Damas: A Gem of Loss AED1.9 Billion for Fiscal 2010

You may have seen the news articles on the loss.  Here in the Gulf News.  Or Khaleej Times.  As usual, if you're looking for more content, you'll find it at The National.

Hopefully, this post will expand the discussion.

For this excursion, here are Damas' Press Release and its Audited Annual Report for 2010 (inexplicably missing the audit report).  Presumably a technical issue because ASDA'A - Burson Marsteller was involved in distributing this. I've sent NasdaqDubai an email to note the oversight.  If you live in the Emirate, you might give them a call. 

The first thing that becomes obvious is that the new board and management are  "taking an accounting bath" - writing down everything they possibly can.  This associates the loss with the previous board and management.  And then when there are recoveries in these same items in the future, they (the new "team") will look like "blooming business geniuses". 

The second thing is that the number of areas where writedowns or provisions have taken place give an idea of the extent of the corporate rot.  There seems scarcely an asset category  or company activity that was not touched.  In cases like this one has to be quite a charitable soul to ascribe the lowest possible level of intelligence and competence to those involved.  Otherwise one would be forced to conclude that they were complicit in the Abdullah Brothers' crimes.  That would, of course, include Damas' Accounting and Finance Department, its internal auditors, its Board Audit Committee and its then external auditors. 

Let's step through the charges.

First "impairments" of AED 790.6 million.   Note 11.

1. AED457 million against the AED767 million due from the Abdullah Brothers (Note 26).  A provision of 59.6%.  This is composed of the AED606 million  in unauthorized withdrawals plus AED150 million in a lost deposit - lost as a bank seized it for a gold loan to the Abdullah Brothers.  Less AED3.3 million in Board fees for fiscal 2010 - we'll file that  under "insult added to injury".  Seems Damas has a soft spot for the Abdullahs and still believes it needs to compensate them for the wise and highly beneficial services they provided to the Company during fiscal 2010.  We can be sure of one thing.  The Company will recover at least AED150 million from the Abdullahs by offsetting the AED150 million subordinated loan the Abdullahs made to the Company.
2. AED106.1 million against real estate due to a downturn in the market values.
3. AED54.7 million for investments in persistent loss making jointly controlled entities which are impacted by a change in the role of the Abdullah Brothers.  Since the losses were incurred while they were running the Company, is the assumption that now that they are not, the situation will change for the worse?
4. AED28.4 million for certain associates due to uncertainty of future cash profits.
5. AED84.4 million for long term loans and receivables from related parties.  Apparently wisely made by Damas with no fixed repayment tenors, no interest applicable and no collateral.  
6. AED14.1 million for available for sale investments.
7. AED16.0 million for intangible assets.
8. AED29.8 for receivables.

Now to Provisions - AED572 million.  Note 12.

1. AED434 million for Inventories (Note 22 (ii)).  Seems Damas gave gold from its inventory to certain "consignment vendors, ventures, debtors, associates, and jointly controlled entities without any margin and to certain parties against cash margin."  Some AED618.2 million (of which AED613.5 was gold) against which it had AED183.8 million in collateral.  It has fully provisioned the remaining amount AED434.4 million.  Once Damas "lent" gold or other inventory, then those assets should have been separated from the rest of inventory.  Especially since the amount is significant - 30% of total inventory.
2. AED121.1 million for doubtful receivables - in very rough numbers 37% of gross receivables.  There's one proven business way to increase sales and that's to sell on very easy terms.  Selling to people who can't or won't pay back works every time.  We are told that this provision is motivated by the change in the role of the Abdullah Brothers in the Company. It seems that the Abdullah Brothers originally approved the extension of these receivables. Which is perhaps why they weren't collected.  Now that they are no longer in control we are to conclude that the receivables won't be collected and must be written off? Frankly, I'm not following the logic here.
3. AED16.6 million for "slow moving inventories".  Since a jeweller's inventory turns really slowly these have to be some "real gems", no doubt.

Third, an AED79,6 million loss on settlement of bank liabilities (Note 13). 

1. AED73.3 million:  Damas couldn't meet margin calls against gold loans.  Wonder where the gold went? Borrowed by an Executive Director?  So the Company had to give Inventory with a cost of AED140.1 million for which the bank gave them AED66.8 million.  That led to an AED73.3 million loss.  Damas is buying back the inventory in a phased manner at the purchase price originally paid to the bank.  
2. AED6.2 million loss on a jewellery for debt exchange.

Provision for Dubai Ventures Loan AED311.5 million (Note 21).

1. You'll recall this transaction was part of the fraud perpetrated by the Abdullah Brothers at the time of the IPO.   They gave Damas funds to Dubai Ventures - part of the Dubai Group - to buy a portfolio of Damas shares to meet the minimum "free float" requirements.  This portfolio became a loan in Fiscal 2008.  And now "poof" it's provisioned.  Though management asserts it will do everything to collect the loan.  Since DV is holding highly valuable Damas shares, I guess it will be a matter of a few trades on DFM/NasdaqDubai.

 Other matters.

1. There are AED94.7 million in losses on Discontinued Operations.  A glance at Notes 15, 38 and 39 discloses a rabbit's warren of companies.  It's unclear to me how any lender could keep either an eye or control on his money once it enters a "black box" like this. That's not to say that there was any malfeasance at Damas on this score.  Just that this is a "tricky" situation for an unsecured lender.
2. Damas' Press Release refers to AED1.9 billion in one off expenses and provisions.  I think that's overstated.  Damas appears to be considering net interest expense of AED132 million as a one off expense as well as some of the losses on subsidiaries.
3. Damas is showing AED775.2 as Cash and Banks classified as a Current Asset.  Some AED392 million of this amount is pledged as security for loans (Note 29).  It seems a real stretch to consider these Current Assets.
4. Rescheduling:  There's a bit of cognitive dissonance between the Annual Report MD&A and the Press Release.  Presumably, the Press Release is the later document so we'll use that information on the structure.  The Press Release states there will be three tranches: Tranche 1 an amortising debt.  Tranche 2 a working capital facility probably "revolving" (not reducing).  Tranche 3 a term loan (presumably with no or a very pushed out amortisation schedule).   Note 2 to the Financials discloses that the proposed tenor is 6 years.   And that recovery from the Abdullah Brothers is not required to repay the debt.

Finally, as always with announcement like this, we at Suq Al Mal are on the look out for contributions to distressed debtors' rhetorical spin.  I'm happy to report that Damas has advanced this art significantly.  Here are some of their contributions:

1. A "difficult, if not unfortunate year".  (Chairman's Statement).  AA:  Unfortunate indeed.
2. "Unfortunate in that the problems which the Group now confronts are of its own making, through the failings of the then Board of Directors and, in particular, the actions of the Executive Directors, the Abdullah Brothers". (Chairman's Statement).  AA:  We can probably explain this statement by two facts.  It's true.  And there's a new team with no reputation at stake.
3. Operating performance "reconfirms the value proposition of the Group's core business"  (Chairman's Statement).  And from the MD&A:  "The robustness of the underlying business model was tested under actual stress conditions ..."   AA:  Much better than a "proven business model".
4. "The Group’s difficulties and the continued involvement with the Abdullah Brothers have raised a number of concerns, publicly. While recognising these concerns and putting in place the appropriate governance structure to mitigate against any potential issues, the continued involvement of the Abdullah Brothers is of strategic importance.  Fundamental in this regard is their knowledge of the  industry, in the areas of product design, quality, but more importantly their involvement in the  recovery of accounts receivables and the inventory given on consignment. In their role as Advisors,  the Group will be able to secure a knowledge transfer and an expedited, if not enhanced, recovery of  its receivables and consignments."  AA:  One certainly hopes so.  Wonder what the compensation is?  And if it's cash or reduction in their payable?

