Dubai: "I Have Always Depended on the Kindness of Neightbors"

Apologies to Tennessee Williams for changing his words.  But casting Dubai as Blanche du Bois seems highly appropriate on a number of levels. 

Today, there is great joy in the financial world:  Abu Dhabi has bailed out Dubai.  Though at this point, we don't know what the conditions are.  Loan or grant?  Any quid pro quo?  Or perhaps quid pro the "quids"?

Like the drunk who has fallen in the river and been pulled out by a kindly stranger, it  is likely that bankers and investors have learned little.  They appear to be headed back to the Risk Saloon to start another bender.  This time it will be different though, they will lay off the "Jack Dubai".  Instead of Old Number 7, perhaps a spot of Black Label. 

Hedge funds and vulture investors are celebrating a quick buck made.  Perhaps the only ones with a claim to any glory.

The borrower is relieved.  It has been spared the humiliation of a formal default.  And Lord knows it's suffered plenty humiliation to date.  The beautiful dream, a modern day Belle Reve,  may be lost.  And despite their name the Elysian Fields are a bit more downscale.  Here's the official statement.

And one revised 45 or so minutes later to include a bit about how Dubai will remain an important global  financial center.  "I don't want realism. I want magic! Yes, yes, magic. I try to give that to people. I do misrepresent things. I don't tell truths. I tell what ought to be truth"  or so goes the script.

One wonders (well at least AA does) how this was overlooked in the initial release.  Initial excitement at the good news?  Lack of attention to detail?  A slip-up at WAM?  Suggestion from someone  higher up to get back on message? 

Women's Wealth in the GCC (No, Not a Marketing Pitch)

AlQabas had an article on the topic in its 12 December issue.

Unlike a previous article this is not a marketing pitch by some firm about how it can help wealthy GCC women manage their wealth, but a more serious discussion of women's place in Arab national economies.

Some highlights:

As per Kuwaiti businesswoman and economic expert, Safa AlHashim:

1. Between 2007 and 2008 the wealth controlled by Saudi women increased from SAR 412 billion (US$110 billion) to SAR 600 billion (US$160 billion).  (AA:  If you're wondering how a change from SAR 412 million to SAR 600 million works out to a 68% increase,  it would appear you've never spoken a Kuwaiti investor.  It may even be an 86% increase by now.)
2. Within the GCC women controlled US$346 billion in 2008. (AA:  I suspect this refers to the total assets under control.  So, for example, if a women controlled a company with $100 million in assets and $25 million in capital, the higher number would be used.  But that is not specified in the article.  It would be highly useful if it were).
   
3. Saudi women retained their number #1 position in 2008.  
4. Kuwaitias were #2 with US$75 billion, Emiratias US$55 billion, Qatarias US$35 billion, Bahrainias US$12 billion and Omanias US$9 billion.
5. GCC women's personal wealth was US$ 40 billion.  (AA:  This is the reason for my comment in #2 above).
   
6. It's expected that by 2011 the amount under control will be US$385 billion.
7. Saudi women have 11 billion in current accounts (not specified if US$ or SAR).  They own 40% of all family companies, almost a third of all brokerage accounts, and control 20% of the capital of Saudi mutual funds.  (AA:  It appears that the first two metrics are by number of accounts and companies and not by value thereof).
   
8. Women in the GCC constitute between 15 to 25% of the actual work force.
9. Women should be given their proper role in the economy as they can serve as a key to development.

The article then quotes Dina Quduh from the Union of Arab Banks:

1. Arab women's participation in the labor force is increasing.
2. However, the Arab World needs to create 100 million jobs before 2020 to absorb the growth in the potential work force.  At 2020 it's expected that the Arab World will have 300 million inhabitants - most of them between 12 and 24 years old.
3. Women are 50% of the potential work force, but are underutilized.  Their unemployment rates are between 20 to 40%. 
4. The average women's employment in the Arab World is 32.7% with the lowest percentage in Oman and highest in Qatar.

Finally, Bahraini banker, Najah AlAli is quoted as attributing the low level of women's participation in leadership roles in the banking and finance sector to local culture, established ideals of the inferiority of women, and concepts about their intellectual and leadership skills.  She also blamed a lack of implementation of laws and regulations for equality as well as weakness in co-ordination between the public and private sector in setting and implementing a national strategy.

Emirate Real Estate - Saudi Investors' Perspective

Today AlRiyadh published interviews with two Saudi investors in the UAE real estate market: Muhammad Bin Husayn AlNimr, Marketing Manager of Awali Real Estate (described as one of the largest Saudi companies investing in real estate in the UAE) and Muhammad AlJarbu', a major investor in Dubai real estate.

The article leads off by noting that Saudis have invested approximately SAR100 billion (US$26.7 billion) in UAE real estate.

