation of Rescheduling

Both AlWatan and AlQabas have articles on the latest developments on TID's restructuring - presumably from a Company press statement.  I suspect we will see that published on TID's website on Tuesday.  Probably as with the last announcement in Arabic only.

Here's a hasty translation.

1. The Creditors' Coordinating Committee ("CCC") announced that most of the commercial aspects of the rescheduling have been agreed with TID.
2. That the English language version of the legal documentation will be completed in one week.
3. Thereafter an Arabic translation will be prepared and given the the Shari'ah Board of TID for a final review (this will take several weeks) before the legal agreements are given to the Special FSL Court for its review. 
4. That in order to speed up implementation of the restructuring, TID has agreed that whatever the date of FSL Court approval, it will use a date no later than 30 September 2010 to begin the calculation of "profit" (interest) with the first interest payment no later than 31 March 2011.  And that the first principal repayment will be no later than 30 September 2011.
5. That TID has voluntarily agreed to be bound by the conditions of the restructuring - including the management of the Company's affairs -  as if the Special FSL Court had already approved the restructuring plan.
6. That the CCC and Chief Restructuring Officer are revising the five year budget/plan and projected financials presented by TID at the 24 May meeting with creditors and will present a revised version to the Company.
7. There is a final quote from Bader Abdullah Ali - the CCC's spokesman.  The most significant part of the quote is that the CCC's role will be concentrated on (a) the revised budget, (b) supervision  of the activities of the Company and (c) the stages of entry under the FSL.

Within the progress update, there are two key points - #5 and #7 and #4.   The creditors have persuaded TID (no doubt gently)  that they should be in control now prior to the anticipated approval of the FSL application.  And as part of that the Company has agreed to an absolute "last date" for starting the timing of interest and principal repayments. 

New Central Bank of Kuwait Regulations on Investment Companies - Practical Difficulties

Muhammad Shabaan at AlQabas has an article that several investment companies have held urgent meetings with the CBK or are trying to arrange meetings to discuss the new regulations on investment companies which pose difficulties for them - particularly those in distress.

In particular one firm with a three year rescheduling recently agreed (clearly Global though its name is not mentioned) pointed out that it cannot comply with the regulations and the terms of its rescheduling.

What's likely to happen is that the CBK will have to give some firms a "pass" on the implementation dates under the argument that they are taking significant steps to improve their financial positions in the spirit (but not the letter) of the regulations.

Kuwaiti Funds - The Impact of Investment Firm Distress

Isa Abdul Salaam at AlQabas has an interesting article on one of the knock on effects of the distress among Kuwaiti investment companies.  Many of the distressed companies have borrowed money from money market and other funds managed by other Kuwaiti investment companies.

What caught my eye particularly in the report was his brilliant phrase:   فعند صباح كل يوم جديد ننتظر أن نسمع عن أزمة جديدة لهذا القطاع الذي لطالما ملأ الأرض بالحديث عن إنجازات لم نعد نراها فعلياً على أرض الواقع

Indeed each new day's morning we expect to hear about a new crisis for this sector which has long filled the earth with talk about achievements which we do not see actually existing.

The distressed companies have not repaid the sums borrowed due to their financial conditions.  For a while apparently with Central Bank of Kuwait tacit approval the funds have been rolling over these obligations on a six month basis.  Recently again with CBK consent, the terms have been changed to monthly.

As per the article several of the investment companies who manage funds have written to other investment companies demanding immediate payment in full and threatening legal action if payment is not made.  KIC has supposedly written such letters on behalf of its Islamic Crescent Fund.

The difficulty is that depressed prices for assets are below cost (and no doubt many of the original purchase prices reflected imaginary values).  The funds are similarly constrained as they have their investors to answer to.

The solution as usual in Kuwait is a call to the government to help resolve the problem:  to bail out imprudent lenders and imprudent borrowers.

The article closes with the comment that some investors in these distressed funds have begun taking provisions against their exposures - up to a reported 50% in some cases.

BP Coffee Spill

Dave Roberts over at The GulfBlog has a positively brilliant post.

KFIC: Sana Juma Resigns as CEO

KFIC announced on the DFM today that its CEO Sana Alaa AdDin Tawfiq Juma had resigned effective 13 June 2010.  No word on her replacement.   There doesn't appear to be an announcement on the KSE.

You'll recall from an earlier post that AlQabas had predicted her imminent departure.  You can access other posts on this Company by using the label KFIC to search.

A helpful reader has pointed out in the comments below - that Ms. Juma also resigned from Kuwait International Bank's Board due to insufficient shares in KIB to serve as a director.

Ted Pretty Resigns from Khaleeji Commercial Bank

A very puzzling announcement by KHCB on the Bahrain Stock Exchange today.  Ted Pretty resigned from the Board. 