Kuwait Stock Exchange Investors' Guide

In case you missed it, the KSE has issued a set of Investors' Guides available here.

Some interesting information for those who use fundamental analysis for their stock selection.  Or want a quick introduction to a Kuwaiti company or sector.

Though like any wise Kuwaiti, I don't use fundamental analysis.  I ask a friend who has a friend who knows what the عراب is buying.  And more importantly when he's selling.  One can make a small fortune that way, though most times one has to start out with a large one.

Abu Dhabi Commercial Bank - AED 306 Million Loss for 1H10

By now you've probably seen the press articles on ADCB's 1H10 results and perhaps as well it's press release and the financials themselves.  The loss was due to the Bank taking an AED1.035 billion provision for its AED6.6 exposure to Dubai World. 

Here are some points that caught my eye.

First, the Financials.

1. Customer Deposits have grown from AED86.3 billion at 31 December 2009 to AED96.8 billion at 30 June 2010.  AED90.1 billion at 31 March 2010.  Unfortunately, there's no note for Customer Deposits so it's not possible to see where the increase primarily came from - government, corporate or retail clients.   Anyone out there with any information, please post.  As well, if  anyone knows, if ADCB is paying above market for funds.
2. Note 2: Bank Deposits - While there is a non trivial AED1.0 billion decrease, the major story here is the shift.  Deposits with banks in the UAE is now 44% versus 33% at 31 December 2009.   A greater proportion of AED deposits?  Helping provide FX funding in the local market.  BTW you'll note that balances with the UAE Central Bank increased by AED700 million roughly the decline in interbanks.
3. Note11:  Interest receivable has increased roughly AED230 million (of which AED147 million was in 1Q10) to AED837 million - some 37.8% over Fiscal Year End 2009's AED607 million.  Looking at Note 14, you'll notice that Interest Payable actually declined 4.0% to AED952 million from AED992 million at FYE09.   Unclear if this is timing differences.  Longer interest periods on loans than the deposits funding them.  Or a sign of some distress.  Something to keep an eye on.

Second, Press Release.

1. Loan to Deposits Ratio.   Yes, the ratio has come down from 135% to 123%.  You'll note it was 151% (! ?) in March 2009.  That's the right trend.  But, sorry to be impolite but a loan to deposits ratio over 100% is not sound banking practice.  In fact it should be lower.
2. "We have taken a more disciplined approach to pricing risk and have significantly enhanced our capabilities in risk management and strengthened controls across the business. As a result of the current economic environment, both corporate and consumer segments continue to experience high levels of stress and therefore we have had to take significant impairments in the first half of 2010.”  And would seem to have some more miles to go.  To be fair it does take time to turn around a big ship.  And changing a corporate culture perhaps even longer.
3. Dubai World Provision - I had understood that the Central Bank of the UAE had asked banks to refrain from provisioning until the restructuring was finalized and they had a chance to study the implications.  Is ADCB pulling a Citibank here?  If you know your banking history (and who doesn't devote lots of time to that interesting topic?),  that question will remind you of the action taken by Citibank to provision for duff sovereign loans in the 1980's.  In effect setting a "standard" for other US banks all of whom (including Citi) had heretofore been pretending that those loans - particularly those to Latin borrowers - were "as good as gold".  Is ADCB getting out in front of the pack so that when other lenders do take the provisions, that Quarter ADCB will be able to report a profit amid a sea of red ink at its competitors?  Or does it have more major pain of its own to take and is trying to spread it out in more manageable chunks?
4. Non Performing Loans:  Increased some AED491 million and the NPL ratio (NPLs to Total Loans) from 5.2% at FYE 09 to 5.4% at 1H10.  That looks good until one notices that the Total Loan portfolio has increased from AED116.6 to AED118.8 billion.  Hopefully, we can assume that none of that AED2.2 billion increase has gone bad yet.  Using total loans at FYE09,  the NPL ratio is 5.8%.  That I think is fairer measure.  
5. Provision Coverage:  ADCB's press release notes that its Provisions to NPLs ratio is 76.7% as of 1H10 versus 67.8% as of FYE09.  That looks good until one notices that the AED1.035 billion provision for Dubai World in included in the Provision total but none of the DW exposure as NPLs.  The latter presumably because DW is not past due on payment.  If we strip the DW provision out, ADCB's Provision Coverage is 61.3% a decrease from FYE09.  It's hard to understand the logic behind ADCB's calculation unless of course it considers the DW exposure "as good as gold".
6. Collateral:  AED2.8 billion at 1H10 versus AED5.5 billion at FYE09.  No explanation for the 50.9% decline.  Valuation changes?  Realisation of collateral to repay loans?  Clients repaid and collateral was returned to them?  All bits of information that would help assess the credit health of ADCB.  The note does mention that much of the collateral for NPLs is real property.  Is that the hint to the reason - further mark downs of property?

As indicated above, some trends to watch on the credit front, though the Bank's main shareholder has supported ADCB from its birth to today whenever it needed funds.  And has the resources to do so again. 

International Investment Group - Releases 2009 Financials in Kuwait 11 Days After Dubai and Bahrain

As you recall, on 18 July IIG released its financials on the DFM and BSE.  Just this Thursday 29 July, it released financials on the KSE.  Announcement in Arabic below.

Perhaps this event was partially responsible for the recent AlQabas article   "Companies Disclose in Foreign Markets Prior to Kuwait Due to Weak Transparency Laws".

One hopes that Kuwaiti investors have access to the Internet or they may be second  in line to receive official announcements of rather material information.

