Department of Sycophancy: "Sheikh Mansour Emerges as the Arabian Warrent Buffet"

الشيج واران بوفيت منصور

So we're told by Arabian Business.

When I think of Warren Buffet I think of many things:

1. A determination to succeed and lots of hard work.  Warren began his career delivering newspapers from his bicycle (which he duly depreciated on his tax return!).
2. A ferocious pursuit of deals, many originating from "cold calls" on firms.
3. A generally single-minded focus on a particular investment philosophy (value investing as taught by Benjamin Graham).  
4. A cool rational head not swayed by whatever was the then current irrational exuberance.
5. A painstaking building of a fortune.  Earning money, saving, reinvesting, making a profit, and repeating the cycle
6. Many highly profitable and visible deals.
7. Despite all of this, little affect on his ego or lifestyle.  He lives in the same rather modest house in Omaha that he bought long ago.

Arabian Business is silent on all but the sixth point so we can only imagine how the other six apply to the Sheikh.

What we do learn from the article apropos of the sixth point is that:

1. He owns Manchester City Football Club.  How this came about and how it was funded are presumably too well known to require recounting, which is perhaps sad because we are left not knowing how he displayed his legendary skill in closing this transaction.  Did he begin with a paper route for The National or perhaps more likely Akhbar Al Arab?  Save his first earnings and by repeating the cycle amassed the GBP 300 million to buy the Club?
2. "He" made an investment in Barclays in the dark days of 2008 and has now made US$3 billion on an "exit".   One that we learn that leaves "the sheikh exposed to any upside in the share price and completely protects him from any downside."  

The latter deal sounds almost miraculous.  He exited Barclays yet retains upside in the shares.

So how can we understand Arabian Business's statement: he "completed his exit from this cool investment"?    Frank Kane has an account here.  As the words suggest, risk has been hedged but not eliminated.

First, PCP3, not the Sheikh,  will continue to own the shares.  PCP 3 has entered into a derivatives transaction with Nomura.  In effect risk on Nomura has been substituted for Barclays.

And as always with derivative transactions the devil is in the details.  What are the conditions for exercise?  Any restrictions or limits on the number of shares to be "put" at any one time?  What is the strike price (or its equivalent) on the transaction?  Current market price?  Something lower?  Is there a time limit at which point the (derivative) contract expires and Nomura is no longer obligated?   Will PCP3 need to roll the derivative forward to maintain its protection at that future date at a price to be determined?    And perhaps very importantly what did the derivative cost?  Are there future costs associated with it?   One presumes Nomura priced for the risk they're taking considering both price and time.  So this isn't a costless transaction.  But then PCP3 gets to keep the upside.

Still a remarkable return.  One worthy of much praise.  Especially when one considers such debacles  as one SWF's investment in Citibank convertible securities.

But before Arabian Business rushes to describe the Sheikh as the Arabian Warren Buffet, it may be appropriate to wait for the development of a consistent track record.  

Not so long ago, Maha AlGhunaim, Esam Janahi and others were lauded for their investment prowess.  And like many a legend, time has not been kind to these.

Special Dubai World Court Orders Nakheel to Pay CDG's Legal Costs

According to Tom Arnold over at The National, Sir Anthony Evans, The Chairman of the Special Tribunal, ordered Nakheel to pay CDG's legal costs.

At this point the Court has not rendered a judgment on CDG's claim.

Dubai's Real Estate Woes Continue

A Not So "Unique" 50 Story Dream from 1997 

 

One of our regular readers/commentators, Laocowboy2, called this New York Times  article on the continuing woes in Dubai's real estate market to my attention.

Some quotes with captions.

"We're not in Kansas anymore, Toto"  The biggest mistake - mistaking a foreign country for your own - and assuming that legal systems, services, construction quality are just like "back home".

“It’s not like in Western countries. It’s very difficult to exit here if there’s a problem. And we’ll never get our money back, but now we’re stuck dealing with this hole.”

AA's Second Law of Lending and Investing: "Due Diligence Before the Deal Not After"

"At the time, few asked if there was a legal framework for resolving potential disputes. Now, with the glitter gone, interviews with investors, legal specialists and real estate analysts here show that many who bought in are finding it hard to get out."

“The rules of the game are definitely opaque here,” said an investor who has bought several properties in Dubai and who insisted on anonymity because of delicate talks with developers and regulators. “In the United States, I would know my legal position much more clearly and could take actions if necessary.“ 

Besides "location, location, location" supply and demand also impacts prices.

Although about 70 percent of empty lots from three years ago have been filled, real estate construction since then has far exceeded the purchases, more than doubling the amount of vacant space available, said Timothy Trask, the director of corporate ratings at Standard & Poor’s in Dubai.

No mention of quality of materials and construction.  Perhaps, that will become  more widely apparent in a few years time, though there's always the odd Discovery Gardens or Sky Gardens or The Villa to help discover flaws.

The Investment Dar - Rumor of Restructuring Bombshell: Request for 50% Hiarcut

Major Al-Musallam Rides to Glory

Before we go further to be very clear this is an account which neither the Company, the Central Bank or the creditors have confirmed.
Update:  TID has denied this story.

Al Qabas reports that TID has submitted a completely new restructuring plan to the Central Bank of Kuwait which calls for lenders to forgive 50% of the existing debt, i.e. KD500 million.   According to the report, lenders were not consulted or advised prior to TID sending the proposal to the CBK.

What's going on here is anyone's guess.

Mine is that the Company and the lenders are jockeying from (what I think is) the fallout from the Ernst and Young report.  As you'll see below. TID and its lenders appear to have been discussing alternatives /modifications to the original plan. From the Al Qabas account these seem predicated on the fact that the Company cannot repay all the debt.  The unpayable quantum seems around a 50% or so.

