Gulf Holding KSC (Closed) – Financial and Legal Problems – Part 1

He's Got A Dossier Too.  That's Why He's Smiling.

As the “Part 1” above indicates, I have a lot of material to cover. 

The principal sources for this post are the FY 2017 AGM and FY 2016 AGM packages (available only in Arabic).  If these links don’t work, go to the investors relations page at www.gfholding.com.  

While this dossier makes lamentable reading indeed, the first thing to note is that it reflects the state of the company prior to GFH’s efforts to right the situation at GH sufficiently to minimize risk to itself  of acquiring the Villamar Sukuk and increasing its shareholding above 50% in GH. Clearly, if GFH had not been successful in its efforts, it would be foolhardy to take these steps.  

When discussing matters financial, where better to begin than with a review of financials?  

The FY 2017 AGM package includes a complete 2017 annual report for GH in Arabic.  AA has transcribed the information into the tables below following the format in the Arabic version and provided USD equivalents. 

Note the financials are unaudited because the local member of Ernst and Young (Al Aiban Al Osaimi and Partners) the auditor refused to give an opinion which it also did for the 2016 annual financials.

Gulf Holdings Unaudited Financial Statements
Assets - Amounts in Millions
	KWD			USD
ASSETS	2017	2016		2017	2016
Non-Current Assets
Real Estate	14.5	12.9		$48.1	$42.8
RE Development	131	123		$433.8	$408.3
Other LT Assets	0.0	1.4		$0.0	$4.6
Total LT Assets	145.4	137.5		$481.9	$455.7
Current Assets
Invest Held for Sale	0.0	0.1		$0.0	$0.3
Other Assets	1.8	1.8		$6.0	$6.0
Cash and Banks	0.5	0.0		$1.7	$0.0
Total Current Assets	2.3	1.9		$7.6	$6.3
TOTAL ASSETS	147.7	139.4		$489.5	$462.0

Source:  GH FY 2017 AGM Package.

1. No real liquidity. 
2. Current Assets are less than 2% of total assets. 
3. Almost no cash. 
4. Over 99% of Other Assets are advance payments to contractors and consultants.  No real liquidity there.

Gulf Holdings Unaudited Financial Statements
Liabilities and Equity - Amounts in Millions
LIABILITIES	2017	2016		2017	2016
Non Current Liabilities
Work in Progress	0.2	0.0		$0.7	$0.0
Sukuk (LT Portion)	58.1	62.1		$192.5	$205.8
Customer Advances	27.1	3.1		$89.8	$10.3
Accrued Expenses  Other Payables	4.8	11.6		$15.9	$38.4
Leaving Indemnity	0.0	0.0		$0.0	$0.0
Total NC Liabilities	90.2	76.8		$298.9	$254.5
Current Liabilities
Due to Related Party	3.0	2.8		$9.9	$9.3
Sukuk (Current Portion)	3.0	1.5		$9.9	$5.0
Accounts Payable	12.9	11.2		$42.8	$37.1
Customer Advances	13.5	18.4		$44.7	$61.0
Accrued Expenses Other Payables	3.0	6.5		$9.9	$21.5
Total Current Liabilities	35.4	40.4		$117.3	$133.9
TOTAL LIABILITIES	125.6	117.2		$416.2	$388.4
EQUITY
Paid in Capital	84.7	84.7		$280.7	$280.7
Reserves	6.7	7.1		$22.2	$23.5
Accumulated Losses	-69.3	-69.6		($229.7)	($230.7)
Shareholders’ Equity	22.1	22.2		$73.2	$73.6
TOTAL LIAB & EQUITY	147.7	139.4		$489.5	$462.0

