AlGosaibi v Maan AlSanea – AlGosaibi’s Strategy with Creditors

In light of my recent post speculating that AlGosaibi was being pressured to accept Grant Thornton's "peace proposal" for a commercial settlement, this is probably an opportune time to take a close look at AlGosaibi's legal strategy. From a document concerned with the recent lawsuit by Trowers and Hamlins that I've seen, it's possible to reconstruct that strategy in more detail and to use AlGosaibi's "voice" in doing so.  Or at least it voice as channeled by US counsel.

Before we do that, a caveat.

What I'm about to present is AlGosaibi's side of the story. As you'd expect AlGosaibi's account is highly favorable to themselves as are statements made by their counsel – who they have hired to represent them.

Nothing surprising here.  This is the (adversarial) nature of the US legal system.  Long ago, AA was called for jury duty in a personal injury case. After the jury had been selected, the judge took us aside. He said that while each counsel had claimed that his sole purpose and desire was to obtain justice, this was not the case.  Each counsel was working for its client's interests, not for justice. And that, recognizing this fact, we should be duly skeptical of any statements made. Such is also the case here. It applies to all parties to the case: AlGosaibi, AlSanea, T&H, TIBC, Awal Bank and their respective management and officers as well as the counsel they have hired to represent them.

Now to AlGosaibi's strategy and rationale.

First, AlGosaibi's central thesis is that TIBC was "throughout its active life a criminal instrumentality operated apparently for the principal purpose of defrauding our client and third parties, incurring massive fraudulent debt in our clients' name and siphoning the proceeds to Maan AlSanea and his Saad Group of companies". In this regard they assert that TIBC was formed without AHAB's knowledge or authorization and that the pledge of shares which is listed as the source of equity for TIBC is not "legitimate." And that they do not "accept any debt owed to TIBC or the validity of any claims whatsoever asserted by TIBC" against AHAB. As part of this thesis, it's important to recall that AHAB also claim that the Money Exchange (through which the proceeds of alleged fraudulent commercial loans were passed) was also under the control of Mr. AlSanea and his confederates.  This thesis - that AlGosaibi itself was the victim of fraud along with the creditors - would also the basis for a less than 100% payback of the loans as I've noted before.  At least by AlGosaibi.

This is also the appropriate place to note that Mr. AlSanea and various other parties accused directly and indirectly by AHAB vigorously deny any wrongdoing.

Second, as a consequence of this (alleged) fraud, the proper response of T&H (and any creditor) is to join with AlGosaibi in pursuing the culprits and not the innocent victim - AlGosaibi.

Why?

"Litigating intercompany positions (e.g., TIBC and AHAB) will take years, if not decades and that such litigation only depletes resources that will be needed to effect a workable commercial settlement". Co-operation on the other hand "avoids wasteful and ineffectual expenditures and offers a potential for TIBC and its creditors to benefit from AHAB's recoveries and its potential commercial resolutions of claims with third parties." 

AHAB's counsel notes that even though AHAB rejects any TIBC claims against itself, it nonetheless has proposed that TIBC's creditors be included alongside its own in any settlement by a "substantive consolidation of all the creditor positions and the creation of a single fund". And that AHAB is creating a "fighting fund" of some US$150 million to use to pursue legal cases against Mr. AlSanea – which would relieve a burden on TIBC's creditors who no doubt would be reluctant to provide substantial funding for such an effort.

As well, it comments that commencement of legal action by T&H against AHAB could jeopardize its good will. And that a further danger to TIBC creditors is that any such legal action will require the presentation of original documents, which AHAB counsel asserts could be difficult to produce. And if produced, AHAB and its counsel are confident that the signatures thereon could be successfully challenged as forgeries.

Counsel also notes that it intends to raise these points with counsel for TIBC creditors, Clifford Chance Dubai.

The fact that T&H launched its suit roughly three weeks after this correspondence was sent indicates that it was not persuaded.

There are a couple of other points in the document - worthy of note and comment:

1. AHAB asserts that Saudi British Bank has refused to turn over to AHAB certain records pertaining to AHAB - which it asserts Mr;. AlSanea has removed from the Company and taken under his personal control and which include those relating to  the underlying pledge of shares which serve as the basis for the equity in TIBC. This is particularly perplexing. Why would SBB not provide duplicates of records to its client of record?  Or in other words, what would be the basis why SBB would refuse to turn over to its client duplicates of certain records pertaining to that client's business with it?
2. That AHAB counsel had proposed an information exchange protocol (apparently in March) under which AHAB and T&H would share information but with the stipulation that neither party would use the information so obtained in legal action against the other. It's perfectly understandable that T&H would not accept this. As the Central Bank appointed Administrator, it has a fiduciary duty to pursue claims against all debtors registered in TIBC's books. And certainly wouldn't want to expose itself to a TIBC creditor later suing it for failure to pursue one of the debtors because it unilaterally decided not to. The better path is to raise the claim.  Then let a Court determine whether the debtor has a defense against payment. This was, I am told, the tactic used in the liquidation of Petra Bank Jordan في الوقت المدثور . 

Stay tuned.  In a day or so, I'll post AlGosaibi's reaction to T&H's apparent rejection of its proposal for co-operation by looking at AHAB's 15 June submission to the NY Bankruptcy Court.

The Investment Dar - Ernst and Young Delivers "Final" Report on Restructuring Plan

AlQabas reports that E&Y has delivered its "final fateful" report on TID to the Central Bank of Kuwait.  The report includes a valuation of the Company's assets which is the basis for E&Y's judgment as to whether TID is capable of continuing as a "going concern" and meeting it repayment obligations under the restructuring.

