Abu Dhabi Commercial Bank AED 9 Billion (US$2.45 Billion) Exposure to Dubai World

Alaa Eraikat, CEO of ADCB, has disclosed that the bank has about AED 9 billion (US$2.45 billion) in exposure to Dubai World "about half of which are supported by collateral and income streams from infrastructure and other projects".

As of yet, ADCB has not taken any provisions on Dubai World because the loans are still performing.

He also noted:  “This is what I tell you makes a big difference [and explains] why we feel comfortable here [with our Dubai World exposure] rather than the lending to Saad and Gosaibi.”  Wise words indeed.

And that of the AED2.1 billion (US$572 million) in 4Q09 provisions, roughly one half were for Saad and AlGosaibi leaving about AED900 million (US$245 million) of exposure to these two companies still on the books.

The bank also provided AED700 million (US$190.7 million) against its AED 1billion (US$    million) of "foreign investments in special investment vehicles and credit default swaps in the US".  Mr. Eraikat said that the remaining AED300 million might also "potentially turn toxic".

Two comments:

1. At 30 September 2009, ADCB had roughly AED20.1 billion in equity.  It's exposure to Dubai World is roughly 45% of equity.  That seems a rather high percentage. 
2. Ambition unaccompanied by intellect is a recipe for disaster.

On the Other Hand Some Do Attend Davos

 

HH Salman Bin Hamad Al Khalifah, Crown Prince of Bahrain.

Davos: When the Going Gets Tough, The Tough Stay Home

First we have this headline from The Wall Street Journal  "Dubai Sheiks to Dodge Davos Spotlight"  which contains this absolutely delightful quote.  Par for the course?

Ahmed Al Sheikh, the head of a new media affairs unit set up earlier this month to coordinate the emirate's communication's strategy with the press, was unreachable for comment and didn't reply to phone messages.

And then again it could just be part of a new focus on expense control.  No unnecessary trips.  The Wall Street Journal did describe it as an "annual jamboree". And I suppose no unnecessary international phone calls on the Company's dirham.

But it's not just shaykhs who are staying home and off the panels as speakers.  A lot of bankers from struggling institutions have demurred as well.  You know those tough titans of finance.  The ones who are not afraid of  rugged competition.  Yet they are apparently possessed of delicate sensibilities after all.

Kuwait Stock Exchange Warns AlAbraj Holding on Trading Suspension If Financials Not Provided by 31 January

The Kuwait Stock Exchange issued a public warning today to AlAbraj that if it did not produce its fiscal year statements (AlAbraj's fiscal year ends 31 October), it would be suspended from trading.

The Company is involved in a legal case with Boubyan Bank over its non payment of KD45.2 million of debt. This is an indication of significant financial issues at the company which are no doubt responsible - at least in part - for the delay in release of its financials.

Here's the text (Arabic only) of the KSE announcement.

[14:27:1]  ِ.تذكير (ابراج) الالتزام بقرار لجنة السوق رقم(16)‏
يعلن سوق الكويت للأوراق المالية واستنادا الى قرار لجنة السوق رقم (16)‏
لسنة 1987، والذي يلزم كافة الشركات والصناديق المدرجة بتقديم البيانات
المالية السنوية في موعد أقصاه ثلاثة أشهر من تاريخ انتهاء السنة المالية،
فانه وفقا للقرار المذكور على كل شركة مدرجة في السوق الالتزام ‏
بتقديم بياناتها خلال المدة المذكورة اعلاه ، وحيث ان شركة الابراج القابضة ‏
ِ(ابراج) تنتهي السنة المالية بتاريخ 31-10-2009 واستنادا للمهلة المذكورة ‏
اعلاه فإن اخر يوم للاعلان عن هذه البيانات المالية هو يوم الاحد ‏
الموافق 31-01-2010 .‏
وبنائا علية فإن ادارة السوق سوف تقوم بوقف التعامل في اسهم هذه الشركة في ‏
حال عدم تقديمها البيانات المالية السنوية في الموعد المحدد .‏

0-0

On to Sunday and Man U.

Sensible Advice: Islamic Finance Not Necessarily Safer Than Non Islamic

Philip Thorpe Chairman and Chief Executive of the Qatar Financial Center Regulatory Authority gave an interview to Reuters at Davos.

Some times the truest statements are the most elegantly simple.

Philip had two.

Here's the first.

It's a myth to assume Islamic finance products are safer than conventional products and underlying risks should be studied more carefully, Qatar's top regulator said on Wednesday.

I guess that here at Suq Al Mal that's the equivalent of preaching to the choir.  Thinking Islamic products are safer than conventional ones is on a par with thinking that if my borrower's name is Muhammad he's more likely to pay me back than if his name is Ganesh.

And as I commented before these structures have not been rigorously tested in courts and because of their need to incorporate asset backed elements into their structures may pose some significant legal challenges.