[11:43:26]  مجلس ادارة (المجموعة د) يوصي بعدم توزيع ارباح عن عام 2009‏
يعلن سوق الكويت للأوراق المالية بان شركة المجموعة الدولية للاستثمار
ِ(المجموعة د) قد اعتمد البيانات المالية السنوية للشركة للسنة المالية
المنتهية في 31-12-2009، وفقا لما يلي:‏
ِ1) نتائج أعمال الشركة:‏
البند             السنة المنتهية في 31-12-09   السنة المنتهية في 31-12-08‏
الربح(الخسارة) (د.ك)           (36.613.067)          (21.488.623)‏
ربحية (خسارة)السهم(فلس كويتي)   (82.02)                  (49.40) ‏
اجمالي الموجودات المتداولة     35.153.190            54.615.998‏
اجمالي الموجودات              107.056.935           149.062.604‏
اجمالي المطلوبات المتداولة     83.008.705             30.258.046‏
اجمالي المطلوبات               83.624.358             84.578.526‏
اجمالي حقوق المساهمين        23.432.577             64.484.078‏
بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 6.004.401 د.ك
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 3.050.192 د.ك
علما بأن بنك الكويت المركزي قد وافق على هذه البيانات المالية بتاريخ
ِ13-07-2010.‏
ِ2) التوزيعات المقترحة:‏
قرر مجلس ادارة الشركة عدم توزيع ارباح عن السنه الماليه المنتهيه
في 31-12-2009، علما بان هذه التوصية تخضع لموافقة الجمعية ‏
العموميه و الجهات المختصه .‏
علما بان تقرير مراقبي الحسابات يحتوي على اساس عدم القدرة على ابداء الرأي
التالي :‏
اساس عدم القدرة على ابداء الرأي:‏
كما هو مبين في الايضاحات ارقام (2.1 - 12.5) من هذه البيانات المالية ‏
المجمعة فقد تخلفت المجموعة في الفترة اللاحقة عن سداد بعض ادوات الدين ‏
الاسلامية مما اسفر عن قيام بعض الاطراف الدائنة برفع قضايا ضد المجموعة
كما توقفت المجموعة عن سداد تكاليف التمويل المتعلقة بصكوك اسلامية ‏
بالاضافة الى مخالفة بعض الشروط الاخرى الواردة في اتفاقية الصكوك ، ‏
وقد ادى ما سبق الى ان اعتبرت المجموعة قد تخلفت عن سداد صكوك اسلامية ‏
وذلك وفقا للشروط المنصوص عليها في هذه الاتفاقية .‏
بالاضافة الى ذلك تعاني المجموعة من نقص في السيولة ، كما بلغت صافي ‏
خسائر المجموعة 36.6 مليون د.ك تقريبا عن السنة المنتهية في 31 ديسمبر 2009‏
ِ(21.5 مليون د.ك - 2008) كما تجاوزت الخسائر المتراكمة 75% من رأس مال
الشركة الام كما في 31 ديسمبر 2009 .‏
اقتراح مجلس ادارة الشركة الام وفقا لمتطلبات المادة 171 من قانون الشركات ‏
التجارية دعوة الجمعية العامة للمساهمين للموافقة على الاقتراح الخاص باعادة
هيكلة حقوق الملكية وذلك لاطفاء الخسائر المرحلة وتخفيض رأس المال ‏
ِ(ايضاح 22) كما تقوم المجموعة حاليا على وضع الخطط اللازمة والتفاوض
مع الممولين لاهادة هيكلة ديونها .‏
ان قدرة المجموعة على متابعى اعمالها على اساس مبدأ الاستمرارية تستند
بشكل كبير على انجاز هذه الخطط والمفاوضان بنجاح. لم نتمكن من الوصول ‏
الى ادلة تدقيق موثوق فيها وكافية لتحديد مدى قدرة المجمعة على النجاح في ‏
اعادة هيكلة حقوق الملكية والدين المستحق عليها .‏
ونظرا لجوهرية الامور المذكورة بفقرات اساس عدم القدرة على ابداء الرأي ،
فأننا لانبدي رأي على هذه البيانات المالية المجمعة المرفقة .‏
امور قانونية اخرى :‏
ما تم ذكرة في ايضاح رقم (6) فيما يتعلق بارصدة المرابحات والوكالات المدينة
مع اطراف ذات صلة والتي تتجاوز حد التركز الائتماني المسموح بة وفقا ‏
لتعليمات بنك الكويت المركزي .‏

The Sweet Smell of Err .... Sky Gardens Tower

From The National - the downside of upkeep.  Or perhaps an indication of the quality of construction.

But he has been told by the building’s maintenance staff that the pipes running through the tower have likely sprung a leak, which is allowing sewage odours to permeate through the walls.

The issue has persisted for about nine months and he says there are no plans at the moment to permanently fix the problem.

Next time don't use the cardboard pipe.  It has a short service life.

RTFM - Read the Comments That's Where the Best "Stuff" On This Blog Is

 Copyright Nableezy 

Creative Commons Attribution-Share Alike 3.0 Unported license.

When I started this blog, my goal was to create a forum for discussion and debate of financial matters in the GCC.  The rationale being that no one person has possession of the facts or a monopoly on the correct analysis of those facts.

Right now there are two vigorous exchanges going on in the comments sections.  I'd like to use this post to identify them:

1. The Investment Dar - Central Bank Gets Another Four Months to Ponder
2. Al Gosaibi v Maan AlSanea - Fortis Bank v ADIB - Fortis Drops "Structured" Bombshell
   

Please take a look.  

And more importantly add your own voice to the discussion.  Comments, criticisms, questions.  

In view of the matters to be discussed, I've booked a couple of tables at the Cafe Riche.  Come join the discussion.  Yes, you can still tell a مخبير  by his shoes, or so I am told. I'll be wearing flip-flops.

AlGosaibi v Maan AlSanea - Almost "Fixed"

There has been a remarkable reversal of fortune of late for AHAB.  

First was the decision by Trowers and Hamlins back in June to sue AHAB and which gave what I described as the first indication that the concerned authorities in the GCC were moving to make this messy problem "go away."   And that the Grant Thornton settlement proposal might be seen as a promising vehicle. to achieving that end.  Essentially GT's Plan involves a pooling of assets of the two companies to settle global creditor claims and the dropping of lawsuits between the two parties.  Those lawsuits have been the primary venue for the charges of fraud levied against Mr. AlSanea by AHAB.  Charges as we always note here on Suq Al Mal Mr. AlSanea continues to deny.  Ending the lawsuits probably allows "diplomatic cover" for jurisdictions to quietly let these difficult and embarrassing matters expire.

Yesterday (28 July) Asa Fitch at The National reported the Caymans Court decision to put its proceedings "on ice" to allow the special Saudi committee to make a determination.   I commented that it looked to me like the "fix" was in as this step increased the pressure on AlGosaibi to agree to the Grant Thornton settlement proposal and that:

A similar movement by the New York Supreme Court would, I think, confirm that this is what is happening. 

In what might be a remarkable judicial coincidence, but just maybe  is not,  today (29 June) NY Supreme Court Justice, the Honorable Richard Lowe III issued final disposition rulings effectively terminating the cases he was adjudicating based on "forum non conveniens".  

Frank Kane's article in The National provides some useful information.   But there's a bit more.  Judge Lowe did not just terminate the Mashreqbank cases but also that of AlAhli Bank which did not involve any countersuit by AHAB.

The three cases and their NY Supreme Court reference numbers are:

1. 601650/2009 - Mashreqbank v AHAB to which AHAB had added Mr. AlSanea and Awal Bank as a Third Party Defendants
2. 602171/2009 - Mashreqbank v the Individual Partners of AHAB
3. 602847/2009 Ahli Bank of Kuwait v Mr. AlSanea and Saad Trading Contracting and Financial Services

The decision (some 19 pages ) is Document 134 in Supreme Court Case Reference 601650/2009 which can be accessed at the NY Supreme Court Website  http://iapps.courts.state.ny.us/webcivil/FCASMain.

What's interesting about the decision?

