Bring Out Your Dead. And Your Near Dead Too. |
Since
last July ever so often I would check to see if there was anything
new on The
Curious Case of Bahrain Middle East Bank.
After
some months, fatigue set in. I missed BMB’s release of its
“missing” 2018 financials.
Belatedly I’m catching up.
Late
November BMB released its 3Q18
unaudited financials
and its FY
2018 audited financials.
BMB’s auditors did not issue an opinion.
Why?
Two factors:
massive losses and apparent fraud.
Losses
Through
3Q18 net losses were some USD 193 million, reduced slightly to USD
189 million for the full year.
At FYE2018 Total Liabilities exceeded
Total Assets by some USD 113 million due to provisions on USD 195
million in non-performing related party exposures.
A rather dismal
picture summarized in the following (all figures as of FYE
2018):
- USD 189 million loss represents 95% of Total Assets.
- Negative equity of USD 113 million.
- CAR is a negative 142.9%.
Apparent
Fraud
So
was this the result of a few bad commercial decisions? Investing in
WeWork, taking a flier on Softbank?
No.
According to Ernst and
Young, during 2018 the new Board discovered that certain exposures
were to or for the benefit of a related party and not to independent
third parties.
As of FY 2018 that USD 190 million in exposure
was
composed of direct loans, interbank placements, and
securities.
While the latter two amounts were with independent third
parties, there were side agreements that secured benefits from them
to
the
related party. No further details.
Perhaps
as collateral?
There is an additional USD 4.6 million in accrued
interest not included in the amounts above, bringing the total to USD
195 million.
Related
Party Exposure
What
do we know about the related party exposure?
From Director’s
Report in the English version of the FY2018 AR, we know that the
related party is related to a major shareholder not a member of
management.
There are only two major shareholders AN Investment
(ANI) (owned by the Turkish “Three Amigos”) and Al Fawares
Kuwait.
I believe the related party is AN Investment (80.77%) not
ALF (14.48%).
- Recall that the ALF directors appear to have been warned—presumably by the CBB--and were able to resign before the CBB “fired” the Board. Unlikely if ALF is the culprit.
- In the Directors’ Report in the 2018FY AR, the parties under investigation are listed as the former Vice Chairman (Mr. Solak), CEOs and CFOs. No investigation of the Chairman (which ALF held) is mentioned.
- It would seem unlikely that ANI as the predominant shareholder would allow ALF to engage in self-dealing at a level that would risk ANI’s entire investment.
- The related exposures are all in Turkey. I don’t believe ALF has any ventures in Turkey.
Who is the related
party?
The terms “TFC” or “TFC Group” are used to refer to
the related party in the Directors’ Report cited above.
I
assume
“TFC” is an abbreviation for “trade finance counterparties”
which was the term used in BMB's press release in 2018 regarding the
CBB prohibitions on the bank.
Why?
Not only does the CBB have
restrictions on related party transactions but also has a limit on
the maximum amount of risk that can be taken on a single entity or
group.
BMB’s exposure to "TFC"
is
well above that limit.
One might be able to make a case that a
single entity or group wasn’t a related party, but it would be
pretty hard to disguise exposure of this amount to a single
party.
The
exposure
would have to be
divided
among several ostensibly “independent” entities with each
entity’s exposure below the single party limit.
- The entire exposure is in Turkey.
- There are multiple exposures to various trade transactions. Not to a single obligor.
- BMB is working “alongside a consortium” of other creditors to recover the amount, hoping to secure a pledge of collateral. But that no restructuring agreements have yet been signed. And it is too early to determine ultimate recovery.
BMB
FY2018 AGM and EGM
The
first two AGM meetings proposed for 23 December and 30 December 2019
did not reach a the required quorum of shareholders attending and so
did not take place.
Under Bahraini law, there is no minimum quorum
required for a third AGM.
That’s good because the 6 January 2020
AGM was attended by just 0.04% of shareholders. You read that
correctly. Not even 1%.
Clearly, ANI facing potential legal exposure
wasn’t interested in attending. Nor was ALF or the ultimate
beneficial owner of the ALF shares as it would no doubt face
questions on how it “missed” the fraud.
Thanks to the question
of Shareholder Khalil al Mirza (162,000 shares) we learned more about
the related party exposure (as outlined above). With 162,000 shares
he appears to represent almost all of the shares attending at the AGM
save for holders of very small amounts.
There was one other
significant-but not unexpected-bit of “news”.
Typically at AGMs,
the shareholders vote to discharge the Board Members from liability
for their actions during the fiscal year in question.
BMB’s Agenda
Item #7 specifically referred to the discharge of the current
directors.
Shareholder Mohammed Abdul Rahman (1 share) asked if the prior
directors were being discharged and was advised that none of the
previous directors (this would include ALF’s two directors) were
being discharged.
The
EGM was not held because of lack of a quorum at all three meetings
proposed: 23 December, 30 December, and 6 January.
The key item for
the EGM was to take a decision on what to do in light of the losses
which trigger compulsory remedial action under Bahrain’s Commercial
Companies Law and the bank’s Articles of Association.
With losses
this large as a percent of equity, there are only
two
options for BMB: raise capital or wind-up the bank.
BMB
Prospects- Little to None
The
Bank is wounded very likely
fatally.
This
is now the second scandal resulting from fraud
that
clouds
the
Bank’s name. And BMB’s reputation
never
quite recovered from the commercially related losses in 1999 and the
subsequent multi-year restructuring that followed.
Hard for me
to
imagine any serious equity investor interest.
There is no obvious
institution that might be compelled to step up. For example, an
existing shareholder.
Rather an entirely new investor will have to
be enticed to commit capital.
Other than the banking license, there
don’t seem to be any positive enticements
at
the Bank.
BMB doesn’t currently have a viable line of business, a
significant
market position or a valuable customer base.
Its reputation is less
than sterling.
A new investor will have to make a significant
capital contribution.
First to meet the CBB’s minimum
shareholders’ equity requirement. That will involve at a minimum
some USD 213 million to restore equity to CBB’s minimum of USD 100
million for a wholesale bank.
Second, cash will also be required to
fund the creation of a new LOB.
While BMB may recover of all or a
good portion of the related party exposure, on a best case basis that
is likely to be a multi-year exercise.
It may well be that the
Bank's auditors and
the
CBB may accept a write-back of some of the loss after a restructuring
is signed, thus, lessening the required capital contribution.
But
that will not alleviate the need for
cash
now to invest in its business.
Customers and financial institutions
are likely to have little interest in
dealing
with the Bank. Lack of FI support will limit BMB’s
ability
to use leverage to increase its assets and ideally ROE, conduct
trading activities etc.
Speaking of banks, recall that there is a
single “regional” financial institution (SRFI) that BMB owes some
USD 127 million for interbank deposits taken. The SRFI is in line to
bear the brunt of any shortfall in recovery.
It seems pretty clear
that this SRFI has been “legally” trapped in BMB.
That leads to
the suspicion that it is not an FI that most financial investors
would want to do business with.
The size of the amount owed by the
Bank to the SRFI also presents a problem.
Paying it off either in
full or in stages would require a significant commitment of cash.
That would reduce funds for investment in BMB’s LOBs.
A potential
new investor is likely to consider all of this
more
unwelcome
“hair”
on
an
already hirsute BMB.Or the final straw on the camel's back.
At this
point barring a miracle, BMB’s fate appears sealed.