Goldilocks and the 3 Bears - A Financial Fairy Tale - Part 1 GFH

Only One Bear Had the Right Meal for Goldilocks

In an earlier post I noted that the disappointing FY 2019 performance of the Goldilocks Fund—a loss of 7% for the year—didn’t explain the rather large drop in cumulative performance since inception (July 2015) from 219% for the first ten months of 2018 to 134% for 2019.

And promised to take a closer look at what happened with a series of three posts on Goldilocks and the Three Bears.

The three bears in this tale are: GFH Financial Group, Noble Group, and Dana Gas.

We’ll start with the first.

Before we do, a few words on methodology. I’ll begin by reviewing the history of Goldilocks investment in each “bear”.

Then I’ll compute the return to actual exit or if the fund still holds the asset until a current date.

Afterwards I’ll look to allocate the loss or gain over fiscal years.

On 8 January 2018, Goldilocks announced it had taken an approximate 4.99% stake in GFH a Bahrain-based Islamic financial institution that has been struggling for some years. An appropriate target for Goldilocks to work its constructionist magic as abundant posts on this blog indicate.

As of 31 December 2017, GFH had 3,681,650,441 shares issued and outstanding. Goldilocks actually appears to have acquired a 4.987% stake or 183,612,310 shares.

At a rough estimate of trading prices around that time of USD 0.42 per share that’s USD 77,117,170.

But how did it acquire these shares?

With GFH’s trading volumes a purchase of this sort even over a prolonged period would likely increase the entry price.

Situations like this are what friends are for!

From an analysis of disclosures in the equity notes in GFH’s annual financial reports, it appears that Goldilocks bought its shares from ADFG/IC.

According to GFH’s 2016 audited annual report, at year end, Integrated Capital held some 13.38% of GFH’s shares. One year in GFH’s 2017 audited annual report, it held 8.01%. 

Supporting a purchase from ADFG/IC is a record of an insider trade on Mubasher by Integrated Capital on 7 January selling 243,377,750 shares at USD 0.40 per share. 

Using that price, Goldilocks’ entry cost would be USD 73,444,924.

We’ll use this as the assumed entry price.

There’s no explanation who bought the 59,765,440 in additional shares sold. Sold to ADFG or “sold” to a lender to secure financing?

So how did GFH make out on its investment? GFH basically exited GFH in 2020.

On 22 January 2020, as part of a clarification regarding AlHilal Bank’s 5.3% shareholding, GFH revealed that Goldilocks held only 0.39% of its shares. It also noted that the ADFG/IC group and related parties held 9.69% of GFH’s shares. 

For those who follow AFDG/IC note that Reem Finance is listed as a related party in the announcement.

So Goldilocks must have sold its shares to a party or parties considered to be outside the ADFG/IC “group”. 

Assuming that GFH is not tardy in reporting significant changes in major shareholders’ and related parties’ holding of its shares, we can assume that purchase took place in December 2019 and early January 2020.

Let’s assume 1 December 2019 through 22 January 2020.

Looking over daily trading records at the DFM for GFH, this sale does not appear to have taken place on the DFM.

That’s also supported by the fact that the total value of GFH stock traded during the period was some USD 78.4 million equivalent over 3,622 trades.

Why look at the DFM?

Because roughly 74% of GFH’s shares are held and traded there.

What that probably means is that the shares were sold to another investor or investors “off the market” in a single or several “large ticket” transactions. 

AA will be looking at disclosures in GFH’s FY 2019 audited financials to see what information we can glean on who the new shareholder(s) are. Distribution of share ownership in the equity note and any disclosures about major shareholders.

Not by any means an easy task. In conformity with local regulations GFH only reports details on shareholders with 5% or more.

Because Goldilocks sold roughly 4.6% of GFH’s shares unless that shareholder already had holdings of 0.4% we’re not likely to learn its identity.

Let’s turn to the more important question, How did Goldilocks fare on its investment in GFH?

First, let’s estimate Goldilocks exit price.