1. First, Judge Lowe ruled that NY courts did have jurisdiction but dismissed the cases on the grounds of forum non conveniens.  Key reasons cited were: (a) availability of other judicial venues for the cases; (b)  presence of key witnesses in the Middle East; (c) local laws govern some key documents. (d) documents in Arabic language and witnesses English language skills, etc.  From the ruling it seems he sees Dubai as the venue for Mashreq's cases (with AHAB then able to raise its claim against Mr. AlSanea in Dubai or Saudi).  And Kuwait as that for AlAhli Bank's case.
2. Second, another significant "bit" of Judge Lowe's rationale for accepting the forum non conveniens argument was that Mashreqbank stated that it was happy to litigate in either NY or Dubai.  And  that in fact Mashreqbank had commenced a lawsuit in Dubai which includes (but is not solely restricted to) the FX transactions which are the subject of NY cases.  See Page 16 of the ruling.   Now, at first blush, this seems a bit surprising.  Why would Mashreqbank incur the not inconsiderable costs of launching a case in New York and then cavalierly toss it away by telling Judge Lowe that it was indifferent to venue?  Perhaps, the answer is to be found in AHAB's defense:  that Mashreq knew the FX transactions were disguised loans and that therefore they were somehow colluding with Mr. AlSanea.  A rather messy situation.  One complicated by AHAB's motion to have the NY Supreme Court compel disclosure under the very strict requirements of NY law.   Perhaps the shift to the more "convenient" judicial venue in Dubai would allow this issue to be dealt with in a more "convenient" way (at least for Mashreq).  And then again perhaps not.  Perhaps it was just a cost cutting measure - Mashreq decided to husband cash by running one instead of two expensive litigations.  And the case in Dubai is for almost twice that in New York.  So there is more "bang" per lawyer "buck" there.  Perhaps it was a belief that justice would be more swift in Dubai.  Perhaps it was another reason entirely.
3. The dismissal of the Ahli case is a bit more concerning - or perhaps should be to BNPP and Fortis who have lawsuits against Abu Dhabi International Bank.  If the Honorable Justice Melvin Schweitzer (who is handling the Fortis and BNPP actions) takes Judge Lowe's ruling as a useful precedent - both banks might wind up  in judicial venues they'd rather not.  NY has a very  large  well reasoned body of case law on letters of credit.  Bahrain would appear to have much less.  At least this could be a conclusion drawn from the Bahraini Court's ruling in ADIB's favor in both actions.  There the Court seemed remarkably unperturbed by the fact that ADIB's case was commenced after both banks had incurred irrevocable payment obligations.  Though to be fair, as I understand it, the Bahrain judgment is not final. 

AHAB does have the right to appeal Judge Lowe's ruling.  Overturning the ruling will I think be as the Japanese say "Possible but very difficult".

All in the Family?: Heavy Trading In Kuwait International Bank Shares - Who's Buying?

AlQabas reports that in the past 10 business days some 90.1 million shares of KIB (8.6%)  have been traded.  KD 19.5 million worth in 1121 contracts.  Apparently someone is buying because the share price  is rising.  2 fils yesterday on 7.5 million shares.  Compared to the KSE which is on a downward trend closing 17.7 points lower.

The speculation is that someone is accumulating a position.

The article does note the requirement for disclosure when one's position hits the 5% mark.  Though I suppose several of one's friends could buy just under the "wire".

Maybe Tessio, Clemenza, Fredo, Tom Hagen, etc.   One suspects not Barzini or Tattaglia.

Belt Buckles: The New Paradigm of Patriotism

For many years now, we Americans have been able to measure one another's patriotism by the presence or absence of an American flag pin on a lapel.  And the bigger a pin, the more patriotic.  

But perhaps we'd become complacent and so lost sight of the original intent of the Founders.

One man, David H Brooks, has shown that we can not only renew our patriotism but take it to a higher level:  the US$100,000 American flag themed belt buckle shown in the above picture.

Even though this idea was his, David didn't shrink from giving average citizens - at least those who pay taxes - the opportunity to join in making his vision a reality by defraying the cost along with $6 million in other expenditures.

As the NY Times reports:

DHB, which specialized in making body armor used by the military in Iraq and Afghanistan, paid for more than $6 million in personal expenses on behalf of Mr. Brooks, covering items as expensive as luxury cars and as prosaic as party invitations, Ms. Schlegel testified.

Also included were university textbooks for his daughter, pornographic videos for his son, plastic surgery for his wife, a burial plot for his mother, prostitutes for his employees, and, for him, a $100,000 American-flag belt buckle encrusted with rubies, sapphires and diamonds.

The expense-account abuse, the prosecution has said, represented a pittance compared with the $190 million that Mr. Brooks and another top employee are accused of making through a stock fraud scheme in which he falsified information about his company’s performance — including significantly overstating the inventory of bulletproof vests — to inflate the price of the stock before selling his shares in 2004.

Patriotism and family values!

Mr. Brooks appears to be using the Abdullah Brothers' defense.  And I suspect this may all turn out to be a tempest in a teapot.  A failure - if one were to be so uncharitable to use the term "failure" - to properly document some transactions. 

I'm also guessing - but don't know for sure - that the buckle is from Damas' Bur Dubai store.

You Said What?: Apparently Time is Running Out

Sorry to be the bearer of bad tidings. But here at Suq Al Mal we don't shrink from telling it like it is.

The Investment Dar - Central Bank Gets Another Four Months to Ponder

Quoting Reuters, AlQabas reports that the Central Bank of Kuwait applied for an additional four months to determine whether TID should be allowed to enter the FSL process - a step that would give it protection from court actions in the State of Kuwait.  And as well, I suspect, from court actions in most other jurisdictions.

The new period runs from 10 July.

Clearly, the CBK is not as convinced as it would like to be that TID can make the current restructuring plan.  

As noted in an earlier post, it's expected that the CBK will impose some conditions on TID as the condition for an approval.  And perhaps propose some modifications to the restructuring plan itself.

From this distance it's hard to see what the CBK's motive is:

1. Reluctance to make a decision that may turn out to be wrong?
2. Hope that if it waits long enough, events will make the decision for it? 
3. Desire to put pressure on the parties to revise the deal - more to the CBK's liking?
4. Need for time to figure out what the right additional conditions are? And negotiate with the parties?
5. Hold TID's feet to the fire a bit longer as a form of punishment?  Though this risks alienating creditors.

The danger with a delay is that those creditors who are pursuing legal cases may win judgments in foreign jurisdictions.  Though I would expect TID to mount a legal defense in such cases that it was partially under the equivalent of Chapter 11 and that foreign proceedings should be stayed until the CBK made its decision, such a defense may prove less effective than TID being finally and formally under the FSL.

A delay does allow the CBK to increase pressure on both TID and the creditors to accept its conditions with minimum negotiation.

Bahrain Police Crack Down on Dangerous Street Crime

Copyright Gulf Daily News Bahrain

In an wise move local authorities - both police and government officials - have launched a decisive campaign to increase public safety in the Kingdom of Bahrain.

While I consider this a family blog and don't post what I consider to be offensive pictures or refer to offensive acts, I've made an exception this time - simply because of the enormity of the act and the need to speak out to condemn it.

Pictured above is the manifestly dangerous Ms. Kauthar Abdulameer,  Bahrain's Public Enemy #1.  

As you can see, caught by the camera in flagrante delicto.  That's right standing in the balmy Bahrain summer  (40 degrees or more centigrade with a bracing hint of humidity in the air) breathing toxic car fumes selling water.  To support her family and newly born daughter, Fatima.  

The heavens call out, I suppose, for an appropriate punishment for so great a crime.  And, if not the heavens, at least the local authorities who apparently have no more urgent criminal matters to deal with.

