GFH Acquisition of Gulf Holdings Kuwait – More Questions than Answers

Not  F. Scott Fitzgerald

Well, AA always thought he had a first rate intelligence, but after reading GFH’s Note 20 to its FYE 2018 audited annual report, AA is having trouble dealing with two fundamentally opposed ideas in his mind at the same time.  

In that Note, GFH discloses that it has become the majority shareholder in Gulf Holdings KSC (Closed) after it purchased 31.39% of GFH in June 2018 for consideration of USD 6.691 million dollars. 

Prior to that GFH held 19.79% to which it ascribed no value, apparently having written down its much earlier purchase--probably originally made in November 2005 when GH was established--to zero.  

Fair enough.  No problem with that.   

The cognitive dissonance occurred when AA noticed a value of USD 6.691 million was being ascribed to the total of GFH’s 51.18% holding in GH.  That appears to have been based on the 30 June 2018 financials of GH which showed "Total Net Identifiable Assets" (hereinafter "TNIA") of some USD 13.1 million.  

What a remarkable coincidence, 51.58% of TNIA just equals the purchase price for 31.39% of GH.  

That was followed by a puzzling accounting on the next page, where GFH's previously owned 19.79% shareholding was shown with a zero value (presumably its book value) with the 31.39% shown at USD 6.691 million with the 51.18% shareholding valued at USD 6.691 million.  

A chart which had in essence two equations valuing the stock of GH. The first: 19.79% x  # shares of GH = USD 0.  The second: 31.39% x # shares of GH = USD 6.691 million.  

AA struggled to hold both these opposing ideas (equations) in his mind as simultaneously true.  There doesn't seem anything about the first group of shares that impairs their rights.  In fact GFH through BSB Ventures voted those shares at GH's delayed FY 2016 AGM and EGM just three months prior to the acquisition of the second batch of shares.  

If USD 6.691 million is the value of 51.18%  of GH’s shares, then that means the purchase price for 31.39% of shares is USD 4.1 million.  Thus, GFH has paid roughly USD 2.6 million more than it should have.  

If USD 6.691 million is the value of 31.39% of GH's shares, then GH's firm value is USD 21.3 million.  Or some USD 8.2 million more than the TNIA identified in the balance sheet. Or in percentage terms roughly 163% of TNIA. 

That is a very wide range of firm value -- USD 13.1 million to USD 21.3 million.  

No doubt some out there are thinking, “But AA this was the purchase of a controlling stake and so GFH would have to pay a "control" premium.”  

Indeed.  

But on the other hand, did the seller have any other potential buyers?  If GFH were to walk away from GH, GH's prospects would be even bleaker than they appeared at the FY 2016 AGM and EGM last March.  And the seller might lose all its investment.  In such a case GFH might be able to pick up GH's choice assets in later fire sale. So GFH had some leverage.  And apparently did not agree to acquire the Villamar Sukuk from AlRajhi until October, some four months after the acquisition.   

Also, there could be hidden value within GH.  Judging from its draft  FYE 2017 financials and the June 2018 presented, very well hidden.  

There is a third potential reason.  That GFH was more focused on completing the acquisition than the price of the acquisition.  

If you’ve read AA’s posts on GH’s financial condition as of FYE 2017, it was in a very sorry state.  Posts here and here. The auditor refused to render an opinion as he had refused for FY 2016. He also remarked that he was unable to determine if GH was keeping proper books of account.  A rather damning indictment on its face.  

Was GH’s financial situation clearer a scant three months after that date?  

Clear enough to justify GFH plunking down some USD 132 million to become majority owner and agree to acquire the Villamar Sukuk? 

I say three months because GH held its FY 2016 AGM and EGM on 1 March 2018 (no doubt delayed for very good reasons) when its woes were many and manifest.  

That doesn’t seem highly likely to AA.  

As noted in FYE 2018 financials:   

“Given the size, geographic dispersion and inherent complexity involved in the acquisition, the Group, as on date of issue of this consolidated financial statements, has not concluded (emphasis AA) on the determination of fair value of tangible and intangible assets acquired, liabilities assumed and residual goodwill arising from the acquisition.“ And further in that paragraph “the estimates of fair values for tangible and intangible assets acquired and liabilities assumed is subject to significant judgement and shall be determined (emphasis AA) by management … “ 

So what did we learn from this quote and the above? 