I suspect that Ernst and Young came back with a very negative assessment of  TID's ability to repay in full and, thus, case serious doubt on the Company's ability to continue as a going concern.  As you're aware, the Financial Stability Law is designed to give protection to viable companies.  It is not intended as a mechanism to provide legal cover for disguised liquidations.  If I'm right (and as Umm Arqala will tell you that's a rare occurrence), a report like this would have thrown quite a large "wrench" into things, complicating the CBK's acceptance of the already agreed restructuring.  How could the Central Bank recommend to the Court that the Company be allowed under the FSL under such circumstances?

I'm also guessing this occurred prior to the end of the first four month period the CBK had for evaluation of the suitability of the original plan and of TID to enter finally under the FSL.

What leads credence to both assumptions are reports in the article that the lenders have floated some  proposals or modifications of their own and the timing of those negotiations.  One was the conversion of  roughly half the debt to equity with some preservation of the rights of the existing shareholders.  Presumably, the lenders could quite easily make the argument that if a debt conversion were required, the old equity has been lost .  And thus the old equity holders should be wiped out.  Their proposal is reported as more generous, though it's not clear what percentage they would allow the old shareholders in the post conversion equity.  Leaving 10% or 20% might for example be considered highly generous by the lenders and an "outrage" by the existing shareholders.  Negotiations on this proposal supposedly took place between July and September.  The story goes that TID's Board went back on a tentative agreement because some of the existing major shareholders did not want their equity interests diluted.  (Unclear to me how you dilute something worth nothing.  There's also a hint here that the major shareholders are very important people.   And, if you know Al Q's politics, you might suspect they are pointing the finger at regal personages).

As a second alternative, the lenders suggested taking some assets in exchange for the debt.  The article says  that E&Y determined that this proposal was acceptable under international principles.  Dar supposedly made a counter offer that brought things back to zero. 

At this point, the two sides are in a deadlock.  I think that TID's proposal (assuming the report is accurate) is more a negotiating tactic than a viable proposal.  Rather it is an attempt to break the logjam by setting forth a maximum position.  One they probably know both the lenders and the Central Bank would have a hard time accepting.  What this proposal does, though,  is shift the parameters of the debate.  While lenders may reject a 50% discount, it may be harder to avoid some meaningful haircut - particularly, if the choice is bankruptcy.  And in order to get itself out of having to make a decision that may prove wrong or hurt its and the country's reputation, the CBK may be inclined to lean on the parties to compromise.  TID has just set one bound on the compromise.

It could be that they are trying to play for time - hoping for a miracle.  Realistically playing for time  hurts all parties - TID, the lenders, Islamic Banking, and Kuwait.  But maybe that's the goal - to maintain the status quo.

The article describes the choices in front of the Central Bank as:

1. Issue a conditional acceptance of the proposal subject to conformity with accounting principles and the agreement of the lenders.  (Or in other words neatly pass the buck.  Or is that the dinar? As Al Q elegantly puts it, getting the lenders to agree may be very difficult given the Company's breach/violation of the existing agreement.  That raises AA's first law of underwriting and due diligence "know your customer".)
2. Reject the proposal.  In which case it's expected that TID will sue the CBK in an attempt to confuse the issue and buy more time.  As Al Qabas elegantly puts it الى ما لا نهاية . (Probably not a first choice. More likely is forcing the Company and its creditors back to the negotiating table.  Or putting them in a situation where they will decide the fate of TID, if that fate is to be bankruptcy).
3. Push the lenders to bankrupt the Company - which will lead to all sorts of negatives for all parties and harm the financial sector, Islamic Banking and the reputation of Kuwait. (I'm guessing not an alternative high on the CBK's list).
4. Convert TID to a holding company.  This would remove it from Central Bank supervision so that the lenders can apply the restructuring deal agreed.  Also the CBK's June ratios would not apply.  (This seems to me to be a bit of red herring.  The CBK can grant an exemption to TID as a finance company from the regulations.  Supposedly the lenders will reject this because they don't think the administration of the company is really interested in solving the problem.  The lenders have on more than one occasion made it quite clear what they think about management's ethics.  They began by asking the CBK to place a minder in the Company.  Then they pushed for the appointment of a Chief Restructuring Officer).
5. Force TID back to the negotiating table with the lenders to find a solution and return to the original plan.  (This seems contradictory.  The original plan is probably moot at this point.  I think the lenders are going to have to accept some changes - and these will be against their interests.  From the report of the alternatives they've offered already it seems pretty clear that they've accepted this - even if it was no doubt reluctantly.  The CBK may well force the parties back to the negotiating table but there will be a new deal.  Perhaps the CBK could impose a time limit for reaching an agreement using as the deadline some date prior to the date it's required to give a recommendation to the FSL Court).
6. Give TID an exemption from the new ratios saying the old plan was devised based on Central Bank advice to the lenders and thus it's not fair to change the rules on them.  As per the article, TID has apparently been saying that the original restructuring plan doesn't conform with the CBK's  "new rules".  The implication being the plan must be modified.   (I don't think that the CBK new rules are the real issue here.  The sticking point is TID's ability to pay and to continue as a going concern.  If the new rules were the only point, then I think the CBK would have given the exemption.  This could be quite easily fudged as an agreed plan to implement the new rules. And so it could be presented not so much as an exemption but a granting of additional time to achieve the goal.  When the debt is paid in full, TID will clearly be in compliance).
7. Exit TID from the FSL and leave it to its fate.  (The CBK probably doesn't want to be the one who puts down this dog.  Better to have the lenders do so.  The "trick" is to find a way to put the parties in a situation where they either come up with a solution or fail - a way which keeps the CBK's hands pristine.  The time limit for the CBK to give its recommendation to the FSL Court is a neat escape hatch.  If the parties haven't agreed by then, the CBK can tell the Court it cannot make a recommendation.  The Court should then refuse to allow TID final entry into the FSL.  Since this is the last extension allowed, the matter is out of the CBK's hands.  Nature and the courts then take their course.  That should be quite a frightening thought for the lenders .  As they stare into the abyss  of almost a complete loss, all sorts of discounts and compromises may become possible).