Source:  GH FY 2017 AGM Package

1. As of FYE 2017, GH has “lost” roughly 82% of its paid in capital.  As is common in the GCC, local law requires the company to take action.  Options are: raise capital, capitalize losses by reducing paid in capital, or wind up the firm.  
2. Current Liabilities dwarf Current Assets. 
3. Roughly 92% of the 2017 Due to Related Parties is due to GFH.  
4. The 2008 Villamar Sukuk (original maturity 2013) was restructured 13 December 2016 (effective 22 March 2017 after finalization of documentation) with the following terms: 
5. Extend maturity to 7 May 2022. 
6. Capitalize KD 5.1 million in unpaid interest (1 May 2008 through 13 May 2013) in the principal of the sukuk.  
7. Commence periodic interest payments starting from 30 June 2018.  I didn’t see a direct statement that interest was not due between 13 May 2013 and 30 June 2018.  But there is recovery of interest paid on the sukuk for  KD6.6 million  in FY 2016 (note 16) which suggests this might be the case.  
8. 1% margin plus 6 month Libor but in any event total rate not to exceed 1.5%.  
9. The notes describe two USD 5 million payments to be made as part of the restructuring.  GH made the first but missed the second due 31 December 2017. The Sukuk holders agreed to an extension while further negotiations took place which appear to have involved GFH.  
10. Villamar Sukuk was structured as a musharakah.  There has been debate if it actually was in conformity with Shari’ah because there are no fixed payments in a musharakah.  Investors in the sukuk share in profit and loss.  The first is from a scholar in Jeddah.  The second from two scholars in Malaysia.  Note that at the time VS was issued this was a common structure until Shaykh Muhammad Taqi Usmani issued his famous opinion.  
11. I have not prepared income statements from the material in the AGM package because income is miniscule.  When an income statement opens with a one line “Other Income” and then goes directly to expenses, you don’t need a CPA to figure out revenue streams are limited.  

Creating income statements is left as an exercise for the student. 

As well those interested may use the 2016 AGM package to create FY 2015 annual financials for GH. 

All in all a dismal picture.   

But this was not the end of GH’s woes. 

Post 2 takes a look at the auditors’ refusal to provide an opinion on the financials as well as legal and other problems that the company faced.

Gulf Holding Kuwait - Was There a Legal Quorum at Its 2016 AGM and EGM (Held 1 March 2018)?

Definitely Not the Eminent Courts of Sharjah

The annual ordinary shareholders meeting (Annual General Meeting or AGM) of a company requires that a minimum percentage of shareholders attend in order for the AGM to be legally constituted.  The same with any Extraordinary General Meeting (EGM).  Typically the company’s Articles of Association provide that if a quorum isn’t reached at the first meeting, a lower quorum will apply to the second, and then an even lower quorum to the third.  

For no doubt good reasons Gulf Holding Kuwait didn’t hold its FY 2016 AGM or EGM until 1 March 2018.  If you’ll look at GH’s package for its FY 2017 AGM  you’ll find a copy of the minutes of both the FY 2016 AGM and EGM.  It appears that the FY 2017 AGM/EGM took place sometime after 1 March 2018.  And, as outlined below, sometime after 25 March 2018!

You may want to download a copy of this document and the 2016 AGM/EGM package as a precaution that GH might change its disclosure policies and remove both of these interesting documents from its website. 

According to the minutes, shareholders representing 517,785,847 of GH’s total 847,000,000 shares or 61.6% of total shareholding attended.   Page 6 for the AGM.  Page 9 for the EGM. 

AA does not know the quorum requirement for a second GH's AGM or EGM.  But it sure looks like we’ve got one.  

But what if one of the shareholders did not have a valid Commercial Registration?  

From the minutes we see that one of the shareholders BSB Ventures asked and succeeded in getting an item added to the AGM agenda.  If you’re interested that was to allow the Board or whoever they delegate to negotiate with related parties regarding legal cases and sign any agreements to resolve. The item was approved.  The minutes state that BSB owns some 19.81% of GH.   Point 10 Page 9.  

So who are BSB Ventures? 

A check in the Bahraini MOIC’s CR search tool www.sijilat.bh  returns a Bahraini WLL company with that name holding CR 95777-1.  This company is shown as owned by GFH.  Formerly EMAD Ventures, its name was changed to BSB 23 April 2017.  So fairly compelling evidence that this is the vehicle through which GFH holds its GH shares.  You can check details at the Bahraini MOIC website.  