Here are highlights from AlNimr's interview:

1. In summary, he thinks rather than massive losses, Saudi investors will see much lower profits.  He estimates it will take five years for prices to recover to their previous high levels.
2. The main problem Saudi companies face is purchasers paying the installments  for the units they have bought.  Their own repayment of bank debt or access to bank credit is a much lesser issue.
   
3. Payments are not being made for two basic reasons.  Either the individual can't pay.  Or has decided that with the fall in real estate prices it's better to walk away.  The loss of the installments already made is outweighed by paying the old market price for a much depreciated asset.
4. Sales levels have fallen by approximately 75% from a year ago.  So it is difficult to find new buyers for property as it comes on stream.  And perhaps more importantly to buy the defaulted units.
5. Many of the buyers purchases were financed with loans secured by their salaries (AA:  A typical bank "security package" for personal loans in the region - though not as typical as before.  The borrower agrees to have his salary deposited at the lender who then deducts the monthly debt service payment).  
6. As a result, lenders face difficult choices when employees lose their jobs.  What he describes as the difficulty facing US banks.  Take the property in satisfaction of the loan, but watch it decline in value with eventual sales below the capital of the loan.  He describes as a "vortex or whirlpool" of losses.  (AA:  How developers are not going to be sucked into the vortex is hard to imagine.)
   
7. He also notes that banks have stopped "name lending" to projects.  (AA: That is lending on the reputation of the borrower - project developer in this case - without too much focus on the economic fundamentals of the project a la Saad and AlGosaibi).
8. Banks have not yet begun seizing real estate projects but have slowed or stopped additional lending to them.  His belief is that they will only do this when the distress is abundantly clear.  (AA: Remember this is a developer/real estate company spokesman and not a banker.  A key characteristic of a real estate developer is optimism).
9. This is temporary crisis which he expects to end soon.  A bit of rescheduling of loan repayments will  set everything right.  (AA: Remember this is a real estate developer speaking.  Think of "The Donald" and you'll have an insight).
   
10. Finally he ascribes the problem to Dubai's excessive use of short term debt.  He believes that if they had used longer term financing no crisis would have occurred.  (AA: The Donald mentality again.  Apparently, he sees little reason that real estate prices need to be anchored to economic reality).

Muhammad AlJarbu' (described as having special expertise in Dubai):

1. A decline of between 35 to 40% in the price leased properties in Dubai.  Elsewhere in the Emirates about 50%.
2. Almost a standstill (rukud) in the sales of units - down 75% from the prior year.
3. Only two nationalities are active - based on their faith that this is a temporary problem.
   
4. Saudi investors are hunting for bargains.
5. Most nationalities not buying save for the Russians.

In addition to the insights these interviews provide, there are two other points worthy of note:

1. The potential for an additional wave of credit and economic distress as the buyers of properties default.  Previously booked sales and profits may need to be reversed.  Banks and other lenders may face a tsunami of bad loans.
   
2. The reality that the problem is not only a problem for Dubai Inc -the Dubai Government  and its independent commercial companies - but that other parties are going to feel real pain.  Developers,   end unit buyers, the banks who financed both as well as contractors, building materials suppliers, and household furnishings retailers.  And those who work for them or supply them various ancillary services.  Simultaneously, a proof of the validity of the Chicago School "price theory" as well as refutation as the market price seems to have been wrong for a prolonged period and sent highly distorting signals - the wreckage of which will have to be picked up for some time.
   

2-1!

Bit of a scare there.

Looks like there's been an increase in the value of "premier" real estate, particularly "villas" in the Birmingham area. 

Hopefully, just a temporary phenomenon.

Middle East (UAE and GCC) Finance and Investment News

Another blog added to the links of Interesting Blogs and Other Links.

Link here.

Dubai Owes Japanese Non Financial Firms US$7.5 Billion

Singapore's "Straits Times" reports that Dubai owes Japanese general contracting, trading, and equipment manufacturing companies the equivalent of US$7.5 billion.

US$1 billion of this amount is overdue.  Some for over one year.

The disturbing element is that some of the projects are for government works which could mean that the Emirate itself is having cash flow problems.

You'll recall there was an earlier uncharacteristic complaint by Japanese companies and diplomats about unpaid bills.  You know when that happens that serious amounts are at stake and are well past due.

Riding the trade (failing to pay suppliers on time) is a "time-honored" (though not necessarily honorable) tactic of the company without money.  As is then pushing the trade for haircuts on  their invoices.  While these tactics don't work well with banks, they have been successfully used with non financial firms.

Nakheel Bond - Payment in Cash and A New Bond

Apparently, there is some talk in the market that Nakheel will offer a partial cash settlement and a new bond for the 14 December payment.

