How the Mighty Fall and How Management Gurus Get Rich

A very good column today at the FT by Stefan Stern.

Interesting insights into the cycle of decline:

1. Hubris born of success - We can do no wrong.
2. Undisciplined pursuit of more
3. Denial of risk and peril
4. Grasping for salvation
5. Capitulation to irrelevance or death

In re my earlier post about the USA today and the Dubacle, I will leave it to you to decide which stage each of these parties is in.

The other interesting insight is that there is a market for management gurus and books apparently unrelated to success.  Perhaps, the most important lesson of all.

USA AAA Rating

The Treasury Secretary of the United States of America gave an interview with ABC this weekend.  He was asked about Moody's comment that the USA might lose its triple A rating.  He replied.

“Absolutely not,” Geithner said, when asked in an ABC News interview broadcast yesterday whether a downgrade is a concern. “That will never happen to this country.”

You notice that Secretary Geithner said "never".

When one thinks that the laws of gravity (physical or financial) do not apply to one, one is likely to be in for a surprising downfall.

And that leads into another issue.  Chairman Mao's  observation of the relationship between political power and guns is oft quoted.  Of course, guns cost money. 

Here's another perhaps cautionary tale from a land on whose Empire the sun never set.  And never would or so we were told.

Damas Appoints Chief Restructuring Advisor

Damas announced some senior management changes at Nasdaq Dubai today.  Most of these are interim appointments while the Board conducts a search for a permanent replacement.

But one appointment did stand out:  that of  Mr. Sanjay Manchanda, a Partner at PricewaterhouseCoopers,  as  Chief Restructuring Advisor.

Burj Khalifa - Observation Deck - 60 Stranded for Over One Hour Saturday

 

Image Credit: Karen Dias/XPRESS

Gulf News (Dubai) reports that a "minor incident" on Sunday is responsible for the close of the BK's Observation Deck.

Sixty people were stranded for over an hour at the top after an elevator apparently got stuck on the way up. A loud bang and cloud of smoke frightened those on the deck.  The passengers in the elevator had to climb up a ladder to get out.

Two views of the situation.

An American tourist:

"But there was a big lack of communication throughout the whole ordeal and it has certainly put me off going back up or taking visiting friends and family."

An unnamed "official".

"It is absolutely normal for a new building to face minor issues such as this, which involved one of the Burj Khalifa's elevators."

As I noted in an earlier post, often new buildings particularly skyscrapers have problems during their initial opening phase.  That's not the issue.  It is how any such problem is handled.   Pretending that they don't  exist isn't really the best way to go.

So it might be helpful to refer to this not as "maintenance" but what it really is "repairs" - fixing defects.  After only one month in operation, there hasn't been any significant wear and tear.

Gulf Finance House - Update on Rescheduling US$300 Million West LB Facility

AlAnba'a Newspaper (Kuwait) reported the following on 8 February:

1. The West LB-led syndicate had agreed to GFH's request to reschedule US$100 million of the $300 million due 10 February for six months.
2. GFH and West LB were in discussion about a US$50 million Sukuk with a two year tenor (maturity  June 2012).
3. Last week GFH was in discussions with various private sector parties in Kuwait and the Gulf seeking a US$100 million loan to be secured by real estate and shares.  (Note most of GFH's facilities are so secured). These were undertaken as a back-up to the West LB discussions. Status of these negotiations is unclear - whether they achieved anything and whether or not they are continuing.
4. Whether repayment of the US$100 million will come from GFH's capital increase last year or from expected profits from GFH's investments (which AlAnba'a says were US$500 million last year).

Today GFH issued an announcement in reply to a request from the BSE about the 8 February article denying that it was in discussion with West LB over a new US$50 million Sukuk.