The average price of GFH stock on the DFM between 1 December 2019 and 22 January was USD 0.2332 (based on DFM closing price data during the period). 

2017 and 2018 cash dividends (paid in 2018 and 2019) add another USD 0.0311 per share so total realized is USD 0.2633.

Based on AA’s assumptions (note that word), Goldilocks bought at USD 0.40 a share and sold at USD 0.263 a share. On its original investment of 183,612,310 shares, it lost USD 0.137 per share or USD 25.2 million. That includes the unrealized loss on shares it didn’t sell (the 0.39%).

Also during 2019 Goldilocks received roughly 10,373,577 in bonus shares which at current values are worth some USD 2.4 million.

That means its loss on the GFH investment is about USD 23 million. Or roughly 31%

This assumes that the above price assumptions are reasonably correct. It also assumes that Goldilocks did not have a price guarantee or favorable put option from IC.

Let’s now allocate that performance over FY 2018 and 2019. Essentially that consists of two allocations: one for dividends (cash and stock) and another for mark-to-market.

As you’ll see from the chart below, the loss was essentially booked in FY 2018 with dividends offsetting further mark-to-market losses.

Goldilocks Investment Returns in GFH
Millions of US Dollars (except share price)
			Dividends
Date	Price	MTM	Cash	Stock	TOTAL
08Jan18	$0.40
31Dec18	$0.25	-$27.5	$4.2	$0.0	-$23.3
31Dec19	$0.23	-$3.7	$1.5	$2.4	$0.2
20Jan20	$0.23	$0.0	$0.0	$0.0	$0.0
TOTAL		-$31.2	$5.7	$2.4	-$23.1

Dramatic Fall in Goldilocks Investment Fund Performance in 2019

Once Shorn Is She Still Goldilocks?

After more than a year of total radio silence on its website, Goldilocks published a press release on its 2019 performance.

No surprises here that the news wasn't good. When a fund stops publishing glowing reports about acquisitions and realisations you don’t need to be Warren Buffet to figure out that things are not going well.

For FY 2019 the fund had a negative 7% return.

On the bright side, Goldilocks noted that its cumulative return since inception in July 2015 was 134%.

That sounds very good until one looks at earlier cumulative returns.

If I’m not mistaken, Goldilocks used to publish its return history on its website. Today for some reason I couldn’t find that information there.

But there are other sources.

On 12 February 2017 ADFG won the “Best UAE Equity Fund” award for its Goldilocks fund at the MENA Fund Manager Performance Awards 2017. According to the news article on WAM, Goldilocks had an “absolute” return of 226% in FY 2016 and its cumulative return since inception was 384%.

ADFG’s website shows a cumulative return through October 2018 for the fund of 219%.

Now if you're like AA, you might wonder why performance for the full year wasn't given.  Another sign that all is not well.

From the change from FY 2017 to FY 2019 in cumulative returns and the relatively small negative performance in FY 2019, you don't need a PhD in math or finance to figure out that FY 2018 must have been a dreadful year.

I suppose the thought was to let 2018 quietly slip into the memory hole and hope no one would notice.

Some of this stuff is just so laughably transparent as well as sad.

So to recap cumulative returns since inception:

1. 2016 - 384%
2. 2018 - 219%. But only 10 months.
3. 2019 - 134%.

In that context not so good.  A rather disappointing trend. 

And if an investor bought say in 2017 or 2018 (when the price was high), the cumulative returns would be much lower.

In the coming days, I’ll publish a series of three posts under the title: “Goldilocks and the Three Bears – A Financial Fairy Tale”.

GFH's USD 300 Million Sukuk - Success Has a Price

And Sometimes It's High as Well

On 29 December 2019 GFH’s shareholders approved GFH issuing up to a USD 500 million sukuk through an SPV in one or more tranches.

On 22 January 2020—less than one month later—GFH announced that it had “successfully priced” a USD 300 million 5 year sukuk. 

Strangely, GFH didn’t disclose what the successful price was. 

An inadvertent lapse in " شفافية "? Modesty or something to hide?

AA will tell you later as I want to let GFH have the first change to explain its success.

