Abu Dhabi Commercial Bank US$2+ Billion Exposure to Dubai World

Reuters quotes an unnamed senior executive at ADCB:  "In the UAE, a senior executive at Abu Dhabi Commercial Bank told Reuters the bank had about $2.18bn to $2.45bn of exposure to Dubai World and related entities".

Strangely, this item was tucked away in one which described the US$77 million in exposure by Omani banks.

Ouch!  Painful but not fatal. 

At 30 September 2009 ADCB had some AED20.1 billion (US$5.5 billion) in capital.  It is also 65% owned by the Emirate of Abu Dhabi (which in case you don't know is the one with the money).    Message:  Abu Dhabi won't let ADCB fail.

Nothing on the ADX this morning from ADCB.  It would seem that having made this disclosure to the news media, ADCB would be following up with a public announcement.  Perhaps, this will occur before the ADX opens tomorrow?

Bank Muscat Exposure to Dubai - US$50 Million

OR19.25 million as per announcement on BSE.  Roughly US$50 million.

Not a major issue.  At 30 September 2009 the bank had OR709 million in shareholders funds.  It earned OR 20 million in 3Q09.

A bit of background on exposure of Bank Muscat and its Bahrain affiliate, Bank Muscat International,  to Saad/AlGosaibi.  If you look at Note #5 page 9 in the 3Q09 financials provided via the link above, you'll see a major increase in loans on which interest is being reserved from OR72.4 million  to OR196.6 million.  But this is only 5% or so of total loans.  And the loan loss reserve ("LLR")  covers 81% of this amount so the net uncovered amount is a mere 4% of equity. 

The Central Bank of Oman runs a rather tight ship - which is one of the reasons why Bank Muscat International in Bahrain was set up.  Expect additional provisions at Bank Muscat in 4Q09 to top up the LLR.

The Investment Dar - Restructuring Update: Not So Good Times

6 December AlQabas has a fairly long article on recent developments.  See also this earlier post.  Also you can use the label The Investment Dar to see all other previous posts.

My following analysis is based on the working assumption that this report is basically correct.  I'm not in a position to make a final determination.  Bear that in mind as you read what follows.

60 second summary.  The restructuring agreement sounds like a financial Treaty of Versailles.  Draconian. It appears to me to be controlled liquidation based on expectations for less than a full recovery - probably with a large loss.  Perhaps up to 50% of the face amount of claims.

To quote an appropriate song, this leaves TID:    بين شدو و حنيني وبكاء وانيني

Here's a rough translation of the AlQabas article.  My analysis/comments in blue italics:

First Principles

The proposal begins with an "open letter" to creditors encouraging them to approach the restructuring with a philosophy of justice and equal treatment for all parties. That there should be no spirit of one creditor trying to get its rights at the expense of another.  As well, no revenge (presumably against management) but a mutual co-operation to get out of the strait/predicament.  AA:  It's always nice to start with noble intentions.  The details of the Plan will show to what extent these are implemented.  And we will be able to get quite a precise understanding of any issues the creditors have with TID and its management as we step through these details.

Menu of Options (With a "tilt" to the desired outcome)

Then the three options are outlined as well as the reasons why only one of them makes sense.

1. Option 1 is the pursuit of legal claims.  Dismissed  as these will be very long and complicated steps, outcome uncertain, involve creditors paying legal expenses and consume a great deal of time.
2. Option 2 is wind-up/dissolution.  Dismissed as resulting in the destruction of the value of assets, the appointment of a liquidator (no control by banks over the process), as well as possible diversions.  AA:  Presumably the latter refers to the liquidator following his own procedures. and desires.  Those familiar with liquidations will recognize the worry that the liquidator's realization of assets may take longer than necessary, not result in the best sales price and incur extra expenses.  Lawyers, accountants and liquidators feast first in corporate dissolutions well before the creditors.  Note the key creditor issue: a concern about "control".  The Arabic says "Lack of any control by banks or investors".  We'll see that theme sounded more than once as we proceed.  Usually creditors want control when they have an issue with the way those in charge have exercised their powers.
   
