Gulf Finance House - Esam Janahi Appointed Executive Chairman More Details on Capital Raising

GFH announced on the BSE today that:

1. Esam Janahi had been appointed Executive Chairman meaning that he would have a role in management presumably superior to that of Ted Pretty, Group General Manager.  (The CBB's Rulebook #2 (Islamic Banks) Module High Level Controls (Module HC) Section HC-1.3.10 expresses a preference that the Chairman be non executive.)
2. "The Board of GFH has also resolved, subject to relevant regulatory and shareholder approvals, to seek a further re-capitalization of GFH by way of issuing equity linked convertible murabahas or similar instruments to raise up to US$300m. Such money will be used solely for acquisitions and growth initiatives. Further details will be made available to the market shortly."
3. Deutsche Bank had been appointed as GFH's "restructuring advisor".  

What's interesting here is that the capital raising does not appear to involve a Rights Offering but rather the offer of convertible securities similar to the one that Deutsche Bank raised earlier.  In which case keep your eyes open for possible discounted instruments as the DB issue was.  With all the implications for leveraged dilution of existing shareholders.  Presumably, the Board has determined that there is insufficient appetite for a straight common equity offer?  Also the comments about the "controls" are designed to reassure potential investors that the new issues won't be used solely for debt repayment, but rather for "growth". 

It's also not clear precisely what DB's role is.  Is GFH seeking to restructure its existing debts?   Or is DB going to focus on the capital raising exercise?  A combination of both?

In commenting on Esam's appointment Ted Pretty said many flattering things about the new Executive Chairman, as you might have expected.  One comment though does stand out:

We now need to aggressively pursue new business in new markets and Esam has an enviable track record in leading such initiatives.

If I'm not mistaken, it was Esam's prior initiatives that led to GFH's current predicament.  Unless of course one believes that the global (lower case "g" please) financial crisis is the sole culprit here.

Oqyana Group - KD72.6 Million Loss for Fiscal 2009

AlQabas reported on Oqyana's annual general shareholders meeting which was held at the Ministry of Commerce and Industry.  As you might guess from the latter statement, that's not a particularly favorable development.  The MOCI doesn't rent out space for meetings.  When a company has a shareholders meeting there, it's because the Ministry has instructed the company to hold one so that it can convey  information directly to the shareholders, usually to advise them of regulatory and other violations  by the company.  These days the MOCI seems to be holding a lot of such meetings.

AlQ mentions two of the comments made by the Ministry:  the Company's financials were delayed.  And it had not registered a piece of property it owns in Bahrain in its own name. Oqyana's Chairman, Nabil Jafar Abdul Rahim noted that the delay was because of the delay in Stehwaz preparing its financials and Oqyana holds 100 million shares in Stehwaz (!).  As to the second comment, he noted that the Company had set up a 100% owned Bahraini subsidiary to hold the real estate.

The Chairman also commented that the primary cause of the Company's loss of KD72.6 million for 2009  versus a gain of KD98 million the year earlier was the revaluation of assets.  Or perhaps more precisely devaluation of assets.  Shareholders' equity stood at KD369 million at FYE09 versus KD429 million the year earlier.  Total assets were down from KD493 million to KD438 million.  

Oqyana holds both Stehwaz and The Investment Dar shares in its investment portfolio.   What value they are being carried by Oqyana is not clear.  If you're not aware, all three companies can be considered distinguished business partners and members of The Investment Dar Group.

Abdul Rahim also noted that Nakheel had given the Company a two year extension to develop its property in Dubai.  Originally the property was to have been developed within 42 months ending in 2009.  Oqyana was unable to secure the necessary financing.  So the extension.  It's unclear  but presumably it's two years from 2009.   Recently, it's been knocking on the doors of local and other banks looking for between US$50 million to US$100 million in loans to move forward.  But it has had no success so far.   

As I'm sure The Real Nick can confirm, a real estate development company without access to loans is in dire straits.  Sort of the equivalent of "The Donald" losing his ego.

On the subject of financing, the Chairman noted that the Company had obtained a loan from a bank in Bahrain against shares of Stehwaz.   This apparently dates from more than a few years back given that Stehwaz has been in rather distressed conditions for some years now.

A new board was elected consisting of Mr. Nabil Jafar Abdul Rahim and representatives of TID, Safwat Real Estate, Efad Real Estate (also affiliated as a business partner with TID), and Adeem.  

If you're not familiar with Adeem, you can link here to "The Navy Seals" of the Investment World!  You can also use the tags "Adeem", "Stehwaz" and "The Investment Dar" to find earlier posts on those entities if you're interested.

Gulf Finance House - Plans to Increase Capital By Up To An Additional US$300 Million

GFH announced on the BSE today that its Board had decided to recommend that shareholders approve a n up to US$300 million increase in capital.   The Board has delegated executive management to take the necessary steps.  A shareholders meeting will be called in the near future as soon as the required regulatory approvals are received.

Lost in Transmission: AlBoom's US$20 Million

Boom!

Abid al Boom's slow moving US$20 million lands him in jail.

Kuwait Stock Exchange: List of 23 Companies Currently Suspended From Trading

Here's the official list of the 23 companies whose shares are suspended from trading on the KSE due to failure to provide financial statements.  As you'll notice they are organized by the number of "missing" financial reports.

Also at the bottom are the three companies whose losses are 75% or greater of paid in (legal) capital.

