"Mastermind" Attempts to Defraud UAE Central Bank

A thoroughly engaging story of an Asian "mastermind" who attempted to defraud the Central Bank of the UAE.

I remember watching Mastermind India on the TV.   Sid Basu.  The Hot Seat.  Your time starts now!   Even the losers were formidable.

Nothing like this story. 

I think the appropriate reference is "The Weakest Link".

Saudi Zain - Just What Did It Miss? Financial Covenants Not Payments

You've probably seen reports that Saudi Zain missed "commitments" under its US$2.6 billion  equivalent "Islamic" facility.  The natural assumption was that these were monetary commitments, e.g., principal or interest payments.

On Saturday, Saudi Zain's CEO, Saad AlBarak, told AlArabiyya that Saudi Zain missed certain EBITDA targets mandated by the facility.  Zain's lenders have waived the breach of the covenants in 2009 and required the company to provide a revised set of targets for 2010 for their approval.

EBITDA is bankerspeak shorthand for earnings before  (the payment) of interest, taxes, depreciation and amortization.  EBITDA is an attempt to capture the ongoing operating cashflow of a company.   Loans and other debts are settled with cash not net income which is accrual based and can often differ significantly from the firm's actual cashflow.  

Lenders include covenants like EBITDA targets as requirements in loan agreements for two reasons.

First, they provide a set of monitoring tools of the company's performance.  In this  case, the EBITDA targets help lenders to determine if the company is earning enough money to settle its obligations, including their loans.  

Second, since these are covenants, a failure to meet them by the company constitutes an event of default under the facility.  In that case banks have the right (but are not obliged to) to declare the borrower in default and accelerate the due date of the loan.  There are two reasons for using such covenants.  First, the covenants and the threat they might be used will focus the borrower's management on doing their utmost to make the company perform.  Second,  if the borrower does not meet the target, the banks have the right to accelerate the loan, if they want.  In such a case they can  require immediate repayment before value in the company is eroded.

It really does pay to be careful with press releases that contain disclosure that one has missed a covenant.  For some inexplicable reason the market gets excited about that sort of thing.  And when the wording lacks clarity the market imagines the worst.  It's also doubly important when one's auditor has included a matter of emphasis statement in his report as this should make any sentient creditor nervous. 

One might state that this sort of poor communication shouldn't happen.  As an old hand in the region, AA has gotten to the point of just hoping that it doesn't occur.

Mr. Obama's War

I read with alarm the news in the press that President Obama has declared war on bankers.   Apparently a sudden shift in his previously benign policy.  It seems that he now proposes imposing limits on the activities that banks may engage in as well as taxes on and other measures affecting bankers' compensation.  Joining in this coalition of the willing in at least  some of the theaters of operation are not only stalwart allies of the recent past but even some  of those previously feckless elderly Europeans.  Or at least so I am told.

The generally sober financial press that I read is beside itself with dire warnings.  It appears our very way of life may well come to an end.   Once again the lights in London and perhaps all of Europe - or at least their financial districts - are going out. I've read stories of huddled masses of bankers yearning to be free, setting sail from London for Asia to escape tyrannical taxes.  In these darkest of days, a few brave (financial) patriots have mounted the ramparts.  Suitable jeremiads  thunder from the editorial and op-ed pages as well as from what are labeled the news columns.  In the temples of finance, high priests perform ancient and powerful rituals over the entrails of distressed subprime loans and derivatives to cure this blight.  The books of Adam Smith are scoured for the right incantations, ignoring as usual the inconvenient "bits". 

Nearer to home, dark rumors have begun to circulate - a Kadaververwertungsanstalt for bankers has opened.  Since I don't have a subscription to either The Times or The Wall Street Journal, I haven't yet seen conclusive proof that it is in operation.   But then neither have I seen that it is not. And that perhaps is the most disturbing thing of all.

As a result, as a member of the banking guild, I am being more circumspect than usual when I leave my home and leaving more infrequently.   And, while at home I listen carefully for the black helicopters, though I am told they are very, very quiet.