Some thoughts:

1. First it's a pretty good assumption that GFH is on the "watch list" by the authorities.  A press report is published in Kuwait on 8 February.  The same day the BSE writes to GFH asking for a clarification.  This enhanced supervision is a major takeaway.  The regulators are concerned about GFH's situtation.
2. Second, it's probably not unreasonable to assume that if GFH were sitting on a pile of cash, the West LB lenders would insist on full payment of the amount due them tomorrow.  So where did that US$450 million go?  Well US$200 million is going on Thursday. No responsible institution is going to pay away all of its cash.   There are bills to pay.  GFH has been running about US$35-$40 million in operating expenses per quarter, though this will now come down as the US$200 million payment will reduce interest expense.  Balance that against cash inflows and you'll see the need to conserve cash:  revenues have pretty much dried up.  In 3Q09,  operating revenues were a paltry US$5.9 million.  And you'll recall I had raised earlier the perplexing fact that Deutsche Bank was converting its facility into stock in GFH.  Could that have been related to a cash outflow? When Fiscal 2009 financials and 1Q10 financials are released, we'll be able to understand better GFH's cash position and what the cash was used for.

Boubyan Bank Capital Raising - 85% Takeup Only

 

AlQabas reports that the recent share offer by Boubyan only received shareholder subscriptions for  495,257 shares which are equivalent to approximately KD127 million. (actually about KD126.3mm)   This is 85% of the amount offered.  That leaves  according to AlQabas 87,398 shares worth some KD20 million unsubscribed for.  

The offer was at KD0.255 per share (a KD0.155 premium over the nominal share value of KD0.100) and extended only to existing shareholders closing on 7 February 2010.   The privileged rights offering mechanism gives existing shareholders the right to subscribe for enough shares to maintain their percentage ownership in the company after the offer closes.    

My understanding is that 583,000 shares were offered - which would make ALQ's numbers above wrong.  Of course, there is another explanation - one which Umm Arqala might well suggest:  that AA is wrong.   Whatever the case, this is an attractive offering price as the shares currently trade around KD0.400 per share.

Al Qabas outlines several options to complete the offering:

1. Boubyan can offer additional shares to existing shareholders.  Any shareholder holding 5% or more would require Central Bank of Kuwait approval.  Absent CBK approval, an existing shareholder could subscribe to a 4.5% stake.
2. Shares could be offered to KIA.   

Personally I think this is not highly likely because KIA sold its  shares just about one year ago.  Earlier post with some background here.

It's more likely that an existing shareholder might buy an additional stake.  The article notes that National Bank of Kuwait (which currently owns 40% of Boubyan) has asked the Central Bank of Kuwait for permission to increase its shareholding to 60%.  And they would be a likely buyer.  As would another investor looking to secure a major block of stock.  NBK's interest is that  they are looking to establish an "Islamic window" to conduct banking operations and sensibly want to ensure that control is firmly in their hands.  At the present they have management control, but not an absolute voting control.   

The article closes by noting that other banks seem happy to invest alongside NBK as several banks had participated in the offering.  That is no doubt true especially since NBK has a good track record in running the businesses it enters.  But then again it just might be that these banks figure that as time passes NBK will  increase its stake in Boubyan and they will be well placed to turn a nice profit on their investment by selling it to NBK.  And would explain as well why a bank or other investor might be interested in the unsubscribed for shares.

Earlier posts on Boubyan including the legal battle between Commercial Bank of Kuwait, The Investment Dar and Kuwait Finance House over the fate of TID's shares can be accessed by using the label Boubyan Bank.

Ahmed AlSuwaidi v Esam Janahi - Update on Lawsuit

According to press reports, the Court of Cassation in Bahrain (the country's highest court) has overturned the decision of the Court of First Instance and the Appeals Court to reject Mr. AlSuwaidi's lawsuit against Mr. Janahi.  The Court of Cassation has remanded the case to another Appeals Court.

Mr. AlSuwaidi is seeking US$125 million in compensation related to "The Energy City in Qatar".  As per the article originally he and Mr. Janahi were parters in a Caymans registered company "Gulf Energy Company" which was to develop the Qatar Energy City.  It's not explained how, but Mr. Janahi acquired control the project which the article states cost several billion dollars and opened in March 2006.

Here's a report from AlKhaleej (UAE) and AlQabas (Kuwait).  