[10:18:13]  ِ.الشركات الموقوفه عن التداول

يعلن سوق الكويت للأوراق الماليه بأنه تم وقف تداول اسهم بعض الشركات وفقا

لما يلي :-‏

اولا:الشركات التي لم تقدم بيانات 31-03-2009 و30-06-2009 
و30-09-2009 ‏

و31-12-2009 و31-03-2010 و 30-06-2010 :- ‏

شركة الصفاة العالمية القابضة(صفاة عالمي) ‏

شركة الدار للاستثمار (الدار) ‏

ثانيا: الشركات التي لم تقدم بيانات 31-2008 12-
و31-2009-03-
 و30-06-2009 ‏

و30-09-2009 و31-12-2009 و31-03-2010 و30-06-2010 :- ‏

الشركة الدولية للاجارة والاستثمار (د للاجارة) ‏

شركة فيلا مودا لايف ستايل(فيلا مودا) ‏

ثالثا: شركات لم تقدم بيانات 31-03-2010 و30-06-2010 :- ‏

شركة بيت الاوراق المالية (البيت)‏

المجموعة الدولية للاستثمار (المجموعة د) ‏

شركة اعيان للاجارة والاستثمار (اعيان) ‏

شركة الشبكة القابضة (الشبكة)‏

الشركة الاهلية القابضة (اهلية) ‏

شركة لؤلؤة الكويت العقارية (لؤلؤة)‏

رابعا:شركات لم تقدم بيانات 30-06-2010 :- ‏

الشركة الكويتية للاستثمار (كويتية) ‏

شركة المستثمر الدولي (مستثمر د) ‏

شركة الاستثمارات الصناعية (ا صناعية) ‏

شركة مجموعة الاوراق المالية (م الاوراق) ‏

شركة مجموعة عارف الاستثمارية (عارف) ‏

الشركة الخليجية الدولية للاستثمار (غلف انفست) ‏

الشركة الكويتية للتمويل والاستثمار(كفيك) ‏

شركة المدار للتمويل والاستثمار(المدار) ‏

شركة الصفاة للاستثمار (الصفاة) ‏

الشركة الكويتية البحرينية للصيرفة الدولية (صيرفة) ‏

شركة المعدات القابضة (المعدات) ‏

بيت التمويل الخليجي (تمويل خليج) ‏

خامسا: الشركات التي لم تقدم بيانات 31-10-2009 و31-01-2010  
و30-04-2010:- ‏

شركة الابراج القابضة (الابراج) ‏

سادسا:الشركات التي تجاوزت خسائرها المرحلة 75% فأكثر من رأس المال:‏

الشركة الخليجية الدولية للاستثمار (غلف انفست)‏

شركة المعدات القابضة (المعدات)‏

شركة الشبكة القابضة (الشبكة)‏

Saudi Zain: Indications of Turnaround - Though It's Not There Yet

In reviewing the 1H10 results of Gulf Finance House, Global Investment House, and Shuaa, I've commented that the only signs of a turnaround that I could detect were comments in the accompanying press releases where such a happy event was more a case of wishing than doing.

So what does a real turnaround look like?

As I've said before, the major sign is in the Company's ability to generate revenue.

Let's look at Saudi Zain for indications of a turnaround.  Note, that doesn't mean there has been a turnaround.  There hasn't.  SZ is still bleeding rather profusely - roughly SAR1.3 billion loss for 1H10 versus SAR1.6 billion for 1H09.

As the first step the usual link to the 2Q10  financial reports:  Arabic version here and English version here.

But there are some positive signs:

1. 1H10 Revenues of SAR2.545 billion a 98% increase over 1H09's SAR1.283 billion.
2. 2Q10 Revenues of SAR1.450 billion 106% more than 2Q09's SAR0.702 billion.
3. 1H10 Gross Operating Income of SAR992.374 million a 256% improvement over 1H09's SAR278.573 million.
4. 2Q10 Gross Operating Income of SAR608 million - 358% over 2Q09's SAR133 million.
5. Gross Operating Margin at 39% (1H10) and at 42% (2Q10) versus 22% (1H09) and 19% (2Q09).

This was accompanied by a reduction in expenses of 45% in 1H10 and 56% for 2Q10 versus the comparable periods the year earlier.

Is SZ out of the proverbial woods yet?  No, it's not. 

1. Financing expenses (read interest) are up significantly.  1H10 SAR545 million (2009: SAR261 million) and 2Q10 SAR317 million (2009: SAR 150 million).  Roughly doubled.
2. It has a matter of emphasis from its auditor (PwC) on the going concern assumption.  (Note #1).  Important because of the impact on lender, supplier, and shareholder sentiment.
3. It still has a very significant debt burden, including SAR2.2 billion provided by BNP in June 2010 with maturity December 2010.  A reason why the rights issue is of key importance.  Plus an SAR9.75 billion Murabaha facility due (bullet payment) August 2011.

Key questions are its ability:

1. To continue to grow revenues while maintaining a reasonable gross operating margin.
2. To maintain expense discipline.
3. To restructure its liabilities by a significant increase in capital which, if successful, should reduce financing costs by reducing the quantum of debt as well as hopefully the interest margin on the remaining post reorg debt.

Those questions can't be answered now.  But there are some positive signs - certainly better than at the companies cited above.

Board of Saudi Zain Proposes Capital Reorganization for Shareholder Vote

Saudi Zain announced on the Tadawwul (Saudi Stock Exchange) today 21 August a plan for a capital reorganisation to be put to a vote at an extraordinary general meeting of shareholders for their ratification subject to the Company obtaining the prior approval of the Saudi Capital Markets Authority, the Ministry of Commerce and Industry and any other concerned body for the plan.

The reorg will take place in two steps:

1. In the first capital will be decreased.  While it's not stated, this is clearly to eliminated accumulated losses.
2. In the second a partial restoration of capital.

Here are the details. 

Capital Reduction 

1. Reduce paid in capital from SAR14,000,000,000 to SAR7,328,843,885.  This covers the accumulated losses of SAR6,671,561,150 as of 2Q10.  2Q10 financials:  Arabic version here and English version here.
2. There will be a reverse split with shareholders getting 1 share for approximately each 2.096 shares they currently own.  As a result, 667,156,115 shares will be canceled.
3. Not stated, but the balance represented by these shares SAR6,671,561,150 will be transferred to Accumulated Losses zeroing it out.