On the other hand, much of the accompanying editorial comment in these same papers says that Mr. Obama cannot achieve victory.  Clever bankers will find ways around these new rules as they did the old.  Apparently, a populist surge holds little prospect of success.  Since the syndication of American Idol, there is little chance of a sahwa.  Rather than "stay the course" the only course of action these defeatist voices advocate is the immediate, unconditional and unilateral withdrawal of US forces from Wall Street. 

I am of two minds on this.

As a banker, the message that our way of life is not really under a serious threat at all is admittedly a comfort.  I also take solace in the demonstrated gap between previous rhetoric and reality.   

But, as a citizen,  I do worry that if we do not fight them over there on Wall Street we may end up  fighting them over here - on Main Street.  Any sign of weakness or hesitation is sure to embolden this already fearsome foe. 

Yet, all this remains quite confusing.

On the one hand, I am told this unjust war will lead to the end of the happy world we now know.  And therefore am suitably scared as I believe is every good citizen's duty.

On the other hand,  I am assured that it is all just a meaningless exercise that will be thwarted by the genius of the free market.  And, if needed, by the timely insertion of one or more brigades of the 101st K-Street Rangers equipped with the latest in both "smart" and "stealth" donation technology.

It is hard to know what to do. 

Caution would seem to be a wise tactic at the moment.

I am keeping a low profile.

I may grow a beard.  Or shave one off.

Borse Dubai - More on US$2.5 Billion Loan and Its Implications

A slip at Suq Al Mal.  In my last post I didn't deal with the background to the US$2.5 billion  loan.  And its potential implications. 

As I like to say, often the details of the story are more or equally interesting  as the story itself.  I should pay more attention to what I say.

With that as background, here goes.

First, where did this loan come from?

In 2007 both Nasdaq and BD submitted bids for OMX, the Swedish exchange.  BD topped Nasdaq's US$3.8 billion bid with one of its own for US$4.0 billion.  Subsequent negotiations among the parties led to BD and Nasdaq agreeing a strategic partnership.   BD was to sell the shares it had acquired in OMX to Nasdaq while at the same time purchasing from Nasdaq some of its shares in the London Stock Exchange and taking an interest in Nasdax/OMX.  When the dust settled, BD owned 19.9% of Nasdaq OMX and 22.2% of the LSE.  Nasdaq acquired OMX.

To finance the deal, BD incurred obligations (which included a guarantee facility) in the aggregate amount of US$3.8 billion equivalent. 

In February 2009, BD announced it had successfully raised US$2.5 billion to refinance these earlier facilities.  At the time this was touted as a sign that credit was available to Dubai Government linked entities, even though on less favorable terms than earlier.

How successful was the US$2.5 billion refinancing?

The earlier financing was multi-year and carried interest rates between 0.7% and 1.3% per annum.

The new financing was at 3.25% per annum (roughly 2.5X taking the maximum margin on the old facility).  The tenor of the new facility was for one year as opposed to the multi-year tenor on the previous.  Though the new loan gave BD the option to extend the loan another year.

Even with the higher margin and shorter tenor, the refinancing was only completed because government owned banks in the UAE joined the deal.

The participating banks included Bank of Baroda, Dubai Islamic Bank, Emirates Bank International, HSBC, Industrial and Commercial Bank of China (Asia) Limited, ING Bank London Branch, Intesa Sanpaolo Dubai Branch, National Bank of Abu Dhabi, Skandinaviska Enskilda Banken, The Bank of Tokyo-Mitsubishi UFJ, Ltd. and Union National Bank. 

What does the recent extension of maturity tell us about the acceptability of Dubai Inc credit in the market?

The cost of BD exercising its option was 0.75% of the loan amount.   I'm guessing this was paid up front.  This effectively represents an increase in the margin to 4%.  (Technically, assuming the fee is in advance and interest is normally paid in arrears, the effective margin on the loan is 4.025% p.a.).  If BD were able to borrow at a rate lower than 4%, it would have.   It did not.  Probably there were no real takers for a new loan because it would have made sense for BD to pay above 4% to secure term financing.