One rub BSB’s CR was “deleted by law” 30 November 2017 with the CR “revived” on 25 March 2018 as you will see at the MOIC website.  

According to AA’s understanding of the Bahrain Commercial Companies Law of 2001 as amended a Bahraini company must have a valid CR to conduct business. There are penalties for conducting business without a CR.  

As noted above, BSB Ventures WLL took part in GH’s FY 2016 AGM and EGM held on 1 March 2018.  At that point it appears that BSB Ventures did not have a valid CR.  

If so, it may be that BSB Ventures lacked the capacity to attend and act at the meeting.  Or in other words it wasn’t legally present at the AGM and EGM.  That may well mean that shareholders representing only 41.8% (61.6% - 19.8%) were present.  If so, was that a quorum? 

AA doesn’t know.  AA is not a lawyer.  

Are there any Bahraini or Kuwaiti law legal experts out there who would care to comment on the following questions and provide any other insights they have? 

1. If BSB did not have a valid Bahraini CR on 1 March 2018, did it have legal existence and capacity to act at the AGM and EGM? 
2. If not and therefore a quorum was not reached, are the results of the AGM and EGM invalid?  This could present difficulties if the Board agreed settlements with related parties over legal cases (AGM added agenda item).  Or if the Board took action regarding the capital reorganization approved in the EGM. Presumably lack of a legal quorum would also affect other decisions taken at the meetings as well, but the first two would appear to be the most serious matters..  
3. And finally if BSB did not have a valid CR, but voted in the AGM and EGM, would it be subject to any legal penalties in Bahrain or Kuwait? 

It may well be that GH's FY 2016 AGM/EGM had the required shareholder quorum.  

1. The 25 March 2018 date is the date of recording the revival of BSB’s CR but that event took place prior to 1 March.  
2. Companies without valid CRs may be permitted to undertake certain actions without violating the law.  
3. Or GH’s Articles may allow a much lower quorum for second meetings and so if GH legally did not attend, then a quorum was still reached.

Gulf Holding KSCC – A Closer Look - Who are the Shareholders?

Dr. Herbert West at the GFH Medical Center, AA in Background,GH Kuwait on the Table

As the picture above indicates Gulf Holding KSC (Closed) ("GH") has “come back to life” after a prolonged state of dormancy apparently though efforts by GFH (now its majority shareholder) over the past 3 years.  

Information on GH is fragmentary.  When corporate distress hits, a typical reaction in this part of the world and others is to go silent.  Or to change the name of the institution in the hopes that the public won’t know that the newly named entity has a less than illustrious past.  A “unicorn” loses its horn and turns to good, one might say. 

More info is emerging after GH’s reported awakening from its coma.  

But what do we know?   Not much. 

As usual AA has your back.  

This the first of four planned posts will look at shareholding.  

GH is a closed private Kuwaiti company and as such need disclose less than a public company.  The nature and extent of the “problems” at GH was severe, probably leading to more than the normal reticence from the company and its shareholders.  

We know that the company was created “in Kuwait in November 2005 by well-known investment companies in the region” who for obvious reasons chose to remain less well known in recent years.  Web searches do not disclose shareholder names.  If there was a self-congratulatory announcement of the formation of the firm back in 2005 (which would be reasonable given the year of creation), it has disappeared down the memory hole.  Some sources refer to five founding shareholders. 

We do know that GFH was involved.  If you look at annual reports back to 2012 (at least), you’ll see references to GFH officers holding senior positions at GH and on its board.  Chairman of the Board.  CEO.  But no mention on GFH’s shareholding which we only about learned from GFH’s 2018 FY Annual report.  GFH's investment in GH was fully provisioned sometime in the unknown past.  

Some information on that topic emerged in Note 14 in GFH’s 2Q18 unaudited interim financials and in Note 20 in GFH’s audited annual 2018 financials.  GFH held a 19.79% share (carrying value nil) prior to becoming a 51.18% shareholder through the June 2018 acquisition of an additional 31.39% in shares.  