Capital Increase

1. Increase capital by SAR4,383,487,180 to to SAR11,711,926,030.
2. 438,348,718 new shares are to be issued.  There is no discussion of the offer price.  SZ's nominal (par) value is SAR10 per share.  If the shares are offered for a higher price (at a premium) then SZ will raise more than the SAR4.4 billion.  My guess is that there will be a strong incentive to issue the shares at par given the Company's financial condition and a desire to obtain as close to 100% take-up as possible.
3. In addition to the normal pro-rata allocation among shareholders, founding shareholders will be able to convert all or part of the debt they've extended the Company.  That amounts to SAR2,914,000,000.  Of that amount Zain Kuwait holds SAR1,859,397,000 (63.8%).  Zain Kuwait holds 25% of SZ's stock and 50% of the Founding Shareholders' portion.  The Saudi General Organisation for Retirement and the Public hold the remainder.
4. Kuwait Zain's response to the new share offer will give a clear indication of Zain's ability and willingness to continue as a shareholder.  There is perhaps an indication of their attitude in that the SAR2.2 billion 6 month supplier credit SZ obtained in June 2010 was guaranteed by one of the Founding Shareholders, presumably Zain Kuwait.

In a bit I'll post on Saudi Zain and the indications of a turnaround.

AlGosaibi v Maan AlSanea - More on The "Fix"

They say there is no surer proof of someone's intelligence than the fact that he or she agrees with you. (See point #3 below).

Echoing a theme raised here earlier, AlQabas has an update on the AlGosaibi and Saad debt restructurings:

1. AHAB has reportedly offered to settle with its creditors at 15 cents on the dollar, an offer that creditors are reported to have rejected as they did the earlier 9 cents offer -- absolutely.
2. Saad has offered to settle a large (but unspecified) portion of its debt to its creditors but noted that freezes on its assets in the USA and Europe resulting from AHAB lawsuits against it frustrated that desire.
3. The Saudi Government is currently undertaking intensive efforts to achieve an accommodation (or reconciliation) between the two groups so that reschedulings can move forward.

As you'll notice, Saad's offer is as well a strong tactical move to develop support for The Fix.

While the article doesn't contain proof of its assertions, nonetheless it clearly demonstrates remarkable insight -- at least using the principle stated in the first paragraph. 

The question remains will AlGosaibi itself get "fixed" in the process?

Gulf Finance House - 1H10 Financials: Reports of a Turnaround Greatly Exaggerated

On Friday I was quite excited to see that GFH had posted its 1H10 financials and press release thereon.  That is until I printed out the 2Q10 report and found it was actually that for 1Q10.  While the First Quarter was much much better than the Second, I'm assuming this is just a technical glitch, and not a desire to focus on relatively happier days of 1Q.  Hopefully by the time you use the link  above to the financials  all will have been corrected.

In the interim, here are some preliminary observations on the summary 1H10 financials printed in the newspaper, sans as is customary the all important notes thereto.  More detailed comments will follow when the full report is released. 

Income Statement

Revenues

1. GFH doesn't really have much to report for 2Q.  Like Global, GFH's first quarter was much better.  The second for both is rather disappointing to use a charitable term.  
2. GFH had US$7.4 million in revenues during 2Q10 (28.5% of 1H10's US$25.9 million).  In 1H09 the comparable revenues were US$68 million.  A decline of 61% for 2010.
3. 77% of 2Q's revenue was due to FX earnings. I don't believe that GFH has an active Treasury function and so this is probably FX translation gains - a non cash non business revenue. 
4. The US$5.2 million in revenue from "Investment Banking Services" was earned entirely in 1Q10 and as per that Quarter's report US$5.0 million was earned from related parties (Note #11).  That's  96%.  You can tell the economy's bad when when your own "relatives" have no business for you.
5. US$5.1 million in placement, arrangement and management fees, of which 79% was earned in 1Q10.  From the Cashflow Statement it seems that GFH has only collected US$0.2 million during 1H10.

Expenses

1. Staff costs at US$8.8 million are 34% of 1H09's!  Though there is an interesting spike in staff costs in 2010.  In 1Q10 staff costs were US$3.6 million and in 2Q10 US$5.2 million.
2. GFH took a US$20 million impairment provision in 2Q10 as opposed to zero in 1Q10.  This is down from 1H09's US$80 million.
3. The bottom line is that GFH's remarkable improvement in 1H10 versus 1H09 is due primarily to the reduction in expenses from 1H09's US$160.1 million to 1H10's US$73.6 million.  Chiefly reductions in impairment provisions and staff expenses.
4. You'll recall AA's test for a real turnaround in a business is the revenue line.  There is no evidence of any turnaround in the Company's core business. In fact compared to 1H09 core businesses are doing worse.  