Finally to close out this post, a recap from the Creditors' Committee official letter to the Central Bank rejecting TID's new plan "in whole and in detail":

1. TID's proposal makes a gift of the money of others (the lenders) to the Company and strengthens (supports) the rights of equity at the expense of the lenders who have not received a single fils since the beginning of the crisis but only promises.  (But they were some really nice promises. Perhaps, even said with one's hand on the Qur'an).
2. TID's proposal is contrary to international and global practices (customary usage) and puts the lenders in the situation of a fait accompli with the proposal being put forward without their agreement or consultation.
3. TID's management is "hitting" (harming) the interests of the creditors and shareholders.  Therefore the lenders reject the idea of a discount which is unjust.
4. The Committee considers that TID's proposal ignores the repayment schedule already agreed.  10% in Year 1, 20% Year 2, 20% Year 3, 30% Year 4 and 20% Year 5.  (There seems to be an argument of a breach of faith here.  And, yes, while the lenders may be thinking of a breach of the agreed business contract for the rescheduling, AA also is thinking that in this context the term applies as well to  religion).
5. TID's proposal prefers (in the sense of giving priority) the shareholders over the lenders contrary to what was agreed previously.
6. The Company has wasted the shareholders' money hiring financial and legal advisors and wasted the banks time negotiating the past 18 months.  

This has been a bad situation from Day #1.  The passage of time has not made things better.  It's likely to get worse.

The lenders face a real dilemma.  Do they compromise to try and get back as much as they can?  Or at some point do they just bring down the house of cards?  With 18 months of time on their hands, lenders may have built rather hefty provisions against this name.  That may give them a bit more negotiating room.

The Central Bank is in the most uncomfortable of positions.  It's got to be hoping that third parties or events are dispositive and that it doesn't have to make a difficult decision.

Threats to Capitalism International Edition: Dateline Qatar Taxes at the QFC

Outside the QFC in the Near Future?

Asa Fitch over at The National reports some distressing news from the Qatar Financial Centre - a corporate tax of 10%.  To add insult to the "grievous" injury caused the tax is retroactive.

 

 

Dubai’s Back: CD Spreads Down But …

 Jakub Hałun
GNU Free Documentation License Version 1.2 

富士山- 5 合目

There have been numerous stories in the press how Dubai is making progress coming back. The conclusion of the Dubai World restructuring agreement and the issuance of the sovereign bond are touted as a watershed in this process.

That's not to say that there is no progress, but that it's a bit premature to declare success.

I'm planning a post on the bond later. Today I'd like to turn to the CDS spreads.

What we are told is that there has been a remarkable compression in CDS spreads which touched 650 or 660 bps, if I remember correctly, at the height of the crisis. The spreads are now down to pre-crisis levels, though pre-crisis is measured as the spread just before the announcement.

There's an apparent fallacy in that statement.  Prior to Dubai's November announcement, its spreads were not in some "golden age" except when compared to the market reaction post announcement. And a lot of that was over reaction due to the market being one-sided (a preponderance of demand for protection over the supply of protection) coupled with the fact that the CDS market is rather thin on the best of days. And even thinner the further one's obligor from the major markets.

There is a tendency among some to imagine that credit is like a light switch. It's either good (on) or bad (off). That's not the case.  There are gradations and usually (but not always) credit improvement or deterioration takes place over time.

Prior to the DW announcement, Dubai's CDS spreads had been trending larger, reflecting deterioration in its credit.

As an illustration, let's take a look at some very easily accessible data on five-year CDS spreads from Markaz. You won't need a Bloomberg for this.

Country	Spread
Germany	38.1
USA	47.1
Japan	59.1
China	62.9
UK	63.8
France	79.0
Saudi Arabia	80.2
Qatar	95.3
Abu Dhabi	106.4
Turkey	150.9
Bahrain	175.7
Oman	221.0
Egypt	227.7
Lebanon	288.7
Dubai	391.3

As indicated above, there are a lot of factors besides credit that affect the spreads. But I think this gives a relatively good idea of where the market sees Dubai's credit. And one would expect Dubai to be higher in the ranking.

So progress has been made. But … there's a longer way to go as indicated in the picture above.  And if you got to the Fifth Station on the bus as many do, your most strenuous efforts are yet to come.  Such is the case with Dubai.

Unicorn Investment Bank - A Second Look at 1H10 Financials

Unicorn has now released its 1H10 financials as well as the Central Bank of Bahrain-mandated Basel II Pillar III disclosures.  

I waited after they posted the first copy of the financials in the hopes that the "fancier" copy to follow would have more details.

Sadly, it did not.  

The number of notes in 1H10's report is only five compared the sixteen that were in 1Q10's report.  Or for that matter the 17 in 1H09"s report.  

Cynics out there might say that after losing US$160.5 million in 2Q10 the bank is trying to hide something.  Personally, I think it's motivated by a cost cutting campaign. Ink is quite expensive.  Even the virtual ink used on the Internet.

Because of the paucity of information in the financials, analysis is a "bit" difficult.

