Saudi CMA Approves 41% Reduction in Kingdom Holding Capital

The Saudi Capital Markets Authority has approved an approximate 41% reduction in the paid of capital of Kingdom Holding Company subject to approval by shareholders at an  Extraordinary General Meeting.  Securing shareholder approval won't be a problem as Amir AlWaleed owns 95% of KHC.

The proposal is to reduce the number of shares from 6,300,000,000 to 3,705,882,300 and the capital from SAR 63,000,000,000 (US$16,8 billion) to SAR 37,058,823,000 (US$9.9 billion).

As per information at the Saudi Stock Exchange, KHC's shareholders' equity has decreased from SAR51.2 billion (US$13.7 billion) at 31 December 2008 to SAR22.3 billion (US$5.9 billion) at 30 September 2009.

A bit of hopefully informed speculation:  The reduction is an accounting exercise designed to eliminate negative retained earnings.  KHC will move roughly SAR 26 billion from the paid in capital account to the retained earnings account.   The transaction has no economic effect.  It is designed to have a legal effect.

Why would KHC want or need  to do this?

While I don't know the corporate law in Saudi, I assume that there are restrictions on the payment of dividends by companies with negative retained earnings.  As well, it could be a matter of optics.  It's hard to sell shares in a company with negative retained earnings - the growth story is less believable.

Global Investment House - Denies Deal With Arab African International Bank

GIH issued a press release on the Kuwait Stock Exchange to deny reports in the local press that it had concluded a deal with Arab African International Bank Egypt (in which the KIA owns roughly 50%) to sell its Egyptian real estate subsidiary to AAIB.

First, it rejected the idea that the sale was part of a "quid pro quo" for AAIB agreeing to join the rescheduling.  It also noted that AAIB had told one of the Egyptian newspapers that the transaction was not related.

Second, it noted that discussions were in a preliminary stage and that no deal had been concluded.

As part of the restructuring, GIH is selling assets to repay its debt so this transaction is expected.  What would be interesting to know is whether these negotiations are the result of a bidding process that AAIB won or AAIB is the only interested bidder.  Or if AAIB is a preferred bidder.  If the latter, then there may be something to the "quid pro quo" story.

The KSE announcement (Arabic text only) is below.

[9:0:57]  ِ. ايضاح من (جلوبل) بخصوص ما نشر في احدى الصحف المحليه ‏امس
يعلن سوق الكويت للأوراق الماليه انه قد ورد اليه الان من شركة
بيت الاستثمار العالمي (جلوبل) انها تود أن توضح بخصوص ما نشر في ‏
احدى الصحف المحليه امس حول تخارج بيت الاستثمار العالمي (جلوبل) من ‏
حصته في بيت التمويل للتمويل العقاري المصري تود الشركة ان توضح ما يلي:‏
ِ1- ان تخارج (جلوبل) من شركة بيت التمويل للتمويل العقاري لصالح البنك ‏
العربي الافريقي الدولي ضمن تسوية ديون هو خبر غير صحيح .‏
ِ2- ان المفاوضات مازالت في مراحلها الاوليه .‏
ِ3- في تصريح لجريده مصريه نفت مصادر بالبنك العربي الافريقي الدولي وجود
اى علاقه بين عملية الاستحواذ و تسويه المديونيات المستحقه للبنك على
شركة (جلوبل) .‏

Stehwaz (Istiwath) Holding Company - Shareholders' Legal Complaint Against Board and The Investment Dar

AlQabas reports that 47 shareholders of Stehwaz Holding Company -شركة استحواذ القابضة  - have raised a legal complaint against the board of directors, the auditors and the parent company, The Investment Dar ("TID").  As its name implies, Stehwaz is involved in mergers and acquisitions as well as pre IPO transaction.  The company has some 5,000 shareholders.   TID and Efad Group are the major shareholders.  Efad is also a major shareholder in TID.

AlQabas describes this as an "unprecedented" action by shareholders against a Kuwaiti company.