Putting aside the fact that it took three weeks for KHCB to bring this news to the attention of the BSE, it would seem that GFH would want a senior officer on the Board since it appears to have reversed its decision to sell its 37% stake in the Bank.  There is no announcement on his replacement.

Could this mean that it has changed its mind again?  US$120 million in looming debt repayments could be a compelling reason.   

Is Mr. Pretty too busy at GFH to give KHCB the attention it deserves?

Or is Mr. Pretty headed for a less stressful position?

Dubai World - Implication of Loan Sales

The Financial Times reports that some banks have begun selling their almost restructured DW loans.  Apparently, the price is something in the 55% of nominal range.   The article goes on to say that DW is considering using "Decree 57" which created a special regime for DW to seek protection under the DIFC Insolvency Law.  Under that law, a company may cram down dissenting creditors and force them to accept a restructuring - similar to the Financial Stability Law in Kuwait.

Some observations:

1. It's not surprising that some banks would be heading for the exit and perhaps taking a larger than required "haircut" just to be free of the restructuring - including those often overlooked indirect costs of administering and following a "special" loan.   Exitors will generally be smaller banks with no real ongoing business with the Emirate.
2. A US$25 million sale out of US$23.5 billion does not a trend make.
3. It's unlikely small trades will give dissidents control unless the existing lenders are highly divided on the restructuring.  On this topic recall that the Co-Ordinating Committee accounts for some 60% of the debt.  Local lenders are likely to go along.  If required, local governments can promise them a capital infusion or low cost deposit to compensate for any direct pain they may feel on the restructuring.  Both methods of course would strictly speaking not constitute preferential treatment.
4. From an investment point of view, assuming a bullet repayment, the IRR on the cited transaction is something around 11%.  With more frequent principal repayments the IRR is higher.  Not a bad return.
5. The public announcement of the readiness to pull the DIFC trigger no doubt is designed to dissuade vulture investors.

Aayan Leasing and Investment - Recourse to Financial Stability Law Remains a Possibility

AlQabas quotes Aayan as saying that the Central Bank of Kuwait has not told it to refrain from using the Financial Stability Law as an option to deal with its problems.  Instead the Central Bank has been urging the Company to take the appropriate decision in the interest of creditors and shareholders to exit its financial crisis as soon as possible.

Aayan said that it will continue in a positive manner with its creditors.  And that if it decides to use the FSL, it will only do so after consultation with its creditors.

You'll recall from earlier posts (which  you can retrieve using the label "Aayan") that the Company has some KD416 million in debt.  As well KFH is a significant shareholder and seems to be trying to shepherd this case to a positive conclusion.

Dubai Holding Dissolves DIC Board and Takes Direct Control

GulfNews reports that Dubai Holding announced that it had dissolved the Board at DIC and taken direct control over the Company.  The cover story is that this was done to "implement a new (corporate) governance structure".

I suspect that as well it reflects a new corporate strategy.  Given the less than sterling performance of DIC and much more limited resources available to Dubai going forward, the Emirate has probably wisely decided to slowly unwind DIC.  That grandiose dreams of an international empire will have to be shelved in favor of making sure the economy back home is taken care of.  

The first step on the new path will be trying to get creditors to extend maturities until markets improve and assets can be sold.  Then triage on the existing portfolio.  Letting those entities that cannot be saved go.  And focusing limited cash on retaining control of and building value in those that have potential for a price rebound.

No longer on the Board of DIC, Samir AlAnsari will have a new role at Shuaa Capital.  Instead of building an empire through acquisition, he'll be tasked with building a business the old fashioned way - disciplined growth.

The Investment Dar - Update on Financial Stability Law Process

AlQabas reports that Ernst and Young has presented its preliminary report on TID to the Central Bank of Kuwait.  It's expected that its final report will be presented in July.  The Central Bank will then study both reports to determine if TID is solvent and should be allowed to used the Financial Stability Law to implement its restructuring.  After completing that study, it will make its recommendation to the Special FSL Court.

The article goes on to note that if the Plan is approved the Central Bank will retain a monitoring role.  If the Company fails to abide by the restructuring, then the Central Bank would recommend whether TID should be given a second chance or should be put into liquidation.

I suspect that this means that a final decision on TID's entry under the FSL will take place in late July or early August.  A September implementation - as discussed earlier in the Kuwaiti press - might take place.  One potential timing issue could be Ramadan - which is expected to begin somewhere just before mid August.

Earlier posts on the Financial Stability Law can be accessed using the label "Financial Stability Law".