The refinancing hasn't really solved BD financing's "problem".  It has merely been pushed out 12 months.  Since the loan finances long term presumably strategic investments, it should be financed with term debt.  But there is more at stake here than short term refinancing risk. Or finance theory.

Why? 

Because of the rescheduling of Dubai World. 

If a rescheduling deal is not struck, it is unlikely that there will be banks willing to make a new loan in to a Dubai Inc entity.  And thus this loan will loom as a potential second rescheduling.  And complicate refinancings of scheduled maturities at other Dubai Inc entities.  And the raising of new financing for new projects.

If, on the other hand, as some commentators appear to believe, Dubai can dictate the terms of the restructuring, banks are going to react with pronounced shyness on new loans to avoid getting shorn again.  A lesson they should remember for at least two years.  And there will be the same implications for refinancings and new financing as above. 

Dubai Inc is, therefore, under intense pressure to conclude a reasonably acceptable restructuring quickly. 

So far there have been no apparent signs that Dubai is moving forward with any concrete action. 

Perhaps it is working feverishly behind the scenes to craft a deal.  Perhaps it hopes to jam the banks. by waiting until the last minute and hoping the pressure of an artificial deadline will cause them to roll over.  Perhaps it doesn't realize how critical time is.  Perhaps, it's just overwhelmed an the enormity of the task.  Perhaps I'm missing something. 

If it is not already doing so,  the Emirate needs to begin to move forward smartly (in both senses of the word) right now.

Ring in the Old: Part 1: Suq Al Manakh - The “Boom”

Symbol of the Suq Al Manakh Building

As promised earlier, a bit of background on the Suq Al Manakh market ("SAM").

The Previous Crisis: The Kuwait Stock Exchange 1977

In 1976 the (official) Kuwait Stock Exchange ("KSE") witnessed a dramatic increase in value. The market rose 135%. Some 176 million shares were traded versus 172 million the year before and 37 million in 1974.

Stocks were traded on both a cash and post dated check basis. Cash payments were at the current stock price. If the buyer wanted to pay in the future, he gave a post dated check. That is, the check would be dated for a date in the future. In effect the seller was granting a bi-lateral loan. The check would be for cash price of the shares (spot price) plus an agreed premium – effectively the interest rate on the loan. And just as in the typical "hire purchase" scheme, the seller delivered the goods (in this case the stock) ahead of the payment.

It's important to mention that in most GCC countries writing a check without cover isn't just a matter of bad accounting. It is an offense punishable by imprisonment. If one's account does not have sufficient funds and the bank refuses to pay the check and returns it to the presenter (in bankerspeak it "dishonors" the check),  jail beckons. On the other hand, if it allows the overdraft and creates a loan, jail vanishes. Generally dishonored check cases are relatively simple matters to adjudicate. The dishonored check is presented.  On its face it is both conclusive evidence and one's admission ticket to jail.

It's very important to understand the critical role of post dated checks in causing the crisis. The fundamental difference is that post dated checks operate outside the banking system. They are purely private transactions.

Within the banking system there are checks on the creation of credit. Authorities place limits on the total amount of lending a bank can undertake based on a leverage ratio.  At that time total assets to total equity.  Often they also set a loan to deposit ratio. Total loans may not be more than  some percent (usually less than 100% - at least in prudent jurisdictions) of total deposits. They also set maximum lending limits to individual obligors expressed as a percentage of capital - usually no more than 25% and more often 10% to 15%.  They specify the types of assets that may be taken as collateral.  In addition the banks have their own credit underwriting process. While as repeatedly demonstrated in Kuwait, this process has been deficient in many respects, it was still a hurdle to be crossed by a would-be investor.

As a purely private non banking form of credit, post dated checks were not subject to Central Bank of Kuwait restrictions on their creation. No ratios, no limits, nada. In theory the amount of loans that could be created was infinite. All that was required was a pen, a stock of checks and the acceptability of one's good name.

On the KSE this led to a dramatic increase in liquidity. With easy cash, investors could make a lot of wise investments. As noted earlier the market rose 135% in 1976.

In 1977 the KSE crashed. Shares declined roughly 40%. There was a severe knock on effect in the Kuwaiti economy.