Since many hedge funds and other distressed debt traders bought at a discount, depending on the price Nakheel offers, this might be an attractive offer.  With the "right" amount, they could exit at a cash profit to the cost of their initial investment.  And then hope to secure a better terms/security package on the remainder.  The bond could be disposed of for another cash payment.  And a creditor buying in at a steep discount (recall Nakheel bonds were trading in the 50 cent range) could make a tidy profit in a short time.

At this point, this is just market rumor and may be nothing more than market participants talking among themselves or to themselves.  And since there appears to be little communication from the borrower, it may be the only dialogue available at the present. 

One would think that the obligor would have raised this concept earlier (before the maturity date).

There is a 14 day grace on the payment so perhaps the strategy is to have the shock of the non payment on Monday followed by a "generous" offer on Tuesday as a way of getting creditors to sign on.    Or perhaps events are moving so rapidly and so unexpectedly that the borrower is playing a bit of catch-up to the market reaction.

In any case, I think that if this is the intent, it would have been better for Nakheel to raise it earlier.  Markets don't like uncertainty.  And the more the uncertainty the less confidence creditors have in their borrowers.  Not a good thing for borrowers.  Though I suppose the consolation is that creditors are notorious for the ADD.  Delays and losses are only a temporary form of Ritalin.

The Investment Dar Restructuring - Push to Secure Creditor Agreement

AlQabas reports that the Creditors Co-Ordinating Committee ("CCC") is undertaking a series of urgent visits on creditors in an attempt to convince them to quickly sign on to the proposed restructuring before the 23 December deadline.

Their two major concerns.

1. The impact of another missed deadline.  
2. The desire to have the restructuring implemented by February 2010.

Of the two, the first has to be the major concern.  If there is another disappointment, could it break the existing group in favor of doing a deal?  And for TID itself, another delay could mean even less chance (and I think the probability is quite low now) of ever emerging from the restructuring as a going concern.

A major focus appears to be Noor Investment Company.  You'll recall that Noor had lodged a lawsuit against TID, which it lost.  However, it seems it has another legal action planned - a new case which will enable it continue its "legal pursuit" of TID.  The CCC is trying to convince Noor that its "best choice" is to agree the restructuring because the affairs of the company have been put in order, the assets blocked and evaluated, and the financials sent to the Central Bank for its approval.

Apparently, Noor is able to pursue its case whether or not it agrees to the restructuring.

A recap of the current situation and some conclusions:

1. As per the last account, some  66% (by amount) of creditors reportedly had signed on to the restructuring. 
2. The Investment Dar Bank Bahrain ("IDBB") was identified as the  major holdout with some 27%  by amount of the outstanding debt. Sources at TID expressed confidence that IDBB would shortly agree. 
3. Since there is no equivalent to Chapter 11 in Kuwait, 100% agreement needs to be obtained. in order to "close the deal".   Dissenting creditors cannot be "crammed down". Hence the CCC's recent actions with non responding creditors.
   
4. It seems pretty clear that there is difficulty in getting the remaining creditors on board.   Perhaps some are waiting to see if the CBK will approve the financials though one would expect that  creditors would have already been given a sense of the contents.  There is also the perennial problem with deadlines:  many will wait until the last possible minute to make up their minds. 
   
5. It's unclear if IDBB has agreed.  One would expect if it had that the CCC and TID would be trumpeting this as a way of creating a bandwagon effect.  In such a case it should be fairly easy  (that's a relative term) to sweep up the remaining 7%.  
6. If IDBB has not yet agreed, TID could be in real difficulty. 
7. The news about visits and a last minute push with non responding creditors implies that things are not going as planned.  Or not going as fast as planned. 
   

As outlined in my previous post, I view the restructuring as a controlled liquidation.   In such a case it's hard to understand why a creditor wouldn't sign up.   The mere fact that the deal is structured as a liquidation means the borrower's situation is dire and there is a risk of less than full discharge of the debt.  Having a legally enforceable charge over the assets and control over their disposal seems to me  a more attractive option for creditors than fighting over the carcass.

The only reason a creditor wouldn't sign up is if he thought he could get a higher recovery by going alone or could somehow force the terms of the restructuring to be revised. Hard to see how the latter would apply so more likely than not it's the first motive at play.  Perhaps, a hope that as a small creditor, the larger ones will buy out one's claim to close the deal.

One counter strategy is to treat dissenting creditors as having agreed.  Under this tactic, payments are made to them in line with the restructuring.  The hope is that while they have a legal right to payment as per the terms of their original contract and a right to sue to enforce that contract, the borrower can tie them up in court for a prolonged period.  Ideally the period of the restructuring or close to it.  And that the court will consider the payments as the borrower's attempt to satisfy the debt.  At some point if enough progress is made in repayment, the dissident creditor may just "give up" pursuit as not being worth the  cost -both direct (legal and other expenses) as well as indirect (time and effort).  Not without risks,  But a potential alternative.

