Istithmar World Loses New York Hotel

The National reports that lenders foreclosed on Istithmar World's Union Square Hotel in New York City.  This is related to problems with debt service at the hotel.  It is not directly related to any problems at the parent, Dubai World.

However, as funds available to Dubai World become more scarce, it will not be able to provide funds to its subsidiaries.

Lenders to standalone projects like the hotel are likely to react to the commercial circumstances of each transaction.  If the equity holder is unwilling or unable to provide additional funding and if it makes sense to foreclose, they will.  Since many of these deals are structured as separate legal entities, they can easily do so.  The assets are to use a term popular in the financial press these days "ring fenced".

This puts more pressure on Dubai World.

As the market denies it new lending, it will need to husband cash to prevent problems like this from occurring, presuming  it makes commercial sense to support a project.  

And  such a need could possibly be a motive to compel them to seek a wider restructuring than just Nakheel and Limitless.

Dubai World - AlQabas Report - Commercial Bank of Kuwait Denies Any Exposure (Again)

Today's AlQabas - published last night  on the Internet - contains an article suggesting that banks may have overlooked some exposure to the Dubai World group.  It's based on a table compiled by City Research using Dealogic (a financial sector publication specializing in reviews of transactions).  Commercial Bank of Kuwait was named as having a large exposure.

This morning CBK issued a press release denying any such exposure and that it had contacted City Research.

[11:28:51]  ِ.ايضاح من البنك التجاري الكويتي(تجاري) بخصوص ما نشر فى احدى الصحف المحلية
يعلن سوق الكويت للاوراق المالية بان البنك التجاري الكويتي افاد بخصوص ‏
ما نشر فى احدى الصحف المحلية اليوم تحت عنوان 293 مليون دولار لبنك ‏
محلي بذمة شركات متصلة ب"نخيل"و"دبي العالمية" ودعمت الخبر بجدول صادر ‏
عن مركز ابحاث سيتي بالتعاون مع "ديلوجيك" ودرءا للشائعات التي قد تثير ‏
البلبلة وتؤثر سلبا وتمس القطاع المصرفي الكويتي،يود البنك التجاري الكويتي ‏
ان يبين بانه هو البنك المعني بهذا الخبر وان هذا الخبرعاري تماما عن الصحة ‏
حيث قام البنك التجاري الكويتى فور اطلاعه على التقرير الصادر عن جهة ‏
الابحاث المذكورة بمخاطبة هذه الجهة التي قامت على الفور بالاعتذار للبنك .‏

Aidan Birkett - Dubai World & The "Profligate" Locals

Earlier I posted on an article reciting the impediments Aidan would face in  discharging his responsibilities. 

I pointed out that there was a strong undercurrent of cultural bias in the article. In effect the article's point was the "locals" had created the mess and would resist letting Aidan "set them straight".  The article detailed  the possible tactics they might use to frustrate his mission.  Things like speaking in their native tongue.   

I wonder how he'll deal with this "local"?

It would appear that we may need more an expert from the East to help sort out the Dubacle. 

Dubacle: $46 Billion and 40% Haircut?

Bloomberg is reporting that Mohammed Jaber and Paolo Batori of Morgan Stanley have issued a report that as much as US$46.7 billion of Dubai World debt may need to be restructured and that haircuts of 40 to 50% are likely to be required.

The press has as usual seized on the most sensational element.  Without the full report  - which I am trying to get - and all its details and nuances, tt's hard to evaluate the analysis. 

My own guess is that there is more pain out there in Dubai.

Heedless lenders and investors were throwing a lot of money the Emirate's way.   A lot of it short term money.   There's nothing that feeds a speculative boom like easy money.    And nothing that  causes a faster crash than suddenly sober bankers refusing to roll over short term loans. 

Dubai Inc wasn't just on a spree back home but in Las Vegas, New York, etc.  And most of that with borrowed money and leverage.  A potentially dangerous combination when asset values go down.   As indicated in my Aidan Birkett post here.

Dubai: Six Months Is Not Enough

Not unexpectedly comes the news that a six month payment delay won't be enough time to complete the restructuring of Dubai.

In a situation like this the market craves certainty. 

But it's not possible to give certainty. 

Realistically, it will probably take at least three to four months for the Company to assess its situation and begin to craft the first stage of its initial plan.