These 47 shareholders' allegations (and note that word) consist of the following:

1. After undertaking the increase in the company's capital to KD 250 million, TID caused the company to enter into a series of contracts for its benefit allowing it to take most of the capital of the company.
2. One example is the sale of Madar Investment Company - which allegedly resulted in a KD 50 million profit for TID and no benefit to Stehwaz.
3. Another item in the list of complaints is the company's lending activity.  The shareholders allege that it is unclear if  KD 3 million obtained by the Board is loan or another type of facility.
4. Exaggeration (overstatement) of goodwill in the amount of KD 50 million.
5. A pattern of conducting real estate transactions solely with related parties - reaching an amount of approximately  KD 300 million.  Stehwaz supposedly conducted these with  just three related parties  from among the founding shareholders.  The complaint specifically raises the point that no real estate transactions were undertaken with other market participants.  The thrust here seems to be a concern over purchases of real estate.  That logically would be one of overpayment.   AA:  In 2007, Stehwaz had KD 450 million in total assets.  The company has not released its 2008 financials.
6. Funding provided to TID via wakala and tawarruq transactions - a major issue given the constrained financial position of TID.

The complaining shareholders are requesting guarantees from those parties who benefited from the transactions described.  That is the first step in seeking to impose personal liability on  member of the board of directors.  An initial (statutory) fine of KD5,001 is also being requested as well for the decline in share value to KD 20 fils.

The Court is to hear the case 11 February.

Some observations.

1. Another bit of bad news for TID in securing creditor agreement to its rescheduling proposal, particularly in light of the charges made in this complaint.  Without full details and noting that this is only a complaint and not a legal judgment against TID, these are the sort of activities that could be behind the Central Bank's delay in approving TID's financials as well as some of the content of the restructuring proposal.  Earlier post here. 
   
2. As well, this suit is reminiscent of some of the issues that the Ministry of Commerce and Industry is pursuing with respect to related party transactions. Earlier posts here and here. 

It's important to re-iterate that these are unproven allegations at this point.  The Kuwaiti Courts will determine if they have legal merit and if sufficient evidence is provided to substantiate them.  In any case this is not good news for TID, particularly at this critical juncture.

Burj Khalifa

AlphaDinar has an interesting article on the surprise naming of the Burj and the economics of the new building.  Well worth a look.

This is similar to donors to universities having buildings named after them.  And in some cases a big enough contribution gets the donor's name attached to a school. 

Shaykh Khalifa is only lending US$ 25 billion to Dubai so it's just his name on the Burj.   At least for now.

Saad Group: Al Sanea Resists Deposition

The National reports that Maan AlSanea's lawyers are resisting his giving a deposition in Saudi Arabia in connection with a lawsuit against him by AlGosaibi.

Wouldn't an elegant solution be for the Court to ask him to visit New York to give the deposition?

Theater of the Absurd – The “West” End

From the US "liberal" site "Talking Points Memo".

First, a quote that is too good to pass up from TPM's daily email. "As Sen. Schumer (D-NY) calls for stronger security measures at foreign airports, his colleague, Sen. Kerry (D-MA), is denied entrance to Iran." AA: Unclear if the two are related.

Second, a more detailed quote from Senator Schumer: "You don't have to be Albert Einstein to realize that flights that originate in foreign countries pose a greater danger," said Schumer, who also added: "What's crucial is that we immediately send many more of our TSA agents to the airports to check on their compliance." AA: I believe all the aircraft hijacked on 11 September 2001 were domestic flights.

BSEC Firing on All “Cylinders” – Another ABS Auto Deal

BSEC announced another automobile related ABS deal. This time for Bassoul & Heneine.

This is the second ABS for B&H – "Cylinder II".

The structure is a mirror image of Rymco. And again the issuer is holding Tranche B.

Here's the earlier press release on Rymco Drive 1.   And earlier post.