You're not likely to see anything in the Bahraini press given the constraints imposed by the Press Law (Law #47 of 2002).  And that's why in the Bahraini press the name of the former CEO of The International Banking Corporation was not mentioned in the article on his arrest.  Or why the Bahrain press will not publish the name of a businessman or company declared bankrupt by the court.

Burjbacle Continues

 

Pawan Singh / The National

When you're on a roll, you're on a roll.

Sadly, though sometimes it's downhill.

To be fair, when the Hancock Building opened in Boston, smart folks soon learned to stay at least one or two blocks away because the windows had the unhappy habit of popping out.   And of course there's the "Building of 1,000 ------" in Hong Kong whose unique porthole style windows were designed to deal with problems as well.

So the reference to "Burjbacle" is not to the problems as much as to the way they are being handled. 

The Market Speaks: SuqAlMal Blogspot Value Declared IPO Rumored to Be Planned

It's hard to put a value of the things one does.  And then self-valuation of assets is always a tricky thing and subject to all sorts of moral hazard.

Today someone pointed out to me that an independent source had valued Suq Al Mal.

As with all good leaders I "immediately sprang into action" to take decisive action to learn the value:  about US$175.20.

That may not seem like much, but as a good GCC investor I see the upside potential here.  

Under my downside case business plan at 84 million hits per day Suq Al Mal will be worth a cool US$20.2 million.  84 million would represent just 1.2% of everyone in the world visiting my site each day.

At my base case plan of just a modest 12% (clearly something quite achievable) SAM is worth US$202 million.

And finally the upside case  at 30% (I'm still the same old conservative AA) US$500 million.

Can an IPO be far away?  

Or perhaps a mudaraba with Rotana?  We can each contribute our assets and share 60:40 in the profits.

Global Investment House's Apologia for the Restructuring

GIH has also published a ten page brochure on its debt restructuring. 

The brochure begins by answering the natural question how did this happen.  It seems Global's misfortunes were a direct result of the Global Financial Crisis (no pun intended) and apparently had little to do with Global's conduct itself.   Sadly, after giving us this insight, the brochure doesn't explain why some other firms weren't affected by the International Financial Crisis.

But then precious space in the report had to be used to describe how GIH's management "immediately sprung into action" and dealt with the crisis.  A wise move when faced with the threat of imminent death.

Certainly, GIH deserves credit for its conduct during the rescheduling - though it is a very sad state of affairs when acting professionally and honorably is apparently so rare an occurrence that it  is remarkable and worthy of comment.  That being said, GIH knows better than I do the nature of the market in which it operates.  From where I sit I would agree that GIH's behavior was out of the ordinary.

However, the tone and whole point of the brochure seems a bit too self-congratulatory.  Especially in a case where the terms of the restructuring clearly indicate that GIH's business model did not work and is being abandoned.

So all in all the brochure seems to me the product of a delicate and apparently still troubled ego.  "It's not my fault".  "See what I nice person I was and how I acted so nicely".  "Many people said so (and I'll devote a page in my brochure to recording their accolades)".

In the world of business one has set-backs.  One addresses them.  One goes on.  If one does look back, it's at the lessons.  Self-justification and self-praise seem out of place.  But then again GIH knows the market it operates in better than I do.

Global Investment House - 2009 Earnings KD120 Million Loss?

Global has an announcement at the DFM today commenting on press reports that it lost KD120 million in 2009.   The announcement states that GIH's financials are with the Central Bank for its approval and until it receives the approval of the Central Bank of Kuwait, it cannot comment.

As of 30 September 2009, GIH had reported a net loss of KD105 million so a loss of KD 120 million would not be anything dramatic.  Operating expenses run about KD17 to 18 million per quarter.  There were probably some additional provisions required (as Ms. AlGhunaim has  hinted in interviews) and as well perhaps some expenses associated with the restructuring.

IMF Analysis: MENA Foreign Trade Constrained by Transport and Customs Clearance Problems

Rina Bhattacharya and Hirut Wolde of the IMF have analyzed MENA foreign trade and come to the conclusion that trade is some 86% below what would be expected given the characteristics of these countries' economies.  The non-oil exports of the MENA countries are significantly lower as a share of GDP compared to all other developing regions of the world.  Imports are also lower as a share of GDP compared to the same regions, with the exception of sub-Saharan Africa. This is documented in Figures 1-6 of the study.