3. Option 3 is the restructuring.   Done of course by mutual consent (AA:  Presumably the creditors made TID an offer it decided was wise not to refuse).  Rights of all creditors to be protected to the maximum extent.  AA:  I'm reading this that there is some doubt about a full recovery. And of course I've "read ahead" of you at this point so I know what's coming.   Banks and investors have "full control" to protect their rights.  AA: There's a sign of serious concern here.  An indication perhaps of strong dissatisfaction.  You'll recall the creditors asked and the Central Bank of Kuwait appointed a monitor to watch over things.  A step not taken at Global Investment House.  Certainly of implementation of corporate governance at TID and steps to protect the rights of creditors.  AA:  Apparently, the creditors see this as a needed change from the past.  

Basic Goals

The proposal then describes the basic goals of the restructuring.

1. First, the separation of the assets of the company and an orderly disposal thereof in a reasonable time to preserve asset values.  AA: Signs of a liquidation.  Asset realization to repay the debt.   Not cashflow from operations.
2. Second, the setting aside of a package of security (collateral) sufficient to protect against any situations resembling the current distressed situation. AA:  More signs of a liquidation.  And more indication of a lack of confidence.
   
3. Third, strengthening the corporate governance of TID and raising the level of transparency and disclosure vis-a-vis the creditors.   AA:  Not a ringing vote of confidence in TID management.
4. Fourth, additional measures to ensure that TID's liquidity is kept with creditors not with third parties.  AA:  This provides the creditors a right of set-off.  Presumably there will be sharing arrangements among the creditors to protect those who don't hold the deposits.  Another sign of lack of confidence in TID management.  And another indication that there is concern about ultimate recovery so the need to keep all assets under the control of the creditors.
   
5. Fifth, facilities and financial services able to be traded according to Islamic principles.   AA:  I'm guessing this is so those who want to get out early can - though they'll have to sell at a discount .
6. Sixth, justice for all creditors and investors by establishing the principle of equal treatment in payments.  

Quantum of Debt and Value of Assets

These two topics are the heart of the creditor decision process.  The higher the value of assets relative to the quantum of debt the less restrictive and onerous the terms of the restructuring.  And here we get confirmation of the basic problem the creditors think they face:  an asset value shortfall.

The Co-Ordinating Committee states there is KD1.220 billion of total debt (US$4.227 billion!) composed of KD 272 million in banks and wakala, KD586 million in various bi-lateral and collective loans, and KD 362 million in sukuk. (KD1 = US$3.50).

TID and its advisors estimate the value of the assets is between KD1.350 billion (short term) and KD1.650 billion long term.  AA:  Assuming these values, at the end of the process with any sort of interest payments, creditors and various other parties will leave little behind - another indication that liquidation is most likely.  TID's incentive is clearly to give a highest possible value in the hope that time will work in their favor.

On the other hand the creditors' and their advisors' view of asset values is different.  KD 600 million for a short term liquidation and KD 1.3 million for a long term liquidation.  The text indicates a 50% recovery rate.  AA:  Equally clearly no one on the creditor side wants to be proven wrong later if there is an asset shortfall.  So the bias is to lower values.  But the disparity here with TID's valuation is  large.  This indicates the strong possibility for less than a full recovery.  In fact a fairly substantial loss.  Hence, the need to control the process to try and extract maximum value.  Of course, anyone who's been involved in a creditor-led disposal of assets knows that creditors are not that much better than liquidators in realizing maximum values.

Restructuring Conditions

1. Imposition of requirements for complete transparency and methods to ensure it.  AA:  Pretty clear why this is being hit.  And notice it is the first point.
2. No sale of any asset without the creditors' consent.  AA:  Completely understandable in a liquidation with insufficient assets to cover debts.
   
3. All asset sales on a sound basis (sahih), legally done, at market prices and not to related parties.   AA: That this point is raised speaks volumes about the creditors' impression of past practice. 
4. TID will not be permitted to dispose of any of its liquid assets without the knowledge of the Co-Ordinating Committee and the agreement of the "restructuring officer" (unclear if this is the CRO appointed by TID earlier or a new position).  AA:  No big surprise here.
   
5. Any amount to be distributed by TID goes to creditors first before management or shareholders.  AA:  No cash to grow/develop the business.  Pretty clear implication for the future of TID.
   