First the good news, no problem with the US$51.5 million in fair value losses on Investment Securities.   The net change from 31 December 2009 to 30 June 2010 is US$67.1 million.  It's composed of (a) the fair value losses through the income statement of US$51.5 million (b) fair value losses directly to equity of US$3.2 million, (c) securities sold of US$36.4 million plus the US$4.3 million loss on the sale partially offset by new securities purchased of US$28.2 million.

The problem is with the US$97.4 million in impairment provisions.  As above using the information in the Cashflow Statement, it appears that there were no purchases or sales of Investments in Associates or Joint Ventures.  The net change from 31 December 2009 to 30 June 2010 is US$27.5 million and it can be assumed that this is due to impairment provisions.  (But note it's an assumption.  It's not proven).

Other Assets are down US$95.7 million over the comparable period.  The Cashflow shows US$70.2 million in proceeds received, leaving US$25.5 million unaccounted for.  Interestingly enough in Note 3.1.4 of Unicorn's Basel II Pillar III disclosures, the increment in impairment provisions between 31 December 2009 and 30 June 2010 is US$20 million (from US$5mm to US$25 million).  It's unclear what is going on here.  The Total Column doesn't seem to add in some cases.  And certainly in more than one case does not tally to the balance sheet.  My working assumption is that Unicorn considers some of the assets in Other Assets as not subject to credit risk.   Perhaps, prepayments?

At this point we've accounted for (or at least think we have) some US$53 million of the impairment provision.  

Assets Held for Sale have decreased US$40.6 million though the Cashflow Statement tells us that US$7 million in cash was received.  So that's another US33.6 million of implied chargeoffs.  If they hadn't occurred, then the bank would not have broken even on the sale.  So we're now at US$86.6 million.    (As a side note, it seems the liabilities associated with the Assets Held for Sale have been folded into Other Liabilities.  Though I can't reconcile to the Cashflow Statement showing a US$5.6 million decline in Other Liabilities).

The charge for Goodwill gets us another US$2 million making the running total US88.8 million. 

Finding the remaining US$8.6 million is left as an "exercise for the student".

We can look at this another way through Note 5 Segment Information which provides a breakout by business line.  All amounts below are rounded to the nearest million of US$.

	Cap Markets & Treasury	Private Equity	Corporate Finance	Asset Mgmt	Strategic M&A	Other	Total
EBIP&FV	US$19	US$4	(US$1)	US$0	(US$4)	(US$29)	(US$11)
Impairment Provisions	(US$15)	(US$15)	(US$0)	(US$2)	(US$37)	(US$28)	(US$97)
FV on Securities	(US$10)	(US$30)	(US$9)	(US$0)	(US$2)	(US$0)	(US$51)
Net Loss	(US$6)	(US$41)	(US$10)	(US$2)	(US$43)	(US$58)	(US$160)

Two comments:

1. On an operating basis (before provisions and fair value changes) two LOBs are profitable:  Treasury and Private Equity.
2. However, changes in fair value are a measure of operating profit.  That means that only Treasury was profitable.
3. After accounting for impairment provisions and fair value changes, each of Unicorn's LOBs was loss making.  Now I suspect that the new CEO wants to clear the books of any potential losses so he starts with a clean slate.  And sometimes there i a strong motive to over provision to provide a bit of lift to future earnings.  Reversals of provisions or mark to models can be quite handy in establishing one's value.  It also gives the company a story to tell about dramatic progress  as it tries to  overcome the lingering effects of the bad times on its reputation. Hard to know if there's a real problem in the assets or if some of this is "taking a bath".

International Leasing and Investment Company - 3 Directors Reportedly Resign

Outside the KSE: They Walk Among Us But Are Forbidden to Trade

 

According to Tamir Hammad at Al Watan 3 members of ILIC's Board have resigned in the past two days.  On Sunday, Mohammed Ahmed Saad Al-Jasser, the representative of Abraj Holding (a 32.3% shareholder in ILIC).  On Tuesday Messrs. Khaled Mohamed Nasser Al-Aboude and Badr AlDeen Noyoh, representatives of the Islamic Development Bank (a 28% shareholder).

As the story goes, the three former directors refused to give a reason.  Indications are that there are sharp differences in the company which will be laid at the feet of the regulators to sort out.

And much there is to sort out.  Among the listed but suspended (from trading) companies on the KSE, ILIC and Villa Moda have the dubious distinction of having failed to issue 7 financial reports - their last being 30 September 2008.  Even poor old TID only has 6 reports past due and shares that honour with Safat Global.

You'll recall there was an earlier flap over whether Mr. Fuad Hamed Abdulqader Al-Homoud was returning in an executive role to the company.   Apparently, that rumor has surfaced again.  Supposedly, a neutral party was negotiating a debt rescheduling agreement with the lenders supported by the IDB and Mr. Al-Jasser.  The latter to take a key management role.  Then some shareholders started pushing for the return of Mr. Al-Homoud as the story goes.   Apparently, those who thought his previous stewardship exemplary.   In any case this supposedly led the 3 directors to exit.  

What's interesting here is that shareholders with more than 60% of the firm don't seem to be able to control the Board.

Anyone with an insight or opinion, please post.

For those interested in a trip down memory lane, you can access earlier posts by using the tag "International Leasing and Investment".

TAQA: US$3.1 Billion Facility Rollover Discussion in Early Stage

Here's TAQA's announcement on the ADX today confirming that it is in the early stages of negotiations to rollover its US$3.1 billion facility maturing next August. 

The press release notes that only US$1 billion has been drawn and that the facility was extended by a 14 member banking syndicate composed of local and international banks.