Balance Sheet

1. Cash Positions -  Cash increased US$7.8 million largely it seems (though money is indeed fungible) from the sale of US$29.1 million of Treasury Stock for US$7.6 million.  That's a loss of US$21.4 million.  You'll see these numbers reflected in the changes in Treasury Stock and Statutory Reserve in the Equity Account.  An interesting transaction.  I wonder if this was through the market (presumably on the KSE) or a private placement to a wise investor?  Or to a related party?
2. Placements with Banks are down to US$121.1 million at 1H10 from US$156.7 million at 1Q10 and US$455 million at FYE09.  The large drop between FYE 09 and 1Q10 is due to  largely to debt repayments during the first three months of 2010.  In any case, as noted earlier the bulk of the remaining funds are pledged to secure GFH's commitments to make investments.  And so should (unless the 1H10 financials reveal otherwise) not be considered as part of the Bank's liquidity.
3. There was an approximate US$45 million decrease in the Receivable for Investment Banking Services from 1Q10, which I cannot find in the Cashflow Statement.  This may be responsible for the increase in Other Assets by a similar amount?
4. An intriguing new category "Assets Held for Sale" ("AHAS") with a balance of US$260 million makes an appearance in 2Q10.  Apparently a shift of assets from "Investment in Associates".  It will be very interesting to see the basis on which these are carried on the balance sheet versus Investment in Associates ("IIA").  If I remember correctly, IIA are carried at Fair Value Through Profit and Loss.  A change to a different basis for AHAS could have income statement implications., e.g. fair value through equity for one.  As well if they are no longer fair valued but carried at cost, that could potentially - but not necessarily - provide some relief on the recognition of changes in value as "impairments" have a different set of rules than "fair value changes".   The reason my antennae are up on this is because GFH chose 2Q to make this change at about the same time it has signalled that it wants to slow asset sales down.  So I'll be taking a close look at the note on this category in the 2Q10 report  when it is available to see if there is any potential Accounting Magic at work here.
5. Other Liabilities have dramatically increased from 1Q10 and from FYE09.   By US$124 million!!  Hopefully, unlike 1Q10, GFH will provide a note with a breakdown of this category for 2Q10.
6. 1H10 Equity was at US$416.5 million uncomfortably close to the US$400 million net worth trigger in GFH's Sukuk.  Without the 1Q10 remarkable conversion of the Deutsche Bank Murabaha which added US$25 million to Equity, GFH would have breached the covenant.  I use the term "remarkable" because I find it hard to understand why a rational investor would be converting debt in GFH to shares at this point.  Or why there would be a market to purchase GFH's Treasury Shares for that matter.  As I've written before, this transaction's structure allows capital to be infused into the firm without the time consuming process of an Ordinary General Meeting of Shareholders, a Rights Issue, etc.   With the selection of the amount and timing discretionary.  Then again perhaps a wise investor saw and continues to see something here that I don't.

As usual, GFH's Chairman and Group CEO have many favourable things to say about their  imagined turnaround.  And I suppose one would expect them to make these statements.  

However, to attempt to blame GFH's predicament on factors outside its control or to portray GFH as being in the same condition as every other "global investment bank" is a bit much.

First, GFH is not a global investment bank.  It was and is a regional investment bank.  Just as TID, Global, or Shuaa were and are.  In the grand scheme of things looking across the world, rather modest sized shops all of them.  

Second, the list of global investment banks in serious trouble is rather shorter than the list of all global investment banks.   Even if we were to grant GFH temporary hypthetical membership in the ranks of global investment banks, the Goldmine, Morgan Stanley, JP Morgan, Deutsche Bank et al may have tinkered with their strategies.  But they are not fighting for their lives.   Make no mistake GFH is in serious trouble.  Its rating, its share price and its financial condition clearly indicate that.

Gulf Finance House - 1H10 Losses of US$47.7 Million

Asa Fitch over at The National has an article on the subject.  Funny how GFH was able to get the news out to The National and other media outlets but unable to get the announcement on the three regional exchanges it's registered on.  Or on its website for that matter.

Once they publish their financial report, I'll comment in more detail.  For now, I'd just note that with other firms who have announced dramatic improvements in their 1H10 over 1H09 results that once you've written the assets down to realizable value there are no further write downs and income "improves".  Real improvement comes of course when your firm generates sustainable revenues and cashflow.

Investcorp to De-List London GDRs

Today Investcorp announced on the Bahrain Stock Exchange that it intended to de-list its London GDRs citing as a reason:

In the period since the Secondary Listing of the GDRs, there have been significant changes in financial markets and the pattern of trading shares. The volume of GDRs traded on the London Stock Exchange over the last 12 months has been minimal and Investcorp does not believe it is cost effective to maintain the Standard Listing on the London Stock Exchange.

Zawya Dow Jones quoted an Investcorp spokesman who noted:

"While Investcorp continues to have a wide range of international shareholders, in changed market conditions the secondary GDR listing in London simply no longer adds value in terms of additional liquidity or research following," a spokesman for Investcorp told Zawya Dow Jones Thursday.

A review of the periodic reports of the Bahrain Stock Exchange reveal the following "extensive" trading in the shares of Investcorp on the BSE:

1. 2009 Annual Trading Bulletin:  For the entire year, there were just 2 transactions for 548 shares representing 0.069% of the outstanding shares of Investcorp.  (Investcorp has 800,000 outstanding shares of common stock). The total for both transactions  was BD307,529, roughly US$814,952. By contrast in 2008, a total of 1,431 shares (0.179% of outstanding common shares) were traded (30 transactions) for BD1,462,491 (US$3,875,601) and in 2007, a total of 5,905 shares (0.738% of common shares) (32 transactions) for a total of BD5,509,677 (US$14,600,644). 
2. 1Q10 Quarterly Trading Bulletin: 1 transaction for 550 shares in an amount of BD308,651, roughly US$817,925).
3. 2Q10 Quarterly Trading Bulletin:  No trades at all.
4. July 2010 Monthly Report (the latest on the BSE):  No trades.
5. To be clear none of the above constitute trading even 1% of  Investcorp's shares.  This pattern of light trading is to be crystal clear not just an issue with the shares of Investcorp but is pretty widespread on the BSE, which is why Investcorp devised its GDR program back in 2006.

So, I find it a bit hard to take this story at face value. Certainly Investcorp is not in dire financial straits and therefore does not need to cut expenses at the cost of reducing liquidity for its shareholders.  Is the problem one of the market price.  If the shares trade on the LSE more frequently, they may drift lower.  Liquidity can work two ways with stock prices.

Here's a link to the Investcorp GDR page at the LSE.