As well, that the Company held a meeting with E&Y to discuss its analysis.  And that according to sources close to the Head of the Creditors Committee, the CCC held a meeting with Credit Suisse, Morgan Stanley and the Company to discuss the latest developments.

And finally that there are members of the CCC who are ready to propose alternatives should the CBK take an adverse decision on the restructuring plan.

I'd be rather surprised if the CBK did not approve the plan.  Rather if it has serious concerns, it might seek to amend the plan in one or more areas, though again I don't expect this. 

Presumably, the development of alternatives is a further demonstration of AA's Law of the Conservation of Due Diligence.  If you fail to do proper due diligence in the underwriting stage, you "catch up" in the restructuring stage.  And then of course the amount of work reflects the impact of time value (present value).  Much more is done.

As you know, the CBK's approval is required for entry by TID into the safe harbour of the FSL which will protect it - at least in Kuwait and probably in other jurisdictions - from dissident creditors' legal actions.  And recall that the FSL does give the CBK the right to amend the restructuring plan if it feels that such is needed to ensure its implementation.

More Signs of Real Estate Woes in the UAE

According to Bradley Hope at The National, Sorouh Real Estate has introduced a "rent-to-buy" scheme for commercial tenants at its Sky Tower on Reem Island.  The plan is apparently designed to "fill out" the remaining 20,000 square meters of commercial space.  Previously, Sorouh had offered a below market rate of 4.99% to first time buyers at its Sky and Sun Towers in the Shams Gate project on Reem.

This follows the announcement earlier this week that Dubai had given Nakheel's Board control over Limitless.    I suspect this is the first step towards combining the two companies as a way of reducing costs as well as adjusting capacity to realistic prospects for demand.

As you'll notice from this article also from The National, Limitless' problems were caused by the "global" (financial) crisis.   On a personal note, I was gratified to see that TN did not use the term "Global Financial crisis" using the SAM stylebook with all lower case letters.  There are some sensitive folks up North as AA knows only too well.

Original Prague Syncopated Orchestra

Equal time for Praha.  And here's the link to their website.

Bratislava Hot Serenaders

Nothing to do with finance or the GCC but brilliant.  Mit "Henry de Winter" und Bobby.  

Here's the link to BHS website.

Riffa Views Bahrain: GP Zacharides Walks

Because if it’s not remarkable it will become invisible.

The Gulf Daily News reports that GP Zacharides, one of the main contractors at RV, had terminated its contract due to non payment of some BD4 million due since February.  

"We have been left with no option following numerous attempts to come to a mutually-beneficial agreement with the client to right the debts outstanding since March and provide comfort that future dues would be paid when due," he said.

"Unfortunately, it is reported that the client could not provide this due to their current and longer-term financial outlook."

GPZ's was contracted to build 300 villas in the Lagoons section of the project.   It claims to be owed BD4 million since last February.  With demobilization and other termination costs, its claim may more than double to BD10 million.

The project has been struggling since 2008 (when it was hit with dramatic cost increases in building materials due to the real estate irrational exuberance - a particular cause was the Dubai delusion).  Then later the collapse in real estate prices slowed sales, reportedly caused some buyers to walk from their commitments.  Tight financing terms didn't help either.

Arcapita brought the project to market in December 2004 for some US$260 million.   It's a measure of its own financial condition that it is not bailing out the project to finish it.

Moody's Downgrades DHCOG

Asa Fitch at The National has an article on Moody's recent downgrade of DHCOG.

"The credit ratings agency downgraded Dubai Holding Commercial Operations Group (DHCOG) by one notch on its rating scale to “B2” from “B1”and kept it on review for another drop. DHCOG, which has large holdings in the hospitality, business parks and property sectors, was unavailable for comment. The group was downgraded to “B1” last December, a rating already considered below investment grade."

You'll recall that last January, Dubai Holding had excoriated S&P for its:

1. manifest "lack of understanding of DHCOG's business, its operations and relationship with the Government of Dubai." 
2. "inaccurate statements coupled with factual errors that are misleading."  

While it may be unclear to some if Moody's is suffering from the same affliction or if S&P was indeed right after all, there's no confusion here at Suq Al Mal.

AlGosaibi v Maan AlSanea - Grant Thornton to Broker "Peace" Deal? Authorities Supporing?

Frank Kane over at The National reports that Grant Thornton is trying to broker a settlement between AHAB and Mr. AlSanea.  Under what is described as the proposed deal, the parties would cease litigation against one another and pool assets to repay outstanding debt.  The stated goal is to maximize creditor recovery.  First, by eliminating the costs of litigation which no doubt would be considerable.  Second, and perhaps, more importantly, shortening the time frame until ultimate payment. 

Acceptance of the proposed plan would also achieve at least four other highly convenient goals:

1. It probably closes the book on allegations of financial crimes - which would no doubt be a comfort to any party who may have committed a crime.   In this regard, it should be noted that not a single party to the dispute has admitted to any wrongdoing.  And all aver they are as pure as newly fallen snow.  Perhaps, the proverbial pristine white snows of Saudi Arabia. 
2. It could relieve jurisdictions of the need to engage in complicated, messy and uncertain criminal prosecutions.
3. It will reduce (but not eliminate) the current intense scrutiny and reputation bashing of regulators and their countries - an unwelcome event fed largely by continuing press reports of the feud.
4. It would settle the dispute between two very important Saudi parties via a compromise .  Peace among the tribes rather than a victory for one side over the other.  Well consonant with Saudi tradition.