HH Shaykh Mohammed Bin Rashid Al Maktoum Interview: "Dubai is Back"

Here's the Bloomberg interview with Shaykh Mohammad and Shaykh Hamdan.

And as well, here are some unbiased reactions to the interview by various local personalities.

Department of No Surprises: Leaked Results of Booz Study - One Bank is Strong the Rest at Lower Levels

5 October's  Al Qabas contains a supposed "leak" of the study Booz did for the Central Bank of Kuwait.  The results one bank is strong and the remainder satisfactory and partially satisfactory.

Since no names were given, I suppose it's a big mystery who the one strong bank is.  That is, of course, if you don't know anything about Kuwait and Kuwaiti banking history.  

Al Qabas' sources tell it the report was given to the Central Bank last week and that the CBK is studying Booz's conclusions to determine which banks need to raise additional equity and which can strengthen their balance sheets by issuing bonds.

AlGosaibi v Maan AlSanea - Secondary Sales and the Fix

Here's an interesting article from AlQabas which reports that some international lenders have sold a part of their debts to the two troubled family groups to hedge funds and distressed debt funds at between 20 and 40 cents on the dollar.

The motive of the selling banks is given as concern that collection of any amounts will take a long time given the complicated affairs of the companies as well as lawsuits from every side.   Or as the Arabic has it more poetically  دعاوى قضائية من كل حدب وصوب .  Even if there is a settlement between the two groups and their creditors.

This raises an intriguing question.  Why are the buyers buying?  Particularly in such a distressed scenario as this where the amounts are so very very large.  And at prices up to 40 cents????

There are a few possibilities here:

1. Al Qabas' informed banking sources may not be so well informed.  
2. The funds have lost their minds.  
3. Or they know (or think they do) something that the wider creditor group doesn't.  One answer would be that there's some sort of "fix" going on to settle the debts.   

The only thing mitigating against this last explanation is the price range.  In a case like this secondary prices should be in the teens, if that. 

So why is presumably "smart" money paying more?

Without knowing the volumes, the identities of the buyers (which may show whether the money is inherently smart or not), and if the buying is focused on particular loans, it's hard to say.

But if the upper bound to the price given is right, I'm betting it's irrational exuberance.

IMF Working Paper: Recent Credit Stagnation in MENA

The IMF has released a Working Paper on credit stagnation in MENA prepared by four staff members, though it should be noted that IMF WP's do not represent official views of the IMF.

The report provides some interesting statistics on credit growth compared to measure of "normal" credit growth and some decomposition of changes in bank balance sheets post crisis.

I didn't see anything particularly controversial in the findings.  Or findings that would challenge intuitive analysis.  

The country by country data does provide a context for viewing credit growth across the region.

The Investment Dar - New Look to the Website

Overheard on the sidelines of the recent OGM, the Chairman/CEO (in the middle) listens to two stockholders discussing the firm's fall:

"There's a 269th Rule of Acquisition?" 

Our friends over at The Investment Dar have a new look to their website.  A space theme.  Much "neater" looking than the new one over at The National.

Wonder if the lenders approved the expense for the redo? 

And wonder if they're ready to boldly go where no lender has gone before?  (Under the FSL)

Global Investment House - A Global Leader in M&A?

Everything is relative:  In a small bowl, a small fish can feel very, very big.

On 27 September, Global published a press release in which Mr. Badr Abdullah Al Sumait was quoted as saying:

"نعتز بهذا الانجاز المتمثل في تبوء جلوبل مراكز متقدمة ضمن كبرى بنوك الاستثمار العالمية في مجال الاستشارات المالية لعمليات الدمج والاستحواذ. ويؤكد هذا الإنجاز الدور الذي تلعبه جلوبل على مستوى المنطقة في تقديم خدمات الاستشارات المالية كما ويدعم سياسة الشركة المستقبلية في التركيز على الأنشطة التشغيلية ومن بينها الاستثمارات المصرفية."

Quite a statement "ranked among the largest investment banks in M&A".

What was the basis for what might appear to be a rather extraordinary claim?

Reports from Thomson Reuters and Merger Market.

In TR's report on the first six months of 2010, Global was:

1. 4th among financial advisors in M&A deals completed in the MENA region 
2. 17th among international investment banks for deals completed in the EMEA region.
3. 15th for deals completed in Emerging Markets

In MM's report, Global was:

1. 6th among FAs for announced M&A deals in MENA during the first half of 2010
2. The Bharti Airtel/Zain transaction on which Global acted as FA was the largest in the MENA region and 8th worldwide.

There's no dispute about Global's position in the league tables, which was due to a single transaction, Bharti/Zain.   Each transaction does count.  Global was Bharti's advisor and so has earned a place in the league tables.  But this single transaction is its only claim to league-table prowess.

And so like the local mutriba after her first big hit, it may be a bit premature to claim to be the next Fairouz or Umm Kulthum,   One may well turn out to be, but the claim will only be proven by repeat performances.   

Now I'd repeat what Global says in its press release:  it is the only GCC or MENA firm to make the list.  So maybe Global might more properly see itself as a regional leader in M&A (though I'd still contend that it had to have repeat performances to qualify at that level).  Not Kawkab Al-Sharq but perhaps Kawkab Al-Khalij.

To be fair,  let's trundle off (electronically, of course) to Thomson Reuters highly intelligent Deals Intelligence Site to take a first hand look at the 2Q10 Global M&A Report.  And by doing so, get a bit of context.

A few factoids from that visit.