GFH’s press release outlined several key takeaways. Italics are AA’s. 

This is a landmark transaction for GFH, placing it in the international debt capital market. 

The successful issuance was supported by a ‘B’ rating from each of S&P and Fitch with strong demand from international investors reflecting market confidence in GFH and its subsidiaries (the Group) and recognition of its healthy financial position, sound strategy and business model.

The order-book for the Certificates was oversubscribed 2.5 times exceeding US$750 million. The Certificates saw strong demand from international investors who were allocated 47% of the issuance with the additional 53% taken up by regional investors.

In terms of the types of investors, 61% were fund managers and 39% were financial institutions.

The proceeds of the Certificates will be used to enhance the financial position of the Group and to fund its next phase of growth.

GFH’s CEO, Hisahm AL-Rayes summed it all up by saying

This is another important milestone for GFH and further recognition from the market of the success of GFH’s transformation into a sound and well diversified financial group. The strong uptake from both regional and international investors attests to the strength of our strategy, our financial health and performance and, importantly, to our future prospects as we push forward in further building our business and position as a leading regional and international investor. The proceeds of the Certificates will enable us to continue to build and deliver even greater value to our investors, shareholders and the economies in which we invest.

Italics in above quote are AA’s and set the stage for some observations below.

First, the successful price was a fixed rate of 7.5% per annum.

You can look over a list of indicative sukuk quotes from Emirates Islamic Bank to get an idea just how successful the pricing was.

Perhaps, GFH is thinking about the success of the investors?  Perhaps relieved that it didn't have to pay 10%?

Of course, the pricing looks “generous” before consideration of credit risk. Then maybe not so rich.

It’s unclear to AA how a low non-investment grade rating of B supported issuance, though it does justify the price. Rather AA suspects that this very generous successful price certainly drove interest and the oversubscription.

One might speculate if at this pricing, oversubscription should have even been higher.

In issuing its ratings announcement, Fitch made the following points.

1. Its rating of B/RR4 was based on GFH’s credit rating as Fitch sees GFH’s obligation under the transaction as the source of repayment.
2. It has not assigned any collateral value to the Trust Assets.
3. It does not express an opinion on compliance with Shari’a principles.

For those who don’t know, a Fitch Recovery Rating of “RR4” represent a historical average recovery 31% to 50% of principal and related interest on securities in the “B” category. Page 24 in Fitch’s Ratings Definitions publication. Be sure you read Fitch’s complete explanation of Recovery Ratings, including limitations.

To AA that sounds like GFH has less than a strong “financial health”.

As to being well diversified, perhaps GFH’s CEO is thinking about the future.

The Offering Circular contains the following contrary comments.

The Group has significant exposure to the real estate sector (page 13)

As at 31 December 2018 and on an original basis, 54.1 per cent. of the Group’s total assets were concentrated on the real estate sector, principally in the form of the development properties (which constituted 26.4 per cent. of the Group’s total assets as at 31 December 2018), its investment properties (which constituted 10.5 per cent. of the Group’s total assets as at 31 December 2018) and its financing assets and assets acquired for leasing (which constituted 8.7 per cent. of the Group’s total assets as at 31 December 2018).

Real estate concentration at KHCB. (page 13)

In addition, 50.5 per cent. of the Group’s commercial banking business’ assets exposed to credit risk as at 31 December 2018 were concentrated on the real estate and construction sectors and 93.9 per cent. by estimated fair value of the collateral accepted by the Group against financing assets and assets acquired for leasing including lease rentals receivable was in the form of real estate as at 31 December 2018.

Real estate valuation is inherently subjective and uncertain, and real estate investments are illiquid (page 9)

Real estate assets are inherently difficult to value. As a result, valuations are subject to substantial uncertainty and subjective judgments and are made on the basis of assumptions which may not be correct.