6. Co-Ordinating Committee has the right to refuse to agree the company's financials.  AA:  Again less than a vote of confidence in management.  They're not allowed any control over assets.  And now aren't even allowed to finalize financial reports.  Perhaps a hint of disputes over the long delayed 2008 fiscal report.  Or other concerns about the integrity and completeness of financials.

Small Creditors' Deal

To accomodate small creditors - defined as those with claims less than KD 3 million (US$10.5 million) - a special deal is offered:

1. 25% of claim amount paid quickly.
2. 50% of claim paid in second tranche.
3. 25% remaining along with other large creditors.

AA:  Gets the small creditors votes.  Recall there's no Chapter 11 in Kuwait so 100% agreement is required to close the restructuring.  Letting the small creditors out early is the price the bigger creditors have to reluctantly pay to maximize their own recovery. 

More Protective Conditions

As a prelude, there is a repetition of the argument that the restructuring will be quicker and more certain than legal proceedings.  It's noted that such proceedings will be complicated and take a long time to get the first level judgment which of course is automatically stayed when the losing party lodges an appeal.   But the deal has a legally enforceable fail-safe mechanism if the borrower fails to honor the restructuring plan.

1. Clear and strong condition that if the company fails the creditors will be entitled to take possession of all assets immediately to protect their rights.  AA:  To be incorporated into the restructuring agreement so exercise of the right can be immediate.
2. Complete transparency and the ability to track the Board to ensure that measures are being implemented.  AA:  We've seen this theme before.
   
3. Pledge of the assets for the loans effective so that court action is not required to enforce rights. AA:  The restructuring terms formalize the granting of collateral so that legal procedures in case of TID's subsequent failure will be more straightforward and simple.
   
4. Structuring the debt so that it is capable of being traded (according to Shari'ah principles) for those who want an early exit.  AA:  Some creditors just want out.  This gives others or new creditors the opportunity to acquire debt at a discount (probably a very steep discount).  Existing creditors can average down their cost base.  New creditors can hope to earn substantial returns.
   
5. The ability to study the assets of the company one by one and the opportunity to secure pledges on them.  AA:  Since this is a liquidation, this makes perfect sense.
   

Implementation

1. Creditors are asked to respond by 23 December with the goal of implementing the restructuring in February 2010.
2. Formation of 3 SPVs to which the Company's assets will be transfered:  real estate, shares, and foreign assets.  AA:  If you didn't see this as a liquidation before, this should be the final proof.  The SPVs will provide another layer of creditor protection in case of a need to seize the collateral.
   

Status of Acceptance

1. TID's Board and managment have agreed.  AA:  An offer they decided was wise not to refuse.  Can't imagine this was embraced with enthusiasm.
2. 80% of creditors have accepted (appears to be by number of creditors not volume of debt) and KD880 million by amount.   AA:  This may be the 66% percent referred to in my earlier post.  
3. The main remaining creditor is Investment Dar Bank which is reported to hold 27% of the debt.   And which is expected to agree shortly according to a source connected with TID.  AA:  I'm hoping this is IDB and its clients as 27% of the debt is KD 324 million which would appear to be an excessive credit concentration for a bank like IDB to have with anyone much less a related party.  You'll also recall the earlier post about Mustafa AlSalih's rumored resignation from IDB and Adeem which would appear to be related.

Status of Financials

The article quoting a source at TID states that the company will present its 2008 financials to the Central Bank of Kuwait either 6 or 7 December.  We'll see how long it takes the CBK to approve.

Co-Ordinating Committee

I had made a point that the CC was largely invisible and had apparently not weighed in to support the restructduring.  The article concludes by saying that they have done so.  It also identifies the spokesman for the CC as Bader Abdullah Al Ali.  AA:  This is the name of the CEO at Gulf Investment House Kuwait.   Usually CEO's of creditors don't get involved in restructurings.  Usually most of the roles on committees are given to major creditors.  GIH is relatively small with some KD 59.9 million of shareholders' funds as per their 30 June 2009 financials.  I hope that GIH is holding a small amount of this paper.

The Investment Dar - News Coming Much Less to Smile About that Global

I hope to post an update a bit later tonight.