In any case I'll be holding my next trip to the Kingdom until I have assurances the authorities have  restored safety and order.   I'd suggest you consider the same.

AlGosaibi v Maan AlSanea - The "Fix" is In? Caymans Island Case "On Hold" Pending Determination of Saudi Panel

Asa Fitch over at The National reports that the Caymans Island Court has suspended its proceedings pending determination by the special Saudi commission set up earlier to investigate allegations of fraud against Mr. AlSanea.

I had posited a bit earlier that for a variety of reasons various jurisdictions would prefer that this  messy dispute  "go away" - especially given the nature of the claims and counterclaims raised by the two protagonists.

The Caymans Court ruling seems to be another step in that direction.  A similar movement by the New York Supreme Court would, I think, confirm that this is what is happening.  If you've been following that case, you will have noticed that on several occasions the judge has mused (signaled?) whether Saudi is after all the proper forum.

Letting the Saudis make a determination as to who is guilty, if anyone, relieves foreign courts of the burden of decision making.  It also allows these jurisdictions to avoid antagonizing the Saudi Government, which no doubt would prefer that any dirty laundry involving its nationals be washed in private. 

And, if by chance, their proceedings result instead in a compromise solution - or "fix" - a pooling of assets to settle claims with a dropping of allegations of misconduct so much the better. 

The ruling is labeled a setback for the AlGosaibis, who as I noted are probably the party whose acceptance of the Grant Thornton "settlement plan" is key to moving forward.  Indeed it is a setback.  As such then it is a powerful incentive to "make a deal".

However, pressure remains on Mr. AlSanea.  The stay on his US$9.2 billion of assets has been reaffirmed.  And the Caymans Court has said that if the Saudi proceedings prove inadequate, it will reopen its own.  So if AHAB suddenly makes a generous offer of peace, no doubt plenty of incentive for him to reply positively.

And this is the usual appropriate place to note that Mr. AlSanea continues to deny involvement in any wrongdoing.

Further Pressure on Rental Rates in Dubai

Gulf News has an article about continuing declines in the Dubai residential and commercial real estate market.  And how this is causing an influx from other Emirates where the supply of "affordable" housing is currently constrained.

New supply is anticipated to exacerbate conditions.

Two sentences in the article caught my eye:

The main concentration of upcoming office supply will come from the Business Bay development. However this is expected to happen in 2011. "There are various infrastructure issues with a lot of completed towers sitting there," said Green.

Perhaps, The Real Nick can comment on what these are.   Utilities, especially electricity?  Or transport.  And of course any reader with a comment is encouraged to weigh in with a comment.   In general the more informative bits of info on this blog come from reader comments.

Continued weakness in real estate suggests issues for lenders on their existing portfolios.  And for developers fewer new projects and perhaps some customers' walking away from previous commitments - as lower rent rates imply a lower value of properties.

There's more to come on this topic.  CB Richard Ellis 2Q report on Dubai should be available on their website shortly.  When it is, I'll post again with the link.

AlGosaibi v Maan AlSanea - English Court Rules Saad to Pay ADCB US$33.1 Million

Asa Fitch over at The National reports that an English Court has ruled in favor of ADCB ordering Saad Trading Contracting and Financial Services to pay ADCB US$33.1 million for a defaulted foreign exchange swap.  The default was triggered by a decline (withdrawal) of STFCS' rating last year June.

Saad does have the right of appeal.

And of course obtaining a court decision in one's favor and obtaining the cash are two different things. 

Islamic Finance - What Does That Term Mean? "Whither Islamic Finance?"

Islamic Finance - a topic much debated these days.

What does it mean?

Is is a real alternative to conventional finance?  Or just an Abu Yusuf trick?

Here's a link to a post by practicing Islamic banker from the GCC with his take on this topic.  "Whither Islamic Finance?"

Well worth a read.

International Investment Group - Sets the Record Straight - It's Business as Usual

Apparently some easily excitable rookie investors panicked when they read IIG's earlier announcement that it was unable to pay some US$152.5 million on its US$200 million sukuk.

So today IIG set the record straight with announcements on the KSE, BSE, and Dubai markets.

"Notwithstanding this announcement IIG wishes to confirm that it and its businesses are continuing to trade normally."

AA certainly hopes that investors will come to their senses and recognize IIG for what it is.  And as well to place the comments in context: apparently "trading normally" up North has a different meaning than in some other markets.  

After all when you claim to follow Shari'ah principles and have the highest ethical standards, who on Earth would doubt your word?  Certainly, not AA.

Suq Al Mal Passes CEBS Stress Tests

In response to what I understand is some baseless concern in the market about Suq Al Mal's condition, particularly in light of the PIGS crisis in Europe, I'm very pleased to announce that SAM has passed the CEBS "Stress" Tests and will not require any additional capital to continue as a going concern even under the rather dire scenarios used.

Pictured below is the actual testing session which I can tell you was quite stressful.  As far as I recall this  experience, filling up the test form was the major stress.  In case you're wondering, I'm on the right.  Sadly, my buddy, KfW, was absent that day.  I'm hoping they'll hold a "make-up" test for him. 

In any case, I did pass, though my test paper and answers are "top secret".

Most everyone who showed up, passed.  No bank left behind as they are reported to say. Well maybe 7.  But over a 92% success rate is highly impressive.

AlGosaibi v Maan AlSanea - Fortis Bank v ADIB - Fortis Drops "Structured" Bombshell

 

 Warning:  Ethics Depicted in Picture May be Smaller Than They Appear

In  my earlier post analyzing the Awal Bank L/C I spent a bit of time speculating on the transaction as a disguised money on money loan and the potential role of Bunge in the second leg, the purchase on a spot basis of the commodity back from from AlGosaibi/Awal Bank.  The necessary step to get funds to AlGosaibi for the loan.

As they say (and they are right), reading is fundamental.   I could have saved a bit of time by looking a bit closer at two documents I had printed out.  

Today having posted on the BNPP lawsuit against ADIB, I decided to finish off the ADIB topic by commenting on the two latest submissions by ADIB and Fortis' counsel in the Fortis Case (NY Supreme Court Reference #601948/2009) - Documents #78 and #79.   Documents I had printed out on 9 July!

Right there on the first page of the 9 June 2010 letter from George O. Richardson, III, Esq.  of Sullivan & Worcester, Fortis' counsel, was the revelation that Bunge had informed ADIB of the precise nature of the transaction via an email prior dated 7 April 2008 - that is, prior to the date  ADIB agreed to confirm Awal Bank's letter of credit.  ADIB's SWIFT confirmation to Fortis was sent 16 June 2008  as per Document #24 Exhibit #2.  Some two or so months later.   By the way, that document (not the Bunge 7 April email but the copy of  SWIFT confirmation of the LC) was submitted by ADIB as part of Nuhad Saliba's Declaration.  Ms. Saliba is Head of the New Countries and Global Wholesale Banking Department at ADIB.

The Bunge email was sent by Rachel Wong of Bunge SA Geneva to Naeem Ishaque, Manager Financial Institutions at ADIB.  There are a variety of copy parties but their affiliations are not clear from the message.  The email is Exhibit #1 to Exhibit A in the Richardson Letter (Document #79).

So what did the Bunge email say?