Temporary forbearance from CBB regulations (page 16)

1. The Group currently benefits from a CBB exemption that permits it to exclude the assets acquired through litigation settlements and by way of a share swap from the CBB’s large exposure and connected counterparty limits. This exemption is re-assessed by the CBB on an annual basis. If the CBB decides to no longer grant the exemption, this will negatively impact the Group’s capital adequacy ratio which may lead to non-compliance with regulatory requirements and result in the Group becoming subject to potential enforcement measures and/or significant penalties. 
2. The Group also has an exemption from the CBB related to its exposures to certain large real estate projects which are higher than 15 per cent. of its regulatory capital. This exemption is also re-assessed by the CBB on an annual basis. If the CBB decides to no longer grant the exemption, this could require the Group to reduce its exposure which could result in significant losses.

From the above AA does not see a picture of strong financial health or the diversification that others see.

One further comment: Know Your Obligor

Under certain conditions GFH is obliged to make full repayment of the sukuk. Fitch considers GFH to be the source of repayment.

It’s critical to understand exactly “who” is on the hook here.

In an indirect way, the Offering Circular does this, but AA fears not clear enough so investors understand.

On page 13 the OC states:

The claims of Certificateholders against GFH will be structurally subordinated to the claims of the creditors of GFH’s investees.

What that means then is prospective investors in the sukuk should have looked at the financials of the parent company of the GFH Financial Group BSC, not the consolidated financials.

Why?

The consolidated financials reflect an accounting construct not a legal entity.

One signs contracts, including debt contracts, with legal entities.

One enforces one’s contractual rights against legal entities not accounting constructs.

Unless GFH’s subsidiaries and investees separately legally committed themselves under this transaction, they are not obliged to repay the sukuk.

Therefore, one needs to look at the parent company’s financials.

These will look quite different than the consolidated group financials.

For example, all of KHCB’s assets and liabilities will not appear in the parent only financials. They will be replaced by a single number representing GFH’s investment in KHCB stock.

All KHCB’s income and expenses will be not appear in the parent only financials. In their place will be dividends received and perhaps a change in value of the stock investment, depending on the method used to account for KHCB.

In this respect it’s important to understand that as a shareholder in KHCB or any other investee, GFH is subordinate to the creditors of the investee.

Also that any cashflow from KHCB or another investee—which AA would venture to claim is critical to repaying the sukuk—will come via dividends or perhaps loans. There are various controls on the amount of dividends an investee may pay and generally limits on intragroup transactions. Thus, funds may not be available.

Here’s an example using Bank of America’s FY 2018 AR. 

Compare the Income Statement and Balance Sheet for the parent company in Note 24 with the Consolidated Income Statement and Balance Sheet. 

Quite a difference. You’ll see each of the points made above reflected in the parent only numbers.

The OC doesn’t contain parent only financials. Yet the parent is the Obligor.

Why? 

How could this critical piece of information be lacking?

Rather than rely on the issuer/obligor, legal advisors, or investment banks to ensure that this information is provided, regulators should require that parent only summary financial information be included.

GFH Financial Group 29 December OGM – New Thinking on Treasury Shares?

Key "Takeaway" from the OGM: If you've been following GFH you know that over the past two years they have "invested" a lot of money in Treasury Share trading. FY 2019 OGM Agenda Item #6 may signal a change in strategy or perhaps "mission accomplished". Or perhaps a new way to "clean out" accumulated Treasury Shares?

The measure proposed using 140 million of GFH's Treasury Shares to fund strategic acquisitions. Expect a subsequent post on this topic.

GFH held an Ordinary General Meeting on 29 December 2019. PPAs you hopefully noted from the "an" above, this was not "the" annual OGM held to approve the audited annual financials, etc. Rather it was an OGM called to obtain approval for some near term actions that GFH's Board wanted to take. Actions that could not "wait" until the annual OGM held after the release of GFH's audited FY financials.

These urgent items are securing approval for (a) the issuance of up to a USD 500 million sukuk and (b) the use of 140 million in Treasury Shares for a strategic acquisition(s) of financial institution(s).

Once GFH publishes its FY 2019 audited financials, we can expect another OGM to be held.