The initial news does not look good for Investment Dar.  There probably will be a rescheduling but on fairly onerous terms.

Stay tuned.

CNPC Replaces Total in Pars 11

The Peoples Republic of China continues its economic penetration of the region.

Back in Washington, minds are focused on what are imagined to be more urgent foreign policy matters.

In the final analysis, economics is the basis of all sustainable political power. 

Countries and elites that ignore this very simple, very basic rule of life find their own power gradually slipping away and the standard of living of their people eroded.

Warba Bank - Founding General Meeting 21 December 2009

Probably I'm one of the few non Kuwaitis who has been wondering when Warba Bank would be officially launched.

Earlier this year, the Kuwaiti Government announced the formation of this Islamic Bank with a rather unique feature.  The Kuwait Investment Authority will subscribe for 100% of the capital KD 100 million (US$350 million).  Then 76% of the shares in the bank will be distributed among Kuwaiti citizen alive on the date of the official launch of the bank.

It seems the founding general meeting will be held on 21  December as the Council of Ministers has given the formal authorization for KIA to go ahead with the meeting.  A Board will be elected.  Then each Kuwaiti citizen will get his share allotment.

(Clearly Warba is a place name as the standard dictionary definition would not do for a bank - Islamic or otherwise).

Global Investment House - Significant Restructuring Progress: The Best of Times

AlQabas Newspaper Kuwait Copyright

6 December AlQabas carries an account of a Euromoney interview with Ms. Maha AlGhunaim, Chairwoman of the Board of GIH.  She's got a good reason to smile.

Main points from the article and some commentary.

1. Holders of all three bonds have agreed with the company.  AA: Not surprising since they are not being asked to reschedule their bonds (payments will be made according to the original maturities), they have been given collateral (apparently for 100% of the value of the bonds) and GIH has agreed to abide by certain unnamed conditions.
2. 51 of 53 lenders have agreed to the proposed restructuring.  Again no haircuts and it appears no prolonged retiming of payments.  At least that's how I'm reading "fatra muhala".  Also collateral will be offered.  AA:  Very good progress.  It seems there would have to be some retiming of payments one way or another.  Either extend the tenor of the facilities.  Or change the amortization schedule by reducing the early year payments and pushing larger amounts to later years.   We'll have to see when the details emerge. 
   
3. Ms. Ghunaim said that GIH is hoping to persuade the remaining two lenders and sign a restructuring agreement before the end of the year.  AA:  This should be doable unless the two lenders are particularly obstructionist.
4. Some details on the US$ 2 billion in "suspended" debt.  15% by amount is "Islamic".  GIH has been paying interest throughout the period.  AA:  Something usually highly appreciated by lenders.
5. There is some analysis of expenses.  Personnel expenses in 2009 are 49% of what they were in 2008.  Other expenses are higher (percentage change unspecified).  This is attributed to the costs of the restructuring.  AA:  Lawyers, advisors and other professional service providers enjoy a bountiful feast on such occasions. 
6. The article ends with some commentary on how this experience has made GIH a better firm and a gratuitous slap at other Kuwaiti investment companies.   AA:  Adversity is no doubt a great teacher as long as one remembers the lessons after the time of trials has ended.  However, as a personal observation, I would suggest a bit of humility.  As life has shown in this case, and others the high flying often fall to earth.  Refraining from denigrating the competition is a wise course.  Future performance will tell who's doing a good job (as well perhaps who's been lucky).  Often the two are confused not only in the minds of those directly involved but as well as the minds of spectators. 

DEWA US$2 Billion Sukuk 1Q 2010

Financial press reports that Dubai Electricity and Water Authority ("DEWA") is planning a bond and/or sukuk issue for 1Q 2010.

This source says that Citibank, Barclays and Dubai Islamic Bank have been tipped to do the deal.  Other market discussion is that the UK bank is Standard Chartered.  Perhaps both are involved?  Stan Chart had a major role in the syndicated loan earlier this year.

A bold move in the midst of a request for a standstill, particularly when DEWA is not a sovereign borrower as outlined below.

The sukuk/bond appears to be new money financing. That is, it is not designed to refinance a maturing obligation.  But rather to secure additional funding.