Kuwaiti Ministry of Commerce and Industry Refers 11 Real Estate Companies to the Public Prosecutor re Foreign Real Estate Sales

Another AlQabas report.

At the end of last week the Kuwaiti MOIC referred the names of 11 companies to the Public Prosecutor for failure to comply with regulations concerning the sale of real estate outside the country. 

Local regulations require that the MOIC approve any such sale and that each sale be documented by (a) an official power of attorney from the company (owner) for the sale, a deed certified  by an official organization confirming the ownership (this is presumably by an official agency in the country where the real estate is located), and as well certified by the Kuwaiti Embassy in the country where the real estate is located.

Apparently, one can't be too careful.  And who would better know local business practice than the local MOIC.

Changes in Board at Aref Investment Company?

AlQabas reports that there will be a signficant change in Aref's Board of Directors - a major figure will leave next year.  The delay in the change is attributed to the financial crisis.  The replacement is said to be aware of the company's internal and external circumstances.

Those who read this blog and Arabic will recall that Aref posted a KD55.1 million loss for the first nine months of 2009 versus a KD39.6 million profit for the same period in 2008. 

Looking at the Arabic financials, here's a bit of tafsir for those interested.

The first line 55 million and 17 million losses are respectively for 9 months and 3Q09.

The next line are per share earnings for the same periods.

The next line is current assets - roughly 330.5 million.

The next line total assets - roughly 780.9 million.

Then follow current liabilities - roughly 366.6 million.

Then total liabilities - roughly 491.9 million

Then total equity - roughly 245.1 million.

If you're wondering, yes, even in Kuwait  the balance sheet must balance.  The missing amount - roughly 43 million - represents minority interests in Aref.

The comparative figures for 2008 are below with net income at 39.6 million for nine months and 12.1 for 3Q08.  With this you should be able to match the other numbers here using the 2009 data as a guide.

Earlier Aref financials are at the KSE website.  Here.

Aref also won a first round suit against The Investment Dar as previously detailed here and here.

Dubai Five-Year Credit Default Spreads

Not surprisingly, after the announcement by Dubai World that it was seeking a six month payment standstill for certain of its subsidiaries, the market began re-rating those companies' risk. As well, the market also began taking a closer look at the risk of the Emirate itself.  And country risk in general.

Using four data points – two days just before the announcement and this Tuesday and Wednesday – we can see the impact. Data is from Markaz Kuwait. Links to their GCC Fixed Income Reports are in the table immediately below.  Click on the dates to access the reports.  Note the CDS data in a report is from the close of the previous day.

23 Nov	24 Nov	8 Dec	9 Dec
306.7	323.4	559.4	598.71

The increase is 292 basis points or 95%. To put this into context, a 10 basis point increase in the credit spread on US$1 billion results in an extra US$1 million in debt service.   Note: a change in credit default spreads does not change the credit spread on existing debt. It might, however, influence the price on new debt.

We can also compare the impact on several other states in the region and use the changes in their CDS spreads as a context in which to view the market's reaction to Dubai.

Country	23 Nov	24 Nov	8 Dec	9 Dec
Abu Dhabi	99.7	99.99	145.56	177.32
Dubai	306.7	323.4	559.4	598.71
Bahrain	172.02	171.94	209.78	212.22
Qatar	93.83	93.57	111.68	119.38
Saudi	74.9	74.9	95.7	98.51
Egypt	217.7	217.7	240.0	241.6
Lebanon	259.98	259.99	269.6	269.6
Turkey	192.24	195.3	192.08	192.08

The major impact as expected is on Dubai.

However, Abu Dhabi was affected as well with a 77% increase in its CDS spread. This makes little if any sense. The Emirate has substantial financial wealth and an even more substantial liquid "bank account" (oil) in the ground.

Bahrain's CDS went up 40.2 basis points, roughly 23.4%. Qatar's up 25.6 bp or 23.6%. Saudi's up 23.6 bp or 31.5%.

Lebanon's moved up 9.6 bp - a negligible 3.7%.  Considering the credit metrics of Lebanon, one might wonder as Qifa Nabki did in a recent post about Lebanon's capacity to service its debt.

And for added context here are some ex-region comparatives.

Country	23 Nov	24 Nov	8 Dec	9 Dec
PR China	78.62	78.62	98.51	75.1
France	27.0	27.11	26.83	28.05
Germany	22.42	23.32	22.94	24.46
Japan	70.9	71.58	91.78	66.5
UK	65.71	66.8	77.04	83.74
USA	31.83	31.83	33.49	34.96

From this chart, it's clear that 9 December was either (a) a day of higher than usual nervousness or (b) a day on which one or two counterparties were shedding risk in their portfolios. Presumably, now that the market has rediscovered (but if history is a guide, only for a while) country risk, some financial institutions may be moving to trim down outsize exposures through buying a bit of insurance.  In this process, the UK suffered the most damage with an 18 bp increase or 27.4%.