First, that GFH bought GH apparently without having a clear idea of value.  It didn’t know in June 2018 when it bought the company if it was overpaying or not. However, it did pay 163% over June 2018 TNIA  In its words it didn’t know the fair value of assets or liabilities assumed. Almost seven and one-third months later—11 February 2019 the date of the issue of GFH's audited FY 2018 financials—it still didn’t.  

Second, that any valuation that will be made is an estimate which is subject to significant judgement.  To be fair generally the only certain items on the balance sheet are liabilities for borrowed money.  Everything else is subject to certain risks of varying degrees.  Cash in US dollars or Euros with a AAA rated bank is more certain usually than accounts receivable for investment banking services.  

In commenting on valuation of such assets, GFH has disclosed for some time most recently in Note 5 (iii) Impairment of Investment Properties to its FY 2018 audited financials that:   

“Given the dislocation in the local property market and infrequent property transactions, it is reasonably possible, based on existing knowledge, that the current assessment of impairment could require a material adjustment to the carrying amount of these assets within the next financial year due to significant changes in assumptions underlying such assessments.” 

Thus, any valuation on GH would probably be subject to the same caveat.  It could change the next year. Side Comment:  Prospective investors in GFH projects may want to reflect on the inherent uncertainty disclosed by GFH regarding valuation of real estate projects prior to making commitments. 

To summarize having bought GH in June 2018 as of 11 February 2019, GFH had not made a determination of the value of GH.  And it has pointed out that any such value it does assign is subject to assumptions which might change within one year.  

Given the uncertainty of the value of GH expressed in these two quotes, AA wonders how GFH determined whether GH was a good investment to say nothing of what to pay for it.  As per GFH’s own words, there might be “negative” good will.  

Also if GFH did not know GH’s value, was it a wise idea to agree to acquire Villamar Sukuk from AlRajhi for some USD 125.2 million in October 2018?  Or should this have been postponed until GFH had made such a determination?  

GFH spent a total of some USD 132 million on GH-- more than GFH’s 2018 net income. Or for another comparative GFH could fund a lot of trading in Treasury Shares with an amount like that and then cancel the shares bought.  

Let’s compare the June 2018 GH financials presented in GFH’s Note 20 to those as of 31 December 2017 for more insights in GH and potential value.  As a reminder, GH’s FY 2017 financials are drawn from the “shareholder package” for the FY 2017 AGM and EGM.   

Gulf Holdings Unaudited Financial Statements
USD Millions
ASSETS	30 June 2018	31 Dec 2017		DIFF
Investment Property	$40.4	$48.1		($7.7)
Development Property	$387.3	$433.8		($46.5)
Cash and Banks	$1.5	$1.7		($0.1)
Other Receivables and Assets (A/R)	$26.3	$6.0		$20.3
TOTAL ASSETS	$455.5	$489.5		($33.9)
LIABILITIES	30 June 2018	31 Dec 2017		DIFF
Sukuk	$202.8	$202.5		$0.3
Advances from Customers	$168.9	$134.5		$34.3
Related Party	$0.0	$9.9		($9.9)
Other Liabilities	$70.8	$69.3		$1.6
TOTAL LIABILITIES	$442.4	$416.2		$26.2
NET IDENTIFABLE ASSETS	$13.1	$73.3		($60.2)

  

What a difference six months apparently makes.  

So how do we perform an analysis of the changes in its financials without notes and more information?  AA thinks the "key" is the decline in equity.  An eye-popping USD 60.2 million equivalent.  

What could cause this?  A spin off of assets into a new firm, return of capital to shareholders, dividends, realized or unrealized losses.  

The first three are unlikely. 

Why? 

No sign of these in either GFH's or GBCorp's FY 2018 financials.  GBCorp in particular is in need of good earnings news and so would be expected to highlight any positive development no matter how small.  

GH has negative retained earnings and no cash, so cash dividends are unlikely.  Spinoff or return of capital are unlikely too because as you'll notice GH is still carrying the full USD 203 million sukuk as of June 2018.  Spinning out good assets in such a condition could subject GH to fraudulent conveyance claims.  