On 8 April 2009 DEWA announced the closing of a three-year US$2.2 billion equivalent syndicated "Islamic" refinancing loan at 300 basis points over Libor.  This  facility refinanced a one year  "Islamic" loan which had a margin a fraction of the replacement loan.  Later in May DEWA announced a thirteen-year ECA backed US$ 1 billion loan.   Both without a sovereign guarantee.

Also in June 2008 DEWA issued a five-year AED 3.2 billion (US$880 million) with Citi, Barclay and DIB as lead managers.  Again no sovereign guarantee.

From the Sukuk prospectus page 17:

"DEWA’s financial obligations are not guaranteed by the Government
Although DEWA is a wholly owned Government entity and also functions as a Government department providing an essential public utility, it is still an independent commercial enterprise and its financial obligations (including its financial obligations under the Transaction Documents) are not guaranteed by the Government. Therefore, DEWA’s ability to meet its financial obligations under the Transaction Documents, and consequently, the Issuer’s ability to pay Periodic Distribution Amounts and Dissolution Distribution Amounts to Certificateholders is solely dependent on DEWA’s  ability to fund such amounts from its business and operations."

In case you're still catching a glimpse of an implicit guarantee, here's an extract from Note 1 to DEWA's 2008 financials:

"Dubai Electricity and Water Authority (“DEWA” or “the Authority”) was incorporated on 1 January 1992 in the Emirate of Dubai by a decree (“the Original Decree”) issued by H.H., the Ruler of Dubai, effective 1 January 1992, as an independent public authority having status of a body corporate, and financially and administratively independent from the Government."

Just recently Fitch downgraded DEWA to BBB- based on an assessment that Government support cannot be counted on.

If you still see an implicit guarantee, AA suggests a visit to your opthalmologist is in order.

The question is what rate DEWA will have to pay on the new Sukuk.

As of today, Dubai Sovereign US$ Sukuks (DEWA is not Sovereign) are trading very roughly at a spread of 550 to 570 basis points with AED denominated issues somewhere around  80 to 100 basis points less.  Jebel Ali Free Zone (which is B+ note DEWA is BBB-) is trading at more than twice the Dubai Sovereign spread.  That suggests a range.  One would expect if priced today that logically DEWA a non Sovereign Dubai obligation would carry a higher rate than the Sovereign.  That implies something over  600 basis points. 

Some caveats:

1. As mentioned earlier, most bond markets (except US Governments) are thin.  Prices accordingly have less "precision" than in more liquid markets.  The GCC bond market is relatively anorexic compared to other thin markets.  The true test of a quote is when you try to hit it as screens do not trade institutions do. 
   
2. Pricing in 1Q 2010 will reflect (a) what has happened and how it has happened on the Dubai World restructuring of Nakheel and (b) macro economic factors/investor preference.
3. It's also important to remember that financial markets are not always logical. 
   

I wouldn't expect that market sentiment is going to improve that dramatically.  And probably not much progress is going to be made on the Nakheel restructuring with the various holidays coming.

Bankers and investors don't like uncertainty so I'd anticipate higher rather than lower prices.   DEWA has an ambitious capital spending program and constraining it will be more difficult than not building another 1 km tall sky scraper.  So it needs the money.  And Dubai does not have a lot of financing alternatives in the market.   The market knows this. 

Dubai and British Horse Racing Latest Line: Better Than Bottle Odds

Copyright Emiratesi Racing Association  

 

To those alarmed about the state of horse racing after today's earlier post, I'd offer this bit of encouraging news carried today by WAM. And a picture of the track. 

Shaykh Mohammed toured the race course at Nad AlSheba earlier today.

Me, I'm about to nip down to the LBO and place a wager.   The Shaykh is going to win and it won't be by a "short head" as they say over there.

Nahkeel Bondholder Group Opposes Standstill

Today's Financial Times article.

I'm not sure if this is "news" in one sense.   Like haggling for a rug in the suq, the smart buyer doesn't take the first price offered. 