M&A Volume for the First Six Months of 2010

Announced - US$1.065 Trillion / Completed US$811 billion

1. Americas:    US$523 billion / US$405 billion
2. Africa/ME:  US$  42 billion / US$  32 billion
3. Europe:        US$269 billion / US$200 billion
4. Asia Pacific: US$199 billion / US$114 billion
5. Japan:            US$  32 billion  / US$ 60 billion

Anyway you slice it Global's US$10.7 billion in 2010 transactions are drop in the vast ocean of all deals. 1%.   It did have a good sized share among Africa/Middle East deals - 25% Announced Deals and 33% Completed Deals - but Mr. Al Sumait is claiming that Global is among the  leading global investment firms in M&A.  Not that it's a leading firm for Africa/Middle East M&A.   

As the table shows, Africa/ME is rather small beer in the M&A world representing 4% of announced deals and completed deals. 

Let's look at this from another angle - the top 25 advisors for worldwide M&A.

Top 25 Global M&A Advisors

1. Global's name does not appear either in Announced Deals or Completed Deals.
2. The top ten firms (led by the perennial leader Goldman) had between US$213 billion to US$112 billion in announced transactions and US$169 billion (Goldman again) and US$60 billion in completed transactions. UBS was in 10th place Announced Deals with US$112 billion.  And Rothschild in 10th place in Completed Deals with US$60 billion.
3. The advisory firms in 25th rank Jeffries (Announced) and Blackstone (Completed) had respectively US$21 billion and US$14 billion in transactions.

Generally the first ten firms are considered the leading firms. Unless one is prepared to define "leading" investment banks in a very generous way Global again fails to make the "cut". 

 Top 25 Financial Advisors for EMEA M&A

1. Deutsche Bank holds pride of place in Announced Deals with US$94 billion with Citi at US$45 billion in 19th place.  
2. For Completed Deals it's Morgan Stanley with US$85 billion.  JPMorgan  is in 10th place with US$50 billion.
3. Global makes its appearance in 23rd place with US$11 billion in transactions for Announced Deals (up from 220th the year before) and 17th place for Completed Deals. Well out of the magic circle of the top ten.

In this category, Global can make the claim that it has made substantial progress - but on a regional not global level.  As I said above, the real proof will be if Global's name is in the list next year.  But until it cracks the top ten it won't be a leader but a second tier player.

Can anyone out there remind me what Global earned on the Bharti transaction?  Earnings are very important in this business.  For the first six months of 2010, the Company reported advisory related fees of KD1.9 million up substantially from the KD0.3 million it earned in 2009.  That's a 638% increase.  One would hope the fee on a US$10.7 billion would be a "bit" more.  Maybe we'll see the full force of the fee in the 3Q10 financials?

And finally at the end of the Global press release, you'll find links to Thomson Reuters and Merger Market reports which can give you an insight into the general M&A market.

A Bridge Too Far: 0-2

Next BC.

Gulf Bank: The Golden "Prize"

 

The Gold's There.  Look Closer.

According to the informed sources of Al Watan, a European Group is now bidding to acquire a significant/meaningful share in Gulf Bank through the services of a Kuwaiti intermediary.  And is therefore bidding against the Qatari Group.

The article goes on to say that GB is expected to declare a profit of KD35 million for the first nine months of 2010.  3Q10 provisioning is expected to be much less than during the first two quarters this year  because GB has provisioned 100% of Saad and Al Gosaibi exposure (KD 120 million!) plus 100% for The Investment Dar, 50% for Global,  and 50% for Aayan Leasing and Investment.

Anyone out there know if the provision levels for TID, Global, and Aayan are Central Bank mandated?  Or if they're just GB's calculations.

I guess Global may be among the worlds leading investment banks  for M&A as Mr. Al Sumait said not so long ago (a post is coming on that topic) but seems to be in rather poor company with respect to its loan repayment prospects.  Half full or half empty?  But nonetheless better than some others.

DIC Restructuring: Difficult Discussions Over Margin and Covenants?

Asa Fitch over at The National reports that discussions between DIC and its creditors over the proposed five-year rescheduling are focused on:

1. The margin. DIC would like 85 bp.  The lenders appear to be sensibly asking for more.  Though the precedent set by Dubai World's rescheduling is not in the lenders' favor.
2. The lenders would like covenants triggering default if certain levels of asset sales aren't met in the second and fourth years of the restructured facility.

While Asa's sources describe the proceedings as "fierce", the Company itself sees things proceeding smoothly.  

I suspect this will end up with a cosmetic change in the margin.  Hopefully, the banks have their eyes firmly on the prize (the more important point):  covenants to force asset sales.  An extra 100 or 200 bps is going to be cold comfort, if the banks can't force the return of their principal.  

There's nothing like the reluctance of an investor who bought at the top of the market to sell when markets are depressed.  He knows there's real additional value there and he has the loans to prove it.  Plus do I need to add The Vision.

Is it News or an Advert?

Dr. Hilton with What Appears to Be Schroedinger's Cat

The National ran this rather remarkable piece yesterday, which sounds to my ears suspiciously like a transcription of marketing literature from Barclays.  

Not really news.  More like product placement in a movie.  Or outright touting.   Sorry, TN, but when you publish transparent advertizing like this, the natural question is:  Are your "news" columns for sale?  Or is this perhaps part of your transition to a new website and your staff are creating filler to see how it looks on the new "page"?

There's no real analysis of the product in the article.

Let's try and fill in that gap.

Before we start a very important caveat:  without seeing the marketing materials, I don't know the underlying structure.  

So what follows is a bit of speculation (note that word), hopefully informed based on structures I've seen before.  To hammer the point home:  this article does not necessarily provide a description of the underlying elements of Barclay's product but shows how such a product might be constructed.

Clearly this is no standard commercial banking fixed deposit product.  In the current market one doesn't get a 9% return on deposits.  And note right up front, it's not a promised return of 9%.  But a return up to 9%!  There is a difference.