"Section 15. Structure  This is a structured transaction whereby Discounting Bank [AA:  Fortis though at this point Fortis name is not mentioned, perhaps because Bunge was still shopping the second confirmation] is required to discount or fund the Instrument in favor of the Beneficiary once the documents are deemed in compliance at its counter, Applicant [AA:  AlGosaibi Trading] will on-sell the Goods to another Bunge affiliated company ("Bunge Buyer").  Once Beneficiary receives the discounted proceeds under the Instrument, Bunge Buyer will effect sight payment to the Applicant immediately.  Applicant will enjoy the cash financing during the Tenor [AA:  the 360 days from acceptance of documents until payment] before repaying the Issuing Bank [AA:  Awal Bank] on maturity of the Instrument."

This effectively demolishes ADIB's argument that it thought this was a trade transaction and that somehow it was tricked and so inadvertently and innocently defrauded.   ADIB is clearly an active and knowing participant in the transaction which equally clearly is a "money on money" loan.  Some might say that transactions like this are  a fraud against the Shari'ah. (With respect to AA's position please see the last sentence).

It also raises a very fundamental question about ADIB's earlier legal arguments in which it and its counsel claim that the bank did not see this was a structured transaction and had no inkling that it was participating in a money on money financing.   

ADIB's learned counsel at Dewey & LeBoeuf have set a high standard of knowledge in their previous pleadings.  They asserted that because Fortis Singapore advised a L/C for the same goods and in fact the same documents, Fortis Netherlands - half way across the world - was deemed to know this with respect to the Awal LC  it confirmed. 

Therefore, it seems highly appropriate and fair to apply D&LB's standard to ADIB with even more rigor because ADIB operates from a single country.  Thus with the greater proximity one would no doubt expect that the knowledge at ADIB permeated every level of that firm, including the chap who makes the tea.

Some might also be tempted to remark that there is a repetitive pattern here with "Islamic" banks of much less than كلام شريف  in their legal pleadings as in the case of TID v BLOM.

Heeding the admonition of Imam AlGhazali, AA will remain silent on all these points.

AlGosaibi v Maan AlSanea - BNPP versus Abu Dhabi Islamic Bank in re TIBC L/Cs

In discussing the Fortis lawsuit against ADIB, I mentioned that ADIB was also a defendant in a lawsuit brought by BNP Paribas' "Full Commercial" Branch in the Kingdom of Bahrain.

The relevant documents can be found at the NY Supreme Court Website http://iapps.courts.state.ny.us/webcivil/FCASMain  under Case # 603365/2009.   Or more precisely one document as all that is posted so far is the complaint by BNPP - missing what I'll bet ares some very interesting attachments.  Unclear why this is.  Especially since the submission in question dates from November 2009.

Here are the facts from the material posted on the NY Supreme Court's website:

1. In March 2009, ADIB issued six irrevocable reimbursement undertakings ("IRU's") in favor of BNPP to induce it to confirm 6 "commercial" letters of credit issued by The International Banking Corporation in favor of Dawnay Day and Co for the Account of AlGosaibi Trading Company.
2. BNPP confirmed TIBC's letters of credit and then upon presentation of the documents accepted the documents and the time drafts presented.  
3. On an unspecified date, BNPP claimed reimbursement of some US$44,875,000 from ADIB.  Presumably, the maturity date of the accepted time drafts.
4. ADIB refused to pay.
5. In September 2009 (after acceptance of the drafts by BNPP) ADIB obtained a judgment in Bahrain Court enjoining ADIB from making any payment.  
6. BNPP is seeking to have the Court issue a temporary restraining order preventing ADIB from moving assets (presumably balances in its correspondent accounts in NY) from the USA.
7. Its claim is for the principal of the payment (US$44,875,000) plus interest, attorney's fees and costs.

Now to some comments.

1. It's not clear to me why there isn't more precision in documents sent to the Court with exact dates when events took place, additional details of the individual transactions -  currency, goods, tenor, etc.  Perhaps time was of the essence and BNPP's lawyers wanted to file quickly to block the potential movement of assets outside of the USA. 
2. Dawnay Day was a very large "financial firm" with a commodities trading wing which ran into some "financial difficulties" as a result, I believe, of the global financial crisis (small "g" as always).  It was also an active participant in structured "Islamic" trade transactions as described in my post about Fortis.  It had at least one subsidiary Condor Trading which it uses so that the "purchaser" and "seller" of the goods are not the same party.  
3. It appears (but the documentary record here is very slim so this is an educated guess) to be a mirror of the Fortis transaction.  The TIBC L/Cs are one half of the "Islamic" structure:  the purchase on deferred terms.  For TIBC/AlGosaibi to actually get the funds a spot sale on a cash basis is required.  That could have been with Condor with TIBC Bank acting as the "arranger" of the transaction.   That is probably the most likely scenario and the one that I think happened - but again note this is an educated (or uneducated) guess.
4. Since discovery in other legal cases has resulted in the publication of  some details of at least the US - domiciled US dollar accounts of Awal Bank and TIBC, clever boots might be looking through that material for incoming credits around the time of the negotiation/acceptance (but not the payment date) of the first leg letters of credit. That is in the Fortis case the Awal Bank LC confirmed by Fortis under ADIB's IRU.  And in the BNPP case, the letters of credit issued by TIBC and confirmed by BNPP against ADIB's IRUs.  If these are indeed disguised clean money on money loans, the second leg (the spot sale) should have occurred around the same time.  The amounts would not necessarily be the same as interest on the loan might be built into the price on the first leg (the deferred payment).
5. But one key additional bit of information.  If we look at the Fortis Case (NY Supreme Court Reference 601948/2009 Exhibit #2 Document #34 Amended Declaration of Qays Zubi, we note two things.  First, TIBC LC's seem to have been denominated in Euros not US.  Second, a restraining order has only been obtained for four L/Cs not six as mentioned in BNPP's complaint.  The total of the L/C's mentioned in the Qays Zubi Declaration are some Euros 18,243,975.  Clearly, that does not equal US$44,875,000.  Two L/Cs are "missing".  Does that give Fortis a legal "wedge"?
6. We also learn that the payment dates on the TIBC L/Cs were between 22 June and 24 June.  You'll also notice that the certified translation has an error in that it shows the last LC as due March 23,2009.  The Arabic clearly states (in "Western" numbers not Arabic!!!) 23 June. 
7. The central point of BNPP's claim (like that of Fortis) is that under a documentary (aka commercial) letter of credit the bank's obligation to pay is independent of the commercial contract.  Its obligation is set by the terms of the letter of credit.  Compliance with the documentary requirements of the letter of credit establishes the obligation.  
8. To overcome the rather substantial amount of case law and precedents in favor of BNPP's legal position, I believe ADIB has to prove two things. (a)  Fraud in the inception.    (b) Involvement of BNPP in that fraud.  That is a a tough row to hoe as the saying goes.  

Transparency: The Missing US$400 Billion in Derivatives

As we in the "developed" (make that "highly developed") West like to do, it's time to preach the virtues of transparency and care in preparing data to those less enlightened and skilled out there.