While GFH has posted the OGM minutes, they are available in Arabic only. GFH is known to be careful with expenditures of its shareholders funds so that not a penny is misspent.

As usual AA has the back of interested parties whose lack of Arabic language skills is perhaps compensated by their investment acumen.

As befits his surname or perhaps because of it, GFH’s CEO was appointed as “Chair” of the meeting.

Agenda Item #1 – Approval of minutes of the FY 2018 OGM. No shareholders had any formal comments or objections to the minutes which were then unanimously approved.

Agenda Item #2 – Approval of Board recommendation for GFH to issue up to USD 500 million sukuk through an SPV, subject to regulatory approval. No recorded comments. Approved unanimously.

Agenda Item #3 – Authorise the Board or whoever they delegate to take all necessary actions to issue the Sukuk. No recorded comments. Approved unanimously.

Agenda Item #4 – Authorise the CEO to take all necessary steps “without limit” to secure regulatory approval for the sukuk. Unanimously approved. AA has no comment on the intent of the phrase “without limit”. But invites those with ideas to comment.

Agenda Item #5 – Authorise appointment of SICO as market maker in GFH stock until the OGM for the year end 31 December 2022. 

This item sparked the first and only question from an unnamed shareholder holding an undisclosed number of shares. He asked if there weren’t any other companies who made a better offer than SICO. 

Mr. AlRayyes said that other offers had been been received. He then proposed an amended Agenda Item to authorise the Board to select the market maker they felt was the most “appropriate”. The measure passed with 100% approval.

Agenda Item # 6 – Authorise the use of 140 million (equal to 3.8% of total issued and outstanding shares of GFH) of the Treasury Shares currently being used to “make a market” in GFH shares for a strategic acquisition of shares in a financial company, subject to approval of CBB, and entrust the Board or whoever they delegate to take all necessary measures. Unanimously approved.

Does this mean that GFH has rethought the scope of its Treasury Share transactions? Clearly, from Agenda Item #5, GFH intends to continue them at some level? Or is there something else behind this interesting decision? Another post will be forthcoming after GFH publishes its FY2019 audited financials.

Agenda Item #7 – To discuss any matters in connection with Article 207 of the Commercial Companies Law. Article 207 allows the introduction of (new) agenda items at an OGM, that is, items that were not included in the original agenda. There being none the OGM was concluded.

ذكرى فاطمة ابراهيم البلطجي - كوكب الشرق

رجعوني صوتك لأيامي اللي راحوا
علموني أندم على الماضي وجراحه
اللي سمعته قبل ما تسمعك اذنيه 
عمر ضايع يحسبوه إزاي عليّ
انت عمري اللي ابتدي بنورك صباحه
قد ايه من عمري قبلك راح وعدّى
يا حبيبي قد ايه من عمري راح
ولا شاف القلب قبلك فرحة واحدة

Strong Evidence No Discount for Gulf Holdings on Villamar Sukuk Repayment to GFH

AA Solves Another Case by Applying Non-Euclidean Geometry

As you’ll recall, in 2018 GFH purchased the Villamar Sukuk—on which Gulf Holding KSC Kuwait is obligor--from AlRajhi at a discount of some USD 77.8 million from its face value (roughly USD 203 million).

In its FY2018 financials GFH declared a gain of this amount.

In looking closely at GFH’s financials, I thought there were two possible structures for the “settlement”:

1. Option 1: GFH reduced the debt amount, GH to pay USD 125 million
2. Option 2: No reduction in debt amount, GH to pay full USD 203 million.

Based on that June analysis, I assessed that Option 2 was the more likely settlement mechanism. You can read the June blogpost here for the detailed argument for that view.

But as often is the case, GFH’s financials didn’t provide all the information necessary to make a conclusive determination.

An apparent dead end. But not really.

Additional “Evidence”

Gulf Holdings publishes financials.

If GFH offered it a discount on repayment, that should show up in GH’s 2018 annual report.

If it doesn’t, then there is further indication that Option 2 is the settlement mechanism.

As it has done in the past, GH included its financials in the shareholder package for its FY 2018 Annual General Meeting.