IIF Report Criticizes Central Bank of Kuwait Re Investment Companies

AlQabas has a summary of a recent Institute of International Finance ("IIF") Research Note on the Kuwait financial sector - June 1 "Financial Sector Strains are Easing". 

Much of the analysis is familiar.  Banks have been hurt by the slowdown in commercial real estate, the weakness in the Kuwait Stock Market, the problems of Kuwaiti investment companies.  Banks are expected to have another weak year in 2010 as the need for provisions continues.  The IIF also noted the unevenness in the banking sector with some banks having relatively low levels of distressed loans 2% and some much higher at 30%.  IIF is rather sanguine on the banking sector's prospects. 

What is the most interesting "bit" is reflected in the headline that AlQabas used.  "Report issued by IIF:  Central Bank of Kuwait issued licenses to investment companies but left them without strong supervision/regulation".  And this probably explains in part the recent new tougher regulations the CBK issued.

English text of the IIF report here - though you need to be a member with a password to access.

Sukuk Investors Need Protection? Or Just to Read the Prospectus

There's an interesting article in The National about the need for greater protections for investors in Sukuk.

“What good is it in the event of a default if you can’t have access to the underlying assets?” said Rifaat Abdel Karim, the secretary general of the Islamic Financial Services Board, a body based in Kuala Lumpur that sets standards for Sharia compliance. “As an investor you need to know what you get.”

Indeed, you need to know what you get.  That requires that you read the Offering Circular.

 

Every sukuk Offering Circular or Memorandum that I have read sets forth whether or not the investors have a collateral interest in the underlying asset.  Generally, legal issues (including ownership, enforcement and other risks) are set forth as well.

In TID's Global Sukuk I Offering Memorandum, the first Risk Factor (page 11) clearly states that  if there is a default,  the investors have no direct recourse to the underlying assets and have to rely on the obligor (TID) to repurchase the sukuk.  

In the Offering Memorandum for Saad's Golden Belt Sukuk, the second Risk Factor (page 24) also makes a similar statement.  As I've noted before, the potential for  a legal  challenge to the determination of the Periodic Rental Payment ("interest payment") is disclosed as are potential difficulties in enforcing rights. (pages 25 and 29).  The fact that the land remains registered in the name of Mr. AlSanea is noted on page 26.

For IIG's Sukuk, turn to Risk Factors (page 17) under Limited Recourse make a similar statement about access to the underlying assets as TID and Golden Belt.  Page 24 discusses that while the certificates are convertible to shares, the Company has not obtained shareholder consent or approval from the Kuwaiti authorities to issue new shares.

There's a very simple rule in finance.  Don't buy an investment if:

1. You're not capable of figuring out what you're buying.
2. And you don't want to hire a professional to help you.
3. Or you're capable, but just don't want to spend the time reading the Offering Memorandum and asking a few questions.

Central Bank of Kuwait - New Regulations on Investment Companies

AlQabas published a summary of key elements in a recent Central Bank of Kuwait general circular to investment companies subject to its supervision.

Here are the main points.

The new regulations were approved by the CBK's Board of Directors on 8 June 2010.  More details to be advised later. 
 

They apply to both parent and affiliate/subsidiary investment companies.  And on a consolidated basis.

Three key ratios are at the heart of the new regulations.

1. Leverage Ratio:  Total Liabilities to Equity may not exceed 2:1.  Liabilities are "all" liabilities except for general and specific provisions.   This definition appears to include accounts payable, other liabilities, etc.  Not just debt to financial institutions or bondholders.  Total Equity excludes Treasury Stock and losses.  What's not clear is the treatment of  "fair value" and similar reserves. representing unrealized profits.  Those familiar with "history" in the area know that a lot of financial firms got in trouble by borrowing against "fair values" which later reversed.  And in some cases may never have existed in the first place.  Declaring profits against these fair values, paying bonuses and dividends against them, etc.  So the treatment of this element in equity is key.  Probably a limit on the amount of fair value that can be included in "Equity" is one solution.  What I'm thinking of is something similar to Basel II's treatment of the components of equity - Tier 1, Tier 2, and Tier 3.  Otherwise, "clever" bankers may discover  or manufacture hidden value in their balance sheets and thus undo the constraint. 
2. "Quick" Ratio:   Liquid assets equal to 10% of Total Liabilities must be held.  Liquid assets are those than can be liquidated within a month and are composed of cash and deposits with the Central Bank and other financial institutions; Kuwait Treasury Bonds and similar Government paper including Central Bank of Kuwait paper;  other sovereign debt rated BBB or above.  Ratings must be from S&P, Moody's, or Fitch.
3. Maximum Foreign Debt Ratio:  No more than 50% of Equity as defined above.  Foreign debt appears to be defined by location of the creditor (credit from "non residents") not the currency in which the debt is denominated.   At a leverage ratio of 2:1 then only 25% of debt can be to non residents.