AA thinks it most likely that the decline in Development Property assets is due to write-offs or impairment charges on these assets.  You’ll recall E and Y were unable to value GH’s land parcel in Morocco as of FYE 2017.   It's less likely that these are sales of these assets at a loss.  

If the increase in Other Receivables and Assets (henceforth "A/R") reflects uncollected sales portions from the Development Property assets and there has been no material increase in cash, that would imply a loss of USD 26.5 million. If we include the Investment Property decline a loss of USD 35 million.  Not enough to explain the decline in equity. 

It’s more likely the USD 20 million increase in A/R is the unpaid portion of the USD 34 million increase in Customer Advances than sales proceeds on Development Property.  We'll discuss the "missing" USD 10 to 14 million from Customer Advances a bit later which AA assumes was collected and spent.  

The equity decline could be due to provisions for  contingencies, legal claims, etc.  If the decline in equity were due to these sort of provisions, we would expect to see an increase in Other Liabilities. We do not.  

So it's most likely that the equity decline is due to impairment provisions on Development Property and as well perhaps on Investment Property.  These would be reflected in a contra account to Development Properties netted directly against Development Properties on the balance sheet and thus "invisible".  

Now to the other side of the balance sheet.  

Total liabilities increased some USD 26 million largely due to a jump of USD 34 million in Customer Advances.  

AA is puzzled.  Are customers rushing to place money with GH? And have placed USD 34 million in six months?  Perhaps, Villamar sales?  

USD 9.9 million in Related Parties (mostly due to GFH) is not shown.  Was GFH repaid? That seems most likely as GFH is using the balance sheet it presented as value of the firm for both GFH and the other shareholders.  Not just what the consolidation effect on GFH would be. In a consolidated scenario inter company transactions would be eliminated.  So, if this is the case, it’s likely the amount was repaid.  

AA guesses that GH received some of the funds from the increase in Advances from Customers.  Probably something like USD 10 million to USD 14 million and used those funds to repay GFH and for other worthy purposes.  That would fit with the USD 20 million increase in A/R (Other Receivables and Assets).  

Where did the other cash collected go?  Well, construction at Villamar is chugging along and some of the previously recorded prepayments to contractors and consultants that were carried in A/R probably have been expensed. As well, the increase in construction would require some additional new payments.   But AA now is the very thin ice of sheer conjecture. 

Total equity is down some USD 60 million.  As argued above, since the major movement on the asset side is in Development Properties that suggests impairment charges or losses on sale of these properties.  

Changes of these magnitudes in GH’s financials in six months must be based on a fairly thorough investigation of GH's books and valuation of assets. 

As part of the purchase transaction, GFH would have to agree with the 30 June financials. One would expect that there was more substantial work and thought given to this transaction than to the basis for US tax policy which was reportedly sketched out on a cocktail napkin after a few glasses in the local pub.  AA wonders if the Presidential Medal of Freedom mooted for the inventor of this economic "truth" will be bestowed at the same stool? 

Now as of 1 March 2018, GH was in a right proper mess financially. Thus, there is good reason to suspect that these changes were worked out in the roughly 3 months to the purchase. 

Why? 

If changes of this magnitude were known at that point, wouldn’t the auditor have known and commented about them?  The auditor was not shy in compiling a laundry list of reasons why he couldn’t render an opinion.   And certainly the board would not have withheld this information from the auditors.  Would it? 

If the changes were made within the 3 month period between March and GFH’s acquisition, why weren't they finalized to the point that GFH could determine the fair value of assets both tangible and intangible?  

In its FYE 2018 annual report GFH asserts that GH’s “size, geographic dispersion, and inherent complexity” made them unable to make a determination of the value of the firm some 7.5 months post acquisition.   

Yet, even if we believe the comment above and AA sure hopes you do, some very significant determinations were made.  As of June GH's shareholders' equity was 4% of its original value down from 24% only a scant three months earlier (FYE 2017).  

AA encountered another conflict of opposing ideas from GFH's explanation about the difficulties in assessing GH's assets.  GH's major three projects are in Bahrain (two) and Morocco.  Does this mean GFH is not that familiar with these markets? And apparently sadly lacks knowledge of and contact with local experts who might assist in this task?  Or that analyzing major (sizeable) real estate projects is an area where GFH is admitting a lack of skill?  Apparently, as well, is GFH disclosing that it did not obtain any special insight into GH from its significant role in GH's board or management over more than a decade?  