Dubai World and Nakheel may be forgiven (at least initially)  if they made certain assumptions about the bondholders' reaction.  Many previously successful borrowers actually believe that they hold a privileged place in the market even if they have bad news of a  standstill or rescheduling.   Our lenders will understand they think.  They don't realize that the lenders' knee-jerk reaction  to such news will take them from hero to zero.   Another complicating factor is there have been changes in the composition of  sukuk holders.  The heavy selling of the certificates between the end of August and November (just prior to the announcement). was not relationship banks buying additional certificates.  Rather they were unloading  what they had.  Many of the new faces - as I presume QVT is - are  likely to be  transaction oriented investors with no relationship to protect vis-a-vis Dubai.  And so less likely to be as sympathetic as the former.  They could well be a convenient screen for relationship banks to hide behind.  Though as well they could be a thorn in  the banks' side.  The banks have other exposure which will have different conditions and legal protections.  So they will have an entire "package" to consider where the transaction oriented investors with only a single bond to worry about will have a different set of priorities and considerations.

In any case, it seems a group representing 25% of the bondholders (by amount) has formed to oppose the standstill.  As per the typical contract, if 25% vote for an early termination of the sukuk,  repayment is accelerated. So despite its small number, this group has significant power.

I'll be taking a look at the Offering Circular for the issue to see if there's anything in the sukuk that gives them leverage.   Of course, one leverage creditors always have is to complicate the life of the obligor via bad publicity and obstruction if nothing else.  This is particularly important when a borrower needs to raise new money or roll over existing debts - as is the case with Dubai. 

On that score later today, I'll be commenting on the proposed 1Q 2010 US$2 billionn DEWA sukuk after I've stoked the engines with some Cafe Najjar.

The True Impact of the Dubacle

Leave it to the Financial Times to get to the heart of the potential real impact of the Dubacle:  the effect on British horse racing.

From the amount of column space devoted, it appears that indeed between the alarm and realism, alarm has carried the day.  Not only are the financial problems of Dubai World an issue, but the mortality of the Shaykh himself a grave concern. 

One senior British racing executive who preferred not to be named "does not dare contemplate a racing world without the Maktoums".   From this comment and his aversion to confronting reality, I'm guessing he's probably also an early and persistent investor in Dubai financial paper.  He may be buying even now.  He probably has a horse named "Implicit Guarantee".

What appears to have happened is that at one auction, the Shaykh's representatives didn't (as we say here in the colonies) "pony up" for another purchase. 

Before the gloom and despair spreads too deeply, AA would like to weigh in or at least neigh in. 

Shaykh Mohammed indeed is likely to "ride out" the debt storm - no doubt on one of his thoroughbreds.  One thing for certain whatever the results of the debt rescheduling, the personal lifestyle of the Shaykh is unlikely to be affected in any meaningful financial way.

So, there is no need for "Last Post" for British horse racing.  Stiff upper lip and all that.  It certainly helps keep the bit in place.

SAMA: Saudi Banks Exposure to Dubai Very Limited

Saudi Arabian Monetary Agency Governor Dr. Muhammad Bin Sulayman Al Jasser said that Saudi banks have very limited exposure to Dubai less than 0.2 percent.

Again this is not a big surprise.  Saudi is a large market and its banks are not forced to go outside the Kingdom to find business.

The Emirates Economist

Now added to the list of Blogs and Other Interesting Sites.

By way of amendment, he notes that it's highly useful to provide a link when you recommend a site.

The DRR Scale - The GulfBlog

David Roberts over at the GulfBlog has made a major contribution to analyzing (or in his case, would that be analysing?) the Dubacle with  the Dubai Ridiculous Rating or "DRR".

One wonders (well, at least AA does) just how "sober" "bankers" and "investors" were persuaded to finance some of these schemes.

I guess the implicit guarantee can cover a lot of financial sins of omission as well as commission.

The chap at my local market (one that sells whole foods or so the sign says) offered to wrap a piece of fish for me in an implicit guarantee.  I declined as I wanted some sort of paper around the fish for the transport home.

Carlyle Guarantee Watch - Third and Final Day

If you've been reading this blog over the past few days, you're not only a member of a rather select group, but you've also noticed that I've been musing on why the Financial Times  hasn't called on Carlyle to provide a guarantee to holders of investments in Carlyle Capital Group as it did to Dubai and Abu Dhabi for Dubai World.  Earlier posts here and here.