The new regulations and ratios apply as of 30 June 2010.  If a firm is not in compliance, it must make efforts to improve its compliance with the final date to meet all the requirements no later than 30 June 2012.
  

Gulf Finance House Sets the Record Straight and Answers Mis-Informed Naysayers

Sadly, there's been a lot of negative press out there, which as GFH has taken the trouble to point out yet again is pretty much misguided.  And this seems to be the week for setting the record straight as another Bahraini banking personality - now absent from the country - did just a few days ago.

You may have seen misguided quotes like this earlier:

Asset sales are likely therefore to be critical over the next 12 to 18 months.  GFH is unlikely to develop sufficient cash flow from operations to repay US$120 million this year and pay roughly an additional US$30 million to US$45 million in operating expenses.  And I am low balling those expenses.

As Ted Pretty notes:

"GFH is a landmark institution in Bahrain and across the Middle East and North Africa region and does not deserve the recent attacks by certain sections of the international media," he added.

"The recent comments about GFH are ill-informed and I am concerned about their sources and the motivation behind them which directly challenge the Islamic financial system and the regulatory oversight of our institutions. Bahrain is a strong vibrant financial centre.

From what I've seen some of these comments are not so much attacking  the practice  of Islamic banking as what is perceived as  the malpractice of Islamic banking.

And

"Every global investment bank has had to review its business model, adjust its liquidity profile and reassess its investment projects and GFH is no different.

Indeed, though one might note that not every global investment bank or regional investment bank for that matter has rescheduled its loans, had a massive loss, and embarked on selling off a material portion of assets which suddenly became "non core".  And is in the position of having 67% of the rescheduled debt due in the next three months. 

And 

The bank exited its investment in Bahrain Financial Harbour for a total consideration of $262m, which included a cash consideration of up to $40m which will help enhance GFH's liquidity position as it builds the business around its new strategy of becoming a creator of Islamic financial institutions in the region and beyond.

Indeed it did.  It sold the BFH Company which owned the land.  Emar apparently didn't want the land and so gave it back to GFH as part of the US$262 million consideration.  So what that means is GFH received US$222 million in consideration in land which if I'm considering things properly it owned before the sale.  

They often say (and are generally correct) that success in investment banking requires intellectual skill, hard work and marketing prowess.  Selling yourself your own property and claiming a great success fits into one of these three for sure.

Hopefully, with GFH's explanation, the unfounded and unwarranted criticism of the bank will end.  That seems only fair.

KFIC - Yet More Details on KD145 Million Rescheduling

KFIC issued another press release today on the Kuwait Stock Exchange - text below Arabic only as usual.

Key points:

There will be an ordinary general meeting of shareholders on 16 June to approve an increase in capital by KD20 million (200 million new shares at KD0.100 each).   This will take capital to KD54,147,801 after an earlier decrease (probably the capitalization of losses) to KD34,147,801.

The first principal payment of KD6,783,000 represents the following:

1. KD2,000,000 on Tranche 1.
2. KD3,813,000 on Tranche 3.
3. KD 970,000 on Tranche 4.

[8:43:39]  ِ.ايضاح من (كفيك) بخصوص بعض نقاط اعادة الهيكلة ‏
يعلن سوق الكويت للاوراق المالية عطفا على اعلانه السابق بتاريخ 08-06-2010 ‏
والخاص بالشركة الكويتية للتمويل والاستثمار (كفيك) لاعادة جدولة جميع ‏
مديونيات الشركة ،تفيد الشركة بان زيادة راس المال المذكورة فى بنود اعادة ‏
الهيكلة هى نفسها التي اوصى بها مجلس ادارة الشركة بتاريخ 11-05-2010 ‏
للجمعية العمومية والتي ستنعقد يوم 16-06-2010 بزيادة راسمال الشركة ‏
بعد التخفيض من 34,147,801 د.ك الى 54,147,801 د.ك وذلك باصدار ‏
ِ200,000,000 سهم جديد بسعر اكتتاب 100 فلس ،ما يعادل مبلغ وقدره ‏
ِ20,000,000 د.ك .‏
وقد تم الانتهاء من التوقيع على اعادة الجدولة بتاريخ 06-06-2010 ،
وقامت  الشركة بسداد مبلغ وقدره 6,783,000 د.ك وذلك على النحو ‏
التالي :‏
ِ1- 2,000,000 د.ك فقط يمثل القسط الاول من الشريحة الاولى.‏
ِ2-3,813,000 د.ك فقط يمثل كامل الشريحة الثالثة .‏
ِ3- 970,000 د.ك يمثل القسط الاول من الشريحة الرابعة .‏
وافادت الشركة بانها سوف تقوم بموافاة ادارة السوق باخر المستجدات ‏
فى حينها .‏

Damas Engages Abdullah Brothers as Senior Advisors

Here's an interesting bit of news from Business 24/7.