Workshop on Government Openness Closed to Public

Implicit openness I suppose.

Tie Your Camel First, Then Trust in God - Part V Maintenance Fees

I thought every developer and property owner knew that maintenance was one of those really important things.  

1. Be sure that you understand the costs of maintenance, and
   
2. Make sure you make provisions for the payment of the same.

Especially if you live in a part of the world where the climate was particularly harsh on buildings.

I wonder if there's implicit maintenance.

Sort of like the famous implicit guarantee.   The Rene Descartes philosophy of maintenance: "I think the property is being maintained, therefore it is".

Or then again maybe Shaykh Khalifa is supposed to take care of this.  This is another thing I don't think he said he'd never do. 

Kuwaiti Banks Exposure to Saad and AlGosaibi - Update

AlQabas has an article 8 December noting that despite all the other issues in the market - Dubai, the world economic crisis - this one remains a major issue for Kuwaiti banks.

Here are the main points from the article along with my commentary in blue italics.

1.  Total exposure is not less than US$1.5 billion.  AA: Maan AlSanea is Kuwaiti by birth, former KAF pilot.  He would have the sort of connections that would overcome the general "silo focus" of local banks on their home markets.
2. Roughly 50% has been reserved to date according to sources at the Central Bank of Kuwait.  AA:  You'll recall this is the general level of provisions that the Central Bank of the UAE mandated for the non bank exposure to the two Groups - saying that it represented a consensus view of both local and international regulators.
   
3. Kuwaiti banks with exposure - save one it appears -  have formed a committee which reportedly includes Gulf Bank, Kuwait Finance House, Commercial Bank, Burgan Bank to conduct negotiations with Saad and AlGosaibi.  Efforts are said to be well co-ordinated.  The banks are speaking with one voice.
4. With respect to Saad, they have written to Saudi banks asking if a separate deal has been signed with Saad.  The existence of a deal has been mooted in the press several times.  The Kuwaiti banks reportedly are threatening legal action which they note in their letter they could direct at the branches and offices of Saudi banks in the West, e.g., London or New York.   This is similar to a letter that international banks have written to Saudi banks.  The Governor of SAMA has denied any side deal.  AA:  The fact that the letter was written even after the denial is an indication of lingering concern that there is some side deal for the Saudi banks.  As I've noted before, I was told there was a  similar side deal for Saudi banks in Redec rescheduling.  Certain government receivables were reportedly assigned to Saudi banks.  The foreign banks complained to no avail and eventually quieted down. So a similar fear that history will repeat itself.   As to the basis for the lawsuit, generally each creditor is on his own.  If he can get repaid, he doesn't have to worry about others.  The one exception to that rule is syndicated loans where banks pledge to share payments pro-ratably among themselves.  The only other avenue would be a general liquidation scenario where creditors should be treated on an equal basis.  I don't think most of the local jurisdictions have a well-defined concept of fradulent conveyance - preferring one creditor over another in some set period prior to a bankruptcy.  And even if they do, there has to be bankruptcy.  If the company keeps going, then it is merely negotiating individual deals with creditors about existing loans, just as it did when it took the loans out.
   
5. With respect to AlGosaibi, the Kuwaiti banks - along with others -  rejected the Group's offer to pay 9% with the rest of the debt forgiven as "sakhiif" - ridiculous/inferior. Apparently, some dismay that AlGosaibi didn't acknowledge the debts as a first step in the negotiations.   Also an assessment that negotiations - with both AlGosaibi and Saad - would be very difficult and might take three years.  AA:  I'm told in the previous great debt crisis of the mid 80's many Saudi borrowers did not earn high marks for ethics and fair dealing in their negotiations with lenders.  One of my mentors could be set into a tirade by the mere mention of the names of Shobokshi, Baroom, and AAA - where recoveries were pennies on the dollar while the obligors managed to protect their wealth.  Some of the assets were quite well protected from creditors.  The three year timeframe may be predicated on the time taken for the "oxygen strategy" described below to take effect.  Recall that Maan AlSanea is allowed a living expense by one Western court from his blocked assets.
   