Here's the second:

The role of regulators is to identify risks and in some instances to become a bit more interventionist," he said.

"If we saw a product that was unsafe for investors, we would not permit it to proceed. Regulation has never been about free markets. Regulation is not a consensual act. It's a political act...Recent events may have moved the bar up in terms of regulator tolerance."

It is so refreshing to see a regulator who doesn't feel he has to apologize for regulating markets. And understands that regulations and regulators are needed because the market is not perfect.

The Emirate Strikes Back: Emirates Bank NBD Drops S&P

"What is thy bidding, my master?"
"There is a great disturbance in the Ratings".
"I have felt it".
"We have a new enemy, the rating agency who downgraded DHCOG."

Here's the press release.  I trust the Death Star is ready.

The International Banking Corporation - Arrest of CEO

Rupert Bumfrey had a post today that AlBilad Newspaper in Bahrain reported that the former CEO of The International Banking Corporation had been arrested after being charged with fraudulent transactions in excess of US$ 2 billion.

That really caught my eye so I decided to take a look at AlBilad's account, figuring it might have additional interesting details.  It does.  As well, it suggests some potential answers to the question as to why the recovery rate on TIBC debt is expected to be so low.

First, a look at the article and then the usual comments.

Here's a quick translation of AlBilad's article.

Nawaz Hamza, Head of Public Prosecution Department, ordered the detention of the (former) Chief Executive of TIBC for a period of six days or the payment of a bond of BD10,000 (US$26,500).  The charge is breach of trust and misappropriation of funds/embezzlement.

Reportedly, the accused chose prison and after a two day investigation, was charged with fraud  involving in excess of US$2 billion. 

Earlier the Prosecutor had determined that the signature of Sulyaman Ahmad AlGosaibi on numerous documents connected with loans and money transfers had been forged through computer imaging of Sulayman's signature.  Once scanned, the signature's appearance had been enhanced by using blue color to make it appear to be an original signature.  And presumably the discovery of forgery prompted the investigation of the CEO.

(An earlier AlBilad article here from 17 January has a bit more detail on the forsensic investigation that determined that Sulayman's signature had been forged on various agreements - presumably loan and similar agreements - as well as certificates of board decisions.  Interestingly, this article asserts that TIBC was under the administration of Mr. Al Sanea.  In fact it makes that statement twice.  It's unclear what the basis for this statement is,  that is, how Al Bilad knows this to be the case.  As you'll recall if you've been following this case,  this is AlGosaibi's complaint: that Mr. AlSanea not they are responsible for the financial distress in their companies).

The article notes that in a meeting  last year in August with regional, Arab and international creditors AlGosaibi had presented a number of documents which it asserted were forged and which established that there had been a widespread forgery of documents and certificates used to obtain loans, bank guarantees, and to make transfers of funds in the name of TIBC and AlGosaibi entities.  As the article notes, this was an attempt by AlGosaibi to prove its innocence from involvement in these transactions.  As well, it  requested creditors to submit documents for transactions with TIBC and the money exchange firm in Saudi so that it could reply on them - presumably whether they were genuine or forged.

Now to the analysis.

1. First a bit of context, TIBC's 31 December 2008 financials (the last issued) showed total assets of roughly US$3.8 billion.  So in excess of US$2 billion is quite a large sum even when considering that some of the transactions also involved AlGosaibi entities in Saudi Arabia, such as the money exchange firm.
   
2. The assertion of widespread fraud suggests some possible reasons for the very low anticipated recovery rates on TIBC.  On that topic, the Governor of the Central Bank of the UAE is on record as telling his banks to provision 100%.   Earlier I had analyzed TIBC's financials and was left scratching my head about the decline in asset values that would be required to cause the apparent loss.  I was focused on duff investments and loans resulting from poor business judgment not fraud. Two potential explanations surface from this assertion of fraud. First, that not all liabilities are recorded.  Thus, assets may be roughly close to the US$3.8 billion in TIBC's financials but real liabilities may be US$2 billion  or so more.   Second, if one is going to forge documents to secure funds, then one is probably not going to have  any scruples about forging documents for assets, though this involves a bit more than scanning one person's signature and changing its color. Just to be clear:  the article does not explicitly state that there are unrecorded liabilities or fraudulent assets.  But that seems a logical conclusion.
   
3. It's important to note that the former CEO has not been convicted. And all we have is a press report that he has been accused.  It's important to note that under Bahrain's Law #47 of 2002 ("Press Law") disclosure of the identity of those accused and press reports on trials are limited so this is at present an uncomfirmed press report.
   
4. It's hard to understand how BD10,000 in bail is adequate security in a case allegedly involving over US$2 billion.  But then again the courts of Bahrain move in the most mysterious of ways.  One can be fined BD1,000 for hitting someone with a fish.  And BD50 for sexual assault.  
   