Here is yet another instance of AA struggling to hold two opposing ideas in his mind at the same time.  The one above.  A second one in which GFH is an expert in real estate across diverse geography from Morocco to India with stops in between.  A master of the mega project.  A structurer par excellence of complex deals.  

More suspicious minds than AA’s might wonder if the fact that becoming majority owner of GH and “settling the sukuk” was the likely but not the only ticket to GFH recognizing USD 77.8 million in revenues in Fiscal 2018,  an amount which the preponderant component of GFH’s FY 2018 net income.  And that "matters" were rushed in order to accomplish the transactions during FY 2018 to generate this income.  

Other observers may feel that this reflects another yet masterstroke by GFH management in the area of "intrinsic" value identification and exploitation.    Similar to its trading in treasury shares and then cancelling them.  

If you know your financial history of Bahrain, you know that Bahraini investors are highly suspicious of Kuwaitis who many Bahraini investors believe over provision companies in order to buy their Bahraini shareholders out on the cheap.  It would appear that this case doesn't apply because the selling shareholder is a Kuwaiti firm with Bahrainis conducting  the buy out. 

In any case AA has his own view but will stay silent so as to not prejudice your conclusion.  

GFH 2018 Earnings – A Closer Look At Debt Settlement Gains – AA is Stumped

After Today's Post, I've Removed this Sign from my Desk

By some accounts (pun intended) GFH had a good 2018.  USD 115 million in net profit, of which USD 114.1 million was for shareholders of GFH.  This compares to USD 103.2 million for FY 2017, of which USD 104.2 million was for GFH’s shareholders.  That year Non-Controlling Interests’ share in profit was a negative USD 1 million.  In 2018 it was just under USD 1 million.  

GFH’s 2018 revenue includes USD 113.1 million from “settlement” of liabilities. This single item is 99% of net profit.  It’s also not what one would commonly consider recurring income.  Hence it merits a closer look. 

To start a glance at the Consolidated Statement of Cashflows show this was a non-cash item.  That is, GFH did not receive any cash from the settlement in 2018.  

Now that’s not uncommon.  Under accrual accounting revenues are booked when earned.  Collection may and often does follow in future accounting periods.   

Note 22 to FYE 2018 Annual Financial Statements discloses that USD 35.3 million of this amount represents the reversal a previously accrued provision (itself a non-cash item) for settlement of liabilities of AHC.   So a non-cash reversal of a non-cash charge.  No cash to GFH in 2018 or in the future.  

Let’s let GFH describe the second larger amount of USD 77.8 million in its own words. 

“During the year, the Group agreed to settle sukuk liability with a financial institution of US$ 203 million at a lower amount, resulting in a gain of US$ 77.8 million (net of associated costs). The settlement was in the form of cash and other non-cash assets.” 

Interestingly, GFH’s October 2018 press release on this issue uses a different formulation: “agreed to acquire circa US$200 million of Villamar Sukuk Company Limited, Sharia Compliant Sukuk Certificates from Al Rajhi Bank”.  

You’re probably wondering why AA is quibbling over the language and parsing press releases.  Well, the manner in which the sukuk was settled has an impact on the net income accruing to GFH.  

Typically, an obligor on an instrument (that would be GH Kuwait in this case) can recognize a gain when it settles a liability for less than its face value. 

But, GFH only owns 51.18% of GH.  So, if GH repaid the Villamar Sukuk (probably with the proceeds of a new loan to GH by GFH as GH is cash poor), on an economic basis, GFH can only claim 51.18% of the USD 77.8 million or USD 39.8 million of this income.  The other USD 38 million belongs to the other shareholders of GH. 

However, if this is the case, under accounting principles for consolidations, GFH is entitled to show the entire amount USD 77.8 million in revenue.  Once again we see a divergence between accounting and reality.  Remember a consolidated statement is a construct which purports to show how the economic reality of a group.  It does not show reality in terms of legal ownership of assets and revenues. 

But under those same principles for consolidation GFH would then have to reflect the share of that profit on the transaction which is due to other GH shareholders via a deduction of US 38 million in the line “Profit of the Year Due to Non-Controlling Interests” from total net income.  You’ll notice in FY 2018, the deduction for NCIs is just under USD 1 million.  