The Kuwaiti Government took several steps to address the crisis. It bailed out investors by buying their positions at the lowest price during the 2.5 month period preceding the crash (which was the absolute peak of the market). The cost was KD150 million. As well, the Government temporarily suspended the creation of new Kuwait stock companies (KSC's) and halted the trading of other GCC shares on the exchange. However, no prohibition was put on the founding of closed Kuwaiti stock companies ("KSCC's"). At the time that seemed reasonable since by law the shares in KSCCs are not allowed to be traded until three years after the date on which the company was officially founded (the "lock-up" period). The authorities also placed fairly strong restrictions on the use of postdated checks, given their role in the crash.

The Suq Al Manakh

These moves restrained trading opportunities on the official exchange. Investors wanted to invest. Punters wanted to punt. So an alternative market sprang up in the Suq Al Manakh complex (whose front door is the masthead picture on this blog). The building itself is like many of the older small "shopping" malls in the GCC. Lots of small offices and shops. The ground floor was primarily real estate brokers – another local investment passion.

Because the trading of Kuwaiti stock companies (KSCs) was restricted to the KSE, the SAM specialized in the trading of Gulf Companies (companies established in other GCC states, primarily the UAE and Bahrain) as well as KSCCs. You will note that from its inception the SAM was engaging in what were illegal activities – the trading of KSCCs prior to the end of the three year "lock-up" period.

The SAM began operations sometime during the summer of 1979. As with the original KSE, real estate brokers were the first share brokers on this "exchange".

A major flaw was that there was no official regulation or oversight of the SAM, not to say that the KSE was then or is now known for its robust oversight and regulation. This not only affected the quality of securities traded on the market but also the practices associated their promotion as well as more mechanical operational issues. There were no uniform settlement and clearing procedures. There was no centralized record keeping system. Most trading was bi-lateral and dependent on the practice of the broker used. Deals were documented in the form of IOUs, post dated checks, and various other records of uneven quality and clarity. This lack of agreed trading procedures was later to greatly complicate matters when the SAM collapsed.

Like the KSE in 1976, trading was on a cash or a post dated check basis. At the beginning, the premium on such checks, the amount over the cash price reflecting the "interest" on the loan, ranged from 40% to 60% p.a. Clearly expected increases in the price of the stock had to be more than the certain premium for this method to be used. To "protect" themselves, purchasers of shares often immediately sold the shares they acquired in the spot market and used the cash received to buy other shares which they then sold on post dated check basis. Maturities were set so that their new sales would mature prior to the maturity of their own postdated check obligation. As such, they would have the funds to settle that obligation plus a neat profit. This works flawlessly as long as the market keeps moving up and as long as their counterparties fulfill their obligations.

While post dated checks had fueled a significant growth in liquidity in 1976, now they caused liquidity to explode. Liquidity drove prices to unbelievable heights with 100% returns not uncommon. Price increases of course "proved" just how great the investments were. Trading increased. Substantial (paper) profits were declared. Trading ramped up further. Even the KSE was affected.

Little focus was given to fundamentals. Investors demanded new investment opportunities. Kuwaitis began incorporating companies in other Gulf states (primarily UAE as well as Bahrain) to satisfy the demand. At the end of the market some 40 or so of these "Gulf Companies" were traded on the SAM. New Kuwaiti Closed Share Companies were created. Many of these began as real estate companies. At least that's what their founding documents said. But seeing the great opportunity in the financial market they quickly began investing in and trading shares. (Remember this point for later). Most of these firms had no business, no assets, no income, and no profit. Many published no financials. Yet, prices continued to climb. At one point the SAM and the KSE had trading volumes in excess of the London Stock Exchange.

My favorite story is that of Gulf Medical, a non Kuwait GCC company, which IPO'ed during the height of the frenzy. Originally founded as a real estate firm, things didn't work out so well in that endeavor. So the owners rebranded the company and offered its shares on the SAM. It was 2,600 times oversubscribed. After launch, it quickly went up approximately 790%.