International Investment Group Kuwait Cures Payment Default

If you've been following the story, you know that on 11 January, IIG Funding Limited was to make a Periodic Distribution Payment (equivalent to interest under a conventional bond) of US$3,353,062.50 on its US$ 200 Million Trust Certificates "Sukuk Al Mudarabah" due 2012.

It did not.

At the time IIG (which is the source of the payment) advised it intended to pay on the 19th.

The payment was received on 20 January.

Under the terms of the Certificates a  three day delay in payment is grounds for the dissolution of the Trust.  Once the three days passes, even if IIG makes the payment as it did in this case, the Certificateholders have the right to dissolve the murabaha transaction.  A dissolution  is the same thing as an acceleration of a conventional bond:  IIG would be legally obliged to repay the Certificates in full - some US$200 million in principal plus any Periodic Distribution Payment ("interest") due.  

However, just as with a conventional bond, the Certificateholders must vote to exercise their right to accelerate payment. 

My guess is that they will not.

Interesting Blog: The Boursa Exchange

Today's feature The Boursa Exchange, a blog on life in downtown Cairo. 

You might wonder why the plug here as it apparently has nothing to do with finance or the GCC.   Well, it has some very interesting posts.  And Cairo is one of the great cities in the world.  And this is my blog.  There is also a link, however tenuous to finance, the blog does take its name from the area where the Cairo Stock Exchange is located

As befits a country with Egypt's history, Cairo has a veritable treasure trove of buildings and neighborhoods - different periods, different styles ...

There's a neat book by Samir W Raafat "Cairo the Glory Years", which focuses on the modern European inspired architecture.  Sadly, it seems a lot of these gems are suffering from lack of proper attention. 

On the other hand, there are some new triumphs - the gisr "gamila" fouq 26th July Street in Zamalek.  And, of course, the Burg Al 'Ayb.  Or is that Burg Al 'Aar?  Shukran gazilan, Ustath Khalid!  

UAE Banking Statistics December 2009

The Central Bank of the UAE has published its "Banking Indicators" for December 2009.

As noted, the figures for 2009 are provisional and subject to revision.  Also the Total Private Funds (shareholders' equity) does not include current year earnings.

Once 2009 fiscal year audits are completed and approved, then it will be possible to perform an in-depth analysis of the UAE banking sector's performance.

In the interim, as a general comment, there were no significant changes or obvious signs of significant distress.

Total assets in the system are down some AED12.5 billion (US$3.4 billion) from November.  That is a fluctuation of less than 1%.  Year over year, total assets are up some AED62.9 billion (US$17.1 billion) an increase of 4.3% over 2008.

Looking at December 2009 figures, loans are down AED9.4 billion and personal loans up AED0.6 billion compared to November 2009.  When December 2009 figures are compared to December 2008  the increase is AED24 billion and AED3.8 billion respectively. The changes are respectively 1% and 0.3% from November 2009  and roughly 2% from December 2008.

The closely watched specific provisions number was AED32.6 billion in December roughly the same as November's AED32 billion, significantly above December 2008's AED19.7 billion.   General provisions for December 2009 were AED10.7 billion versus AED9.3 billion in November and AED5.3 billion in December 2008.  Here the percentage changes are more dramatic when December 2009's figures are compared to December 2008's:  65% for specific provisions and 102% for general provisions.

Another Own Goal for Team Dubai in the S&P/DHCOG Ratings Dispute

You've probably seen the press articles that Standard and Poor's lowered the rating on DHCOG from BB+ to B.  A weaker cash flow and lack of information are cited as the reasons along with some background on the Emirate and Dubai Inc.  These reports also note that S&P has withdrawn its rating.

What I want to focus on in this post is the proverbial "war of words" that they have launched.

Was this war necessary? Who stands to win? Who will be the most damaged?

As you might guess from the title, I have my own view. Team Dubai has roundly booted yet another one into its own net. And when it comes to scoring, it seems that just about everyone on the Team is capable.  To be clear here I am referring to DHCOG's reaction to the ratings downgrade and withdrawal by S&P.

Let's start by reviewing each's press release – where better to wage a war of words.

First, S&P. Their press releases, including rating actions, are password protected (though all you need is an email address and the willingness to give it to them to get access). If you can't or don't want to do that, Bloomberg has a more complete account than many of the reports in the press. 

S&P states that:

1. Materially weaker cash flow and a resulting negative impact on liquidity as well as lack of clarity on potential government support (that famous "implicit guarantee" rears its head again) is the basis for the ratings decline. 
2. Because of "inadequate timeliness of information and insufficient documentation (emphasis mine) to maintain their surveillance" they have decided to cease rating the company.  (You might ask why they didn't just withdraw quietly with no fuss and no downgrade.  It's common practice that a rating agency doesn't simply withdraw without either reaffirming or changing the rating.   This is especially the case if they have negative information and conclusions. Since this will be their last word, to do otherwise might leave the market with the wrong impression of their opinion. As to the fuss, it either came as a reaction to what I expect were rather sharp discussions between the two parties. The other less favorable interpretation is that there are significant shortcomings in the information that S&P cannot let pass without comment.). 
3. Three further important negatives. First, the rating trend is negative: more erosion in credit quality is expected. Second, the rating and the negative future view reflect their base case. In other words they are not basing their rating and view on the future on the "downside" case. Third, a broad criticism of "lack of market transparency, reliable market data, and the level of financial information" (Ouch).
   