That would seem to indicate (note that word) that another form of transaction was used.  But, it could be that there were offsetting losses for the NCIs of USD 37 million and so the net would only be USD 1 million.  (USD 38 million in GH profits less USD 37 million in losses on other transactions for NCIs).  

If this is not the case and that seems likely, could GFH structure this transaction in another way to allow it to keep the entire USD 77.8 million for its own account? 

AA is not a CPA or CA.  What follows are some conjectures or more precisely speculations. Note that word well.  

1. Having acquired the sukuk certificates, GFH as the owner of the debt engaged in a restructuring agreement with GH.   
2. Under the restructuring, GH remained liable for the full USD 203 million.  
3. Because GFH acquired this debt (the Sukuk) at a discount its cost for the restructured loan is USD 125.2 million.  To balance its books, it needed another debit on the balance sheet to bring the restructured loan to USD 203 million which was offset by a credit to income.
4. Hence, the possible USD 77.8 million profit, arising in the transaction with AlRajhi and not GH and thus fully GFH's and outside of consolidation as it is a transaction with a third party.  In this case GFH would not need to have been a majority owner of GH to recognize this profit which would be "all" its own.

Recognizing profit assumes that GH repays the loan in full.  If this is the transaction that was used, if GH does not for some reason repay the debt in full, GFH will have to take a write-off in the future.  And the future is far away.  

As AA understands IFRS 9 (remember the caveat above about AA's accounting credentials or lack thereof) when a debt instrument is acquired at a deep discount due to credit reasons then an assessment of Expected Credit Loss (ECL) must be made.  In this case, the ECL then would reduce the immediate profit recognized. 

Clearly, the roughly 38.3% discount on the Villamar Sukuk is due to credit distress not current market rates being above the coupon on the debt. 

It would therefore seem to AA that some sort of ECL should have been considered and perhaps created.  As well, it seems (to AA) that assuming no loss on a debt that has been in default since 2013 with minimal repayments during that period is a heroic one. 

That being said, GFH is intimately familiar with GH having had leadership positions on the Board and management for years.  As well, perhaps, it acquired collateral which would make an ECL superfluous. 

AA is stumped.  

In the absence of a detailed description of the transaction from GFH so far, we don’t know.  

AA welcomes other conjectures and ideally local accountants’ expert opinions.  

AA also recommends that shareholders and analysts pose this question to GFH management.  The ideal venue for that the 2019 AGM and EGM for FY 2018 have passed without this issue being raised in those fora according to published minutes of the AGM/EGM.  

That doesn’t stop shareholders from exercising their corporate governance rights and responsibilities to pose the question now.  Or for those who analyze GFH’s equity or debt instruments to raise it as well.

Update on GFH Treasury Share Trading – Another USD 40 Million to USD 69 Millon of Equity Up in Smoke

This is what I suppose one might from a shareholder’s perspective call adding insult to injury.  Or more accurately “insults” to “injuries”.  For details of the "original" insult look here.

At its FY 2018 EGM, GFH shareholders accepted the Board of Directors’ proposal to cancel some 207,547,170 of Treasury Shares. According to the published minutes, there was no discussion on this topic.  A fool and his money … 

Now you may be wondering why AA thinks this is an “insult” to shareholders.  

After all, the Treasury Shares have already been deducted from shareholders’ equity and so canceling them will not affect shareholders’ equity.  

There will just be a set of accounting entries within shareholders’ equity to remove these shares from the Treasury Shares account in shareholders equity to other accounts within shareholders’ equity.  The net accounting effect is zero.  

AA agrees. 

But, and there’s always a “but” with AA.  It will also involve the legal cancellation of these shares.  They will no longer exist. 

GFH did not conjure these shares out of air.  It paid hard cash—shareholder cash—to acquire them.  

And, thus, there is a real economic effect to canceling them.  

One thing AA learned in business school was that if you have to choose between economic and accounting effects, choose the former.  Unless, of course, you’re part of management and your bonus depends on the accounting.   “If you can’t fix the business, fix the accounting”.  

If GFH retained the shares, it could sell them in the market or use them as compensation in a transaction with a third party in lieu of cash or other assets sometime in the future.  