In that vein, here's a quote from the BIS Publication "Provisional International Banking Statistics First Quarter 2010"  Footnote #5  Page3:

In previous reports, some US reporting banks have failed to fully account for the risk transfers associated with protection bought using credit derivatives. This has been corrected for Q1 2010 only. Therefore, the current data for Q4-2009 and Q1-2010 suggest a much larger increase in US banks' cross-border ultimate risk claims and inward risk transfers than will be shown when the Q4-2009 data have also been revised. The amount of this additional reporting is estimated to be close to $400 billion in the Q1 data.

Apparently, the BIS noticed this when reconciling reports on a country by country basis - there were US$400 billion more of transactions reported with the USA than its own institutions reported. 

The culprits have been identified as the non banks that transformed themselves into bank holding companies in the wake of the global financial crisis (all lower case, especially the first word), e.g., Goldman, Morgan Stanley, etc.

Presumably the result of a failure to understand how to fill up the forms.

AlGosaibi v Maan AlSanea - Legal Case Summary and Status

Citi, the Delegate on Saad's Golden Belt Sukuk 1, has posted a notice on the BSE listing the legal cases  it is aware of involving Mr. Al Sanea and his companies as well as their current status.

Besides conveying useful information, the Delegate is putting Golden Belt Certificateholders on notice that other creditors of Mr. AlSanea and his companies are pursuing legal claims.  As long as Golden Belt Certificateholders are not, they are effectively in a junior position.

Why?

As I read the Delegate's last announcement, while a sufficient number of Certificateholders (more than 25%) have voted for Dissolution of the Trust, they have not indemnified the Delegate to its satisfaction.   That is, agreed to reimburse Citi for expenses.  Until that happens, the Delegate is not obligated to take the legal steps to dissolve the Trust, claim on the Repurchase Obligation of Saad Trading and Contracting, and in the event of non payment by STC pursue STC in Court.   Thus, the Certificateholders are effectively in a subordinate position against STC - they have an uncalled guarantee.  

The Delegate is doing this to cover its legal posterior.  In the event that the Certificateholders' recovery is adversely affected by failure to take action, the Delegate will have a legal defense that it has done all it  was obligated to do to protect their rights.

The thorny issue for Certificateholders is whether they agree to repay Citi for legal expenses involved in taking such actions.  Will the net recovery after the expenses be more than if they did not take action?

And this is I suppose as good a place as any to note that Mr. AlSanea still denies any improper or illegal behavior.

The Investment Dar - Central Bank to Impose Conditions to Enter FSL

Muhammad Sha'baan at AlQabas quotes informed sources that the delay in the Central Bank's approval of TID's entry under the protection of the FSL reflects some fundamental concerns and that as a result the CBK is likely to impose conditions and constraints as the price for TID's entry - which they will secure prior to any approval.

The steps will protect the interests of creditors as well as support the rehabilitation of TID.  And this "workshop" (or perhaps worklist) of effective and swift measures will immediately follow entry under the FSL. 

The article notes that TID's "file" is complicated (and presumably this is the reason for the CBK's caution):

1. A significant amount of creditors want nothing to do with the restructuring and are determined to continue legal action.  The concern is that a foreign judgments will be immune from the FSL and thus will disturb the Company and upset the legal protection given.   AA:  There is no real way that the CBK or Kuwaiti authorities can get 100% a priori assurance this will not happen.  The hope is that a foreign jurisdiction will recognize the FSL as being analogous to USA Chapter 11 and stay legal actions in their countries.  This is something the Kuwaiti authorities have to make a leap of faith on once they've decided the larger issue - whether it is better to liquidate or rehabilitate TID.  The USA (State of New York to be precise) has recognized the Administration of TIBC in Bahrain as a fair and reasonable process and has stayed legal actions. One would hope Kuwait could get similar treatment.
2. The Company has yet to issue any financial reports from 2009 or 2010. The article describes several legal/regulatory issues -- the holding of annual shareholders' meetings, restoration of trading on the KSE --  as well as the determination of the Company's financial situation.  AA:  The regulatory issues are immaterial to the issue of ability to repay creditors.  The major issue is whether it makes sense to liquidate the Company or run it as a going concern (which will have a higher expense level).  Which course provides the highest net payout?   Which course does the least damage to Kuwait? The longer the file is left undecided the more value that will be lost. 
3. Complete and detailed information and explanation from the Company is lacking.  The Creditors Co-Ordinating Committee failed in obtaining information on some issues - where the answers are still "floating" according to creditors.  AA:  The CBK, CCC and creditors need to determine if the Company is being forthright.  If it is not, then it's time to remove the Board and management and go forward with the restructuring.  Or put the Company in Administration.  If the situation is unclear because of external factors and the Company cannot respond with precision, then the creditors will have to learn to live with ambiguity.  One would have hoped that by now the creditors would have made a decision on this score or decided to accept less than forthright answers.
4. Some points remain open.  It appears the chief one is shareholder support.  AA:  It seems a mite optimistic to expect shareholders to put more money into TID at this point (as it does for Global) until shareholders seem the direction of the restructuring.  Presumably, any money put in will wind up immediately in the creditors' pockets.  A rather hard sell to shareholders who have probably lost most if not all of their past equity.  Invest money not to build for the future but to pay off loans. Even putting money in to build the business requires a bit of optimism - perhaps irrational - at this stage.
5. Another major unresolved issue is expense reduction/control including grants, bonuses etc for management.  AA:  Unless this is the typical bankers' myopic focus on pennies in a restructuring, this is a rather disturbing bit of news.  If repayment of TID's mountain of debt depends on reducing relative hillocks of expenses, it may be time to consider Administration.  Unless of course the intent of the plan is a disguised liquidation.  Or there is no alternative to current management and controls are required to avoid dissipation of assets.   
6. Ernst and Young (who the CBK hired to evaluate TID's financial condition) ran a series of stress tests (to use a term common in the press).  Apparently under some of these TID was unable to repay principal and/or service debt.  That led E&Y to comment on the Company's debt burden and  reliance on two sources of revenue.  The CBK is said to be looking for 100% assurance that TID will be able to service its debt according to the plan.  AA:  Perhaps this is just a flight of rhetoric.  But if the CBK is looking for 100% assurance, it needs "tae think again".   The only thing the CBK can be sure of with that level of precision is that banks under its supervision are likely to make manifestly stupid loans again and get themselves into a serious deteriorated situation.  It cannot be sure that TID will sail through.  What it needs is a reasonable assurance - tempered by a keen understanding of what a bankruptcy this size will mean for Kuwait.   The US Court didn't have 100% assurance when it let General Motors through the gates of reorganisation.  

There are a couple of other points of note in the article:

1. Legal experts say that the CBK is not bound by the Special FSL Court's request.  That as the Central Bank it has certain powers beyond and above the FSL.  
2. The Company is described as being in the position of "one standing on shifting sand" given the decline in asset prices and the problem of coming up with asset values given different and moving prices.
3. Some local banks (Kuwaiti) have provisioned between 50% to 100%.  In any case by the end of the year according to CBK requirements, provisions will have to be at 100% as for other troubled investment companies.  AA:  Presumably at that point, having taken the pain, banks don't need to accommodate a plan because they have nothing to lose.  The bankers' rule that a recovery on a fully provisioned loan is found (new) money as opposed to recoveries of old lost money.