Now over to DHCOG's press release.

Their view is clearly and starkly stated.

1. They dropped S&P as a rating agency due to S&P's "lack of understanding of DHCOG's business, its operations and relationship with the Government of Dubai." 
2. They have been "sharing adequate information frequently and in a transparent manner" with S&P. 
3. S&P has made "inaccurate statements coupled with factual errors that are misleading." 
4. Therefore, they "discredit and disagree with the content of the latest S&P report". 
5. They will continue to work closely with other rating agencies and directly with investors in full transparency".
   

Now let's look a bit deeper.

Not so long ago, November 2008 to be precise, DHCOG was rated investment grade with "A" or an "AA-".  A "B" rating is a bitter pill, though DHCOG has had prior tastes from earlier downgrades. At any time, a downgrade isn't welcome.  Given Dubai's current difficulties, the downgrade – dangerously close to CCC territory – was probably seen as a direct threat to the company, the parent, and the Emirate itself. Add on top of that a rather broad and sharp criticism of market transparency and reliability and DHCOG's strong reaction isn't surprising.  Another concern might as well be the potential adverse affect on the main shareholder's attitude to the management of the company. What I suspect is the proverbial straw on the camel's back is that S&P signaled that it was likely to further downgrade the company, probably into CCC territory.

Who dropped who?

A tricky question. 

Usually such disputes are settled in such a way that no excessive dust is raised.  The company tells the rating agency it isn't happy with the rating. The rating agency advises that it cannot change the rating. So they find a way to part – an amicable divorce. That wasn't the case here.  Both parties have kicked up quite a bit of dust and it seems more than a few rocks.

My guess would be the company made the decision to prevent further downgrades. S&P could have maintained coverage and just marked the company down further if it felt the information were inadequate or delivered too late unless of course it felt the situation was so bad that to continue would violate its integrity and potentially cause severe damage to its reputation. The question that can be posed to S&P is how does this lack of market transparency and reliability affect its ability to rate other companies. Is the situation so severe that it needs to withdraw from other rating engagements?

Just how serious is the dispute?

Both have levied fundamentally serious charges against one another that go to the heart of the other's competence. And a hint of criticism of integrity.

1. S&P contends that the company was not providing information on a timely basis and that when supplied the documentation was inadequate. 
2. DHCOG claims that S&P is unable to understand its business or its relationship with the Dubai Government – in effect the rating agency doesn't have the skills to perform its job. But more than that, compounding its deficient critical skill, S&P is making factually incorrect and misleading statements – a direct attack on its integrity.
   

Whose story is the market more likely to find credible?

In a dispute like this, outsiders are unable to conclusively determine whose story is true.  They don't have the facts so they rely on the reputation of the parties, their presumed motives, and their conduct in the dispute. Dubai is at a disadvantage on all three except perhaps in the region.

While the folks back home will probably quite naturally take DHCOG's side, the wider market will tend to believe the rating agency.

Why?

S&P enjoys a better market reputation than DHCOG. It is a "household name" and has built a perception in the market that it is a smart thorough institution.

The central reason though will be the perception that the company is motivated by defensive self interest. The downgrade affects the company's access to debt markets as well key deal terms, e.g., tenor, pricing, security and covenant packages.  It may also affect the price of the company's stock since shareholders are legally subordinate to all creditors. Faced with these potential outcomes, it's expected that the company will fight to prevent them from happening. Given the negative outlook, it's likely that S&P would have downgraded the company further. While DHCOG would prefer to avoid the "company" of single "B" rated companies, consorting with those in the "CCC" class has to be an even more distasteful prospect.  Also complicating DHCOG's sales story is the fact that many a company in this sort of situation has claimed that credit or stock analysts didn't understand their businesses or the real worth of the company. But, generally, history has vindicated the analysts.

On the other hand, the market finds it hard to believe the rating agency has a hidden agenda or gets great benefit from the downgrade. It is seen as doing its job in delivering the bad news.

So what does a smart company do in this situation?

The first is to realize that not much can be done.  The rating has been lowered.  No amount of protestation will cause the rating agency to change it. Trying to convince the market that you're right and the rating agency is wrong is difficult, if not impossible, for the reasons outlined above. And a variety of parties are locked into using the rate whether or not they believe it is correct.  Entities subject to Basel II. for their capital adequacy calculation.  Investment companies who are limited to investments of a certain credit grade.  Banks who translate external credit grades into internal models for underwriting decisions and pricing purposes, etc.