Bankers are not very good on selecting earning assets (that's why a select group of distinguished banks, including those from The Developed West hold a disproportionate share of Dubai World debt) but they are generally fairly good at pricing deposits.  They usually are very careful to set the rate on deposits less than the rate they expect to earn on assets. (Note the word "expect".)

Compounding the earnings issue (what the banks will have to use to pay the depositors) is that the tenors are relatively short.  And it's a general rule that the shorter the tenor on a deposit instrument the lower the rate.  More risky assets (equity, etc) have of course higher returns.  One has to ask oneself just how high a return is needed to give the investor a high rate on his deposit/investment.  We'll look at that a bit later.

So how does a bank structure the transaction so it can make a tempting offer like this?

To be clear what follows is based on structures I'm familiar with - which are multi-year tenor instruments.

First, in order to "guarantee" the principal, the bank "buys" a zero coupon bond with a portion of the proceeds of the deposit.  This theory is that this "guarantees" the depositor his principal back at the end of the term.   At maturity the redemption value of the zero coupon equals the original principal.  If the bank or the investor wants a higher return, the amount of the zero can be reduced so that the depositor has this "guarantee" for some percentage less than 100% of his original principal, e.g. 90%, 85%, etc.

Sometimes when investors or depositors hear about the zero coupon, they think they have a guarantee of the return of principal.  Generally, they don't because the bank buys a "zero" coupon bond from itself.  So the depositor has a promise from the bank to pay him back secured by the bank's creditworthiness  In effect the exact same promise he gets if he places a conventional deposit.   In either case if the bank is in financial difficulty, it won't be able to pay back a straight deposit or a bond.

How could a depositor/investor get a real guarantee on his money?  Two steps.

1. The bank would buy a zero coupon government bond issued by the US, UK, UAE, or Indian governments, thus "guaranteeing" that at maturity the receipt of the face amount of the bond in  US$, Sterling, AED or Rupees respectively.  I'm assuming that each of these sovereigns would "print" enough money to satisfy its obligations if that would be required.
2. The bank would legally pledge these government bonds as collateral for the investment/deposit.  If they're not pledged, they are part of the estate of the issuer (the bank) in bankruptcy.  And the depositor/investor is an unsecured creditor of the bank.

Sometimes the transactions will be described as "guaranteed".  That occurs when a subsidiary of the bank issues the investment certificate or the deposit.  Then the parent guarantees its subsidiary's payment.  Again stripping away the form, the substance is that the same as if the depositor had placed a deposit with the parent (the bank).  There is no third party guarantee.  It is "all in the family" as I often like to say here at SAM.

Sometimes a minimum interest rate is "guaranteed".  This can be achieved very simply, by taking some of the remainder of the deposit after the zero is bought and putting it aside.  Say the bank wants to promise 1% interest.  It deducts $1,00 from the US$9.09 or the US$2.91 and puts it in a deposit.

The remainder of the principal of the deposit (what's left after the "zero" coupon security is bought and any minimum interest guarantee reserve funded) is then used to "punt" in the investments - equities, commodities,  options and derivatives, etc..  

Often with leverage where the bank lends additional funds secured by the additional assets purchased.  Generally with a mechanism to unwind leverage if volatility in the underlying instruments increases.  The bank will tout this as a "protective feature" to limit risk.  And it does.  However, volatility is a measure of the change of the value of an asset - whether the values are increasing or decreasing.  So some of the upside is given away.  But a fair trade to limit downside risk, I think.

Now to some numerical analysis.

 

With interest rates so low and the tenor so short, clearly a large part of the initial principal of the deposit would have to be used to purchase the zero coupon.

The remaining principal is likely to be very small.

Let's look at a simple example for a one year tenor.  Assume that interest rates are 10% (clearly they are not now.  This is our standard Panglossian best case.)  If they were, a zero maturing for $100 one year from now would cost US$90.91.   At 3% one year rates, the bond would cost US$97.09.  

This means that with the 10% scenario the bank would have US$9.10 of the investors' funds to punt with.  And US$2.91 at a 3% level of interest rates (closer to today's level).  As you notice, I am assuming there is no promised minimum interest.  And I'm assuming there are no upfront fees or ongoing operating expenses.  All of these would serve to make the economics even more difficult.

To get the 9% return on the total principal (i.e.,  US$9 in our example of the US$100 deposit), the bank would have to earn - without any leverage on the remainder (after buying the zero):

1. Roughly 100% if the remainder were US$9.09.  (Our highly unlikely 10% market rate scenario)
2. Roughly 309% if the remainder were US$2.91.  (Our still optimistic 3% market rate scenario).

Neither of these seem realistic returns for current market conditions.  And one might even consider that  if achieving these rates during the last bout of irrational exuberance was difficult, it might be even more so now.

Add some leverage and the required returns still remain very high.  

With total leverage of 3 times:

1. In the first case the required one year return is 33%.
2. In the second case, the required return is 103%.

With leverage, the lender always collects his principal and interest first.    If asset values decline, and trigger the leverage control, the lender will sell the additional assets and repay the loans (principal plus interest).  If the proceeds aren't enough to repay the loans, then he'll take money from the US$9.09 or US$2.91 "remainder" to cover any shortfall on principal and interest.  So employing leverage can cause an erosion of the "remainder" under certain market decline scenarios.

If the investing scheme breaks even, then the investor will get the market rate on his or her deposit.  The US$9..09 or US$2.91 in our two examples.  In effect the one year rates.

Up to 9% sounds great.  Getting it will be a little more difficult than reading a glossly brochure.  