6. Ahli Bank of Kuwait has chosen to pursue legal action against Saad in New York.  AA:  A court judgment is most easily used to attach assets in the jurisdiction of the court.   Otherwise the lender marches into a foreign court with his judgment and asks the local court to enforce it.   That doesn't work particularly well with the GCC.  Back in the USA, probably all of Saad's  major assets have been  identified and many banks are pursuing them.  The court appointed "administrator" for SICL (Caymans) has already been active in US courts blocking Saad assets.  Unless Ahli knows of something that others don't and can prove it belongs to Saad, it will be in a very long line.  Perhaps the suit is an attempt to pressure Saad for a settlement.
   
7. That the Central Bank of Kuwait is providing "every support" to the Kuwaiti banks.
   
8. The target will be to block the two Group's assets in Saudi Arabia first and then around the world.  An effort that is expected to be very complicated.  AA:  The idea is to cut off the borrowers' oxygen and force them to do a deal to unblock some of their assets and to be able to conduct their operations.
   

Assuming regulators are basically right about the level of provisions, creditors are in for a long and difficult process.  And probably substantial losses on these two names.

If you use the labels Maan AlSanea, AlGosaibi, Awal Bank and The International Banking Corporation, you'll be able to track back previous articles to get a more detailed picture.

Local Commentators: UAE Central Bank Unlikely to Require Provivions for Dubai World

The 8 December issue of AlBayan Newspaper Abu Dhabi contains an interesting article on Dubai World.

Looks like a piece designed to steer towards a goal:  no provisions for Dubai World.

The argument builds its case through a series of steps.

It begins by quoting unnamed British bankers as saying that the current negotiations would lead to a mutually satisfactory solution of a rescheduling.  AA:  As this story goes, it's a simple matter of coming to an agreement to re-time payments.  And such a mutually satisfactory agreement is close at hand.   No real problem.

Then Abdul Rahman Al Saleh, Director General of the Emirate of Dubai Finance Department, is quoted  that the Emirate of Dubai is fully capable of discharging its obligations.  AA:  A bit of misdirection.  The issue isn't the Emirate's capacity to service its debts but its commercial companies'.

Then he's quoted strongly refuting the assertion that the Government of Dubai had recently announced that it would never guarantee Dubai Group's debts as though it were a surprise.  He noted that the fact that Dubai Group's constituent documents clearly state that there was no guarantee and that it's appropriate to make a distinction between the Government and these companies such as Nakheel and Limitless.  AA:  If you thought you had a government guarantee, you were mistaken.  It's your own fault.  No quibble from me on this point.  Even though you might have noticed the Government of Dubai "logo" on the prospectus for the DEWA Sukuk (with the Government in the honored "on the left" position.  But buying financial instruments is just like buying toothpaste.  One has to be able to distinguish among the claims made.  Will this toothpaste really improve my social life?  Does this sukuk really have a government guarantee?  If you read the prospectus, you saw that it didn't!

Then Moody's is quoted that Dubai World and DEWA are fully capable of attracting new investments once the current hubbub quiets down.  AA:  I'd like to see the original.  I'll bet there are all sorts of caveats.  Higher pricing.  Limited amounts.

Then Jean Claude Trichet, Governor of the European Central Bank, that Dubai does not pose any sort of a real crisis to the world economy.  AA:  The collectability of the debt and its impact on the world economy are two different things.  The world economy does not have to collapse for a lender to lose a good portion of his loan to Borrower A.  Or Borrower "D".

Bankers and financial experts consider it unlikely that the Central Bank will require local banks exposed to Dubai World to take any provisions since it is a large company and still continues to enjoy the confidence of local and foreign investors.  As well since the company merely asked for an extension of payments and not any cancellation of its debts.  AA:  This is the heart of the argument.  Not sure the too big to fail argument works w\ithout a government guarantee.  Usually too big to fail is the argument for getting one.  Many large companies have gone "south".   Enron for one.   From the rush by various financial institutions to make it clear through public announcements that they have not extended credit to Dubai World, I'm guessing there's a strong argument against the maintenance of confidence by investors.  From the reaction of local stock markets, there's a similar indication.   Finally, let's wait to see the final restructuring package before we rush to determine that there is no haircut - either direct or indirect.  There are rumors that Nakheel and other companies were offering construction companies 75% payments as final settlements with a confidentiality/non disclosure agreement part of the package.   If they can't pay suppliers why should we think they can pay bankers?  To be fair as well we shouldn't yet be assuming there will be haircuts.