As the Cayman Islands' Court appointed liquidator for Mr. Al Sanea's Cayman companies,  GT's sense of fiduciary duty is clearly the motive for devising the settlement plan.   

As outlined above the plan would benefit other parties.  And they might well be expected to promote its acceptance.

Since the beginning of the crisis, Mr. AlSanea has suffered  heavy personal opprobrium in the press despite his repeated denial of any wrongdoing.  He and his firms have borne the brunt of legal actions filed.  And thus he may be well incentivized to deal.  

AHAB has until recently had a kinder fate.  And may therefore need a bit of prodding.   As well, they are perhaps the key to acceptance given the nature and vehemence of their accusations against Mr. AlSanea.  If they will sign the deal, then it may be easier for Mr. AlSanea to agree-  particularly if as expected the deal will involve a removal of accusations.

That's why I wonder about the recent spate of litigation directed against AHAB.  

Could it be that certain authorities are attempting to put pressure on AHAB with the view of securing its acceptance?

You'll recall that in announcing its US$720 million lawsuit against TIBC on 16 June Trowers and Hamlins said it took the action "following referral of the claim by the Council of Ministers." Clearly a reference to the Saudi CoM.  No doubt, any proposed legal actions were vetted as well by Trowers and Hamlins with its employer, the Central Bank of Bahrain.   In both cases an official "green light" to proceed.

Then again this all may be coincidence, though I don't think so.  The affair has dragged on to long.  Each day it persists is highly inconvenient for important parties who no doubt feel that it's time to close the book and move on.

Bahrain Court Rules in Favor of Central Bank of Bahrain's Decision to Place Awal Bank in Administration

The CBB issued a press release noting that a Bahrain Court had issued a ruling supporting its decision to place Awal Bank in "administration".  The former Chairman (Mr. Al Sanea) had raised a court case challenging the CBB's action.

It's not clear from the press release or news items (which seem to be a mere transcription of the press release) whether this is the Court of First Instance (which I suspect) or a higher level.  If it is the Court of First Instance, Mr. AlSanea would of course have the right to an appeal. As well, if it is the Appeals Court.  Like American baseball, the Bahraini system gives each litigant three goes at bat - with the Cassation Court (Supreme Court) being the final one.  

I'm guessing that Mr. AlSanea may take another swing in the courts.  And here it's appropriate to remark that Mr. AlSanea still continues to deny any wrongdoing in the conduct of his business affairs.

The importance of the ruling to CBB is evident from the inclusion of quotes from three senior executives.  Their common focus on the CBB's actions to maintain the strength and reputation of the Bahrain banking sector no doubt reflects some concern over the market's perceptions of both. 

Dubai Properties to Countersue Hopkins

Quoting an item in Reuters, Business Maktoob says that DP has indicated it will countersue Hopkins Architects for damages it suffered when HA stopped work on Central O8 towers.

Maybe, DP is reading SAM?  Realistically, probably not.

Gulf Finance House - In Final Stages of Restructuring US$100mm West LB Syndicate

There are press reports (Gulf Daily News and Reuters) quoting Ted Pretty, CEO, of GFH that they are in the final stages of refinancing the "stub" US$100mm from the earlier US$300 mm West LB led-syndicate.  As you recall, they repaid US$200 mm of the loan on maturity in February and then rescheduled the remaining US$100 mm for payment this August.

Whether this reflected the lenders' desire to keep GFH on a very short leash, irrational exuberance on the part of GFH's management regarding the potential for sale of its highly marketable and valuable "non core" assets, or some other serious delusion on the part of GFH or its creditors wasn't clear at the time.  And is still not clear.

What was clear at the time is that barring a miracle, GFH was not going to be able to make the payment.

This time a more sensible two to three year rescheduling is apparently being contemplated.  According to the GDN article, GFH and its creditors are in documentation.  If this is correct, then the deal terms are set.

What will be interesting to see is the impact on pricing.  The six month extension resulted in a five-fold or so increase in pricing.

Also what is clear from all of this is that GFH's rather low stock of credibility has been depleted even more.  

The Company really doesn't do itself any favors by making unrealistic pronouncements (US$420 mm in asset sales) or reversing course as with the on again off again sale of its interests in Khaleej Commercial Bank.  

Adding to its problems, if S&P holds true to its earlier position, GFH is in line for a downgrade.  A particularly unwelcome development as it seeks to rebuild its market position.  Particularly with clients.

On a positive note, this more sensible rescheduling does offer substantial relief to demands on its cash flow.  As well as a third chance to move forward. And also looking forward probably no American baseball rules here.

It also  will also give the folks at GFH another opportunity to use their demonstrated talents for writing press releases.  I can see how this successful rescheduling might just demonstrate yet again (as if another demonstration were needed) the confidence of GFH's lenders and the market in its proven business model, leading position as the premier GCC Islamic Investment Bank, as well as its promising future. Smaller minds may just see it as lenders accepting the inevitable if they want to maximize their recovery.  But then these are minds without the "vision thing".

I'll also be looking tomorrow morning for the announcements on the BSE, KSE, and other exchanges regarding this material development.

Markaz Kuwait: Massive Losses in Kuwait Investment Firm Sector

The fine folks at Markaz have issued a report on the Central Bank of Kuwait's proposed new regulations for the Kuwaiti "Investment" Firm Sector.

Markaz is generally supportive of the CBK's actions.