The conclusion is that two factors are primarily responsible for trade under performance:

1. Transportation problems 
2. Customs clearance "inefficiencies"

While one might quibble about just how precise the conclusions are (Is it really 86%?  Or is it 83%?), the bigger picture of under performance is less subject to debate.   

And that really is the central message from the study - quite a disturbing one for an area facing a demographic "explosion" and the need to create new jobs.

Kuwait National Portfolio - A Slightly Different Take From Bader Al-Subaie

A slightly different take on the purpose of the National Portfolio from Bader Nasser Al-Subaie, Chairman of Kuwait Investment Company which is managing a portfolio for the Government.  Here's the KUNA account in Arabic and English.

From his reading of the founding documents of the National Portfolio concept, the primary focus is investment and investment returns with impact on the market a desirable secondary effect.  Of course in "providing liquidity to the market" the National Portfolio does support the market.  And that there was an entire package of steps - of which only two have been implemented.

Earlier post here.

DMCC Asks Dubai World to Remove Its Logo From DW's Website

The National (Abu Dhabi) reports that DMCC has asked DW to remove its logo from DW's website as it asserts that it was never owned by DW.

That's really not a vote of confidence in DW coming after all this time when apparently it either didn't notice or didn't care about the "mistake".  Funnily enough the Chairman of DMCC is the son of the Chairman of DW.

It would seem that not only were foreigners incapable of distinguishing between the Government of Dubai and companies owned by it but also it appears some Emiratis themselves.  And despite a very clear exposition from Abdul Rahman Al Saleh, Director General of the Dubai Finance Department repeated here in case you've missed or forgotten it. Or this one from Lt. General, Dahi Khalfan, Dubai Police Commander General and Head of the Dubai Government's Budget Committee.  Missing one admonition is sad, missing two (including one from the Police Chief) is just downright regrettable.

Take one implicit guarantee and call me in the morning if you're still confused.

"It's Unpleasant To Have A Rat In Your Flat"

 

Completely Unrelated Picture Courtesy of Joanne Servaes

Indeed.

Luckily the problem is solved.

Burj Khalifa Observation Deck Closed for Maintenance and Upgrade

 

Picture Courtesy of  Bu Jassem at the Buj Al Arab Blog

Gulf News reports that the observation deck has been closed for "maintenance and upgrade".  The National (Abu Dhabi) perhaps a politically less correct article given its first paragraph.

Luckily, it appears that the problems are only technical in nature:  "Technical issues with the power supply are being worked on by the main and sub-contractors and the public will be informed upon completion."

Of course, as with any building, one has to perform maintenance to keep it looking new and to repair any wear and tear on the building and its furnishings.   And one shouldn't wait too long to take steps to keep one's building looking "smart".

And one can often charge more rent in a building if one upgrades its facilities and decor.

0-2

 

Indeed we have to give Chelsea credit and then move on to the next game.

Kuwait National Portfolio Poised to Make Significant New Investments?

AlAnba'a Newspaper (Kuwait) reports that the Kuwait Investment Authority ("KIA") met with three Kuwaiti investment companies last week to hear their proposals for investing the remainder of the National Portfolio set up by the Government in 2008 to combat the effects of the global financial crisis on Kuwait's economy.  The NP was capitalized at KD1.5 billion, though only KD0.4 billion has been invested to date.  That has led to criticism from various parties for the need for greater speed, especially punters caught in the market downturn.  Not of course for concern for their own finances, but for the greater national self-interest, I am sure.

AlAnba'a reports that the NP earned 13% during 2009, a rather incredible return considering the overall KSE is down some 10% for the year. (More on this remarkable result below).  Furthermore the article notes that expectations are for a 30% return on the NP this year. 

For some reason, AlAnba'a expects that once a firm is chosen there will be a significant infusion of funds by the NP into the market - either all or a great portion of the remaining KD1.1 billion.  As you might guess from that comment, I have some doubts as to whether this can move forward in the next few days (" خلال الأيام القليلة المقبلة").  The Government still has to pick new managers for its portfolio and sign contracts with them.  Then funds have to be transferred.   Then one would expect a careful process of analysis and selection of stocks.    