Of course the Central Bank will make up its own mind and will speak for itself. AA:  And here there will probably be public policy considerations mitigating against significant provisions unless the situation  becomes obviously desperate.  Likely outcome is to put a bandage on the wound and hope that a miracle cure is found in the not too distant future.

The Investment Dar - Press Release on Restructuring

The Investment Dar has issued a press release on the restructuring.

The tone here is quite different from that in the AlQabas article I commented on.

That of course is not unexpected.  There is always a great deal of sturm and drang in these negotiations.  Having been the "best" customer when times were good, the borrower becomes a veritable pariah when he advises the banks he cannot pay.  Restoring confidence takes a while and punctual performance of the restructured obligations.

And management's natural inclination is to put the best face on any development.  To appear to be leading the process and making necessary adjustments/concessions rather than being forced to do so.

Some similar points sounded in the press release to that in the earlier article:

1. A commitment to total transparency.  (That theme was sounded more than once in the AlQabas article).
2. An enforceable security package.  (The best kind of security package to have if you're a lender).
   
3. The Chief Restructuring Officer  will serve for the entire five-year repayment period.  (A minder since the creditors have evidenced some concern about existing management - enough so that they asked the Central Bank to appoint a monitor).

We'll get a better sense of the atmosphere when the creditors respond and when we learn more about the final shape of the restructuring deal.

Lending 101 - Cost of Tuition AED500,000 + AED2,000 Legal

The UAE Supreme Court has ruled against a local bank for unsound lending practices in a recent case.

“All banks should stop granting loans to limited-income people, unless within the limits of their capabilities,” the court said.

Sometimes one has to pay a price to learn the obvious.

UAE Market Volatility Continues

Contrary to reports this week that everything was just fine in local stock markets, there's been a reversal today.

Frankly, there's nothing surprising about this. 

Until there is more clarity on the restructuring and some progress has been made with creditors, market volatility should remain high.  Especially since this market and other GCC markets are largely dominated by retail trade.  

Qatar National Bank - No Exposure to Dubai World

QNB joined the parade of financial institutions disavowing any relationship with Dubai World with a one liner at the Doha Market this morning.

Central Bank of Bahrain - Dubai World Exposure Less Than 1% of Total Assets

 

HE Rashid AlMaraj, Governor of the CBB, said today as per Reuters that Bahraini banks' exposure to Dubai World was less than 1% of consolidated assets.

Deutsche Bank - No Exposure to Dubai World

As per Reuters, Henry Azzam disclosed at a conference today.

The Tail of Two Investments: Citibank and ADIA and KIA

No, AA's spell checker isn't off this morning, though it may take one more cup of Cafe Najjar to bring all the lights fully on.

Tail is a deliberate choice: 

1. Barring a miracle or a negotiated settlement with Citi, one is facing a substantial loss beginning next March.  
2. Another has just exited an from investment in Citibank at a hefty profit.   So we are at the tail of the investments.

The first is ADIA who back in November 2007 invested US$7.5 billion in Citibank mandatory convertible bond with an 11% coupon and conversion to take place between US$31.83 to US$37.24.  Around the time the deal was struck Citigroup was trading at $32 to $33 per share.  ADIA in effect sold Citi a put option (the right to sell Citi shares to ADIA at a fixed price).  As well  ADIA also gave Citi the first 17% of the upside (the movement in share price from $31.83 to $37.24).   ADIA only gets the upside  if the share price goes higher when for example say it would get Citi shares trading at $41 for $37.24.   An investor would do a deal like this if  its expectations for volatility in Citi's stock was low for  the option period. Or if it believed that volatility was all one way -- the upside.  ADIA recently was cashed out by Citi at the lower $31.83 price.  Citi's stock price is roughly US$4.00 now.  You can do the math on the  impending loss based on market price.   Here's an article from The National.  Recall AA's earlier post on the AED 1 billion camel.

The second are KIA who bought US$ 3billion  (I think Series B 1) from the US$12.5 billion convertible issue in January 2008 - roughly two months after ADIA's investment  The conversion price  was US$31.62 per share.  KIA has recently claimed a profit of US$1.1 billion.  Just in time for the interpellation sessions with the Majlis Al Umma.  You'll recall that earlier the MPs objected to the investment.   They say timing is everything! And that's not just investments but also politics.

Here's the WSJ article on KIA's US$1.1 billion profit.