The "headline" story here (and sadly not a surprising one) can be summed up in this quote:

The sector lost over USD 2 bn in 2009 following a monstrous loss of upwards of USD 3 bn in 2008, and continues to post an aggregate loss of over USD 100 mn in 1Q10 (an annual run rate of USD 400 mn). The losses are tied to impaired assets which companies have been writing-off in an attempt to restore some health to their balance sheets. Liquidity and over-leverage have also been an issue for the sector, whose assets are often comprised of difficult to value and illiquid investments which are then pledged as collateral against further borrowings. These issues were not bothersome during the boom periods; however, when the global financial crisis hit, it exposed the sector’s vulnerabilities resulting in a massive destruction of wealth.

The report has three main parts:

1. A discussion of the ratios.  This is well worth a close read.
2. The CBK's analysis of compliance. (Discussed below)
3. Markaz's own analysis from a sample of 32 companies.

I'll let you read Markaz's discussion of the ratios - not much for me to add.

As to the CBK's analysis,  of the 100 firms in the sector:

1. 94 meet at least one of the new criteria.
2. 82 at least two of the new criteria.
3. 49 all three of the criteria.

Markaz has done a bit of data gathering and number crunching to come up with a ratio compliance test for 32 firms in the sector for the first two new ratios:  total leverage and liquidity (the latter what Markaz calls the "Acid Ratio").  It's not possible to calculate the third ratio (foreign debt exposure) given the woefully inadequate disclosure of foreign borrowings.

The detailed results of Markaz's analysis are in Appendix 2.  On an aggregate basis, of the 32 firms in their sample.

1. 75% met the Leverage Ratio.
2. 44% the Acid Test (Liquidity Ratio)
3. 34% both ratios.

One point I would like to highlight is their focus on fair value reserves.

The problem arises in the valuation method used in this segment which can be vague at best and completely misrepresentative of “actual” value in the worst case. By misrepresenting the fair value of Assets Available for Sale, a company can inflate its Fair Value Reserve (and therefore Equity figure) by booking Unrealized Gains, which would produce a lower leverage ratio." 

Earlier post on this topic here.

Jones Lang LaSalle: "Dubai Real Estate Slowdown to Continue"

You've probably seen reports quoting Jones Lang LaSalle's prediction that half of Dubai's commercial office space will be vacant in 2011 and that the residential property market will also be under stress until then as well.

Well, here's the original JLL report that is the basis for those news items.  Besides containing more information, the JLL report also provides some nuances.

Commercial Office Real Estate

1. While there is a substantial vacancy rate in commercial office space currently at 38%,  only 12% of single ownership stock in the Central Business District ("CBD") is vacant.
2. JLL sees very little demand for "strata titled" space.
3. There is in some respects a shortage of good quality supply (location, specification, legal title) as evidenced by the lower vacancy rate in the CBD.

Residential Space

1. Rents for  higher end apartments (Burj Khalifa) continue to decrease significantly.
2. Higher end villas are hit even harder.

Retail Market Space

1. Estimated Rental Values down 39% from 2Q09 to 2Q10.
2. Retail sales growth expected to come from department stores and mid market value chains rather than luxury goods.
3. No significant new supply until 2013 (Mall of Arabia in Dubailand).

Hotels

1. Beach hotels have higher Average Daily Rates than business hotels - AED1,386 versus AED660.
2. New hotels are expected to intensify competition and lead to a decline in ADRs not a decline in occupancy percentages.

There's a lot more in the report and you can "mine" it according to your own interests.

Central Bank of UAE Preparing Provisioning Guidelines for UAE Banks for Dubai World Exposure

Quoting Reuters, Emirates Business 24-7 says that the CBUAE has advised banks not to take specific provisions against their Dubai World exposure pending the CB's release of guidelines on provisioning.

As discussed in February, the CBUAE is in the process of revising its general guidelines for loan classification and provisioning.   

No doubt they will want to do a bit of "fine tuning" regarding guidance for Dubai World.

British Architectural Firm Sues Dubai Properties for AED27 Million (US$7.3 Million)

Bradley Hope over at The National reports that Hopkins Architects, a major UK architectural and engineering company, is suing Dubai Properties in the DIFC Court  (Court Case CFI 034/2009) for AED27 million (US$7.3 million) for what it claims are unpaid fees and costs it has incurred in connection with Central Park 08, a set of twin 50 storey towers next to the DIFC.

As per the DIFC Courts website, Dubai Properties has until 12 July 2010 to present its defense.

This amount is rather small beer in financial terms.  And failure to pay reflects either a very serious commercial dispute.  Or a rather severe cash crunch at Dubai Properties.

The article leaves the impression that HA stopped work because of non payment and then DP sought to cancel the contract.  Assuming this is correct, it would seem then that DP would owe HA for work to date less any deductions for any damages it can claim against HA.  From the article it sounds as though DP is not raising any counterclaim against HA, though it may still be early in the legal game.

In any case, I am taking comfort as I suppose we all should by the recent words of a high placed guy in the Emirate who should know the score.  While this quote refers to Dubai World, I'm sure that it probably equally applies to Dubai Holdings.

"I'm not worried about the company, the company has got the wealth. So they have something, and they will come back very very quickly."

Though I'll confess I'm not so confident about HA collecting its receivable.

AlGosaibi Offers Creditors 20% on the Dollar Plus Proceeds of Lawsuits Against Maan AlSanea

Quoting informed sources, Frank Kane at The National reports that AHAB has offered creditors a cash payment of US$1.8 billion on US$9 billion of liabilities plus up to US$4 billion hoped to result from AHAB lawsuits against Mr. AlSanea.   