Now in the Gulf when you subscribe for an IPO, you are required to make a deposit for the full amount of your subscription. How does one finance such large "tickets"? Well, one's banker is one's friend – at least until the due date of the loan. Banks happily advanced funds requiring only a small cash deposit. They knew that their loan was largely secure because the investor was likely to get only a small fraction of his requested amount. If the downpayment were equal or greater than that amount, the bank had nothing to worry about. And, as everyone knew at the time (except one really smart guy at the National Bank of Kuwait), this time it really was different. So even if the investor got all the shares, he could simply sell them and liquidate the loan. If not, the bank would take the shares, sell them and repay the loan. The bank then saw a risk free loan, though it did not offer the client the risk free rate on the loan for some inexplicable reason. As attractive as the interest was, the subscription fees - generally taken on the full amount of the subscription – were even more mouth watering. (Remember that bit of the deal economics: the fees dwarf the interest on what are essentially two week loans). At the end of the subscription period, the investor got his allotment. The bank had the excess funds returned to it and settled the loan after deducting its interest. Everyone was very happy.

As you probably have guessed, investors' practice of oversubscribing led to even greater levels of oversubscriptions. It was a bankers' (and fools') paradise.

With this sort of a compelling financial story and after careful and sober analysis, many of the local banks began lending against shares. Generally to "investment" companies so they could make a wise investment in these shares. And some highly creditworthy individuals. Many of whose most bankable collateral was their excellent family name. What excellent collateral these stocks proved to be. At least initially. With each passing day their prices increased. The collateral coverage on the loans increased. Why one might even increase a loan against this collateral so that one's client could make more wise investments.

Only one bank kept its head, the National Bank of Kuwait. From what I've been told it was Abu Shukry (Ibrahim Dabdoub) who recognized the irrational exuberance all around him for what it was and kept his bank out of the party. Even though the music was playing, Abu Shukry didn't dance. Other banks were not so restrained.

Accompanying the "boom" in the market was a boom in the premia. From 40% per annum to 70% then 80%. By 1982 the premium had risen to 200% and before the end of the saga 400%.

Everything was going really well. Or so it seemed.

A footnote on numbers: Since record keeping was not one of the Suq Al Manakh's strengths, many of the statements involving numbers are no more than estimates.  I've seen articles that state with certainty that 42 Gulf Companies were traded on the SAM. Absent a central clearing system, I'm not sure how one can know with the level of certainty required to use that degree of precision.  The same with premia on what were essentially bi-lateral deals.  The premia were whatever the two parties agreed. So I've used formulations like "about", "roughly", and "approximately" to indicate that these are not hard and fast numbers.

Adeem Investment Company - The Work Continues

Copyright Ricardo Liberato Used Under Creative Commons License

It's not a suprise that a big project takes a long time to accomplish. But it's going to really be something when it's done.

Earlier posts here and here and here.

Mabruka Ya Iqbal - Arab World's Youngest Female Medical Student

Copyright The National Newspaper Abu Dhabi

Here's a great story.

A young Lebanese girl from the Beka'a - hardworking and bright - is soon to be the youngest female medical student at Weill Cornell Medical College in Qatar.

“I’m an example: I’m a woman, but still I made it,” she said. “If you have the motivation and you have the abilities, no one’s going to stop you, whether you’re a woman or a man.”

Let us hope that no one stands in the way of her dream or any others out there.

Boubyan Bank Statement on Lawsuit Against AlAbraj Holding

In its "Disclosures" section, AlQabas has two lines giving Boubyan Bank's reason for the lawsuit.  The Bank took the action because AlAbraj stopped settling its debts with Boubyan, which the Bank states total KD 45.2 million in aggregate - owed to both the Bank and some of its clients.  Boubyan also notes that in addition to raising the bankruptcy petition against AHC it has filed a "responsibility complaints" against some of AHC's former board members.

You'll recall that in its statement to the KSE, AHC had described its debts as recently having been reduced to KD39 million.  It's not clear why the difference.  Is AHC referring only to principal, while BB is including interest?   Earlier post here.

In any case, what is clear is that BB appears to be the major and perhaps only real creditor of AHC.