The second is to choose one's battles carefully. There is truth and there is the appearance of truth. The market does not have the facts. It will judge on appearance. Even assuming that the rating agency is dead wrong, the company has to think carefully if a bitter public dispute will help or harm it. One does not want to wind up in a worse position after the battle than before.

The third is to reply appropriately if one chooses to fight. What arguments are most likely to be plausible? As hurt and perhaps outraged as they were, the wiser thing for DHCOG to have said would be that S&P doesn't understand our business and hasn't given sufficient weight to certain factors. We disagree with the assumptions in their economic model. Their interpretation is therefore wrong. This is much better than saying that the rating agency has the facts wrong, that it lacks the requisite skills or that it is making inaccurate misleading statements. It will be very hard to convince the market that this is the case with a firm with S&P's reputation.  

Compounding DHCOG's position is that other rating agencies have been downgrading it. So in a sense DHCOG is not just fighting one agency, it is fighting the Big Three. An even larger credibility disadvantage. What the company can hope for is that there will be differences among the agencies and it can therefore discredit the lower rating. But, last December Moody's downgraded the company to "B1" – the same as S&P. Fitch's rating is "BB" – higher but by only one level. All three agencies have assigned negative future trends. This certainly takes the wind out of DHCOG's argument. Where there may be hope is that other agencies will not be so negative about the company's timeliness and quality of information and may not wield as broad a brush in criticizing the local market.  Perhaps, apparently small victories but important victories particularly in this climate.

Perhaps, in drafting its press release, DHCOG's target audience was the regional market, that in the UAE or one rather important shaykh in Dubai. And for this audience, their approach may have been the right one. But in terms of the wider market, the one that actually matters for financing, it is not. The press release is unprofessional. It sounds too emotional. It looks like it was drafted in a fit of pique. All that is missing is the sound of the foot stomping.

In the midst of a very challenging refinancing process Dubai Inc. can't seem to avoid scoring own goals.  This isn't the first.  And this isn't the only player (Dubai Inc entity) to do so.  Team Dubai needs to get a better hand on its play (public relations).  The task is difficult enough as it is without needlessly making it worse.   

Not only for the good of today but as well for the good of tomorrow.

Investment Dar - Forward Steps on Legal Agreements for Restructuring

AlQabas quotes sources on the Creditors Committee that Committee is moving forward with the legal documentation and the implementation of the restructuring despite the fact that the Central Bank has  not yet approved TID's financials.  (Those of you reading the Arabic text will notice that I have added the words "not yet" as the original wording didn't make sense.)

Two working meetings involving the Creditors Committee and its legal consultants will be held in preparation for a meeting at the end of February at which the wider group of creditors will be asked to give their final agreement to the legal documentation for the restructuring.  It's been agreed  in principle that the first meeting will be held on 8 February to agree the final draft of the legal model (documentation?) for the plan.  At this meeting two of the members of the Committee will be formally delegated to work with the legal consultants on finalizing certain technical details.  As per the article, it's been agreed that Lloyds Bank will be one of them.  A Kuwaiti institution will be chosen as the other. (Presumably,the choice of a Kuwaiti and an international firm is because implementing the plan involves steps in both Kuwaiti and "international" jurisdictions).  The article notes that the Committee's legal advisors intend to consult with these two firms and obtain their advice on numerous non legal technical points related to the transfer of the assets, the mechanisms for doing so, and the location of the entities that hold these assets).

A second meeting will be held on 18 February to put the final touches on the legal documentation. And then a wider creditors meeting will be held at the end of the month.

Based on my admittedly a tortured translation (either I'm off my game or AlQabas' reporter is), some comments:

1. Clearly, the creditors have a sense of urgency to get the deal done.  They are not waiting for CBK approval of the financials. This urgency is probably driven by two things.  First, having labored so long to get approval from a majority of creditors, the Committee wants to bind that approval through the signing of definitive documentation.  The longer this takes the more chance  that some creditors will withdraw their previous approval. Some approvals already may be contingent on agreement before the end of February or some other uncomfortably close other deadline.  Second, the creditors have evidenced a keen desire to get TID's assets under their firm control, e.g., the request that the CBK to appoint a monitor at TID during the negotiations, the repeated comments about disclosure, transparency and corporate governance, the requirement that the Company appoint a Chief Restructuring Officer, etc. 
2. What is hard to understand is the delay at the CBK.   Given the importance of TID's restructuring, it would seem that the CBK would be working hard  to finalize its review. 
3. With respect to the meeting schedule outlined above, I wonder if  the plan is to sign the definitive legal  documentation for the restructuring at the end of February.  If that is the case, then it would seem that following the 8 February meeting, the Committee would send creditors draft documentation for comments with the meeting on the 18th designed to address any points raised and allow time for the circulation of a revised draft.  Then signing could take place at the end of that month.  If not, then it would seem signing would occur sometime in March.
   