One other shareholder has self-identified.  That is GBCorp Bahrain (20% owned by GFH). In Note 6 to GBC’s 2018 annual report, GH emerges from nowhere shown as fully written off with the date captions for this entry strangely set to 2014 and 2013 in the 2018 AR.  Amount shown before provision is USD 13.4 million.  Assuming AA is correct and that 1 USD = KWD 0.2920 in November 2005 GBCorp would have 4.9% shareholding based on GH’s KWD 84.7 million paid in capital.  

But we don’t know what GH’s original paid in capital was and whether there were additional amounts raised or earnings capitalized via bonus shares. Remember the Note in GB's financials because you’ll find their plaintiff’s claim against GH outlined here.  We’ll be looking at that in a future post.  

What can we do to find the others?  

My wise mentor on things Middle Eastern once told me “AA, look at the boards of directors and you’re likely to discover undeclared shareholders, especially if you see shaykhly names.” Either the shareholders themselves or their known associates or “friends”. 

So, for example, at one time two sons of Shaykh Zaid were on the board of a bank listed on the ADX.  ADX shareholder records showed their shareholding as minimal.  Were their board memberships an example of only selfless public service?  Or that they were undeclared major shareholders?   AA was told by someone who should know that it was the latter.  

So other than GFH who are shareholders?  

Besides the GFH members disclosed on GH’s website, the GH board includes one individual from Kuwait Real Estate Company, one from INOVEST, and one from GBCorp.   

It’s hard to imagine an individual seeking to associate with GH.  That wouldn’t be much of a reputation builder.  That suggests that KREC and INOVEST are the missing two shareholders.  We don’t know what their holdings, if any, are.  And also if there were other shareholders.  If GBCorp is a shareholder, was Global Investment House in Kuwait one as well?  

There is other information on an earlier shareholder.  

Mr. Ahmed Mohammed Abdulla Al Ameer of Bunyan Real Estate Company a subsidiary of Bayan Investment Company Kuwait is described as one of the principal founders of GH.  He was Vice Chairman of GH for a while.  He doesn’t appear any longer.   Was BIC/BREC a (partial) source of the shares that GFH purchased?   

In the comings posts we’ll take a look at the sorry state of GH, prior to GFH’s rescue.  

And as well raise an interesting legal issue for discussion by the community. 

A Tale of Two Markets: DFM and Bahrain Bourse

Prepare Yourself for One of AA's Rants

You bet AA is mad and frankly isn’t going to take it anymore, especially after another frustrating attempt to use the DFM website to do some background research on GFH.  

One of the things that investors generally expect from stock exchanges is information.  Some exchanges make information easy to find and obtain.  Some don’t. 

Now if you were to ask the average Abullah or Trevor from the street about the DFM and BB, the DFM would generally come out as the “better” exchange. 

This post will discuss three areas of shortcoming where the DFM misses the standard of the BB using GFH to illustrate them. 

First, easily accessing corporate disclosures.  

Here are links to the corporate disclosure pages at DFM and BB for GFH.  

The first thing you’ll note is that the BB link goes directly to the Corporate Actions page.  

The DFM link goes to the overview page and you have to select the disclosures tab at the top.   Not a big thing.  Let’s mark this a minor inconvenience.  

More importantly, you’ll note that the BB has a descriptive title for the majority of news items, Dividends Declared, Market Making Report.  

DFM contents itself with the descriptor “Notification”.  Ah, tell me something I didn’t know. It’s a notification, right?  But about what?  

Notification is definitely not helpful and leads to a waste of time if one is trying to research a particular topic or wants to know what disclosures GFH or another issuer has made.  Mark this a major inconvenience.  One that really doesn’t need to be.  

At the DFM, if you click on a particular Notification, you get a second page with a button which tells you how many documents there are on what is still a “secret” topic.  Click on the button.  You get another link to the still “secret” document or documents.  Click on the document to retrieve it.  Your patience is finally rewarded because at this point when the document opens, the “secret” is revealed.  You now know what the “notification” is about.  But للصبر  حدود Mark this a major time waster.  Mark this as highly user unfriendly.   