Lightning Storm Hits Burj Khalifah

I am told by those who claim to know that the storn lasted over one half hour with repeated "strikes" on the Burj.  You can see the tip of the lightning arrestor above the top of the Burj. 

As far as I know, "Reverend" Pat Robertson has not yet commented. 

Boubyan Bank Lawsuit Against Al Abraj Holding

Al Abraj Holding Company Kuwait issued a press release on the Kuwait Stock Exchange today (text below) regarding press reports that Boubyan Bank had filed a bankruptcy case against it for non payment of loans.

In its press release AHC makes the following points:

1. The loan from Boubyan was made in order to purchase a majority stake in International Leasing and Investment Company.
2. The loan was secured by the shares in ILIC. 
3. With the decline in shares, the cover of the loan by the shares was less than agreed.
4. Given that fact and that the company stopped servicing its debts, BB resorted to a court case. 
5. The Company received no formal advice/warning of the case from BB nor any official notice from the Court.
6. Recently ILIC reduced its debts from KD 51 million to KD 39 million.

A bit of background on ILIC.

Islamic Development Bank Jeddah and Abraj are listed as the two main shareholders but I don't know recent percentages of holdings.  The Company states that it operates according to Shari'ah principles in providing leasing services.  It also makes investments in other companies.  This seems to be a major activity.

You'll recall that ILIC is one of the six companies suspended from trading on the KSE, due to failure to release financial statements.  The Company has not published its fiscal year 2008 nor any interim statements for 2009.  In May last year it announced that the Central Bank of Kuwait had given it permission to hire Citibank as a consultant "as a specialized consulting agency, to examine and evaluate the company development and suggest the appropriate solutions".   

The Company is clearly in financial distress. 

Many of the names in its portfolio are Kuwaiti companies.  And many of those are known to be in distress.  There was an interesting phenomenon in Kuwait in the period just prior to the crash in 3Q08.  Many industrial and other companies in Kuwait were making their profit from wise investments in the KSE rather than their core businesses.  And that profit was largely based on increases in the carrying value of investments rather than ongoing cashflow.   Money was borrowed from banks eager to increase their business to make these investments.  And when they turned out to be an apparent wise idea, more money was borrowed to make even more investments.  Banks were similarly eager to increase their business even more.  A true meeting of commercial interests.

And, as though familiar with Kuwait know, there is often a  "network" of related  individuals and companies who trade shares not only to make a profit but also to prop up share prices.   And perhaps  in so doing keep local bankers happy with their collateral values as a result.  The recent story of Nafais is just one example.  For those who read Arabic, AlQabas has an account.  For those who don't here's AlphaDinar's take.

Unfortunately, when the KSE "retreated", many an investment company ship was left stranded.  And many a local banker felt his ankles get wet.  Some their knees.  A few their thighs.

While it's unclear just how AHC reduced its debt by KD 12 million, one might understand that BB felt left out, which may be another motive for its lawsuit.  If one isn't servicing one's debts, how does one reduce indebtedness roughly 24%? 

To close out the story on Boubyan.  Like many other financial institutions in Kuwait, BB is increasing its capital.  BB by 50%.  583 million new shares are being issued at 155 fils (55 over par value).  The rights offer will take place between 24 January and 7 February for shareholders of record as of 21 January.

AHC press release below.  

[8:33:52]  ِ.ايضاح من (ابراج)بخصوص ما نشر فى احدى الصحف المحلية امس ‏

يعلن سوق الكويت للاوراق المالية بان شركة الابراج القابضة تود ان توضح ‏

بخصوص ما نشر فى احدى الصحف المحلية امس حول رفع بنك بوبيان لدعوى افلاس ‏

ضد الشركة ،تفيد الشركة، بان مديونيتها لبنك بوبيان ناتجة عن شراء الشركة

لحصة الاكثرية بالشركة الدولية للاجارة والاستثمار وقد كانت هذه المديونية ‏

قد تمت تغطيتها بشهادة اسهم تغطى الكفالة البنكية مقابل القرض وبسبب ‏

انخفاض اسعار الاسهم تم كشف التغطية الى ما دون المتفق عليه وبسبب ‏

توقف الشركة عن سداد اقساط القرض فقد لجئ البنك الى القضاء لتحصيل ‏

القرض علما بانه حتى تاريخ هذا الكتاب لم يصل اى اخطار من بنك بوبيان ‏

او من قبل المحكمة رسمي بخصوص القضية المشار اليها .‏

وتفيد الشركة بان اجمالي القرض كان 51 مليون د.ك تقريبا وصل بعد التسديدات ‏

الى 39 مليون د.ك تقريبا .‏

 