So by cancelling the shares what are GFH’s shareholders “losing”?  They’re losing those future potential uses of Treasury Shares. 

But you object GFH’s Board are prudent stewards of shareholders’ interests.  It’s probably a de minims amount.  

At FYE 2018 GFH held 255,455,953 in Treasury Shares valued at USD 85.424 million, giving an average cost of a T/S at roughly USD 0.33.  

GFH and through SICO its market maker have been busily buying and selling Treasury Shares since then, but we don’t have the data to compute an average price per share for a more recent date.  So we’ll use the USD 0.33 FYE 2018 average price per Treasury Share with the knowledge that the average price may be lower, particularly as GFH shares are now in the USD 0.20 range.  

The 207,547,170 in T/S--that GFH most likely canceled in May or June this year—are (or more precisely “were”) therefore worth some USD 68.5 million using USD 0.33 per share.   

At USD 0.20 per share average price the pain is less but still a considerable USD 41.5 million.   

Think of either of these amounts as a percent of reported net income  

Unless we assume that GFH could have only sold these shares for zero in the future and that no one would have assigned them any value in a transaction, GFH has just thrown as much as USD 68.5 million down the proverbial drain.   

Suppose, for example, that it could have sold the shares for roughly one-third of their FYE 2018 price.  That would be very roughly USD 23 million for the shareholders.  If it sold them at current prices, somewhere in the USD0.20 range, that would be USD 46 million. It would have incurred a loss on the transaction but nothing near the loss from cancelling the shares. 

You’ll remember that GFH’s excellent 2018 and 1Q19 misadventure in share trading cost its shareholders some USD 37.4 million. And if you don't, here's the link to an earlier post.  Add the cost of cancellation and that number together and you have an amount almost equal to FY 2018 reported income.  USD 68.5+USD37.4= USD 105.9 million.  Or, if we assume the average price per Treasury Share in May this year was around USD 0.22, a total of USD 78.9 million. 

But there’s more.  

GFH appears to have continued its Treasury Share transactions in 2019 past 1Q19.  Here are the links to the disclosures for April and May.   

There’s little need for AA to  detail this topic.  

Dr. Sabah Al Binali has already done so with an excellent analysis in Zawaya on this activity.  He notes that the activity is not consistent with “making a market”.    A market maker provides temporary liquidity to bridge gaps between supply and demand in the market.  Thus, a real market maker should be running a roughly balanced position with some inventory on hand in case there is excess “buy” demand.  

AA thinks it is highly likely that in the case of GFH such inventory need be only minimal.  It seems from the trading numbers that “supply” far outweighs "demand".   To add another insult, despite all this spending, GFH’s price has continued to drift downward. 

Now having incurred the losses of FY2018 and 1Q19 what business logic would then decide cancelling Treasury Shares with a value of USD 68.5 million was a good idea?  

And having proposed the cancellation of these Treasury Shares, what sort of logic (if we may use that term in this connection) would have continued Treasury Share transactions? 

It’s hard for AA to think of a sound business reason.  

Those more suspicious than AA might surmise that GFH is desperately trying to maintain its share price because someone important to it has used GFH stock as security for a loan or has created a fund which contains GFH stock.  And GFH needs to clear out the “old” Treasury Shares so it can continue buying its shares and still remain within the 7% limit in what appears to be losing effort to prop up its share price. 

Those same people would probably think that only something like that could persuade the Board that piling more losses on top of USD 105.9 million was an “idea” much less one that should be considered.  There is a logic here because according to the CBB approval SICO, GFH’s “market maker”, is limited to holding not more than 3% of GFH stock.  And GFH restricted to holding 7%.  

One other point.  In its FY18 annual report, GFH touted the use of its Treasury Shares as follows:  

“To manage the liquidity risk arising from financial liabilities, the Group aims to hold liquid assets comprising cash and cash equivalents, investment in managed funds and treasury shares for which there is an active and liquid market.” 