Some caveats:

1. The CDS market is thin.  Several same direction trades (all buys or all sells) can move the market price.
2. As with other financial instruments, sometimes sophisticated market participants engage in herd behavior and are known to be prone to irrational exuberance or stark terror.  
3. As mentioned above, a change in the CDS spread does not automatically change the credit spread on an existing loan or bond.  It may however influence the price at which new debt is raised.
   

The take away is that these price changes are not necessarily an accurate reflection of credit risk as I hope the changes in spreads on Abu Dhabi and Lebanon note show. 

In fact Bill Gross at PIMCO (Pacific Investment Management Company) is buying up Abu Dhabi and Qatar bonds believing they are mispriced and that he can get a bargain now.  Bill is such a large player that his deals can move the market.  

Apparent Dramatic Improvement in GCC Security? Or Outbreak of Diplomatic Illness?

The Sixth Annual International Institute of Strategic Studies Regional Security Summit is being held in Manama from 11 through 13 December.

In an apparent sign of markedly decreased tensions in this formerly volatile part of the world, neither Secretary Gates from the United States nor the Foreign Minister of France, Bernard Kouchner, needed to attend. Secretary Gates was in Kirkuk for a clearly much more important "sunny day town hall meeting" with 300 US troops. Foreign Minister Kouchner was in Paris to join President Sarkozy for critical meetings with President Mubarak of Egypt who is arriving Sunday, which coincidentally is the last day of the conference.

Completely unrelated to this bit of news were the comments by the Foreign Minister of the Kingdom of Bahrain, Shaykh Khalid Bin Ahmed Al Khalifah, against imposing additional sanctions on Iran and criticizing the exclusion of the Arab states of the Gulf from the negotiations with Iran.  And it appears even more comments here.

Also completely unrelated to both was the reported presence of the Foreign Minister of the Islamic Republic of Iran at the conference.

GCC Real Estate Projects - A Survey

With all the discussion about the fall out from real estate  in Dubai and the declines in real estate elsewhere in the GCC, I thought it would be useful to provide a bit of macro context. 

Luckily, Global Investment House has recently issued a report on the GCC real estate sector. You'll have to register to get the full text.  Click here to do so.

Based on information from MEED Projects, they've compiled a comparable table across the six members of the GCC.

Amounts in Billions of US Dollars

Country	Nov 2009	Nov 2008	% Change	Held Projects	% Held
Bahrain	$ 68.3	$ 57.7	+18.3%	$ 9.1	11.8%
Kuwait	$ 271.5	$ 298.7	- 9.1%	$ 41.0	13.1%
Oman	$ 104.6	$ 106.4	- 1.7%	$ 6.7	6.0%
Qatar	$ 204.8	$ 216.9	- 5.6%	$ 7.9	3.7%
Saudi Arabia	$ 609.4	$ 606.5	+ 0.5%	$ 39.2	6.0%
UAE	$ 915.9	$1,228.2	-25.4%	$368.2	28.7%
TOTAL	$2,174.5	$2,514.5	-13.5%	$472.1	17.8%

At 42.1% the Emirates' share of real estate projects seems outsized relative to their population as a percentage of the GCC total or to their economy as a percentage of GDP total. When the held projects are factored in, their share goes to 48.5%.

That level of activity could be the sign of several things:

1. Severe underdevelopment relative to the rest of the GCC.  I think we can rule that out.
2. A speculative boom.  From the nature of the projects, this is the leading candidate.
3. The development of needed infrastructure.  For anyone who has endured the traffic jams in Dubai or elsewhere in the GCC,  the Dubai Metro seems a worthwhile project.  But this does not seem to me to the major driver of the activity.
   

I suppose an argument related to #3 above is that they are developing the next London or Manhattan.   To paraphrase  "Field of Dreams":  If you build it, they will come.  

Not sure I buy that there is a need for a major financial center between Hong Kong and London.   Nor that there is any "natural" location for any such additional center.  Capital is highly mobile these days.  There are few to no impediments to cross border flows.  And the state of today's communications has eroded whatever earlier benefit there was from having a physical presence in a specific location.  If the new center must have a "seaside" location, Shanghai or Mumbai could serve as well as Dubai.

It's more likely that a regional center will arise in the GCC, but I doubt that at present it would need to be as large or as elaborate as London or Manhattan. 

The critical work that needs to be done is building another form of infrastructure:

1. The creation of a set of appropriate laws and regulations
2. The development of a cadre of trained judges and lawyers to implement them
3. Enhancements and actual implementation of accounting standards and regulations
4. Establishment of a sovereign bond curve as a benchmark for pricing other issues in the debt markets
5. Greater institutional participation in local stock markets 
6. More liquidity in both debt and equity markets - not only in terms of demand but also on the supply side. 
   