4-2 & Top of the List

CFA Kuwait Holds CFA Charter Award Ceremony

Copyright Arab Times Kuwait

I've written before about the role of institutions in promoting the development of markets.  

A very important element of that process is developing skilled ethical professionals to operate the financial infrastructure created.  In fact it is the critical element as has been shown recently with the  financial crisis in the West. 

The CFA Institute plays an important role in developing such professionals in the finance world.

Earning the right to use the CFA Charter requires three years of graduate level study and the passing of three rigorous examinations as well as practical work experience. It's a very high honor.

CFA Kuwait, a relatively new local society in the GCC, held an awards dinner for new CFA charterholders in Kuwait.

Ibrahim Dabdoub, the dean of bankers in the GCC and a bankers' banker - a sadly vanishing breed, presented the certificates.  (He's seated in the middle of the picture.)

Standing on the far left is the dynamic M.R. Ragu, SVP of Research at Markaz Kuwait.  He was instrumental in the founding of CFA Bahrain as well as CFA Kuwait.  Wherever he goes, if there isn't a local society, there soon will be.  So congratulations are in order to M.R.

A Tale of Two Countries - Dubai and the USA

Copyright GulfNews Dubai

Dubai may have the world's tallest building and the only indoor ski mountain, but here in the USA we have the smallest yet representation of the Burj Khalifah.   Sic transit gloria mundi . 

That is, until, I suppose some "Westerner" carves it on a grain of rice.  

At least we don't have to worry that Dubai will take our national debt record from us. 

Istithmar - David Jackson - "Action Jackson"

Frank Kane at The National's take on Mr. Jackson's career at Istithmar.  I'm guessing that his reference is to Detroit and not Chicago.  The former to a 1988 "action" movie.  The latter to a member of the Chicago "Outfit".

If the analysts at RGE are right about the leverage he employed, I'm sensing a honorary citizenship from a country "up North".   If the award is made soon enough, David may get his personal loans forgiven.  You have my implicit guarantee on that.

With leverage at this level, it's hard to see how even a modest recovery in prices  from the crisis induced decline could led to "attractive value" for Dubai World.  Any recovery would go first to the lenders to make them whole on principal plus interest before DW would see any cash.  That means they would have to go to roughly 90% of original cost. 

That's a bit of a climb from the values mentioned in the article.  And when buyers have a sense that a seller is motivated the pressure on price is downward not upward.

Istithmar World Chief Resigns

 The National reports that David Jackson has resigned today as CEO of Istithmar World. 

Here's another item from GulfNews which includes a critical bit of the press release:  the farewell statement thanking David for his contributions.  In a situation like this, it's important that the employer signal whether or not it had an issue with the departing employee.  Saying nothing is code for a negative view.  

 

It may be reading a bit much in from one announcement, but it seems that Aidan's role is larger than a consultant.  Then again as part of the ritual of debt restructurings, the debtor is often obliged to make a ritual sacrifice of one or two members of management.  I suppose in that case the CRO might be the right person to officiate at the service to appease the creditors.

Gulf Finance House Rating Lowered to B+

In response to a request from the BSE, GFH provided additional information on it recent downgrade by S&P  including the text of S&P's analysis.

Nothing surprising here.

GFH is trying to revise its business model and deal with upcoming maturities under very difficult market conditions.

Liquidity and upcoming debt maturities are the two main challenges to implementing this change of course - which is why the rating agency has focused its rating action on these issues.

Previous posts here and here.