Additional conditions and safeguards - while no doubt justified - are unlikely to provide 100% assurance of TID's success.  At some point the CBK will have to make a decision - formed largely by the intersection of approximations of fact and the realities of policy - what is best for Kuwait.   And then prepare itself for criticism that its decision was flawed.  With no doubt a major part of that criticism coming from the "wise and learned" members of the Majlis al Umma.

Dubai World - Lenders Will Be Worse Off If They Reject Current Deal

Reuters reports in an exclusive that it has seen a document that DW has circulated to its creditors warning of the dire results if creditors reject the current deal.

1. No government guarantee
2. Loss of pari passu with the Dubai Fund.
3. Withdrawal of the generous offer to use previously ring fenced assets from Isthimar World and Infinity (MGM Grand in Las Vegas) to fund repayments.
4. Longer tenors.
5. Significant reduction in ultimate recovery.

As Reuters notes and quotes:

The document made clear that creditors would suffer in a liquidation scenario and that Dubai's own coffers would be protected.

"Recoveries for all creditors except DFSF in a liquidation scenario would be significantly below those expected under the proposal," the debt plan said.

Of course this announcement is completely unrelated to the fact that DW is trying to get creditor approval for its current plan which it "improved" once already because of creditor pressure.

Having been involved in similar such exercises,  AA can vouch that borrowers and/or bank steering committees never ever ever use dire threats to try and persuade other creditors to accept a plan.  No fear mongering.  No threats. You know stuff like:  This is the best deal you'll ever get.  Take it or leave it.  The alternative is destruction of value in a messy bankruptcy.  I'll hold my breath until my face turns blue.

And AA should know as he has been both a threatenee and a threatenor - though in an institutional and not a personal capacity.

Realistically at this point, DW is close enough to the magic number necessary to cram down creditors that it needs just a few more.  

You do remember how out of a solicitude for a fair and just process Shaykh Mohammed issued a special decree that DW's debt restructuring would be handled according to the DIFC regime.  And some said the Shaykh didn't have The Vision Thing.  As far as AA can see, he saw this coming all along.

And finally a virtual tip of AA's enormous tarboush to Aidan and DW.  It seems DW will sell "strategic assets" to fund repayments at least at some stage.  Note the use of the term "strategic" as opposed to "non core".

Kuwait: "The Age of Taxes is Coming"

Kuwaiti Citizens Demonstrate Near Sheraton Hotel Kuwait City

So screams the headline from the 23 July issue of AlWatan.  A most scary development.

According to the article, the Ministry of Finance is preparing a public awareness campaign under the slogan "Tax the Permanent Source of Development" as well as that the Ministry had sent some of its staff to Egypt to learn methods for fighting tax evasion as part of a plan to introduce a comprehensive tax plan including an income tax.

Can it be too much longer before  حزب حفلات الشي   eclipses the salafist bloc in the Majlis al Umma? 

Can the local versions of   سارا بالين  and   جلن باك  be far behind?

Though knowing Kuwait, this may turn out to be like electricity.   At the end of the day citizens will delay paying their taxes until the government bails them out.

Aayan Leasing and Investment - MOCI Shareholders' Meeting 10 August

Aayan (no doubt with a bit of encouragement from the MOCI) announced on the KSE this morning that its ordinary and extraordinary general shareholders' meeting will be held on 10 August at the MOCI premises at 11 AM.   I expect this will be an "interesting" meeting as the centerpiece will be the MOCI's presentation of its report on the Company's financial condition as well as certain violations it believes have occurred.

The KSE also noted that it had not yet finished its review of ALI's  2009 financials and would publish them once it completed the review.

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Damas Extends Standstill To September - Business Model Apparently Validated Yet Again

From Nasdaq Dubai 22 July:

Damas International Limited (the Company) announces today that the Company has signed an extension to the standstill agreement signed with a majority of its bank lenders. 

 

The standstill agreement has been extended until 30 September 2010 in accordance with its terms in order to allow the Company to finalize its restructuring plan and having regard to the Ramadan period. The Company has agreed a term sheet with the steering committee of its bank lenders and which has now been sent to the entire lender group for approval.  

The Company is pleased to announce that a majority of its bank lenders have approved the extension which proves once again the confidence of the Company's bank lenders in the strength of the underlying business model of Damas, a Company spokesman stated.

With respect to latter comment, I was surprised that Damas neglected to mention their lenders' confidence in Damas proven corporate governance model.  So I will mention it here.

Some commentators might remark that the lenders are making the best of a bad situation in the hopes of securing their recovery.  But those with Vision (like AA) know this can't possibly be right.  Can it?

What Were They Thinking?: Bharti Airtel US$7.5 Million Loan - "Sour" Skim

You'll recall that Bharti Airtel secured a US$7.5 billion loan last March to fund its purchase of African assets from Zain Kuwait.  Original pricing on this 4.7 average year life loan was 195 basis points with a 20 basis point up front fee.

Subsequent to granting of the loan, S&P reduced Bharti's credit rating from BBB- (investment grade) to BB+ (non investment grade).  It seems now that the lead arrangers have a bit of problem.  Their hoped for skim on the loan has gone sour.  Rather than being able to sell the loan at say 190 basis points margin, the lead arrangers are reportedly finding that the "market" is demanding around 250 basis points.  

I've seen comments that suggest the mark to market would be on the order of US$40 million to 42 million.  Without the exact amortization schedule, it's not practical to calculate.   BofA is reportedly going to mark.

Funny thing is, when the lead arrangers were pricing the deal, S&P put the Company on ratings watch for a possible downgrade.  One would have thought (at least this one) that perhaps the pricing would have been linked to the rating.  Apparently not.

The frenzy with which the loan was bid may be a leading indicator of the end of the banking recession and the return to "happy days".  Though the sour skim may be a contrary sign.

Lead Managers and their reported shares are:

1. Stan Chart US$1.3 billion
2. Barclays: US$0.9 billion
3. ANZ, BNP, BofA, Credit Agricole, DBS, Bank of Tokyo Mitsubishi, Sumitomo Mitsui:  US$0.8 billion.

(There's apparently a bit of rounding in the above numbers).

Another Insult to the United Kingdom: Frosty Chill Settles Over Anglo-American "Special" Relationship

US-UK "special" relationship apparently "on the rocks".

As pictured above, the Prime Minister and the US President exchanged  cases of beer at the conclusion of the Toronto G-20 summit to settle a bet over the winner of the USA/UK World Cup match.   As it was a tie, each drank the other's choice of a beer.  The Prime Minister Goose  Island 312.  The US President Hobgoblin Ale.

At that time incredulous reporters noted that the US President had refrigerated his drink.  As per contemporaneous and reliable press reports, the Prime Minister gently advised the US President that Hobgoblin is to be drunk at room temperature.

Based on intelligence gleaned from highly reliable sources (The Financial Times), Suq Al Mal can now report a further chilling deterioration in what has clearly become the former "special" Anglo-American relationship.    

During their Washington meetings this week, the US President drank another chilled Hobgoblin in the Prime Minister's presence.  A clear, deliberate and direct slap in the face to  English tradition, and thus, to Mr. Cameron, Parliament and the United Kingdom. As of yet, there have been no reports of the reaction of  a no doubt shocked Prime Minister.

Some commentators have linked the US President's behavior to his interpreting  the tie in the US-UK World Cup Match as evidence that the United Kingdom was now "punching below its weight".