"At a time when Damas is going through a period of transition and pursuing a renewed strategy for its sustainable growth, the involvement of the Abdullah brothers in an advisory capacity provides us [with] significant depth of knowledge and insight," a spokesperson for Damas International Limited (DIL) said.

Presumably they've been engaged to give advice on marketing and design and not on corporate governance or financial matters.

KFIC - Details on KD 145 Million Debt Rescheduling

KFIC issued a press release on the KSE early this morning (copy below, as usual Arabic only) with details of its rescheduling.

Here's a quick translation.

All outstanding loans and facilities are being converted into a single loan.
 

The loan is secured by all the assets of KFIC and is divided into 4 Tranches.

1. Tranche 1:  KD64 million due in quarterly installments over five years with final maturity 31 December 2014.  Secured by the finance receivables of the Company.
2. Tranche 2:  KD71.467 million secured by the Company's listed and unlisted securities portfolio.  Repaid as assets are sold with final maturity no later than 31 December 2012.
3. Tranche 3:  KD3.813 million due on signing.
4. Tranche 4:  KD5.720 million quarterly installments due in the next 1.5 years.

[8:48:49]  ِ.ايضاح من (كفيك) بخصوص اعادة هيكلة ديون الشركة ‏
يعلن سوق الكويت للاوراق المالية بان الشركة الكويتية للتمويل والاستثمار ‏
ِ(كفيك) افادت بانها قامت باعادة جدولة جميع مديونياتها والبالغ قيمتها 145 ‏
مليون د.ك الى قرض واحد مجمع ،حيث تم التوصل بين كلا من الشركة ‏
والبنوك المقرضة (المحلية والاجنبية) الى الشروط النهائية للجدولة وذلك ‏
على النحو التالي: ‏
ِ1- تحويل كافة القروض القائمة الى قرض واحد مجمع .‏
ِ2-يكون القرض مضمون بكامل موجودات المجموعة (الشركة الكويتية ‏
للتمويل والاستثمار وشركاتها التابعة )  ‏
ِ3-زيادة راسمال الشركة .‏
ِ4- يتم تقسيم اجمالي مديونية الشركة الكويتية للتمويل والاستثمار الى اربعة ‏
شرائح كالتالي: ‏
ِ- الشريحة الاولى :اجمالي قيمة 64,000,000 د.ك على ان يتم السداد على فترة ‏
ِ5 سنوات تنتهي فى 31-12-2014 بدفعات ربع سنوية تبدا من تاريخ توقيع العقد ‏
مضمونة بمحفظة مدينو التمويل للشركة .‏
ِ-الشريحة الثانية :باجمالي قيمة 71,467,000 د.ك مضمونة بجميع ‏استثمارات ‏
الشركة المدرجة وغير المدرجة على ان يتم السداد عند بيع اى اصل من اصول ‏
الشركة بمدة اقصاها 31-12-2012.‏
ِ-الشريحة الثالثة :باجمالي قيمة 3,813,000 د.ك يتم سدادها عند التوقيع .‏
ِ-الشريحة الرابعة :باجمالي قيمة 5,720,000 د.ك يتم سدادها فى خلال سنة ونصف ‏
من تاريخ التوقيع على العقد بدفعات ربع سنوية ومضمونة ايضا بجميع استثمارات ‏
الشركة .‏

The Investment Dar - TID's Shari'ah Board "Slaps Down" TID's Defense in BLOM Lawsuit

TID has issued a press release that its Shari'ah Board met 22 May and reviewed the Wakala Contract between TID and Banque du Liban et D'outre Mer ("BLOM").

The Board ruled as follows:

1. The contract is Shari'ah compliant.
2. The Company should not make assertions in Court about whether a contract complies with Shari'ah or not before it has obtained the judgment of its Shari'ah Board.
3. The Company should withdraw this defense its Court Case against BLOM.  

The Company noted at the end of the press release that it had done so.

This is a rather significant development.  

First, TID's Shari'ah Board has set down a clear rule.  The determination of what is Shari'ah compliant is the Board's responsibility and not management's.  And that no actions are to be taken before the Board rules.

Second, in no uncertain terms, TID's Shari'ah Board has "slapped down" TID's  rather shabby (I'm being polite again) attempt to hide behind the Shari'ah to avoid settling an obligation.

Fugitive Banker Gives His Side of Story re TIBC

Frank Kane over at The National conducted an interview with Glen Stewart which was in the June 8 issue of The National.