As Mr. Kane notes and as I have as well before, Mr. AlSanea continues to deny AHAB's allegations against him.

The al Gosaibi family of Saudi Arabia is prepared to sell much of its 70-year-old business empire to help pay its creditors, informed sources say.

The proposed net payment is a minimum of 20% (US$1.8 billion) with a maximum of 64.4% (US$5.8 billion).

As the article points out, the net value of Mr. AlSanea's assets is not known. 

Assuming for a moment that AHAB would be successful in its lawsuits, I believe it would become another of Mr. AlSanea's unsecured creditors.   And would therefore be entitled to a proportionate share of the "estate".  As well, the resolution of the lawsuits is probably something that will require a very long time to settle.  In objecting to a potential suit against itself by Trowers and Hamlins,  AHAB is reported to have said that "litigating the intercompany positions will take years if not decades and that such litigation only depletes resources that will be needed to effect a workable commercial settlement".   One may perhaps safely presume that the same would apply to AHAB lawsuits against Mr. AlSanea.  

Putting aside the depleted resources argument, one might argue that the present value of the proposed settlement is therefore less, much less, than 64% or 20% for that matter (which will depend on sales of AHAB assets). 

DIC Cashes Out of Merlin (Madame Tussaud's)

Asa Fitch over at The National reports that DIC has sold its remaining 6% stake in Merlin to CVC.  No doubt an element of cash need drove the sale, though DIC received the lion's share of its return in 2007 when it received GBP 1 billion in cash plus 17% of Merlin.  This is compared to the purchase price of GBP800 million in 2005.  

The additional amount for the sale to CVC is icing on the cake.

According to CVC's press release on the sale, the ownership of the Company is now KIRKBI 36%,  Blackstone 34%, CVC 28%, management 2%.

With no single investor holding majority control, managing the Company will be a bit trickier than if there were a dominant shareholder.   

On the other hand, a distinct benefit is that cash calls for new equity (if any is required) will not fall disproportionately on any one shareholder.  

The Company needs cash to fund its "ambitious growth programme" as the CVC press release states.  And there is the unfortunate bunching of loan maturities - the extension of which is being negotiated currently.  Both potential cash demands.

Additional debt financing is unlikely.

The CVC press release also states that "Merlin does not intend to increase its financial leverage."   I suspect that the decision reflects more than sober financial self-discipline. Bankers are now less willing to lever up the company than they were during the  "Bonny" days when Charterhouse owned Madame Tussaud's.  Then loans were abundant.  And with easy terms - long dated bullet loans.    

That leaves additional equity.

Last October, the Financial Times reported that Merlin would IPO in 2Q10 with the transaction mooted at some GBP2 billion.  The sale to CVC suggests that the IPO route is not as likely as there is little reason for Blackstone to reduce its position in a trade sale if an attractive IPO is imminent. 

The remaining source is private equity - and perhaps a rationale for several rather than one dominant shareholder.

The Investment Dar - No Agreement on Draft Budget Expenses

Citing informed sources, AlQabas reports that the meeting earlier this week between the Creditors Co-ordinating Committee and the Company did not resolve the differences over the level of operating expenses in the proposed five-year budget (which is required under the restructuring).

At the end of the meeting, the CCC came up with some modifications to the Company's budget which were devised by the Chief Restructuring Officer - who was appointed by both sides as a "neutral" party to review the proposed five year projected financials/budget.

The Company is expected to reply within the coming week.  If it agrees, then the revised budget will be submitted to the Central Bank for its review.  If not, the dispute will remain open (unresolved).

As noted in the previous article, the creditors' position is that expenses should be in harmony with the new situation the Company finds itself in.  Meaning probably fairly dramatic cuts in operating expenses.

The central question is just how deep the cuts are and whether they are really required.  Or if they are a bit of overkill by overzealous bankers.  Without details, there's no sound basis for judging one way or the other.

NY Court Compels Release of AlGosaibi Bank Account Details

As per the Gulf Daily News,  Trowers and Hamlins won an important legal victory in US Bankruptcy Court.  The Court ruled that AHAB's New York bankers must disclose details of a key AHAB account.   One to which reportedly a large amount of funds were transferred.  As the article notes, Trowers and Hamlins have been requesting information on this account since last August.  

Trowers & Hamlins partner Abdullah Mutawi, who is leading the asset realisation strategy, said it was a significant development.

"This is the first time AHAB has been compelled to reveal details of any of its bank accounts," he said.

"It is particularly significant because AHAB has repeatedly refused to hand over important information relating to the operation of the account.

"The account is important because a substantial portion of TIBC's funds were remitted to it and the information should help reveal the ultimate destination of those funds."

As I noted in yesterday's post about First Gulf Bank's lawsuit against AHAB,  there seems to have been a change in the dynamic of this story.  The focus is now on AHAB's behavior - both in terms of responsiveness to requests from creditors as well as its role in the collapse.

I suspect this is going to get increasingly messy.  At the end few reputations may be left undamaged.

Dubai: Self Made Challenge

HH Shaykh Mohammed Bin Rashid AlMaktoum set the record straight in an interview with CNN.  Or more precisely will do so next week when the interview airs.

Like Global Investment House in Kuwait, Gulf Finance House in Bahrain and several other careful students of the market, he's identified the sole cause of current problems - the global financial crisis.  As we always note here at Suq Al Mal out of an abundance of caution to prevent anyone from drawing the wrong conclusion, that's global with a lower case "g".