A few interesting other items:

In April this year, Investcorp announced it had signed a deal with two holders of Investcorp GDRs to buy them at US$5.00 per share.  In case you're wondering that's about US$0.24 over the offer price announced today, but then markets are down since April.  Interesting that having had a problem raising common equity not so long ago that Investcorp would be buying back common equity.  Wouldn't it make more sense to buy back expensive preferred stock?

If you recall, Investcorp has a special approval from the Central Bank of Bahrain to hold up to 40% of its outstanding shares as Treasury Shares.  And if not, it's outlined on page 28 in Investcorp's 2009 Audited Financials.  That is, just coincidentally, the free float on Investcorp's shares which you'll see outlined on the same page.

I wanted to check what level of Treasury Shares that Investcorp was holding but couldn't immediately find their Quarterly financial reports on their website.  Can anyone out there help me?

Al Mazaya Kuwait - The Villa Project Dubai

When Global floated the subsequently "ill-fated" AlThourayia Project Management Company to invest in Mazaya Saudi Arabia, it noted on page 25 in the Private Placement Memorandum that one of the attractive features of that transaction was the involvement of Mazaya Holding (in which Global has presciently acquired a stake earlier, though Global's stake in Mazaya was not mentioned directly in the PPM):

Mazaya Saudi will be positioned to leverage on Mazaya Holding’s competitive market edge, an absolute advantage against competition. As a new entity, Mazaya Saudi will enter the real estate market backed by Mazaya Holding’s respective expertise. The Company will gain from Mazaya Holding’s breadth of practice,  which has materialized through the 18 projects Mazaya Holding has on hand. Such projects range from megascale residential communities, to high rise mixed-use towers, to BOT projects. Mazaya Saudi will benefit from the know-how of Mazaya Holding, and will seek to develop similar scale projects, which shall be backed by Mazaya Holding’s vigorous methodology.

One of the projects touted as evidencing Al Mazaya's absolute advantage (and if you know the Economics definition between comparative and absolute advantage, you'll know just how remarkable a claim that is) was The Villa Project in Dubai, which involved the construction of 500 villas scheduled for completion in mid 2009. (PPM Page 28).

Gulf News recently ran an update on the project's progress.

The villas were to have a garage and vary in size starting from four bedrooms. "The whole attraction for the project was that you could customise the villas with swimming pools and the landscaping would be included in the fee. We were promised courtyards, water features, a school, mosques, shops and a medical centre, but there is none of that," said the businessman.

According to him, the original location for the development was supposed to be near Global Village, but it was moved by seven kilometres to the current location.

"The big thing at the moment is that [Al] Mazaya are expecting us to pay the Dh25,500 cost of connecting the sewage and Dewa [Dubai Electricity and Water Authority] lines even though its not our responsibility, that's the job of the developer. The frustrating thing is that my neighbour who has Dubai Properties as the developer doesn't have to pay."

The businessman had bought his villa in 2005. "It does say in the contract that they have leeway of a year on completion, but even with that it's two years behind schedule and most of us are still paying rent when we should have moved in," he said.

Other issues concern the poor workmanship and finishing, no boundary demarcation, landscaping or community facilities.

These are some rather serious charges.  But AlMazaya is not shy about taking responsibility for its actions as this quote from the CEO of Al Mazaya Dubai evidences:

"The problems with ‘The Villa' have been due to circumstances beyond our control," he said.

It seems even an  absolute advantage cannot overcome the actions of others.  Unclear if the global financial crisis (lower case "g" on global) is the culprit here.

And a tip of AA's massive tarbouche to Laocowboy2 for calling this article to my attention.

International Leasing and Investment Board Announced- Fuad AlHomoud as Member

ILI announced its new board this morning on the KSE.  It includes Mr. AlHomoud as a member. 

You'll recall that AlQabas had published an article stating that the regulatory authorities and one large creditor had reservations about his returning to ILI in an executive capacity.   A day later AlQabas published Mr. Al Homoud's strong denial.  Relevant post here.

The Chairman, Mr. Hajjaj Mohamed BuKhadur, has been appointed as Managing Director not Mr. AlHomoud.  A face saving compromise.  A tempest in a teapot.  A bit of a "fix"?  Unclear to me.

[11:11:36]  ِ.تشكيل مجلس ادارة الشركة الدولية للاجارة والاستثمار (د للاجارة) (موقوفة)‏
يعلن سوق الكويت للأوراق المالية بأن الشركة الدولية للاجارة والاستثمار
ِ(د للاجارة) (موقوفة عن التداول) افادته بأنه بناء على اجتماع الجمعية
العمومية العادية المنعقدة في 10-8-2010 والذي تم فيه انتخاب اعضاء ‏
مجلس ادارة الشركة فقد تم تشكيل مجلس الادارة ليصبح على النحو التالي:‏
السيد / حجاج محمد بوخضور                  رئيس المجلس والعضو المنتدب
السيد / عبدالوهاب عبدالرحمن المطوع        نائب رئيس مجلس الادارة
السيد / اسامة علي المطوع                                  عضو
السيد / فؤاد حامد الحمود                                    عضو
السيد / بدر الدين نويرة                                      عضو
السيد / محمد احمد الجاسر                                  عضو
السيد / خالد محمد العبودي                                  عضو

AlFarabi Investment Company Planning to Enter Under Financial Stability Law

Yesterday Al Watan published an article stating that Al Farabi had received agreement in principle from the Central Bank of Kuwait to enter under the protection of the Financial Stability Law.

Today AlWatan published an article in which AlFarabi's GM confirms the news.  But denies being the source of the leak as the Company's intention is to wait until the upcoming shareholders' general meeting.