EFG Hermes Raises Estimate of Dubai Inc Debt to US$130 to US$170 Billion

There have been a couple of reports in the press that EFG-Hermes has dramatically raised its estimate of the total of Dubai Inc's debt to be potentially as much as US$130 billion to US$170 billion.   Here's one such report from the Gulf-Times in Qatar quoting AFP.

Without a copy of the EFG- Hermes report it's hard to analyze the summary findings in the press reports.  It appears that EFG-Hermes believes that there are undisclosed bi-lateral loans and perhaps an undisclosed capital markets issue (private placement?) that accounts for this additional US$35 to $75 billion.

At 30 September 2009, Emirates NBD had total assets of AED291 billion (US$79.3 billion) and a total loan portfolio of AED217.1 billion (US$59.2 billion).   That would mean that the bank had  30.3 % of its total assets and 40.6% of its loans extended to its parent Group (the Government of Dubai and related entities). 

Dubai: Bank of Tokyo-Mitsubishi Joins Creditors Committee

Reuters reports that BOTM is joining the Creditors' Committee and this is being cited as a reason for the delay in submission of the standstill request by Dubai World.

Frankly, I have to admit I don't understand this.  Dubai World's standstill request should be predicated on facts.  Its estimated cashflow should drive the terms.  And it should not expect to deliver the request and have the banks meekly accept it.  They will have questions.

Unless an abundance of bankerly politeness is required, I don't see why DW can't submit its proposal and then BOTM and any other bank who joins the Committee can catch up.   As well, I presume that the Creditors' Commitee is going to go to all the creditors for their agreement.  Unless of course DW is going to the Insolvency Court at the DIFC to get a standstill.  If that is the case, then from a purely legal standpoint it need only convince the Court to grant the standstill.  Under the Insolvency Law, creditors get to vote on the proposed restructuring plan not the standstill.  Not that I'd recommend doing that.

Time is of the essence, as the lawyers say.  Dubai can't afford to lose a day. Particularly because of the artificial end of April deadline.  A deadline that bites both the banks and Dubai - as Abu Dhabi's charity is conditioned upon that deadline.  And if my guess is correct, bites Dubai a bit harder than the banks.

What was also another strange note was this comment:  "What this (Mitsubishi's addition) implies is that the negotiation process will be prolonged and we may see some more banks enter the scene," said Janany Vamadeva, banking analyst at HC Brokerage, predicting an agreement to extend maturities with interest paid out.

Perhaps, Mr. Vamadeva has a different definition of "prolonged" than I do.  But it seems a bit optimistic to expect a diverse group of creditors with differing financing instruments to agree on a US$26 billion restructuring quickly.  Bankers usually save all the caution they failed to exercise in the loan underwriting stage for the loan restructuring stage.  

It's AA's law of the conservation of due diligence.  If you don't do it at the beginning, you wind up doing it at the end.  And then usually compounded several times with manifold layers of silliness  and needless complexity added in by some of the creditors.

Borse Dubai Extends Maturing US$2.5 Billion Loan by One Year

You've probably been reading news items about the upcoming maturity of the Borse Dubai's US$2.5 billion loan this February.  Many of these stories have presented the maturity as another test for Dubai Inc.

Well, the loan contained an option for the borrower to extend the loan for another year which is what the Borse has done.  So the problem is resolved at least for a year.

Story from the Gulf News here.

And one from The National here with some speculation on capital markets issuance by Dubai entities and the expected impact on projects in the Emirate.

Damas: Abdullah Brothers Sell Tower to Repay Obligations

Copyright Imre Solt - Usage under GFDL

The National reports that the Abdullah Brothers have sold one of their twin towers in Dubai to pay back what the The National charitably refers to as debt arising from "unauthorized" investments.  Applying that same standard, I guess one could characterize Brother Bernie's fund as having engaged in some "unauthorized" investments.  It was no doubt an oversight that he didn't give his investors up-to-date and accurate performance figures.

No word on how much was received for the building.  A safe assumption is that the sale involved a substantial haircut.

Good luck to the Brothers on raising the money to make Damas whole for their own unauthorized oversight.