So what happened?

As you'll recall, Citibank had an exchange offer mid year in connection with an "investment" by the US Government in its stock via the conversion of preferred shares.  Other preferred security holders were given the option of joining the deal. In fact it was a condition.  Uncle Sam agreed to match US$ for US$ any private sector conversions on these terms.  Some background here and here  and here.  In summary,  preferred securities could be exchanged for common shares at US$3.25 per share.  Citi was trading at approximately half that price at the time.

ADIA didn't participate in the exchange.  KIA did.

For the nominal value of its US$ 3billion of preferred stock, KIA would have gotten 923 million shares.   To reach the US$4.1 billion in sales proceeds mentioned in the articles, KIA would have had to sell at higher than the current US$4.06 per share.  Or  sell something over 1 million shares.  Perhaps it had an additional 86.8 million shares from capitalized preferred dividends?

Two questions remain:

1. Who bought KIA's stock?  At what price?
2. Can ADIA renegotiate its deal with Citi?  (It's unlikely the Citi's price is going to $31 in four months).
   

Global Kuwait to Sign Restructuring Agreement 10 December

AlQabas reports that Global reached agreement on the restructuring with its lenders 6 December.  A formal signing ceremony is slated for 10 December to be accompanied by a party and press conference.  The Governor of the Central Bank of Kuwait, Shaykh Salim AbdulAziz AlSabah,  has been asked to attend.

You'll recall that in yesterday's post on Global Ms. AlGhunaim had said that GIH had reached agreement with all but two of its creditors.

Good news for Global.

2-0 And I Am All "Stoked" Up

A victory and our backs to the 'Spurs.

Perhaps, Santa is responding to my latest letter.

Whatever the case,  another appeal. 

Red and White.

Aidan Birkett - Dubai World - Chief Restructuring Officer - Cultural Biases

An article from Maktoob Business on the cultural and other constraints to be faced by Birkett in Dubai.

If you read the article closely, you'll notice a strong undercurrent:  having made such a hash of things, the locals obviously can't be trusted to work their way out of the problem.   Culturally, they are just not up to it is the message.

So naturally we need to find an ex-region savior - preferably an expert from the West wearing a business suit.  To come in and sort things out.  To set the locals straight.  But will these incompetent locals let him save them from their follies goes the story?  Hence, the hand wringing over the obstacles in Mr. Birkett's path.  

But what should we then make of the recent "performance" in the more sophisticated financial centers  - the  subprime crisis, covenant lite loans, and assorted other manifest absurdities?  Where it should be  noted the amount of funds at risk in the Dubacle is but a rounding error in relation to the larger Western sums.

Will we soon be hearing calls for the dispatch of some sober looking chap in a thaub and ghutra to set the benighted fools in New York, London and other financial capitals straight?  Ever sensitive to the psychology of the less developed world, AA could suggest two Arab bankers who would arrive wearing business suits so as not to disturb local sensibilities in Europe or the States too much.  Dr. Naaman Al Azhari or Hassan Juma.   Let's hope that the locals' quaint but irritating folkways don't get in the way of  either of these khabir's work. 

It's important to be very clear about two things.

First, Mr. Birkett's position. 

He was hired as the Chief Restructuring Officer to come up with a restructuring plan. 

He is not the CEO to whom the CRO reports.  He is not the Board of Directors to whom the CEO reports.  He is not the shareholders to whom the Board reports.

He was not hired as a replacement for Shaykh Mohammad.  Nor did Shaykh Mohammad give him his shares in the company.

He is an employee.  He will give his advice and his client will either accept it or reject it.   In effect he is a mustashaar. 

Second, the capabilities of the locals in the GCC.

It's also important to understand that the people in the region and those in Dubai are no more a collection of incompetent fools than the financial titans in the West.  And no less able to take sage and sound advice.  And, yes, also subject to the same constraints that sometimes result in compromises between what should be done and what can be done.

Other Omani Banks Exposure to Dubai Inc

Again from Reuters.

1. Bank Dhofar - Nothing
2. National Bank of Oman - $22.6 million
   
3. Bank Sohar - US$4.3 million

Since HE Hamood Sangar AlZadjali, Governor of the CBO, said that the total exposure by Omani banks was US$77 million these disclosures plus that by Bank Muscat account for the total.   Again nothing here that will break any of these banks.