Some observations:  

1. GFH Treasury Share transactions in 4Q18 which were roughly 39.7% of all transactions in its shares on the Kuwait, Bahrain, and DFM during that period and ended the period holding more of its shares. That’s clearly not an “active and liquid” market, but rather an artificial market.  
2. Investors are generally advised to carefully consider the liquidity of the securities they purchase before they purchase.  Getting in to an investment is generally remarkably easy.  Getting out may be another matter entirely. Also investing in securities whose price is being artificially supported is a recipe for losses.   
3. On a positive note GFH’s liquidity position apparently has remarkably improved as it no longer needs to use its Treasury Shares to provide liquidity.  It can therefore cancel some 207 million of them.  
4. Not only that but GFH’s liquidity allowed it to spend between USD 78.9 million (USD0.20 per share) to USD 105.9 million (USD 0.33 per share) on the cancellation and Treasury Shares trading during FY 2018 and 1Q19.   
5. Kudos to GFH’s management for strengthening GFH’s liquidity!  
6. Based on just these two achievements, I’m certain that very few will argue with AA’s assertion that USD 3. 5 million in 2018 compensation for GFH’s Board just isn’t fair when all they have done for (or is that “to”)  shareholders is considered.  

Amidst this gloom, there is perhaps hope on the regulatory front.

Sometime in 2019, the Central Bank of Bahrain mandated that market making transactions be disclosed. 

AA thinks, but doesn’t know, that his was likely the CBB’s reaction to GFH’s 2018 Treasury Share transactions.  If AA’s conjecture is correct, then hopefully the CBB is aware of the situation and taking whatever action it deems appropriate.  

As for GFH’s poor and as each day passes apparently poorer shareholders,   الله يوفقهم

Though as AA learned in school, it’s best to tie one’s camel first ….

Gulf Holding KSC (Closed) – Financial and Legal Problems – Part 2

As I mentioned in Part 1 and will mention again, this is the state at GH prior to GFH’s rescue activities. Until we see 2018 FY financials we won’t have information on current conditions and thus be able to measure the level of success of GFH.

In Part 1 we looked at GH’s dismal FY 2017 and 2016 annual financials.  

More than enough woe for the company there.  

What could possibly be worse?  

How about the auditor refusing for the second year to render an opinion?  

How about numerous legal woes?  

With GH’s FY 2017 AGM Package, we have a detailed exposition from Ernst and Young’s Kuwait Office AlAiban and AlOsaimi and Partners.  Normally, we would not see this.  There would be a few short sentences in the auditors’ report disavowing an opinion with very high level reasons given.  But, scant detail.  

Here we have a 2.5 page exposition laundry list of problems ending with what appears to AA as a rather damning statement.  You’ll have to read further to learn just what the auditor said.  

Let’s run down the points for focus.  

1. In the introduction (paragraph 2), the auditor states that it “was unable to obtain sufficient or appropriate evidence” to give an opinion. 
2. This is followed by 3 numbered paragraphs explaining why. 
3. The final paragraph (the usual one about compliance with local law and maintaining proper books of record) follows the standard paragraphs about (a) the board management’s responsibility for preparation of the financials and (b) the auditors’ responsibility for the audit. 

Let’s look closer at the auditors’ reason for not rendering an opinion. 

Paragraph 1 – Company Financials Recapitalization and Sukuk  

1. As of 31 December 2017 accumulated losses reached KD 69.2 million and current liabilities exceeded current assets substantially more than KD33.1 million.  
2. According to the Sukuk restructuring terms GH was to make two KD1.5 million payments to the sukuk holders.  It make the first 4 April 2017.  The second due 31 December 2017 was postponed as part of negotiations among GH, the sukuk holders, and a related party (presumably but not stated GFH).  A new agreement was struck on 7 March 2018 with the payment due on 31 March 2018 which was later amended to 31 May 2018.  
3. As part of the recapitalization (required because accumulated losses exceeded the maximum percentage of paid in capital), on 1 March 2018 at the delayed 2016 EGM, the shareholders approved using the FX Reserve along with the Voluntary and Statutory Reserves.  E&Y considers use of the FX Reserve as a violation of IAS 21.  
4. Additionally at the same meeting the shareholders agreed to 77.6 million new shares (par 100 fils) to increase capital.    It is unclear what the point here is.  Is the point that the board and management have taken no concrete steps and that the outcome is uncertain?  