"The recession is a global phenomenon and I do not think that we in Dubai fear it, but instead we consider it a challenge."

It's often said that true progress and development comes by challenging oneself.  Sadly, other members of the GCC, like Qatar, apparently don't feel up to challenging themselves in quite the way that Dubai is challenging itself.

While in reference to Dubai World, he adds: "I'm not worried about the company, the company has got the wealth. So they have something, and they will come back very very quickly."

Some Kuwaiti Banks Overreaching in Collateral Demands

AlQabas quotes unnamed financial sources that some banks have been taking excessive collateral in restructuring debts for their subsidiaries and affiliates - reaching 400% coverage in some cases.  The issue is that such coverage levels effectively place other creditors - banks, investors in murabaha transactions, etc - in a much weaker position.

The financial sources expect that disadvantaged creditors will raise formal complaints with the Central Bank of Kuwait.  The article notes that the traditional collateral level is between 150% and 200%.

A final comment is that some restructurings are being delayed as creditors cannot agree - given some creditors' demands for a higher ratio of coverage or specific assets for themselves.

While nothing concrete was said, I wonder if this relates to "Islamic" banks.  

Perhaps one of my better informed readers will care to comment.

First Gulf Bank Sues AlGosaibi for AED58.7 Million

First Gulf Bank has launched a suit in the Abu Dhabi Court of First Instance against AlGosaibi's local company and AHAB itself.

Both parties are being quiet about the details of the case.

FGB reportedly has a US$55 million in exposure to both AlGosaibi and Saad.

From recent press announcements it appears that the legal tide has turned - and that the current focus is now on AlGosaibi.

AT Kearney: Reinventing Investment Banking in the GCC

An interesting report from ATK on the GCC investment banking sector.

The key issues that GCC investment banks face are:

1. Competition from more established firms - who are opening offices in the region.
2. Local investment firm's business models which focus heavily on private equity investments.  That in part reflects the state of local capital markets.
3. A debt capital shortage which constrains the ability to build asset intensive businesses.

To that I'd add:

1. A reluctance by clients to pay for advisory services unrelated to fund raising.
2. Relatively modest volumes.  This in part explains the focus on proprietary investments where the gross margins are higher than on capital markets and advisory business. 
3. Market deficiencies.  An absence of sophisticated institutional investors.  Local equity markets are largely driven by irrational exuberance and pessimism of retail investors.    Constrained free float on many major firms.
4. In general weaknesses in corporate governance and disclosure.   
5. Lack of skills and shortcomings in professionalism/ethics.

Central Bank Regulation - John Lipsky

John Lipsky, First Deputy Managing Director at the IMF, delivered a speech on deficiencies in central bank regulation prior to the recent crisis plus some prescriptions for correcting shortcomings in Moscow last Friday. "The Road Ahead for Central Banks: Meeting New Challenges to Financial Stability".

He identifies a central failing which might be described as simple minded credulity.

Prior to the crisis, for instance, supervisors relied excessively on financial firms’ own risk analysis and internal controls. In broad terms, they relied heavily on the self-disciplining qualities of markets. In other words, supervisors were insufficiently intrusive and skeptical.

What could possibly go wrong with allowing firms to police themselves?  Not just allowing them to judge when they had "broken" a prudential limit, but allowing them to measure whether they had broken it or not.  And, we hear yet again about the self disciplining qualities of markets - which is the regulators' equivalent of the implicit guarantee. 

In fact if you read the speech carefully, you'll see that this failing is the root cause of most of the other shortcomings he identifies. 

AlGosaibi v Maan AlSanea - Trowers and Hamlins Statement

One of my new and frequent commentators mused whether the fact that Trowers and Hamlins had launched a lawsuit against AHAB represented any sort of determination by T&H about the guilt or innocence of the parties involved in the case.

I had speculated that T&H was merely doing its job - going after the registered debtors of TIBC and pursuing collection of funds without making any such judgments.

That left us in a stand-off of opinions.

So, I posed a question to T&H through Hill and Knowlton.  Today I received the following response which I quote verbatim.

A Trowers and Hamlins spokesperson said: “Our investigations to date and other extrinsic evidence provided by third parties - which we are still considering - would suggest that there were irregularities in the manner in which the business of TIBC and other institutions connected with the AHAB / Saad situation was conducted.  However, investigation of fraud or other criminal activities and/or other material non-compliance by officers or other stakeholders of TIBC with the law or regulatory requirements essentially remains the remit of the public prosecutor and the CBB respectively and it is therefore not appropriate for us to comment or speculate further.”

As you'd expect a law firm to do, this statement is carefully crafted to avoid creating any unwanted legal problems for T&H.

There are several points I think are worthy of comment:

1. That at this point what T&H has seen suggests - though not conclusively - that there were "irregularities in the manner in which the business of TIBC and other institutions connected with AHAB / Saad situation was conducted".
2. That investigation of fraud, criminal activities or material non compliance with regulations is not T&H's responsibility but that of the "Relevant Authorities" in the Kingdom of Bahrain.
3. Accordingly, T&H will not comment on such matters.
   

Damas - Enforceable Undertaking Latest Developments

A rather enigmatic press release from Damas on Nasdaq Dubai this morning.