4. What will be very interesting will be how the restructuring deals with the non signing creditors.   And how those non signing creditors will react.  Will there be a late rush to join the restructuring?  Or will these creditors pursue TID for payment in court?  A right it seems they retain in the absence of a legally enforceable "cram down" in Kuwait.   If so, it would seem highly likely that one or more of them would challenge the asset transfers because after the assets are transferred and pledged to the signing creditors, there will be no assets of any significant value left in TID with which to settle their debts. 
5. So successful meetings in February may not be the last act in this long running saga. 
6. In any case, besides potential lawsuits, at a minimum, TID will probably have to fulfill the same KSE requirements as Global Investment House: obtain shareholder approval of the transfer and pledge of assets and then request KSE approval before making the transfers.  It's hard to see how the KSE could or would want to cut a different deal for TID.
   

A Man's A Man

St. Michael's Cemetery, Dumfries Scotland.

1-3

Now is as good a time as any to say "argh" I suppose.

But, on to Wednesday.  Red and White!

Saudi Mortgage Law on the Way?

So says the Gulf News quoting Bloomberg quoting HE Muhammad Al Jasser, Governor of SAMA.

It might come as a surprise to many out there but there is substantial unmet demand for housing in the Kingdom.

This law will facilitate the mobilization of real estate finance, particularly for residential housing.  It will also provide alternative investment opportunities for local financial institutions.  

In 2006 Unicorn Investment Bank in Bahrain teamed up Standard Bank and the IFC to launch the first ever securitization of housing receivables in the Kingdom.  Here's the IFC's write-up on the transaction. It was a modest sized deal of some US$18.5 million.  But followed by further deals by UIB in 2007 (US$600 million and US$1,000) for Dar Al Arkan.  Here is the portal page to UIB's press releases on these transactions, if you're interested.

Saudi Capital Markets Authority Levies Fine on CEO of Sadafco

The Saudi Capital Markets Authority announced it had fined the CEO of Sadafco SAR 50,000 for disclosure of "inside information" on the company's 1Q 2009 earnings.  If I'm not mistaken the CEO of Sadafco is a non Saudi.  No name was given in the announcement and so I'll refrain as well from providing a name.

Of late the CMA has been increasing the pace and rigor of its monitoring and enforcement actions.

Kuwait: Central Bank Governor Tells Investment Companies There Are Only Two Choices: Debt Restructuring or The Financial Stability Law

AlQabas reports  that the Governor of the Central Bank of Kuwait delivered a short and sharp message to Kuwaiti investment companies at his last meeting with them.

He is reported to have told them that they have only two choices in front of them.  Accordingly, they should abandon pleas for increases in liquidity, the lowering of interest rates, or the purchase of company assets.

Instead they have to choose from one of the two courses of action:

1. Agree a rescheduling with their lending banks.  Some investment companies have done this which proves it is not impossible. It's incumbent on other firms to begin this process.
2. Submit themselves to the Financial Stability Law mechanism.  He noted that to date there have been no cases so one cannot say what the results will be.  

He criticized companies for failing to confront and disclose their current situations.  A fact that he related to the size of their problems.

What's clear is that many of these companies are still in denial about the extent of their problems.  And that they are in the typical borrower's "delay and pray" mode.  If I don't formally recognize the problem, it doesn't exist.  Maybe a miracle will happen.  Asset values could reach their previous heights.  The government will launch a bail-out.  Sadly, this has happened enough times in Kuwait to make this a credible strategy.  A profound sense of citizen entitlement - even when unjustified - is one of the legacies of a "rentier" state.  And of course, local banks who funded these wise investments similarly are looking for a way out of the predicament.  So there are two sets of voices calling for a government "rescue".

Dubai World's Consolidated Assets More Than Twice Its Consolidated Debt: So What?

 

 

You've probably seen the press reports carrying the "good news" that Dubai World's assets (even after the market decline) exceed US$120 billion and could therefore easily "cover" its debt of US$57 billion.  Here's one sample.

The original article is here in Al Ittihad.

As you might expect, I've got some comments on the headline.  More on that later.  In the interim,  two words neatly sum up my reaction: "so what?"

But first to the real meat of the article: a discussion of the restructuring negotations.

Quoting an unnamed source, the article states that DW has been involved in intensive negotiations with its creditors and has achieved "tangible progress" during the past 25 days.  Creditors have reportedly shown "positive reactions" to the proposals submitted by DW.  The Company is concentrating its efforts on convincing creditors of the high probability of success because of two key factors.  Sadly, only one of them is mentioned in the article - the durability of its real estate and investments assets which have begun to demonstrate recovery of value recently.  The strategic nature of investments was noted.  That would I suppose make the financings that support them "strategic" as well as the repayments.  I am not certain, though, if the margin on such a loan would be strategic or just tactical.  One hopes that DW does not consider itself a "day trader".