To set the stage, as I understand it, there are two contentions central to the TIBC/Awal/AlGosaibi/Saad Group saga:

1. That there was massive fraud at the these entities which was the direct cause of their apparent collapse.
2. That Mr. AlSanea was improperly exercising control over TIBC and certain AlGosaibi units (the entity mentioned most was AlGosaibi's Money Exchange).  As noted in the article, a charge that Mr. AlSanea strongly disputes.

In his interview Mr. Stewart addresses the second.  He flatly contradicts the AlGosaibi's assertion that Mr. AlSanea was not authorized to exercise control over TIBC and the Money Exchange

What he does not appear to address in this interview is the first allegation.

I would also be very interested in Mr. Stewart's thoughts on the Ernst and Young report.  As per that report, it seems the CEO of TIBC had very limited authority.  Mr. Stewart deferred to Mr. AlSanea on decision making on just about every matter.  Beyond that there was the curious case of payment approvals.  E&Y stated that Mr. AlSanea used Mr. Stewart's password to release payments.  As I noted at the time I commented on the E&Y Report, it is very unusual for a CEO to be involved in  the operational aspects of releasing payments.  And giving another person one's password is generally considered a violation of segregation of duties and dual control.  

It would be highly useful to know how Mr. Stewart:

1. Saw his role as Chief Executive Officer at TIBC  and how that might compare and contrast to CEO's at other banks.  What precisely were the duties of TIBC's CEO and what were those of  Mr. AlSanea?  Is it good form for a CEO to give his password to a third party?  What does it mean when a person in the position of CEO apparently has no power to make any material decision? 
2. Understood  the requirements of Central Bank of Bahrain regulations regarding corporate governance. And, what if any, disclosures regarding Mr. AlSanea's role were made to the Central Bank.

Perhaps, Mr. Kane will have the opportunity to do another interview with Mr. Stewart.

One thing is abundantly clear from this interview and that is the emotional pain and suffering of Mr. Stewart.  Adding to that distress, we learn in this article that he felt abandoned by his own country in the midst of the "arbitrary actions and retaliations of the Bahraini legal system".   

KFIC Announces Signing of KD145 Million Rescheduling

Kuwait Finance and Investment Company, KSC ("KFIC") announced that it had signed a rescheduling agreement with all of its local and foreign lenders  - 22 in all.  The deal has a five year term ending 31 December 2014.  It was reached after 18 months of negotiation with lenders.

Both Al Watan and AlQabas have reports.  From the similarity of wording, it's clear the source was a  KFIC release.  As discussed below, AlQ has am "extra" bit:  some speculation on management changes.

Some of what I consider noteworthy points from the articles.

1. National Bank of Kuwait and AlAhli United Bank acted as lead banks in the restructuring process.
2. Ernst and Young undertook a valuation of the Company's assets and pronounced their fair value at 15% more than book value.  
3. Neither newspaper mentions a "headline" from KFIC's press release - that they serviced interest on the debts during the 18 month restructuring negotiations.  Perhaps this is well known in Kuwait?

AlQ continues with some speculation on possible changes in management.  Sana  Juma has supposedly resigned as CEO (earlier she had been at Gulf Bank) and been replaced by Riham AlGhanim, who is on the Board.  Ghadir Al Ateeqi, Head of Human Resources, is also reported to have resigned. 

You'll recall that KFIC lost KD13.8 million in 2008 and KD10.9 million in 2009.  The articles refer to 1Q10 results. These were operating income of KD4.7 million and net profit of some KD1.1 million. (Not mentioned in the two press reports cited above).

AlBashayer Investment Company - Focused on Women

ABIC will target wealthy women in the Abu Dhabi.

Gulf Bank Sues AlGosaibi and Saad Groups in Saudi Arabia

According to Marwan AlBadr of  AlQabas, Gulf Bank filed suits in Saudi against both AlGosaibi and Saad in two legal forums:

1. The Negotiable Instruments Committee - which deals with bank checks, letters of credit and similar instruments.  The NIC has set a hearing for March 2011.
2. The Committee for the Settlement of Bank Disputes - which is a SAMA committee to resolve disputes over loans and lines of credit.

It's expected that other banks will follow suit with suits in Saudi.

Al Boom Holdings

Here's an account from The National of the trial of the head of the Al Boom Holdings.

An Emirati property magnate spent almost Dh960 million of his investors’ money on parties, boats and luxury cars, a special fraud tribunal heard yesterday.

Abid al Boom, the chief executive of Al Boom Holdings, and his six co-defendants cheated some 3,700 investors out of their savings.

Only one per cent of the embezzled money was recovered, the prosecutor, Younis al Baloushi, told the tribunal.