AF is primarily Kuwaiti owned by financial institutions KFH and  Industrial Bank of Kuwait and corporate groups.  From Kuwait:  Al Mousherji, Al Sayer, Hasibat Groups of Kuwait and the Olayan Group of Saudi Arabia.   It states it conducts its business according to the Shari'ah.

It is a private equity, direct investment firm which is probably best known for winning the privatization of the lube oil blending plant from KNPC.  The lube oil venture is separately capitalized from AF.

Fuad AlHomoud Responds: "No Regulatory Concerns About My Return to Internation Leasing and Investment"

AlQabas published a response by Mr. AlHomoud to its earlier article claiming that regulatory authorities and one major creditor had reservations about his return to an executive management role at ILI.

He categorically denied the article stating that it was baseless and contrary to the facts.  And then chided AlQabas for what he described as a failure to adhere to proper journalistic standards.

Global Investment House: 1H10 Financials – A Closer Look: Looming Cash Crunch

GIH released its 1H10 financials on the DFM on the 15^th.

With these in hand we can look at a bit more detail – the good, the bad and the ugly – some of which was missing from its earlier press release.

SUMMARY

While Global's press release did some fancy dancing around the losses, the real story from the financials is a looming cash crunch this year. If we assume that cash income from operations can pay most of the operating expenses (except interest), as outlined below, Global has to pay an estimated KD39.8 million in principal repayments and interest for the rest of the year. Estimated adjusted Cash and Banks as of today is some KD40.5 million, leaving no margin of error.

The implications are clear.   

Global is under intense pressure: 

1. To come to deal with NBUQ on the KD71.8 million "frozen" deposit unless justice is swift in Dubai. In which case there is always one more appeal.  Perhaps, a "break-up" fee for walking from the deal?  It may be a small price to pay to unlock this much needed cash.  Forgive interest plus an additional sweetener?
2. To conduct major asset sales – which in this down market are likely to cause accounting losses. While these will be "paper" not cash losses, they will erode capital further which will erode market confidence. 
3. Sell debt or equity to a convenient أبو سكر or الهيئة
4. Or to cause a "miracle" at a subsidiary via a successful prayer through Wali Al Thouraiya. Luckily that saint's tomb is in Kuwait and not in Saudi where that sort of thing is frowned upon. At least officially. 
5. Whatever miracles might occur this year, thanks to Global's wise lenders who imposed an unrealistic and irresponsible three-year rescheduling tenor, the problem only gets worse next year and the year after.
   

ANALYSIS

Net Income

Unlike Global which danced around the earnings issue, let's go straight to the bottom line.

1H10 Net Loss was KD34.9 million versus KD99.7 million for the comparable six-month period in 2009. 2010's performance was affected primarily by losses related to various investments which drove operating income to a loss of KD8.6 million (2009: KD45.6 million). Operating expenses were KD26.8 million (2009: KD54.1 million).

A closer look at 1H10 Operating Income shows that GIH basically broke even in 1Q10 with a loss of KD0.4 million. 2Q10 the loss was KD8.2 million.

Operating Expenses were KD15.9 million in 1Q and KD11.9 million in 2Q. 1Q's personnel expenses were KD0.4 million higher than 2Q's, other operating expense KD1.1 million higher, interest KD0.6 million higher and impairment provisions KD0.75 million higher. Interestingly, personnel expenses were KD0.9 million higher in 1H10 versus 1H09. Perhaps performance bonuses? New hires? More than 50 MBAs as one of our frequent commentators would have it?

During 2Q10, while its fee generating businesses accounted for a respectable KD6.9 million in income (1Q10: KD5 million), these revenues were overwhelmed by losses on financial assets held for sale (KD4.1 million), losses on FVTPL (KD11.9 million), and losses on subsidiary disposal (KD2.4 million). To some extent this is not a surprise. Global's investments are market sensitive and the market declined in 2Q10. Also the company is on a forced "Jenny Craig" diet – selling assets to pay the light bills and its rescheduled debt.

Comprehensive Income

1H10's comprehensive loss was KD41.6 due to downward revaluation of financial investments (KD6.7 million) offset in part by a FX gain of KD1.1 million. The comparable figure for 2009 was a comprehensive loss of KD90.1 million as the Company benefited from a net KD9.6 million in unrealized revaluations.

Cashflow

1H10 cash from core operations was a negative KD18.8 million versus KD16.0 million the year before. When financing costs are factored in (you will see these at the very end of the section on operational cashflow), the numbers are a negative KD25.9 million (1H10) and KD32.6 million (1H09).  They  include principal payments on short term debt: KD10.6 million in 1H10 and KD24.4 million in 1H09. (Note:  The US$50 million (KD14.6 million) debt payment 12 July is not included in these financials).  These are the light bills that Global needs to pay to stay in business.

Cashflow from changes in operating assets and liabilities were a positive KD30.1 million in 1H10 and KD34.1 million in 1H09. Essentially Global is dis-investing from its operating businesses – through asset disposals. Also as its business activities and volumes slow, there is less need for "working capital", e.g., receivables, etc.   The bad thing about a strategy like this is that it's limited to the amount of assets you have to sell.

As a result of the above, total operating cashflow was KD4.1 million positive in 1H10 versus KD1.5 million positive in 1H09.

Investing activities in 1H10 were a net use of cash of KD12.6 million (largely associated with the closing of AlThouraiya in 1Q10). In 1H09 this category provided KD35.9 million in positive cashflow.

Financing activities were a negligible outflow of KD0.5 million in 1H10 versus KD4.9 million outflow in 1H09.

The bottom line a net reduction in Cash and Banks of KD8.9 million in 1H10 and a net increase of KD32.5 million in 1H09.

The pattern in operating cashflow is likely to repeat itself: operating losses from the core business plus negative cashflow from financing costs offset by a net inflow from further disinvestment/reduction in core operating assets and liabilities.