At the BB, you click on the title and get directed to a page with additional information on the topic and then one further click to get the document.  One less click.  You need not go down the rabbit hole as at the DFM to figure out if this is a notification you’re interested in or not.  

Now suppose you want to go back to the list of disclosures.   

At the DFM, there is no back button.  So if having solved one mystery, you’re up to try your luck with a second Notification, you need to use the “page back” button/arrow on your browser. Alas, you find yourself back to page 1 of the list you’re looking at.  If you’ve picked a period with multiple pages, yes, you go back to page 1 even if you were on page 2, 3, or 4.  Mark this down as ridiculous.   As well not particularly user friendly.  

At BB, there is a back button.  Surely the DFM can afford a back button.  Can’t it?  

Click on it (BB’s back button) and you wind up on the last page you were looking at. 

Second, trading information. 

The DFM apparently believes or knows that its investors really only look back six months from the current date.  

BB caters to an apparently different set of investors who may wish to take longer looks up to 10 years.  But note if you click a longer period, the entire chart might not display in the window so you will have to scroll horizontally.  As well, BB allows customization of its data charts.  Want candles? They got candles.  Want bars? They got bars.  And not just for week-ending Saudis!  Want technicals? They got technicals. 

Surely if BB can do this, DFM with much greater resources can at least do the same.  Why it apparently hasn’t, is one of those Middle Eastern “mysteries”.  

Third, disclosure standards. 

The Central Bank of Bahrain has mandated that an issuer listed in Bahrain or one that has offered a security there must disclose in Bahrain any information required by another exchange even if Bahrain doesn’t otherwise require that disclosure.  

You won’t find the minutes of GFH’s March 2019 AGM and EGM at the DFM.  You will find them at the BB. All that’s at the DFM or all that I could find is a summary of decisions taken.  No insight into debate or shareholder objections.  

This information should be at the DFM.  

Additionally, the DFM or other regulatory authority should mandate a rule similar to the CBB’s.  If you disclose elsewhere, you must disclose on the DFM even if we don’t otherwise require it. 

This year probably in response to GFH’s excellent 2018 adventure (perhaps more accurately misadventure) in treasury share trading, the CBB began requiring that each month’s market making activity be disclosed.  GFH is disclosing this on both the BB and DFM.  

The DFM should consider having a similar rule because this is useful information and not every issuer on the DFM is subject to CBB regulations. 

Does all this mean that the DFM is not a good exchange?  No, what it means in standard financial advice terms is that the “DFM needs to up its game”.  Make its website more user friendly, provide more information, and strengthen some aspects of its disclosure rules.  

Financial Action Task Force to Issue Anti-Money Laundering Guidelines on Virtual (Crypto) Assets

On the chance you missed it …

FATF is expected to issue recommendations regarding Anti-Money Laundering procedures that should be applied to virtual assets, e.g., Bitcoin et al. If these reports are true and FATF adopts its typical formula for standards, this which will fundamentally change these assets.

The FATF is an iinter-governmental international organization that issues standards for combatting money laundering and terrorism finance.

It does not have the power to issue laws which bind individual countries. But its standards are generally but not always adopted by countries into their national laws.

Why?

Countries that don't adopt or sufficiently implement FATF standards on AML and countering terrorism finance are identified by FATF as "high risk and other monitored jurisdictions".  The financial community then imposes special measures when dealing with these countries or more simply "black-lists" them.  Typically countries fall in line, though there are some exceptions, e.g., DPRK.

FATF's recommendations tend to focus on two areas:

1. CDD or KYC - That is, knowing the identity of the customer through obtaining various information evidenced by documents (e.g., for an individual a copy of a passport or national ID card, proof of address) and as well the customer's financial status and any special status, e.g., politically exposed person.  This information is generally to be periodically reviewed and updated as necessary
2. Transaction Monitoring - Scrutinizing of transactions to identify any that are suspicious with subsequent further review/investigation of the transaction.  If after the investigation, it appears that the transaction is suspicious, a report must be filed with the designated national authority.