As reported in the article, Mr. Al Boom's counsel did not offer a defense.

PRC Economic Penetration of the GCC

This brochure tells the story.

June 8-10 Dubai.  1,300 firms.  6 product categories.  One stop shopping.

And note this is part of a well organized trade promotion effort - not just in the GCC.  There'll be a fair in Miami in 2011.

To update Chairman Mao:  While power may come from the barrel of a gun, a country's economy is the basis for all power.

Dubai Rentals - Bargain Time

What's interesting about this article is the assertion of a new found willingness by landlords to negotiate rents.

Apparently, tenants are taking advantage of the market to move from older to newer properties.  Or to properties that are more convenient.

As a result not only are the explicit rentals coming down, but landlords are offering incentives like free months, absorption of utilities, enhanced maintenance, etc.

A key factor going forward will be the balance of inward and outward migration by expatriates.  A negative trend will depress rates.  A positive one may lead to stability and some increases.  And the balance will have clear implications for property and development firms as well as their creditors.

According to Colliers estimate, average rental rates have declined by 25 per cent between Q2 2009 and Q1 2010. As per Harbor's calculations, International City rents are 20 per cent lower than Q4 2009 and eight per cent lower than Q1 2010; Discovery Gardens rents are 13 per cent lower than Q4 2009 and eight per cent lower than Q1 2010, while rents in Dubai Silicon Oasis are five per cent lower than Q4 2009, but remain stable compared to Q1 2010.

Robinson points to a one-bedroom apartment being leased in December 2009 in Discovery Gardens for Dh57,000, which came down to Dh50,000 in March 2010 and is available for Dh40,000 in May.

However, a studio apartment in International City, leased for Dh30,000 in December 2009, declined to Dh22,000 in March 2010 and is being still leased for the same rate.

Dubai Holdings: Review of DHCOG 2009 Financials – The Business Model

DHCOG's 2009 audited financials as well as the CEO's commentary are available at this link at NasdaqDubai. Earlier audited financials are in the "Related Documents" section here.

Before I get into detailed comments on the 2009 annual report, I'd like to start by looking at DHCOG's business model, particularly its ability to generate cash. This will provide context for understanding DHCOG's ability to address the issues it faces.  A robust cashflow can pay bills directly.  And, if they are lumpy, a sound cashflow provides a basis for accessing finance to pay bills immediately.

In that regard, DHCOG is heavily dependent on Government Grants for both income and cashflow.

Let's start with net income

All amounts in AED billions. Percentage = Government Grants/Net Income.

	2009	2008	2007	2006	2005
Net Income	(23.6)	9.8	13.9	7.6	1.5
Govt Grants	0.7	19.2	10.0	6.6	0.7
Percentage	NM	196%	72%	87%	47%

 

Notes 2.22 (page 27) and 29 (page 72) in the 2009 financials discuss respectively the accounting treatment of subsidies and the amounts involved. 

With respect to the first, when the Government gives DHCOG land, the Company records the land as an asset with the contra entry to the liability account "Government Grants". Upon sale of the land, DHCOG recognizes profit based on the cost of the land. It then also recognizes the gain on the Grant as a separate item. This enables readers of the financials to determine the value added by DHCOG  through its own efforts by separating out the subsidy it has received.

A hypothetical example illustrates the point. 

Let's assume that the Emirate gives the Company a piece of land fair valued at AED100 on 1 January 2009. DHCOG books an addition to Land of AED100 and reflects a liability of AED 100 under Government Grants.  Then assume a sale on 1 July 2009 for AED 110. The Company's total profit is the sale price AED110 since it paid zero for the property.  In its accounting, DHCOG splits the AED 110 into two components:  AED10 in "Revenues" and AED100 in Government Grants.  In this case the Company is only responsible for 9% of the profit. The subsidy for 91%.

That was a hypothetical example.  Let's look at actual profitability.  Over the period 2005 through 2009, the Company earned AED9.2 billion. During the same period, Government Subsidies  were AED37.2 billion. Or 4.04 times net profit! In fact without the subsidies, DHCOGwould have had a net loss of AED28 billion.

As a side comment, the subsidies result in an interesting transfer of wealth from the Emirate to the private company owned by the Ruler of the Emirate.

The pattern is the same when we examine Cashflow From Operations (2009 Note 47).

Again all amounts are in AED billions.