7. On the debt side many of the issues are not traded, particularly the Islamic structures.  Or to be more precise not traded in local markets.
   
8. The free float on many equity issues is rather shallow.   Relatively small transactions can move the price disproportionately. 
   
9. And in certain markets there are sadly issues with brokers and market makers - who seem more focused on making a market for themselves than for their customers.  Though to be fair this is not just a GCC phenomenon.  
10. Finally, there is the "silo" nature of the GCC.  At this point, countries by and large stick to their own national business.  There isn't a lot of cross border investment. 
    

Governments in the area are not oblivious to these issues as evidenced by the initiatives launched QFC, DIFC, the Saudi CMA and in Bahrain. 

There is also another issue and that is the nature of the market.  Is the market intended to be one that  primarily mobilizes capital for local use?  Or one that provides funding to other geographic regions?  

For the first alternative, Saudi Arabia would seem the natural site given its population and major share in GCC GDP.  One could I suppose argue that as happened with commercial lending in the 1980's, a nimble neighbor with a more congenial regulatory regime and living conditions could play this role.  There are two major differences between then and now.  First, GCC nationals have the primary role in financial firms - at all levels.  There is less need for Western experts to be parachuted in.  And thus less need for concern about their life style preferences.  Second, the Kingdom is not sitting on the sidelines watching others develop an offshore center to serve the Kingdom.  New regulations - particularly those from the Capital Markets Authority are designed not only to foster the development of the market  but also to "encourage" foreign firms to open offices in the Kingdom. 

Is there a role for a regional Hong Kong?  Perhaps.  And several contenders as well.

Real Estate Gets Sick But It Doesn’t Die

Many of you out there will recognize this saying so beloved of those in the GCC.

But two things that aren't are covered in the saying are:

1. How severe the illness can be.
   
2. How long the convalescence is.
   

Much has been written about the follies of the "locals" in the GCC with their real estate investments so much that AA has been thinking about enlisting "The Donald" as another of the experts from the West who might come to help put things right. He's got quite a track record especially with his gaming properties – which in true fashion he's bet the house on a couple of times, lost, then won. Sadly, each time his stack of chips seems to get smaller.

Here's a link to some other stories detailing how one can make a small fortune in the real estate business. As another old saying goes, the first step for many is to start with a large fortune. Link here.

Emirates Airlines US$1.3 Billion Financing

The press is reporting that Emirates has raised US$1.3 billion in financing for six A380 aircraft from Citibank and Doric Finance UK.

A couple of observations:

1. The financing is supported by guarantees from the export credit agencies of France, Germany and the UK.  In effect the lenders are not taking financial risk on Emirates or Dubai.
   
2. In most cases, the ECAs require that the loan be structured as a finance lease.  A special purpose entity ("SPE") is the owner of the aircraft and it leases it to the airline.  This is designed to give the ECAs a greater ability to repossess the plane if the airline doesn't pay.  To that end there is a special convention under Unidroit (the so-called Cape Town Convention) which embodies international agreement on this security structure.  More on the Cape Town Convention here.  The UAE is a signatory to the Convention.  The ECAs generally only lend to borrowers from a country that has signed the convention.  And the SPE has to be incorporated in such a country.
3. Also it's important to note that ECAs will often extend credit to borrowers that the free market will not support, either because of concerns about their creditworthiness or the terms of financing (tenors, rates and other conditions).  As government agencies, the ECAs are in the business of promoting their nation's exports through the provision of financing.
   

All this is not to say that Emirates is a bad risk.  But portraying access to ECA finance as a sign of robust financial health is a bit of an overstatement.  

Thor Asset Purchase (DEWA) Bond Holders Waive Acceleration

DEWA (Dubai Electricity and Water Authority) has issued a statement that payment on the Thor Asset Purchase Company ("TAPC") securities has not been accelerated.

TAPC is an asset backed security ("ABS") based on DEWA customer electricity receivables. 

Apparently, the transaction requires that DEWA maintain a Fitch rating above BBB or the purchasers have the right to demand early repayment.

Middle East Economic Digest ("MEED") has the fullest story I've seen to date. 

That is, in a nutshell, that the holders of TAPC waived the right to early repayment.  It's unclear whether the waiver was absolute or whether it was conditional.

Nakheel - Intercompany Funding

Looking at the pattern of intercompany funding at Nakheel from fiscal year end ("FYE") 2005 through 30 June 2009, it's clear that during the second half of 2008 there was a fundamental change.  Prior to that point Nakheel was a net debtor to the "Group".  At 30 June it was in rough balance.  In the happy state of  being "neither a lender nor a borrower".  After that period it became a net provider of funds to the Group.  And for quite significant amounts.   In fact for an amount that would allow it to settle the 14 December Sukuk without any difficulty.