Cylinder II has been terms - lower price and longer tenor.  This is probably reflective of a combination of things:  better market conditions and the fact that Rymco Drive was a debut issue.

BSEC also has issued some interesting publications on securitization and related issues in Lebanon.

Kudos again to the fine folks at the BEMO Group and the even finer distinguished banking family of Obegi.

When the Going Gets Tough, The Tough Unilaterally Reinterpret Their Contracts

Article from The National here on Mashreqbank's unilateral change of base rate on mortgages.  Spoiler: it's not a decrease.

I believe the relevant technical term is chutzpah.

But wait there's more - perhaps technically rising to the level of egregious chutzpah

Mr Beckett said. Mashreq has waived refinancing fees until the end of March so customers can take their business elsewhere if they choose.

Yes, indeed.  Banks in the UAE are falling all over themselves to make new loans for more than the value of the property.

New Addition to Links - LSE / Kuwait Programme on Development, Governance and Globalisation in the Gulf States

A new addition to the roll of Interesting Blogs and Other Links:    Kuwait Programme on Development, Governance and Globalisation in the Gulf States.

This looks to be an excellent source of information on a variety of topics concerning the GCC.

And as Kristian Ulrichsen noted in a comment to my earlier post, they also offer seminars in London.  BTW in addition to co-ordinating academic content, he is also a post doctoral fellow who seems to specialize in GCC security matters.

Here's a link to their "Events" page.

And finally a tip of AA's virtual tarboush to the Kuwait Foundation for the Advancement of Sciences who is the "founder of this feast".

2-1 !

HH Shaykh Mohammed Bin Rashid AlMaktoum - Anniversaries

 

This week marks two important anniversaries for Shaykh Mohammed.  Accession to the throne.  And election as Vice President of the UAE (5 January).

A variety of tributes and celebrations have or will take place.

Here are some of the customary homages.  And here as well.

There is more information at the Shaykh's website.   If you read his poems (Nabati style), the original Arabic is preferable to the English translation.

SAMA Governor Denies Saudi Bank "Settlement Deal" with Saad

In an interview with the Saudi Newspaper, Al Iqtisad, HE Dr. Mohammad Bin Sulayman Al Jassir, Governor of the Saudi Arabian Monetary Agency denied that there had been any settlement among the Saad Group and Saudi banks.

Continuing he noted that since AlGosaibi and Saad were commercial enterprises SAMA had not right of supervision - either directly or indirectly.  Thus, it had to rely on the banks for information.  They told SAMA that they had offset the collateral they held against their loans.  The article does not  contain any comment on how much of the exposure was collateralized/offset.   Governor Al Jassir noted that this was something that foreign banks had been doing as well.  His point being that offsetting collateral is a normal banking practice.

He also said that the uncovered portion of both local and foreign banks' exposure remained a problem and that as far as SAMA knew there had been no settlement between Saad and its creditors.

Some observations:

1. Banks get to choose on what basis to lend their clients:  secured or unsecured.
2. Lenders with security (and properly drafted legal documents) have the right to take possession of and realize the security upon the occurrence of certain defined events.
3. It may be that Saudi banks were relatively more collateralized then foreign lenders.  As a side note, one of the interesting patterns in lending is that often foreign lenders impose fewer conditions on borrowers than local lenders.  Generally, those foreign lenders, often Western, justify this by their greater sophistication in underwriting and their more developed risk management skills.  Of course, competition plays a role.  Pricing and requirements are the two ways to compete for a borrower's business.
   

LSE Study on Nationalism in the GCC

This is part of the Kuwait Project on Development, Governance and Globalisation in the Gulf States being undertaken by the LSE.   The report is available here. 

Here is a description of the Kuwait Project.

There are more interesting publications from the Project available here.

And more to come judging by the list of proposed and in-process papers listed.

This looks like an excellent source of information and analysis on the GCC.

Dubai: Jailed Businessmen Buy TVs for Inmates

Some businessmen jailed for financial crimes in Dubai bought flat screen televisions for inmates as the prison management refused to replace old non functioning models. 