To be very clear, am I saying it's impossible that this scheme could earn 9%?  No.  Rather that the probability of earning 9% is rather low.  Better I suppose than the odds of Paris Hilton winning the Nobel in Physics. But who knows what she's doing right now?

The National: Mahmood Karzai Villa Sale and US Federal Tax

The National is in the process of changing its website.  

The draft site site has some articles not in the existing site.  Here's one about potential US tax issues for Mr. Mahmood Karzai with the sale of his Dubai villa.  You'll find other articles and get a sneak peek at the new format by going to www.beta.thenational.ae

You can read the article for details.  

The US is one of a few countries that tax their citizens on worldwide income. 

Reuters: How Dubai Got Serious?

An interesting report from Reuters:  How Dubai Got Serious.

A deliberate choice of headline?  Or perhaps an unintended indication that at one point Dubai was not serious?

To whet your appetite some quotes.  My comments follow each quote.

The auditors' task is to investigate exactly where the money went, who lined whose pockets, and what other financial landmines might lie in store. Forensic audits at state-linked firms, such as Dubai Holding, are part of a wider corruption probe that has targeted senior figures from Dubai's boom years.

Lots of commissions to track down to say nothing of more simple misappropriations.

Abu Dhabi's ascendancy began in the wake of 2008's global credit crunch. Reports about debt trouble in Dubai's flagship companies had been circulating within government from as early as 2005, though most people seemed happy to ignore them. In 2008, the end of a six-year oil-fueled boom burst Dubai's real estate bubble while the global financial crisis left the emirate unable to refinance looming debt obligations.

Lenders merrily rolling over loans and pretending everything was OK.

 "The announcement was a disaster for Dubai. They were told 'don't worry, Argentina has done this, Venezuela has done it. People forget and they start lending again.' But what they didn't take into account was that those are real economies. This is not a country.

Ouch!  But right on target.  Not a country in several ways. 

"Nakheel's books were so screwed up it wasn't even funny."

"No-one knew the magnitude of what was owed, then the complexity of it," the former adviser to Dubai World says. "A lack of experience -- and ego -- made it hard to admit defeat."

And still make it so for the "Dubai's back" crowd.

Almost two-thirds of Dubai World's debt is held by six banks, four of them British: HSBC, Lloyds, Royal Bank of Scotland, Standard Chartered, and local lenders Emirates NBD and Abu Dhabi Commercial Bank.

Another great moment in banking!  There's no fool like and old fool.  And then there are bankers.

"They believe that now the problem is solved," says the former Dubai World adviser, who is critical of creeping complacency just a year after the crisis. "The problem is not solved, they still owe the same amount of money. They will have to pay the same amount, only a little later."

See above "We're back".

The Investment Dar - Changes to Restructuring Plan?

Al Qabas reports that this Wednesday, TID held a meeting in Dubai with the Creditors Co-ordinating Committee and Ernst & Young.  This is the first meeting between the CCC and E&Y.  Earlier the CCC had submitted a letter to E&Y asking that it look out for the interests of lenders as well as the owners of the Company.   

As you'll recall, E&Y has been tasked by the Central Bank to perform the technical study required under the FSL as part of the CBK's determination of whether to recommend that the Special Court make the final decision to either allow TID the protection of the FSL or deny it.  So E&Y is working for the CBK and not the lenders or the owners/borrower.

What's intriguing is that the article also mentions that the CCC has been pressuring the Company to inform it of changes and amendments in the restructuring plan which were made without the knowledge of the lenders.  If you've read earlier posts here, you'll recall that I mentioned in March that the FSL gave the CBK the right to impose additional conditions on the borrower and amend the plan in order to improve the probability of the borrower's performance.  

In this situation, the CBK holds the trump card.  It's "yes" vote is necessary for obtaining entry under the FSL.  Given that a liquidation under local laws would be messy and greatly reduce recovery prospects, both TID and the lenders are going to find it difficult to say "no" - though I suppose they can try to negotiate.   The CBK can counter by citing the report of E&Y - the independent experts asked to assess TID's financial condition and the plan.

It's also important to note that Al Qabas' account is only as good as its sources.  Last July the newspaper reported that E&Y was submitting a "final" report.   Though I suppose one possibility is that E&Y's report at that time said that the Company's  financial condition meant the original plan wouldn't "work" and needed to be modified. 

Absent a direct link into the creditor group, we'll have to wait to see what develops.  If any creditor out there reads this as an invitation to comment, he'd be right. Or, if the creditor prefers, make contact outside the blog via our contact form.

The article also mentions that during the  meeting Brother Adnan, TID's Chairman/CEO, reportedly advised the lenders that he had consulted God before founding the company.  «استخار الله ثم اصدر اوامره في تأسيس شركة تحوي بعض الاصول» .  Subsequent events would appear to confirm that he failed to maintain subsequent contact for management advice.  Or perhaps ignored what advice he did receive. Or perhaps he got a "wrong number" in his original contact

Some of the creditors expressed their disapproval over some of the decisions that Mr. Al Musallam had taken.  After a closed debate, he left the meeting and did not return, leaving the CCC and creditors with an advisor.  Some creditors are reported to have objected that the advisor had no legal status. He was not an officer of TID.  He retorted that he had a position in one of the external entities (whatever that means).

Things aren't going well.  

It seems that relations between TID and its lenders are difficult.  Mr. Al Musallam should remember that during the rescheduling the lenders will be poking their noses into his business.  While the restructuring covenants are no doubt "arranged with the greatest of care in the hopes that the cashflow soon would be there", there will be times when interpretations of meaning will arise.  Disgruntled creditors can read things more strictly if their backs are up.