Suddenly last night I had a flash of insight and realized I had overlooked two critical things. 

First, from the "free market" (yes the quotes mean the same as they when around "banker" here) doctrinal perspective it would be a direct violation of the teachings of Adam Smith for Calyle to provide a guarantee.  Market participants are supposed to exercise careful due diligence and then bear responsibility for their actions.  Interference with this sacred principle would of course undermine the very workings of the "free market" and in so doing undermine our very way of life. 

This clearly explains why Carlyle isn't going to be asked to provide a guarantee.

But what about Dubai or Abu Dhabi in the case of Dubai World?  How do we explain this apparent inconsistency?

Darwin's observation about the need for organisms to adapt to their natural environment or become extinct is also applicable to the financial world.   UK banks (home of the FT by the way) are owed some US$ 5 billion by Dubai Inc.   These banks constitute the largest foreign creditor group.  If not a potentially existential threat, at least an existential inconvenience.  Thus, the necessity - as with the BBA letter to Lord Davies in re Saad and AlGosaibi -  to adapt certain elements of Adam Smith's teaching to the new environment. 

But it would be wrong of course to ascribe purely mercenary motives.  Both initiatives would also protect the reputation of the borrowers.  One's good name is treasure.  And this kind solicitude  of lenders for the borrower is certainly evidence of purity of motives.  Isn't it?

0-3 or 3-0 Yet Again and Yet Again Still With Red and White

Abu Arqala has written another letter to Santa - after all he wears the colors.

More Hysteria on Islamic Finance

In case you're not familiar with with the fine blog Aqoul, you should be.

An interesting article dissecting political hysteria regarding "Islamic finance".

Emirates Airlines - No State Guarantee

Maktoob reports that Emirates Airlines has confirmed that there is no Government of Dubai guarantee on any of its obligations.

This points up one of the many benefits of the explicit guarantee.  You know when you've got one.

With the implicit guarantee, well, you're really never sure.

And often it turns out to be worth less than the paper it's not written on.

Anyone out there want to guess how many self-proclaimed bankers and investors thought they had a guarantee?  They probably did but I think Sasquatch may have taken it with him last time he was at the credit or investment committee meeting.  And he's quite a difficult fellow to locate when you need him.

Unusual Trading in Nakheel US$3.5 Billion Sukuk Shortly Before Restructuring Announcement

AlQabas reports (apparently quoting a Dow Jones item) that there was an unexpected bout of trading in Nakheel's US$3.5 billion sukuk.

The source is Data Explorers (a company that tracks pledged stocks and bonds) who noted that approximately 75% of the holders of the sukuk sold their positions between the end of August and end of November - when markets still anticipated payment December 14th.   At this point the sukuk was trading at 110% of nominal value (there is a 9.5% premium over the "face" amount at redemption).   There were no visible signs of distress.  All the talk was that the bond would be settled at  maturity. 

The question then is why the persistent selling.  How did owners know it was a good time to sell?

After the announcement, the price of the sukuk fell to 40% of nominal.

It would be very interesting to know who the buyers were. 

The article also goes on to say the QVT Financial LP had hired the law firm of Ashurst to represent them.  When placed in 2006, 100 or so investors purchased the sukuk.  Half of whom were banks.  40% from the Middle East and 40% from Europe.

Qatar Islamic Bank QR54 Million Exposure to Dubai World

QIB announced on the Doha Stock Exchange that its exposure to Dubai World is QR 54 million  (US$ 14.8 million) reflecting participation in an "asset backed" Sukuk issued by Dubai World with maturity 2017.

At 30 September 2009, QIB had roughly QR7.8 billion  in shareholders' equity.   This exposure is then not problematic.

Three comments.

1. I believe this may be the Dubai Ports 6.25% Sukuk.  If so, this is probably a better obligation to hold than say Nakheel.  It's surprising that QIB wasn't more specific.
2. As we've seen from some of our forays into Sukuk analysis, there is not always recourse to the underlying assets.  So the term asset backed should not be read to imply that necessarily there is collateral.
3. The comment about financial impact means that QIB is taking changes in value in the sukuk directly to its equity in the "fair value reserve" account there.  Thus, these changes do not pass through its income statement.