A real estate development company is a heavy consumer of cash.  It supports its assets through a combination of accounts payable and accruals which would include construction and other costs.  As well as from advance payments from customers.  And debt.  Lots of debt.  It's rare that a company involved in development is a cash cow - a provider of funds to other members of its group.  Usually the holding company arranges cash for its real estate subsidiary.   It's hard to imagine a company still actively developing mega projects raising cash to fund the parent.  But it's this latter behavior which seems to have occurred sometime after 30 June 2008.

That timing coincides with the recent economic slowdown.  And my guess is that Dubai World needed cash and Nakheel was a convenient source.

Let's look at the history using Nakheel's financials.   We'll use annual reports to look at two years data in most cases.

Some "tafsir" on notation.

1. DF = Due From.  These are amounts that related companies owe to Nakheel.  They are in effect extensions of credit by Nakheel.  They would appear in the balance sheet under the caption accounts receivable on the asset side of the balance sheet.  
2. DT= Due To.  These amounts are owed to Group companies by Nakheel.  And are a form of borrowing.  They appear under the caption accounts payable on the liability side of the balance sheet. 
3. There is also the Shareholders' Account which is another source of funds.  The treatment of this changed during the period.  In the earlier years it's reported separately and must be factored in to the DT position.  For example, in the 2006 annual report.
   
4. DF-DT = Net position.  When this is negative, the Group is funding Nakheel.  When it is positive Nakheel is funding the Group. 
   
5. There is also a category appearing on the asset side of the balance sheet "loans to a related party".  These are all loans to Dubai World.  The DF and DT assets and liabilities are not only to the parent but to other related entities, which would include the government.  Keep that in mind as we go through the analysis.  I think it's very relevant for the 30 June 2009 position.
6. There is of course nothing sinister in intragroup transactions.  These can be part of the normal course of business.  What one does look for are patterns and changes in pattern.   In the amounts involved.  Or the net position among the firms.  Has a cash user suddenly become a cash provider.  These might be indications that something has changed.
   

Now to the data.

1. At FYE 2005, Nakheel's Net Position was AED0.3 billion - AED 8.4 billion = AED8.1 billion.    There were no loans to related parties.  The Group was funding Nahkeel in an amount of AED8.1 billion.
2. At FYE 2006, Nakheel's Net Position was AED0.6 billion - AED 6.7 billion = AED6.1 billion.  There were loans of AED2.8 billion from Nakheel to Dubai World.  Thus the net position was Group funding to Nakheel of AED6.1 billion - AED2.8 billion or AED3.3 billion
3. At FYE 2007, Nakheel's Net Position was AED 1.8 billion - AED6.0 billion = AED4.2 billion.  Related party loans were AED2.5 billion.  Thus the Group was funding Nakheel for AED1.7 billion (AED 4.2 billion - AED 2.5 billion).
4. At 30 June 2008 the Net Position was AED1.3 billion - AED6.1 billion = AED4.8 billion.  At that point related party loans were AED4.8 billion.  Thus, there was no funding either way - AED4.8 billion - AED4.8 billion.
5. At FYE 2008 the Net Position was AED8.3 billion - AED4.5 billion = (AED3.8 billion).  This is the first time the Net Position has been negative.  As well there were related party loans of AED 9.3 billion.  Thus, Nakheel is now funding the Group for AED13.1 billion.  And that coincidentally is a bit more the amount of the payment due 14 December of AED12.9 billion.  And one might make the argument that the borrowings during 2008 by Nakheel of US$750 million (AED2.1 billion) and AED3.6 billion largely were used to fund Dubai World.  Why?  See below the analysis of the growth in Accruals and Advance Payments.
   
6. At 30 June 2009, the Net Position was AED10.1 billion - AED 7.1 billion = (AED3.0 billion).  Related party loans had increased to AED9.8 billion.  Thus, it appears that Nakheel is funding the Group for AED12.8 billion.  But, the AED 3 billion loan received from a related party came from the Dubai Stabilization Fund (technically a related party) but not from Dubai World so the funding position vis-a-vis Dubai World is actually AED15.8 billion.

 Growth in accounts payable and advances.

1. FYE 2005:  AP = AED 4.1 billion,  Advances=AED15.5 billion.
2. FYE 2006:  AP=AED12.4 billion.   Advances=AED09.7 billion.
3. FYE 2007:  AP=AED14.1 billion.   Advances=AED12.2 billion.
4. 30June 08:  AP=AED16.3 billion.    Advances=AED18.4 billion.
5. FYE 2008:  AP=AED22.8 billion.    Advances=AED28.8 billion.
6. 30June 09:  AP=AED28.6 billion.    Advances=AED27.9 billion.