According to those financials:

1. The principal amount of the sukuk is unchanged.
2. As per Note 25, there has been no material change since the date of the financials (31 December 2018) and the date of the external auditors’ report (23 April 2019).

If discussions were ongoing for a reduction, then these should be mentioned in the “subsequent events” note. 

That increases my confidence that the sukuk is being “settled” under Option 2: GH to pay full value.

However, it is possible that GFH and GH did not begin negotiations until after 23 April. But again I consider this unlikely.

There was another open question from my June analysis regarding the potential need for a provision. The Sukuk was non-performing and AlRajhi sold it at a 38% discount. That would seem to be a strong indication that the Sukuk was impaired.

So how could GFH be confident enough persuade itself and its auditors to (a) book the entire USD 77.8 million gain in 2018 and (b) treat the Sukuk as unimpaired.

AA overlooked the fact that the sukuk is secured by Villamar Project assets.

GFH is the “natural”--perhaps the only—realistic buyer for these assets. Arguably it is also the potential buyer best placed to extract full value from the assets.

In any sale GFH and GH (controlled by GFH) would enter into “arms length” negotiations to set the price.

Now some out there might be thinking: “But, AA, this gives GFH the opportunity to potentially manipulate the sale price to its advantage to ensure it ‘collects’ 100% of the Sukuk thus justifying the USD 77.8 million ‘debt settlement gain’. It would be able to bury any shortfall in the value of assets acquired where that amount will be hard to detect”.

To those doubters I say that AA is highly confident that GFH will acquit itself in this transaction applying the same standards of ethics for which it is well known.

Regarding a potential sale of GH assets, according to the GH’s 2018 AGM package, shareholders were to be asked to approve the recommendation of the Board of Directors for a strategic sale of Residential South Real Estate Development Company SPC (RSREDC) and the owner of the Villamar project for a total value of US $ 52,466,853 US $ 47,466,853 / cash (US $ 5,000,000) and authorize the Chairman or his designee to take all necessary actions to complete the sale and transfer of ownership.

As I translate the Arabic AGM notice, the sale price appears to have two tranches: a cash tranche of USD 5 million with the remainder non-cash. Perhaps in partial settlement of the Sukuk?

You can check my translation by using the link above to find the AGM Agenda Point 6 on page 5.  If I've missed something, please set me straight.

I haven’t yet found any press release or other announcement about a sale.

But one appears to have taken place.

If I’ve read the information at www.sijilat.bh correctly, ownership in RSREDC (CR 59128-1) was amended in November 2019 from Gulf Holdings Kuwait to GFH Asset Company Cayman Islands.

Anyone out there with info, please post a comment.

Tesla Phenomenal 4Q 2019 Earnings - Built on Government Handouts

Sadly Tomorrow Never Comes

Tesla announced 4Q19 net income of USD 105 million.

Accompanying the announcement, Elon Musk said:

A lot of retail investors have deeper and more accurate insights than many of the big institutional investors

He went on to predict great things for Tesla’s future. A claim he’s made before.

In that respect Tesla is like Brazil - its bright future always remains in the future. Or the bar portrayed above.

Some 9 years after its IPO, Tesla still has to turn an annual profit. 

Excitement over the 4Q19 announcement should be tempered by realisation that Tesla has not yet had a significant profit from its basic lines of business.

An important point for investors to consider unless harvesting government handouts is the key business of Tesla. 

In 4Q19 Tesla’s revenues included some USD 133 million from sale of regulatory credits. So Tesla’s basic businesses earned a negative USD 28 million in the Quarter. 

That "performance" is not as good as 3Q19 where the reported net income of USD 143 million included regulatory credits of only USD 134 million. In that Quarter Tesla’s basic businesses earned a whopping USD 9 million.  And you thought Saudi investment banking fees were huge.

For 2019 reported net income was a loss of USD 862. Total regulatory credit sales were USD 596 million.

So the net income from basic businesses was a USD 1,450 million loss. 

With performance like that AA can’t understand why the stock has hit USD 1,000 per share.