These measures go to the heart of one of the two touted features of crypto-assets; anonymity.   

The other major feature that the crypto-assets are backed by air remains intact.

Cybersecurity

If You Don't Use Wi-Fi, You Can't Get More Secure Than This

AA incautiously steps out of his areas of imagined expertise.

Interested in cybersecurity?  

Here are four articles for you.  

1. Hiscox 
2. Deloitte Article 
3. Deloitte Webcast 
4. FICO report.    

Qatar: Doing Quite Nicely Thank You

The Lights are Still On 

So how is Qatar faring in the face of the Quartet’s boycott?  

Of course, not everything is perfect but as the 2019 IMF Article IV consultation with Qatar demonstrates the country is coping and in some areas doing quite well.

From this point on what follows are a series of direct quotes from the IMF. 

On May 13, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Qatar and considered and endorsed the staff appraisal without a meeting.  

Economic performance improved in 2018. Qatar’s economy has successfully absorbed the shocks from the 2014–16 drop in hydrocarbon prices and the 2017 diplomatic rift. Real GDP growth is estimated at 2.2 percent, up from 1.6 percent in 2017. Headline inflation remained low.  The central government’s fiscal position switched to a surplus of 2.3 percent of GDP in 2018 from a sizable deficit in 2017. Recovery in non-resident deposits and foreign bank funding helped banks increase private sector credit. Banks have been able to diversify the geographical composition of non-resident deposits. The current account is estimated to have reached a surplus of 9.3 percent of GDP in 2018, largely reflecting higher average oil prices. Reserves reached US$31 billion (5½ months of imports) at end-December 2018. Recently, Qatar issued US$12 billion in international bonds, which was more than four times oversubscribed, with lower spreads than in previous issues.

Qatar’s banking sector remains healthy, reflecting high asset quality and strong capitalization. At end-September 2018, banks had high capitalization (CAR of 16 percent) and maintained strong profitability (ROA of 1.6 percent), low non-performing loans (ratio of 1.7 percent), and a reasonable provisioning ratio of 83 percent. Banks are comfortably liquid, with a liquid-asset-to-total-asset ratio of 29.7 percent. Nonetheless, strong credit growth that outpaced deposits resulted in the system-wide loan-to-deposit (LTD) ratio of 103 percent which is higher than the CB’s guidance of 100 percent. After a period of rapid growth, real estate prices in Qatar are adjusting to new levels. According to the real estate price index developed by QCB, following an 82 percent increase during 2012–16, real estate prices fell by 15 percent during 2017–18. Macro-financial prospects remain favorable, though risks skew to the downside.   

The external position is weaker than the level implied by fundamentals and medium-term policy settings. (Annex II). Nonetheless, with gradual fiscal adjustment, the estimated current account gap could be closed in the medium term. While reserves are low relative to the ARA metric, risks are mitigated by large sovereign wealth fund assets (Annex II) and external debt is assessed to be sustainable (Annex III). The peg to the U.S. dollar continues to provide a clear and credible monetary anchor and is considered to be sustainable 

Stress test results indicate that Qatari banks can withstand severe macroeconomic shocks. Given the strong position of the financial system, with low NPLs, adequate provisioning, and solid profitability, banks can comfortably withstand higher NPLs and lower profitability brought about by macroeconomic shocks (see IMF Country Report No. 18/136). Many of the real estate borrowers are reportedly well-diversified large conglomerates that are able to support their loan payments from other businesses.

The recovery in non-resident deposits (by 23 percent y-o-y by December 2018) and foreign bank funding (up by 23 percent) helped banks increase private sector credit by 13 percent y-o-y by December 2018.5 Banks have been able to diversify the geographical composition of non-resident deposits and lengthened their maturity structure.  

The stock market performed well in 2018, with the index recovering its 2017 losses and rising by 23 percent in 2018. Bond yields declined reflecting positive investor sentiment towards Qatar.