The Investment Dar Wins Lawsuit (Administrative Court) Against Central Bank of Kuwait for Non Approval of Financials

The 1 January 2010 edition of AlQabas carries the news that TID has won a lawsuit in the Administrative Court against the CBB for its refusal to approve TID's 31 December 2008 financials.  The Court  abrogated the CBK's decision to refuse to approve TID's  financials and awarded provisional compensation KD 5,001 (US$ 17,500).  The competence of the court to hear the case was challenged by one of the parties (unstated, but presumably the CBK.) and this matter was referred to the Circuit Court  (?) #10 who are expected to review the matter on 28 January 2010.

Most of the article - roughly three-quarters - consists of a letter that TID says it sent the Central Bank on 14 July 2009 (and which appears to be part of the  documentary evidence submitted for the case).  The letter states that the financials were fully prepared and signed by both auditors, though the auditors stated that they were unable to give an opinion (in accountant-speak a "disclaimer of an opinion").   TID argues that the auditors had no issues with the company's assets, did not find any violations of law, etc.  and so the disclaimer does not mean there are any of these sort of problems.  TID states (in the letter) that CBK asked for the removal of the disclaimer.  TID pointed out that the auditors had the "first and last" word on their opinion and that the company could not compel the auditors to make a change and that to do so would be to violate Kuwaiti law.  The letter ends with a statement that CBK's refusal is causing serious damage to TID and its shareholders.

Some reactions to the news story:

Global Investment House released its financials on 26 April 2009.  These contain an audit disclaimer.  If the disclaimer in TID's report is broadly similar to that in GIH's, it is hard to understand why the CBK would approve GIH's financials but hold TID's.   Unless there were other serious factors involved.  The alternative explanation - that the CBK is engaged in a vendetta against TID -  doesn't seem credible to me.

As a side comment, GIH's audit opinion is dated 3 February.  The release date suggests that the CBK required roughly three months to content itself with GIH's financials.  

What might those factors be?  And what might be some signs? 

1. GIH's financials were submitted fairly quickly to the CBK.  The presumption is shortly after the auditors signed off on them - 3 February 2009 - and GIH's board approved them.  TID's took a bit longer.   TID explained this as the need for "additional reporting requirements" in April 2009. 
   
2. At the request of creditors, the CBK appointed a special monitor at TID.  It did not at GIH.
3. As a result of negotiations with creditors, TID appointed a Chief Restructuring Officer.  Creditors at GIH did not require this.  The two creditor groups are not exactly the same so this may reflect their different composition.   Or there may be another reason. 
   
4. TID's restructuring agreement - as described by AlQabas - contains strong statements about increasing transparency and strengthening corporate governance.   There is also what might be a telling condition:  All asset sales to be undertaken on a sound basis (sahih), legally done, at market prices and not to related parties.  Without direct knowledge of the negotiations between TID and its creditors it's not possible to know what motivated this requirement.  One might infer that a provision of this sort is designed to prevent the recurrence of an event.  Then again creditors often impose "silly"  or "belt and braces" conditions given the dynamics of restructurings.
5. Similarly, the restructuring agreement gives the creditors' committee power over the company's financial statements - that is, creditors have the right of approval over financials.  Again there is no way of knowing for certain why this was included.  One might infer that this reflects some creditor concern about the quality/integrity of the financials.  And then again it might simply be creditor "overkill" in imposing conditions.
   
6. Finally that same report said that TID was submitting its financials to the CBK for approval.  It may be that with progress in the restructuring negotiations the auditors were willing to remove their disclaimer (no opinion).  Or perhaps there were some changes to the contents of the report.  As outsiders it is difficult to know.  However, auditors are generally reluctant to stick their necks out.  And in difficult situations like a restructuring, their natural caution increases. I would expect that until the definitive legal documentation for the restructuring were signed by all parties, the auditors would be cautious about issuing a "clean" audit opinion.  One compromise could be a "matter of emphasis" opinion - in which they put their concerns into a note to the financials.
   