The article then states that DW is focusing restructuring on its two "real estate" subsidiaries: Nakheel and Istithmar (?: I think Istithmar has wise investments in a variety of non real estate ventures).  Specifically mentioned as being excluded were Dubai World Ports, JAFZA, and Dubai Drydocks - all of which are recording "excellent operating results despite the world financial crisis which has affected world trade and transport."  Hopefully their bottom lines (net income) are doing equally well.

No mention of a formal request for a debt standstill.  No mention of any sort of draft proposals.  It still seems to me - despite this article - that progress is painfully slow.  And largely at the "touchy - feely" stage.  With nothing concrete to respond to, bankers are of course going to evidence all sorts of "positive reactions", especially if the coffee is good.  Or reactions that might be interpreted as positive because since they have nothing in hand concrete, they have not rejected anything.

Of course, such negotiations are not going to be conducted in the media.  It's going to be difficult enough herding the creditor cats.  But one would expect that some news beyond this rather superficial account would be in the press if really serious results had been achieved.  In that regard, it seems to me that securing the debt standstill is a key initiative.  This should be the easiest to achieve of all that will have to be done.  Once done, it is a visible milestone.  An accomplishment that gives a bit of psychological momentum to the process.  We've seen the opposite of this effect at The Investment Dar - where the standstill process has been a negative rather than a positive.

That being said, Mr. Birkett is an expert in this field so clearly I am missing something. I sure hope so.

Now to my comments.

It makes no sense to talk about the consolidated assets of Dubai World versus its consolidated debts unless those assets are going to be applied to the US$22 billion of debt to be restructured.  To do that Dubai World needs to take certain steps.  If it does not, then lenders to Nakheel or Istithmar have cold comfort from assets at Dubai World Ports or any of DW's other subsidiaries.

Why?  Two words (actually five):  "A will and a way"

The Will:  The article itself reconfirms what DW has said earlier.  It is restructuring these companies. The other companies and their assets are outside the restructuring.  Just as the fact that Shaykh Mohammed is the owner of DW does not mean that his personal assets are available to pay or support the restructured debts.  DW has evidenced no desire to make these assets available. 

The Way:  But, more importantly, is the way this would be accomplished.  In that regard it seems there may be some confusion about a very fundamental issue:  the difference between an economic entity and a legal entity.  Understanding this distinction is critical to understanding the "way".

Consolidated financials do not represent a legal entity, they represent an economic entity.  DW Group is not a legal entity.  The legal entities in the Group are the various subsidiaries (and their subsidiaries and so on) and the parent company - Dubai World Holding.  The Group is a combination of all these legal entities into an "economic" entity. From a legal standpoint it is a fiction.

Legal entities - not economic entities - own assets.  Legal entities - not economic entities  -enter into contracts, including those for debt. It is the wise lender indeed who understands precisely what assets  the potential borrower owns.  And then reacts appropriately to that understanding.

As a holding company, Dubai World legally owns shares in Dubai World Ports, Nakheel, etc.  It does not directly own the assets of these companies.   Those companies do.  And, if they are holding companies, this same pattern repeats itself.

At each subsidiary level there are a variety of legal relationships and requirements governing those assets.

First, in a liquidation, each and every creditor of that subsidiary gets paid back before the shareholder gets a single fil.

Second, any transfer, pledge or other disposal of an asset owned by that company (the subsidiary) is subject to the completion of legal steps as required by the local law in the jurisdiction where that company is incorporated and where the asset is legally domiciled.  This is both a matter of corporate law (which governs how corporations conduct their affairs) and of laws setting forth the legal requirements for a sale, pledge, etc.  For example, if a US company owns an asset in England, then both US and English law will govern what is needed to be done to dispose of or otherwise deal in that asset. In some cases assets may be subject to additional requirements, such as those imposed by financial exchanges (stock markets), etc.

Third, contracts can create new requirements beyond those mentioned above.  For example, any sensible lender puts covenants in its loan contract restricting the borrower's ability to pay dividends or to transfer, sell  or pledge its assets.   Loan agreements typically include financial ratios (debt to equity) etc. which the company must maintain.  To do so the company has to take or refrain from taking certain actions.  A properly structured set of ratios can impose all sorts of constraints on a company - constraints that if enumerated might require volumes. 

Some hopefully illustrative examples.

Let's look at the 2008 financial report of JPMorgan Chase.

Total consolidated assets (of the economic entity, the JPMC "Group") are an impressive US2.2 trillion. (page 131).  Total assets (of the legal entity JPMC, the holding company) are US$436 billion (page 225).  20%!  As you look at these assets, you notice "Investments in Subsidiaries" is a major category.   It is here that JPMC the Holding Company's ownership (through equity shares) in the separate legal entity JPMorgan Bank, NA is reflected. 