According to the news article, the Government will apply the following criteria in selecting a new fund manager:  The firm should not have any financial weakness or be involved in any financial irregularities (an alternative translation would be crimes) and have good performance over the past five years. It's also "necessary" that it have a good reputation and possess both confidence (presumably in its abilities) and in its commitment.  That I suspect should quite smartly narrow down the list of potential new managers, though I suppose there could be local variants of some of these standards.  There is after all Australian Rules "footy".  And it works quite nicely I am told.

At the end of the article there is a precis of criticisms levied by the (Government) Audit Bureau ("ديوان المحاسبة") about the National Portfolio's performance in 2009.  The AB's report begins by listing a series of decrees by the Council of Ministers and the Finance Minister that the AB believes have not been implemented in the NP.  These have to do with maintaining conformity with certain ratios limiting the amount of the portfolio that can be invested in an industry or a single company within that industry.  What this means is that at least some the existing managers of the NP are running portfolios less diversified  than the Government regulations determined was appropriate.  The AB report also notes that the NP's goals also include improving the factors influencing trading on the KSE - to foster positive factors and eliminate negative ones.  And presumably there is a criticism implied here that the NP hasn't been doing enough in that area.

As a side note, it is a requirement of Kuwaiti law or regulations that when the Government owns 25% or more of a company that that company be subject to an audit by the Audit Bureau.  There have been some complaints raised that there are listed firms in which the Government has broken this threshhold but which have not been made subject to an AB audit.  And if you've been following the matter, some investors have raised a formal complaint with the KSE.  It is an old but wise truism to be careful what you wish for. 

Dubai Islamic Bank Signs Wakala with UAE Ministry of Finance

Dubai Islamic Bank announced on the Nasdaq Dubai today that "like other national banks", it had signed a Wakala Agreement with the UAE Ministry of Finance.  This is part of the UAE Government's program of providing funding to banks to strengthen their financial resources.  As with the other transactions, the UAE MOF may convert the Wakala Deposit and any accrued but unpaid profit distributions (interest in a conventional financing) to equity in the Bank.

Two intriguing things from this announcement:

1. The agreement was signed on 31 December 2009.  Yet the announcement was only made today 7 February.
2. Apparently, the amount of the Wakala Deposit is a minor detail which need not be disclosed.  At least at this point.

The date of the agreement (just in time for 2009 financials) suggests a pressing need at DIB for additional funds of a capital nature.  AA wonders if the deal was actually signed on 31 December 2009 or if it was signed "as of 31 December 2009".  In the latter case, it may have been signed sometime after 31 December 2009.  And that might explain that the apparent late disclosure was not late after all.  

DIB's Board will meet on 10 February to discuss the fiscal 2009 financials, perhaps another sign that ducks have only  recently been lined up, including this one.

And then again it may just be a case that disclosure standards differ from those AA is familiar with. 

Esterad Convertible Bond Offer Withdrawn

Further my earlier post, today Esterad announced on the BSE that it has withdrawn its Convertible Bond Offer due to "prevailing market conditions" and that BBK (the Collecting Bank) will return funds to those who did subscribe for the Offer.

As well, Esterad also announced that its ordinary general meeting of shareholders would be held on 30 March.  More importantly it disclosed that its Board had recommended against any cash distribution (dividends) for the fiscal year 2009.

That latter point is signficant, though not surprising.   

The company didn't pay dividends in 2008, a year in which it had a net loss of roughly BD 11 million (income statement) and a BD 14 million comprehensive loss.   For 2009, it had net loss of BD 3.8 million (income statement) and BD1 million in comprehensive loss.  The difference between net income or loss and comprehensive income is that comprehensive income  (or in this case loss) includes changes in equity, such as fair value changes,  that do not pass through the income statement.  

It should be noted that from at least 1975 through 2007, Esterad paid cash dividends each year with the latter years at a generous 45% distribution rate.