Paragraph 2 – Al Areen Downtown Project   

1. On 19 January 2012 the Bahrain Chamber for Dispute Resolution issued a judgment against GH and affiliated companies--Al Areen Downtown Real Estate Development Company, Al-Areen Real Estate Company LLC and Diyaar Bahrain Real Estate Company WLL.-- requiring then to pay KD29.3 million (USD96.7 million) plus 3% interest to Boulevard Al Areen Real Estate Development Company.   
2. GH and its subsidiaries were ordered to transfer the land title to AlAreen Downtown Real Estate Development Company (hereafter “Downtown”) and other parties (unspecified) and issue shares so that Downtown would own 81.5% of Dhahiat Al Areen Company.  
3. According to the auditor, the BCDR decision required the consolidation of Dhahiat into Downtown for financial reporting purposes, but that GH has not done this.  
4. In 2015 Boulevard and the GH companies entered into negotiations.  As of the date of the annual report, GH and associated companies were reportedly finalizing the negotiations. 

Now we'll exit E&Y's comments for a closer look at the legal case and  status of the companies involved.

GBCorp is both a GH shareholder and a shareholder in Boulevard.   GBCorp’s FY 2018 audited annual report  note 6.1 provides some additional information. What follows is GBCorp's account.  After it had subscribed to Boulevard, the project developer and other owners of the land did not transfer the land to the project company nor did they issue shares to Boulevard for its subscription.  Perhaps these are the shares in Downtown referred to in point #3 above.  

As per GBCorp the GH Group did not fulfill its obligations under the proposed settlement agreement, the request for execution of the judgement was re-instated as is pending as of the date of GBCorp’s financials.  

As per the Bahrain MOIC website (www.sijilat.bh) as of 17 June 2019 here are details on the state of the companies involved in the litigation:  

1. Gulf Holding KSCC Branch (CR 61962-1) in Bahrain was “under sequester” as of 25 April 2019 and had earlier been under sequester as of 12 March 2017 and 12 November 2016.  
2. Dhahiat Al Areen (CR 67389-1) was “under sequester” as of 8 February 2018 and CR was not renewed.  Earlier under sequester as of 3 July 2012.  
3. Al Areen Downtown Global Real Estate Development Co. SPC (CR 99533-1) “deleted by law” 19 May 2019.  Note the “Global” in the name. 
4. Al Areen Downtown Real Estate Development Co SPC (CR 59127-1) “under sequester” but has filed on 28 April 2019 to remove sequester (CR201958845).  Or it may be that sequester has been lifted on that date but one data item on page (the “under sequester” reference) has not yet been updated.  
5. Diyaar al Bahrain Real Estate Development Co (CR 58196-1) “under sequester”.  You will find a list of court cases under sequester details at the MOIC website.   You will also notice that Mr. Esam Janahi is listed as a 50% shareholder along with Mr. Abdul Rahman Al Jasmi, also with 50%.  According to this listing, Mr. Janahi is “under sequester”.     
6. Boulevard Al Areen Real Estate Development – Couldn’t find them at the MOIC site. 

Now back to E&Y's commentary.

Paragraph 3 – Villa Royale Morocco    

1. As of 31 December 2017, the title to the land in Tangier for this project had not been transferred to GH.   Transfer is subject to GH paying the remaining balance of KD7.6 million.  The seller agreed in April 2018 to extend the due date for payment until 29 April 2019.  GH will pay by issuing redeemable preferred shares.  
2. E&Y notes that it was unable to perform the necessary procedures to value the land. 

Report on Legal and Other Regulatory Requirements  

1. GH has not taken concrete steps to rectify its capital position, i.e., accumulated losses more than 75% of paid in capital.   E&Y described the EGM resolutions as “merely plans” but that no action has been taken.  
2. E and Y also states that “we are unable to conclude that the Company maintains regular accounting books and that the consolidated financial statements are consistent with those presented in these books.” 
3. On its face that appears to go beyond noting a lack of action on the capital issue, the various legal issues regarding Villa Royal Morocco or AlAreen Downtown. And, as such, a rather damning assessment of GH's accounting.

On a positive note, GFH appears to have made progress in alleviating some of GH’s distress.  

It's unclear as to the status of the legal claims.  Companies are still under sequester.  

Does this mean that settlement agreements have not been finalized?  That they have but the legal process and updating of the MOIC records has not been completed yet? 

If we obtain 2018 and later year financials for GH, we will be able to see in better detail what has been achieved and what remains to be achieved.