And, it's important to note, that at these subsidiaries, the same pattern may apply.  Think of DW's subsidiary, Istithmar.  It owns a variety of investments, Cirque de Soleil, Barneys, etc.  Each of which is a separate legal entity.  In fact, it probably owns these companies through one or more intermediate holding companies (for tax and other reasons).  When Istithmar's NY hotel got into trouble, lenders were not able to force Istithmar to pay (as it had apparently not given a guarantee for the hotel's debt).  Nor could they attach assets at the Cirque  - taking, say, the lead acrobat or his safety net.

How then does a lender get access to the assets?

An indirect way is to get the holding (parent) company to give its guarantee.   This establishes the holding company's obligation to pay the loan if its subsidiary does not.  However, it gives only an imperfect and indirect access to the assets.  The lender is an unsecured creditor of the holding company, which as indicated above has its main assets in shares of other companies.  If the holding company defaults, the lender can take possession of the holding company's shares in the subsidiaries.  However, as a shareholder, the lender still remains subordinate to all the creditors at those subsidiaries.   In effect the lender has merely "stepped into the shoes" of the shareholder.

A "better" way is to get the subsidiaries themselves to provide a guarantee.  In this case then the lender becomes a creditor at the subsidiary level and has the direct  lender's access to the subsidiary's assets along with all other creditors of that subsidiary.

There are a variety of issues involved in implementing these two previous steps.  The most important of which is establishing the legal basis for the giving of the holding company or the subsidiary's guarantee  so that it is legally binding on the subsidiary.  "Consideration" in English or "US" law terms.  Other issues would be the existence of any restrictions put on the subsidiary by its existing creditors to prevent just such actions - out of their own concern to maximize their share of the company's assets.

Orion Holdings Overseas - "Unauthorized" Trading and Corporate Governance "Shortcomings" Led to Collapse

A bit more information has come to light about the causes of the meltdown at OHO via an article in The National: at least US$20 million of unauthorized trades in gold and other commodities including oil.

That sounds familiar.

"It's hard to understand how this happened.  If OHO's main lines of activities were brokerage, fund management and technology, that is a great deal to lose in this period, even given the economic meltdown.  Was OHO taking proprietary positions that turned against it?  Was it trading in oil?  Or other commodities?  OHO was a member of the Dubai Mercantile Exchange."

However, a "mere" US$20 million in losses should not have caused the collapse of a company which  was valued at some US$263 million in February 2008.  The losses would have had to been more, a lot more.  Or it would have to be that the company had a lot of assets whose ultimate value proved to be much less than their carrying value. Or some combination of these and perhaps other factors.

That's not the only thing in the article that I'm having difficulty getting my head around.

1.  Shareholders' Blame Game - This seems to contradict the statement that "management was gambling with the firms' money".  Unless of course some shareholders felt that management was acting on the instructions or with the acquiescence of some of the other shareholders.  And were therefore asserting that that shareholder had a liability to make them whole.  Otherwise, it would seem the shareholders would have a very compelling shared interest to protect their dwindling investment by cleaning house of the culprits in management.  There is also the "testimony" from Shuaa that it was not involved in the management of the company.   Was no other shareholder?  Not even the largest? If so, what then is the basis for Shuaa's legal action against  the Chairman and Petra? 
   
2. Risk Management Report - The article seems to question whether the Board saw the report.  The Chairman says that he resigned in protest of the Board's failure to respond to the report.   It seems plausible that before resigning he would have raised the topic with the Board.   And then it would seem equally plausible that they would have asked to see the report if they had not.  One might also wonder if Sami Boujelben wouldn't have "rung up" the board members as part of the professional discharge of his duties.  Now, if at his resignation, the old Chairman did not agree to allow other parties to select his replacement, his resignation did not diminish his company's control over the number of seats on the Board and thus over OHO. It was then only a matter of changing a face.  Another set of questions regarding corporate governance and risk management focuses on the losses themselves.  Once they occurred, did the Board not receive and review financial reports?  Did the CEO or CFO brief the Board on the financials, including the losses?  If the Board wasn't getting periodic copies of and verbal reports on the financials, then there are some rather potentially difficult questions for the Board about how it implemented corporate governance.
   

What is presented raises more questions than it answers - at least for me.

The shareholders of OHO are primarily institutional investors.  They are not small unsophisticated retail investors hoping to turn a quick buck on their shares so they can buy a refrigerator (as one punter on the Dana Gas IPO told the press in Bahrain).  Thy had placed serious money on the table.  It was evaporating.  They did nothing? 

It seems there must be something more to the story.  Just as the US$20 million loss doesn't fully account for the financial distress the company now finds itself in, the corporate governance  related comments here don't seem to as well.

Another interesting bit from the article and that is the assessment that Shuaa over reached in its private equity investments and will be retrenching to focus on more core business of brokerage.

Finally, other investments as well as the general market trend are responsible as well for the decline in Shuaa's share price. It's not just OHO. When Shuaa issues its year end detailed audited financials, it will  hopefully be possible to quantify in part the relative contribution of each investment to the provisions and the loss.  No doubt,  the debacle involving the convertible and Dubai Group also played a role.