	2009	2008	2007	2006	2005
Gross Operating CF	2.1	5.4	4.7	2.1	0.6
Net Operating CF	0.8	10.0	16.9	4.6	1.3
Govt Grants	0.7	19.2	10.0	6.6	0.7
Govt Grants/NOPCF	88%	192%	59%	143%	54%
Customer Advances	(4.2)	0.5	2.7	8.2	4.5
Deferred Revenues	3.3	7.0	6.4	0.3	NM

 

Not surprisingly, the above table shows a similar critical dependence on Government Subsidies, this time for cashflow. In four out of the five years, Government Grants were larger than Gross Operating Cashflow – that is Cashflow before changes in long term assets and liabilities and short term assets and liabilities (e.g., Working Capital).   By way of explanation, Gross Operating Cashflow is a better measure of the ability of a firm to generate cash from its operations than Net Operating Cashflow as the latter involves transient sources and uses of cash not resulting from the basic business process.

Another key component of cashflow has been customer advances (deposits) on purchases. As the real estate sales machine slows down so will the pace of new investments by clients.  As the Company's CEO, Ahmad Bin Byat, noted in his commentary on 2009, "The real estate market is expected to continue to face challenges in 2010 and 2011 until the excess supply of the existing and expected inventory is absorbed by stronger demand." That likely means no real meaningful additions to Customer Advances. Rather these will be drawn down. And if the recovery in 2012 is delayed or tepid, the situation will continue.

Also the Deferred Revenues point to another issue for the future.  The Company has been receiving cash for projects underway. These cash receipts have been booked as deferred revenues.  That is cash  is received but income is not recognized.  When the projects are completed and handed over, DHCOG will book substantial revenues. As of 31 December 2009, the amount of outstanding Deferred Revenues was some AED17.1 billion. However, when it does, these revenues will not be accompanied by cashflow of this amount.   To the extent that liabilities have increased during this period, a creditor would have to ask where the Company will get the funds to settle these obligations.

As hopefully this analysis makes clear creditors face two issues with DHCOG. The first largley trivial. The second critical. 

1. Continuance of Government Subsidies. A slowdown in real estate may mean an inability to utilize the remaining Government Grants, AED36.8 billion at 31 December 2009, in line with the "Master Plan's" timing. Theoretically, this could result in termination of the grants or a change in the their cost basis. However, since the good Shaykh is giving himself land, he is probably inclined to revise the terms of those grants to accommodate any slowdown. The maintenance of subsidies is the key to the Company's ability to generate significant net income and more importantly the cash necessary to repay debts. With a zero cost of land, the Company is uniquely positioned even  if real estate prices are sharply lower.  It also benefits because it does not have to finance the land prior to sale. No need to raise debt, leaving "spare" borrowing capacity, assuming it has access.  And no interest expense, improving both the bottom line and cashflow.
2. The overall state of the real estate market. While it's highly likely that the Shaykh will continue to see the wisdom of granting land to DHCOG, the real question is whether there will be significant demand for new projects. Property in the Company's "land bank" will do creditors little good if it cannot be sold. As noted above, Byat does not expect a recovery in the next two years. And there are some critical amounts due in that period.  And if he is wrong about the vigor or timing of the recovery, the situation will be even more difficult.

With this the stage is set for a second post on the 2009 financials.
 

International Investment Group: KPMG Report Ready But 2009 Financials Not Approved

IIG issued a press release on NasdaqDubai advising that while KPMG had completed its interim report, the Company could not release it yet because the Central Bank of Kuwait had not yet approved IIG's 2009 audited financials.

That latter statement indicates that the news in those financials is going to be what we in the financial world describe as "disappointing".

Here's the text of the press release:

Reference to the subject above and our announcement dated 22/04/2010, relating to the interim KPMG  report, to be received on 31/05/2010 and submitted to Sukukholders, which includes a preliminary  assessment of the company’s financial position and the options available to the company. 

Kindly be advised that KPMG has finalized the report referred to above, but IIG is yet to receive Central  Bank of Kuwait’s approval of its financial statements for the fiscal year ending December 31^st, 2009.  Accordingly, IIG is not in a position to release the aforementioned report, which includes references to the  31^st December financial statements, before obtaining such approval. 

We shall provide the interim report to all sukukholders who has signed confidentiality agreement, as soon  as the Central Bank’s approval is received.

IIG's Audited Finacial Sattements for the year ended as on 31st Dec 2009, shall be released to the market upon receiving Central bank of Kuwait's approval.

Earlier post here.

Dubai Debt Rescheduling Watch: DHCOG AED23.6 Billion Loss

DHCOG's 2009 audited annual report is out.  AED23.6 billion loss.  Equity at AED14.6 billion versus AED37.1 billion.

More commentary hopefully later today.

Dubai Debt Rescheduling Watch: Dubai Holdings Commercial Operations Group Misses Doctor's Appointment

Following up on Frank Kane's earlier article at The National, I was eagerly anticipating reading DHCOG's financials at Nasdaq Dubai.  Sadly they weren't posted.  Seems DHCOG missed its appointment.