Balance Sheet

Global's assets have shrunk from KD1,011 million at 30 June 09 to KD823 million at FYE 09 to KD774 million at 30 June 10. This pattern is likely to continue as the Company continues to sell off assets and reduce debt.

Equity (excluding minority interests) continues a similar downward pace: KD213 million at 30 June 09, KD163 million at FYE09 and KD124 million at 30 June 10. Minority Interest also is declining. KD81.3 at 30 June 09 to KD31.0 at 30 June 10. As Global sells its less than wholly owned subsidiaries, it "loses" the Minority Interest associated with these companies.

There is another side to this coin (pun intended). It also loses the Cash and Banks associated with the sold subsidiaries. As disclosed in Note 6, the closure of Al Thouraiya "cost" Global KD18.725 million in Cash and Banks. At 1H10 (Note 8), KD37.2 million of the Company's KD92.3 million of Cash and Banks is cash at subsidiaries – which arises solely on consolidation and may not be under the Company's control – though the sad stories of Global MENA Financial Assets and Al Thouraiya may evidence Global's powers of persuasion, particularly where it controls the Board. An ability to persuade legally independent companies to take actions contrary to their interests and then settle the resulting obligations by taking fantastic assets instead apparently less valuable and pedestrian cash. Notwithstanding this "history", a conservative approach would be to discount Global's liquidity position by excluding the "consolidated" cash.

A discussion of cash would not be complete without referring to the US$250 million deposit frozen at NBUQ by the wise application of both impeccable transaction structuring skills and similarly impeccable legal document drafting. The saga continues. Global has won in the Court of First Instance. NBUQ is appealing. When this will be settled is not clear. We're only at Round Two out of a potential three round bout.

Looming Cashflow Crisis

Finally, as Global has noted, it has paid in principal payments US$78.9 million under the restructuring so far this year, leaving another US$92.6 million (roughly KD27 million). We can estimate the remaining interest for 2010 at roughly KD12.8 million by using 1H10's expense. The required debt service is KD39.8 million. Global's estimated cash on hand (excluding amounts arising on consolidation) is KD55.1- KD14.6 July principal repayment = KD40.5 million. This rough calculation indicates how close Global is to the "tripwire".

Global is under intense pressure to: 

1. Settle with NBUQ on the US$250 million "frozen" deposit unless justice will be uncharacteristically swift in Dubai. And if it is, NBUQ has the right of one more appeal. 
2. Sell assets. Under these market conditions, fire sale may be the more apt description. The result of which while they will be "paper" losses, will nonetheless inflict real damage on Global in terms of eroded market confidence following further erosions in capital. 
3. Sell equity or obtain debt from أبو سكر or الهيئة. One of our regular commentators suggested this may be a viable option, if things get difficult. 
4. Look to create a miracle with a subsidiary – an appeal to the regional St. Jude of financial institutions – Wali Al Thouraiya. Subsidiaries, watch your cash!
   

The problem is that this is only Year 1. Under the irresponsible and unrealistic three year debt rescheduling imposed on Global by its wise lenders and agreed by its wise management (probably at the financial equivalent of gunpoint), the problem only gets worse next year as the scheduled payments are larger than this year's. So Global could well meet this year's cash requirements only to find itself in the same dire situation on 31 December 2010.

International Leasing and Investment - The "Fix" is in? Central Bank Trying to Stop?

The 16 August issue of AlQabas has an intriguing article on ILI: "Supervisory Reservations About Return of AlHomoud to International Leasing."  KSE page on ILI here.

The article states that:

1. The regulatory authorities, among them the Central Bank of Kuwait, have reservations about the return of Fuad AlHomoud to ILI especially after his membership to the Board and appointment as Managing Director.  
2. One of the largest creditors of ILI has joined in these reservations on the basis that he has been following the company for years and knows its "ins and outs".
3. PWC who the creditors had engaged  issued a report that accused the previous executive management of taking loans and using them for other than the purposes for which they were obtained.  
4. And PWC had recommended that court action be taken against previous executive management.  
5. The article quotes an unnamed source in Munshaat (a Kuwaiti Real Estate company) that Mr. AlHomoud is facing a court case related to the time he was at both Munshaat and ILI.  
6. After an examination, the Central Bank of Kuwait found that the previous management guilty of a number of violations and excesses and levied a fine of KD200,000.

What's apparently troubling some is the sudden "understanding" between Mr. AlHomoud and Mr. Bassam AlMutawa, the investor who has proposed a plan to save ILI.  The question is whether they have joined forces to save the company or for another reason.

At this point, AlQabas speculates (and note that word) that legal cases relating to ILI could be very uncomfortable for a variety of people and that having  control over the Company's "files" related to such cases could be a powerful motive for some to seek to obtain control over ILI.

ILI is currently suspended from KSE trading due to failure to provide financials.  It has not yet provided its 31 December 2008 financials or any subsequent ones.

And finally, while not stated in the article, I am going to presume that Mr. AlHomoud like a prominent expatriate Kuwaiti  businessman denies all allegations of wrongdoing.

KSE Suspends Trading in 12 Additional Companies (Now 24 Suspended)

You'll recall that yesterday the KSE warned 55 companies that they risked suspension of trading if they did not present their 2Q10 financials by 10:15 AM Kuwait time this morning.

12 of the companies on the list were already suspended for failure to provide earlier financials so the warning to them was a matter of form.   I've highlighted them by changing the color of the word (موقوفة)  (suspended) after their names to blue.

Of the 43 new "warnees" (55-12), 31 of them managed to get financials in to the KSE.  Thus, the 24 suspended companies are composed of the 12 of this group "left behind" along with the 12 previously suspended.

In relatively short order most or all of these firms should provide financials and the list will shorten again.