Three points of note:

1. Damas International Limited ("DIL") is negotiating a Cascade Agreement with Damas Investments Limited and Damas Real Estate Limited, the Abdullah Brothers who own both companies, and their respective creditors.  "The purpose of the Cascade Agreement will be to effect an orderly realisation of the assets of the Abdullah Brothers Group. DIL and its board will at all times continue to act in accordance with their legal duties."
2. "DIL notes that its undertaking to recover amounts owing from the Abdullah Brothers at paragraph 17.37 of the DIL Enforceable Undertaking is expressed to be subject to any stand-still, restructuring, security, cascade or similar agreement with the Abdullah Brothers Group and their creditors, including DIL. DIL further notes that in the enforceable undertaking given by the Abdullah Brothers dated 21 March 2010 (the "Abdullah Brothers Enforceable Undertaking") the obligation to repay the Drawings Amount (as defined therein) to DIL at paragraph 15.11 is expressed to be on terms and conditions either already agreed or to be agreed with DIL. Further, the obligations of the Abdullah Brothers to use the net proceeds of realisation of assets to repay the Drawings Amount at paragraph 15.12.1 of the Abdullah Brothers Enforceable Undertaking is expressed to be subject to the terms of any settlement, stand-still, restructuring, security, cascade or similar agreement with creditors (including DIL)."

It sounds as though Damas is in the process of revising the original repayment schedule agreed with the Abdullah Brothers.  No doubt legally required in terms of the rights of all creditors.  What it probably means for DIL is a longer payback period.  And depending on the assets, perhaps less than 100% payout.  From what I've read it seems likely that many of the investments may be problematic to sell at original cost.

The International Banking Corporation - Trowers and Hamlins Sues AlGosaibi

Not a good week for the AlGosaibis.

Trowers and Hamlins, the Central Bank of Bahrain Administrator for TIBC, announced through its public relations firm, Hill and Knowlton, that on 16 June, it had "filed a US$720 million foreign exchange claim against Ahmad Hamad Algosaibi & Brothers (AHAB) at the Saudi Arabian Monetary Agency (SAMA) Committee in the Kingdom of Saudi Arabia, following referral of the claim by the Council of Ministers."

There are a couple of telling points in the press release.  The first is the comment that the claim was filed "following referral of the claim by the Council of Ministers".

The second is a quote from Abdullah Mutawi, the T&H Partner handling this case:

“The claim we have launched with the SAMA’s Committee follows unsatisfactory responses from AHAB and their representatives to questions relating to the assets of TIBC that we have repeatedly asked them."  

You'll recall (and if you don't here's the link) that earlier there were complaints from some of the Kuwaiti banks that AHAB (as well as Saad) were not responding to requests for information or to hold meetings.   T&H notes in the press release that it has has "filed an application in the Courts of New York under Chapter 15 of the US Bankruptcy Code for an Order pursuant to Bankruptcy Rule 2004 authorising discovery.  The application seeks to obtain an Order from the Court compelling the disclosure of key financial information which the Administrator has been requesting from AHAB since August 2009 and which has not been forthcoming."  

The third is that AHAB is the "single biggest debtor owing US$3.2 billion."

In its press release T&H notes 

In addition the Administrator recently filed cases with the Negotiable Instruments Committee (NIC) in Saudi Arabia against Saad Trading (US$ 117 million), which is part of the Saad Group, as well as Abdulaziz Al Sanea (US$54 million) for defaults on loans advanced by TIBC.   Hearing dates have been set for early 2011 in relation to those cases and the administrators are currently working to expedite these hearings.

And that it will be pursuing other cases in an attempt to recover monies owed TIBC.

Finally, there is a quote from an unnamed representative of the Central Bank of Bahrain

“We are pleased that litigation has been launched less than 12 months after the CBB placed TIBC into Administration. This is a positive step forward in what is clearly a very complex case and reflects the CBB’s commitment to maintaining a well regulated and stable investment environment in Bahrain.”

Frank Kane over at The National has some additional information.

Two quotes. 

The first.

“Trowers and Hamlins’ rhetoric simply ignores [the Al Gosaibi group’s] multiple offers to enter into a co-operative information sharing agreement …”said Jim Courtovich, the spokesman for Al Gosaibi, said in a statement to The National.

The second.

In a letter to Mr Mutawi dated May 26 obtained by The National, a lawyer for Al Gosaibi said the group was advised not to hand over documents to Trowers and Hamlins because the firm was planning to use them as evidence in cases against Al Gosaibi.
“We could not responsibly advise our clients to proceed in this manner,” the letter, from Eric Lewis at the firm of Baach Robinson and Lewis, said.

In the letter, Mr Lewis also advised Trowers to join Al Gosaibi in the fight against Mr al Sanea, asserting that filing lawsuits against the group would be unproductive for creditors to TIBC.

As always, it's a good way to end a post on this topic to note that Mr. AlSanea vigorously denies the AlGosaibi allegations against him.

KFIC - Annual General Shareholder Meeting Approves Capital Reorganization and RIghts Offering

KFIC published the results of its shareholders OGM held 16 May.

1. Agreement not to distribute dividends for Fiscal 2009.
2. Recapitalization by extinguishing 2009 losses of KD25,314,775 by utilizing General Reserves of KD6,371,986, Legal Reserves of KD8,948,771, and Capital in Excess of Par KD2,210,849.  The difference will be made up by reducing Paid in Capital from KD41,930,970 to 34,147,801.
3. An increase in capital of KD20,000,000 by issuing 200,000.000 shares at KD0.100 per share by way of a priority rights issue.   This allows existing shareholders the absolute right to buy enough shares in the Rights Offering to maintain their respective percentage ownership of the Company.
4. Election of a new board for a three year term.