The debt raised wasn't used to pay these liabilities down.  Nor was it devoted solely to construction and other development costs.  If it had been, then Nakheel would not have been able to fund the Group.

On a related note, these amounts should be considered among the liabilities that Nakheel has to pay or restructure along with their debt instruments.  Though it should be noted that customer advances are repaid by handing over the promised real property to the client.  It's only in the case of a failure to build and deliver the property that a refund would be due.

The point of this is that even if the restructuring is limited to Nakheel and Limitless there is a lot more than US$26 billion in liabilities to be dealt with.

Global Investment House - Restructuring Agreement Signed

Global Investment House issued a press release to announce that it has signed an agreement with its bank lenders for a rescheduling. You'll recall that there is no restructuring for GIH's bonds, though GIH has provided collateral.  But see the "devil in the details" below regarding pro-rata application of repayments.

Here are some of the points from the press release that caught my eye along with my comments in blue italics.

1. There has been a fundamental change in GIH"s business away from more capital intensive  proprietary and real estate investments.   AA:  The new GIH is going to be a much different entity focused on client services:  asset management, investment banking and brokerage.  It will have a much smaller balance sheet.  As a result it will require less debt.   
   
2. Assets from the discontinued lines of business have been segregated into two separate companies., structured as funds.  One in Bahrain to manage equity investments (proprietary investments) and one in Kuwait to manage real estate investments.  AA:  The fund structure allows GIH to sell off shares to investors - which could prove another way to secure funds for debt repayments.   As well, the entire companies could potentially be sold to another fund manager.   That being said, the most likely scenario is asset sales.  Looking at GIH's 30 September 2009 financials Note 26 Segmental Analysis, you'll see that these two areas account for KD866 million or roughly  88% of GIH's total assets.  While accounting rules require that assets be allocated to business segments, management has some discretion in the allocation. And every asset has to have a segmental "home" so this is an approximation - though probably reasonably close to actual.
   
3. These two companies, the proceeds of their activities, and other assets have been pledged to the lenders. As well there is a telling phrase near the end of the description of the new facilities - that   "certain of Global's other income streams" have been pledged.  AA:  I'm reading that latter comment to mean that revenues from asset management, brokerage, etc. have been pledged.  Lenders who are owed roughly KD615 million (KD500 million in  loans and KD115 million in bonds) want to have a sufficient over collateralization in case asset realizations fall short.
   
4.  The new facilities have a three year tenor and are amortizing.  AA:  This is a relatively short period.  If markets recover slowly, GIH may be forced to sell assets at less than ideal prices.  It would have been better - and I think not represented a material increase in risk - to give Global a four year tenor.   Also note that there is a 1% step up in the interest margin on the loans each year from the first year's margin of 1.5%.  The idea is to create an economic incentive to GIH to pay.  And to compensate lenders for additional risk.
5. Lenders and bondholders share pro-rata in the asset realizations and other payments.  AA:  I think the three year tenor of the loans and this mechanism answer why the lenders agreed to let the bondholders keep their original maturities.  The banks have a similar maturity - the bond payments are heavier in 2012 and 2013.  And payments are going to be applied pro-rata.
6. GIH has shareholder approval to issue 1.5 billion new shares at KD0.110 per share (a KD0.010 premium to the nominal value).  A share issue is not planned immediately, but later when market circumstances are favorable.  AA:  Shareholders would naturally be reluctant to put additional capital into Global unless they were sure the funds were going to be used to develop the business and not merely to pay off the lenders. 
   

GIH has a restructuring deal with its lenders.

The terms are tight:

1. GIH's business model has been changed.  I think this has more to do with the lenders than with a change of strategic heart at GIH.  It's hard to imagine the lenders allowing GIH to conduct business as usual, particularly in areas that demand significant new capital during the three year rescheduling period.   
2. The company has been effectively mortgaged to the banks.  
3. The three year tenor and increasing interest margin place pressure on the company to liquidate assets.  I think these two elements are potentially onerous.  Creditors have a duty to their stakeholders to get their money back.  They also have a duty not to harm their borrower if they can.  
4. GIH's strength has been its asset management business (seeded by the KIA where Ms. AlGhunaim worked before joining the firm).   At 30 September Global had some KD2.2 billion in assets under management.  It also has a reasonably good track record with its funds.  So there is a solid basis on which to base a continuing business.
   
5. It's likely that Global will emerge from the restructuring.  However, it will be a much different and slimmer firm than it was in 2007.

The Gulf Curve Blog: Interesting Analysis on GCC Bonds

The GulfCurve blog has a very interesting analysis of GCC credit spreads with a focus on the impact of the Dubacle.   Well worth a read.

Ibn Kalb Ends Piracy

The National reports on a low tech way to prevent pirate attacks.

“Fear will spread throughout the community and young men will not volunteer to join.”

Except for the ships' crews.