It seems to me that there is more to the delay than just the auditors' disclaimer.  I don't have the impression that the CBK is capricious or vindictive.   It would seem to have some questions or concerns about TID's financial position.  But we will have to wait to see what happens when TID's financials are released. 

Jawad Bu Khamseen - Follow Up to Yesterday's Post

Mr. Jawad BuKhamseen - Picture Copyright AlQabas Newspaper

AlQabas ran an article today which consists of a letter from Mr. Bu Khamseen's attorneys (the Law Firm of Abdul Hamid AlSarraf, a very well known and respected law firm) in which Attorney Ahmed Tawfiq AlRashid makes the following points:

1. There has been no bankrutpcy or insolvency legal ruling made against Jawad Bu Khamseen.
2. The Court has ordered him to pay a certain sum to settle his deferred payment share trades.  AA:  Presumably those remaining from the Suq Al Manakh.
3. The judgment is not final but is subject to appeal which is what they are doing on his behalf.
4. By publishing the article AlQabas has violated certain laws and has impugned the good name of Mr. Bu Khamseen.  AHAS law firm will be taking the necessary legal action to seek redress for these violations.

At the end of the article there is a single sentence attributed to the Editor of AlQ:  "What we published yesterday was an official letter from the Ministry of Finance to banks regarding the necessity of implementing the judgment". 

New Year's Celebrations Cancelled At Suq Al Mal - And Just in Time!

Luckily I just saw this article in Gulf News.  I had just enough time to cancel Nancy Ajram's performance.  Hopefully, she can get a last minute booking in Bahrain.

Anyways, as you all know by now, if I read it in the Gulf News,  I know it has to be true.

"There must be a zero-tolerance policy towards any parties or celebrations marking the new year as they are against religion and the law," MP Mohammad Al Hayef said.

Since GN is from Dubai, it omitted the good MP's full name, Mohammed Al Hayef Al Mutairi.  And he represents the good folks in the Fourth District.

I hope all of you out there will take Brother Mohammad's words to heart.

AA will be spending the evening shortening the hem on his virtual thaub.  You would be well advised to do the same.

End of Year Protocol #2 - Words of ?

Copyright 2003 David Monniaux

Another contribution to the year end protocol of media retrospectives. 

This one not in the wisdom category but somewhere between incredible and bizarre.

1. "Something is unusual. We have never had such a high number of people involved in corruption," Dhahi Khalfan Tamim, who also heads the Dubai government's budget committee, told Reuters. 
2. Tamim said police had drawn "a list of more than 60 people mainly from government-linked companies" who are under investigation, adding no-one on the list was from a government department.

It's hard to understand this surprise.  

After all, what possibly could go wrong with US$ 60 billion of hot and easy money rocketing through the Emirate?  With contracts being let left and right for billion dollar projects?  And ignoring for a moment the regional history of commissions,  Philip Thorpe's observations in 2004 or the corruption trials at the beginning of 2008, who in their right mind might have guessed there was an increased potential for corruption?  Or that it was occurring?

As a distinguished Capitaine once put it "I'm shocked, shocked to find that gambling is going on here".

End of Year Protocol #1 - Words of Wisdom

The end of the year is a traditional time for reflection in the media - retrospectives on the year, best and worst of the year lists, etc.

As a newbie blogger, here's my first entry in that exercise, a link to an article by Richard Thaler of The University of Chicago on the efficient markets hypothesis.

Yes, the italics are deliberate.

Like all economic theories  the EMH is an opinion.   In economics one hopes for informed opinions, but opinions they remain.  Not scientific laws.  Nor Divine revelations.

Often the most profound thoughts are the simplest.  And perhaps the most obvious.

4-1!

I see my earlier request to increase the first number has been granted. But to avoid any appearance of greed, the second number can remain at zero.

On to Sunday.