The board is composed of: 

1. Saleh Yacoub Yousef Al-Humaidi
2. Riham Fuad Mohammad Al-Ghanim
3. Mahmoud Fouad Mohammad Al-Ghanim
4. Tariq Mishari AlBahar
5. Mahmoud Emam Yaseen Owais
6. Abdulmohsen Yagoub Yousef Al-Humaidi
7. Fadwa Yacoub Yousef Al-Humaidi

This is pretty much the old Board except that Tariq appears to have replaced Wael Jassim Al-Sagar.

للشركة الكويتية للتمويل والاستثمار ( كفيك) قد انعقدت يوم الاربعاء ‏
الموافق 16-6-2010 واقرت الجمعيه العمومية بما يلي :‏
ِ1- عدم توزيع ارباح عن السنه المالية المنتهية في 31-12-2009 ‏
ِ2- الموافقة علي اطفاء الخسائر المرحله للعام 2009 بمبلغ 25.314.775 د.ك ‏
وذلك باطفاء رصيد الاحتياطي العام بمبلغ 6.371.986 د.ك والاحتياطي القانوني
بمبلغ 8.948.771 د.ك وعلاوة الاصدار بمبلغ 2.210.849 د. ك وتخفيض راس
المال من 41.930.970 د.ك الي 34.147.801 د.ك بمقدار الخسائر المتراكمة بعد
اطفائها من الاحتياطيات وعلاوة الاصدار والبالغه مبلغ وقدره 7.783.169 د.ك ‏
ِ3- الموافقة علي زيادة رأ س  مال الشركة من 34.147.801 د.ك الي ‏
ِ54.147.801 د.ك وذلك عن طريق طرح عدد 200.000.000 سهم للاكتتاب بقيمة
اسميه قدرها 100 فلس كويتى نقدا ودفعه واحدة وذلك للمساهمين المقيدين بسجلات
الشركة في نهاية اليوم السابق لبدء الاكتتاب في زيادة رأس المال ويكون لكل ‏
مساهم الاولويه بالاكتتاب بحصة من الاسهم الجديدة ومتناسبة مع عدد اسمهه .‏
ِ4- كما تم انتخاب اعضاء مجلس ادارة جدد للثلاث سنوات القادمة كما يلي :‏
السيد - صالح يعقوب يوسف الحميضي ‏
السيدة - رهام قؤاد محمد الغانم
السيد - محمود فؤاد محمد الغانم
السيد - طارق مشاري البحر
السيد - محمود امام ياسين عويس
السيد - عبد المحسن يعقوب يوسف الحميضي ‏
السيدة - فدوي يعقوب يوسف الحميضي ‏
وعليه سيتم تداول سهم الشركة بعد تخفيض رأس المال اعتبارا من اليوم الخميس ‏
الموافق 17-6-2010 ‏

The Investment Dar - TID and Creditors Debate Expense Controls

AlQabas reports that the Creditors' Co-Ordinating Committee and TID will meet in Dubai on 23 June to discuss the CCC's request that TID reduce operating expenses.   As per the article the creditors want at least a 40% reduction in expenses during the first three years of the rescheduling.   The Five Year Budget and projected financials the Company presented propose expense levels much higher than that.  

TID's argument is that it needs to maintain a certain level of expenses to manage its affairs and fulfill all the requirements of the restructuring -- and from the reports of terms of the restructuring I've seen there are many.   

The creditors for their part claim that the expenses remain elevated and are not consistent with the situation of the Company and general economic conditions and that the Company does not need the number of staff.

As I've written before, there is a natural tension in restructurings between the debtor and the creditor over expenses.  And often the creditors insist on draconian cuts which do not materially improve their repayment prospects but which often dramatically harm the Company's ability to function as a going concern.

Without details it's hard to say.  But I think you can see which side of the debate I'm leaning towards from my comments.  That's of course not to say that there shouldn't be some expense control.  But that it should be focused and relevant. 

Etisalat AED37 Million Bonuses Flap

The UAE State Audit Institution ("SAI") has raised questions about AED37 million in bonuses that the Board granted itself and its Chairman for 2009.

The SAI believes the bonuses should have been approved by shareholders at an Annual General Meeting.  The Company says that the majority shareholder (the government with 60%) has approved these in the past and that its Memorandum and Articles of Association do not required ADM approval.

"They have the right to say whatever they want. We cannot ask them not to write it, but we have our own view that we have the right to voice," Mohammad Hassan Omran, etisalat Chairman, told Emirates Business. "Definitely we are working with them in order to develop the way reporting and auditing should be done."

I thought it was pretty much standard corporate law requirement in the GCC states that shareholders approve such payments.

Gulf Finance House - Badr Al Subaiee Resigns from Board

GFH announced on the BSE today that Bader Al Subaiee (Chairman and MD at KIC) had resigned from its Board. 

And that it will be discussed at the upcoming shareholders' general meeting.

I haven't seen anything in the press on this and wonder if it's related to GFH's ongoing problems or is a personal matter.

Hashem al-Dabal Released After Repayment of AED130 Million

Business Maktoob reports that Hashem al-Dabal, former Chairman of Dubai Properties, has been released after repayment of AED130 million he allegedly embezzled in his former position.

AlGosaibi v Maan AlSanea - Bahrain Court Rules Documents Not Forged AlGosaibi to Appeal

A bit of a bombshell from Frank Kane at The National today.

The Bahrain Chamber for Dispute Resolution ruled "at the end of last month there was no evidence to show the signatures were not genuine."

The AlGosaibi's intend to appeal.  And is usual with the Bahraini Court system, it will be up to the Cassation Court (Bahrain's highest Court) to render the final judgment.

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.