[10:40:7]  ِ.وقف التداول باسهم شركات اعتبارا من اليوم ‏
يعلن سوق الكويت للاوراق المالية بانه تم وقف التداول باسهم (24) شركة ‏
وهى الشركات التالية:‏
الشركة الكويتية للاستثمار (كويتية)‏
الشركة الاهلية القابضة (اهلية) (موقوفة) ‏
شركة المستثمر الدولي (مستثمر د) ‏
شركة بيت الاوراق المالية (البيت) (موقوفة) ‏
شركة الاستثمارات الصناعية (ا صناعية) ‏
شركة مجموعة الاوراق المالية (م الاوراق) ‏
الشركة الدولية للتمويل (د للتمويل) ‏
شركة المجموعة الدولية للاستثمار (المجموعة د) (موقوفة) ‏
شركة مجموعة عارف الاستثمارية (عارف) ‏
شركة الدار للاستثمار (الدار) (موقوفة) ‏
الشركة الاولى للاستثمار (الاولى) ‏
شركة اعيان للاجارة والاستثمار (اعيان) (موقوفة) ‏
الشركة الخليجية الدولية للاستثمار (غلف انفست) (موقوفة) ‏
الشركة الكويتية للتمويل والاستثمار (كفيك) ‏
الشركة الدولية للاجارة والاستثمار (د للاجارة) (موقوفة)‏
شركة المدار للتمويل والاستثمار (المدار) ‏
شركة الصفاة للاستثمار (الصفاة) ‏
شركة المدينة للتمويل والاستثمار (المدينة) ‏
الشركة الكويتية البحرينية للصيرفة الدولية (صيرفة) ‏
شركة لؤلؤة الكويت العقارية (لؤلؤة) (موقوفة)‏
شركة الصفاة العالمية القابضة (صفاة عالمي) (موقوفة)‏
شركة المعدات القابضة (موقوفة) ‏
شركة فيلا مودا لايف ستايل(فيلا مودا) (موقوفة)‏
شركة الشبكة القابضة (الشبكة )(موقوفة)‏
اعتبارا من اليوم الاثنين الموافق 16-08-2010 ،وذلك لعدم تقديم البيانات ‏
المالية المرحلية للفترة المنتهية فى 30-06-2010 ،فى الموعد المحدد .‏

Gulf Finance House Apparently "Hits the Wall": Delays Publication of 2Q10 Financials Until Study on Capital Reorganisation and Capital Increase Completed. Share Trading Suspended.

The Bahrain Stock Exchange announced this morning the temporary suspension of GFH from today until 23 August.

Yesterday instead of approving the Bank's 2Q10 report, GFH's Board met and took the decision that a  capital reorganisation and capital increase were necessary.  It  advised the BSE that it would therefore delay approval/issuance of its financials until it completed studies related to both and their effects on the financials.  It also requested the one week temporary suspension of trading.

From this rather dramatic last minute announcement it certainly appears that GFH has finally "hit the wall".   It had earlier received approval for a delay in issuing its financials with the deadline today.  Since it has not issued them, the news therein must be fairly grim.

There's a trading suspension announcement on the KSE (copy below, Arabic only).   Sadly, as you might have guessed,  it misses the important "bit" why the financials are delayed.  It just suspends trading because the financials were not provided.  Confirmation, if one were needed. that the news is not material to investors?  Or perhaps more accurately to Kuwaiti investors?

[10:25:14]  ِ.وقف التداول باسهم (تمويل خليج) لحين ورود بيانات 30-06-2010 ‏
يعلن سوق الكويت للاوراق المالية بانه تم وقف التداول باسهم بيت التمويل ‏
الخليجي(تمويل خليج) لحين ورود بيانات 30-06-2010 .‏

There is also an announcement at the DFM - where the exchange simply posted a copy of GFH's letter.

As of the writing of this post, there is nothing posted on GFH's website on this topic.

Footnote:  A "capital reorganisation" need not mean a rescheduling/restructuring of debts.   As of 1Q10 GFH had accumulated losses of US$440 million versus its legal (paid in) capital of US$621 million.  Under Bahrain Commercial Companies Law (as with some other GCC jurisdictions) when a firm has losses 75% or greater of legal capital, it's obliged to take action.  Either dissolve the firm, raise new capital, or use existing capital and reserves to offset the losses.  The latter can involve reducing legal capital.   So the capital reorganisation may be this process.  It may also include a debt rescheduling though with the recent West LB deal and earlier rescheduling of its LMC facility, the Bank shouldn't have an immediate debt repayment problem.  Unless of course things have really deteriorated.  On the debt front, don't forget that GFH's sukuk indenture requires them to maintain US$400 million or more of shareholders' equity.  So it's not too hard to imagine the Bank being close or below this trip wire as of 30 June 2010.

AlJoman: Cross Holdings on KSE Equal KD3 Billion or 9.4% of Market Value

AlJoman issued another interesting analytic piece.  This one on cross holdings on the KSE.

A bit of initial tafsir:

1. It's based on information from the KSE on shareholders of listed companies.  
2. As per KSE rules, shareholdings 5% or more are to be reported. 
3. Data is as of 5 August 2010.

Here's a quick summary.

1. 84 listed companies have cross shareholdings spread across 132 companies.
2. The amount is KD3.035 billion which represents 9.4% of the total market capital of KSE listed companies (KD32.4 billion).
3. It also is 21% of the disclosed investments by KSE listed firms (KD14.7 billion).  
4. Al Joman estimates that aggregate cross holdings (including those below the 5% threshold) equal 20% of the market capital of KSE listed firms.  It doesn't detail its rationale.
5. It ascribes this motive for this cross holding essentially as market manipulation.  Companies cross hold, inflate demand (sometime fictitious) for their partners' shares, and thus create bubbles.  When the downturn came, this mechanism which had been so powerful in creating the updraft was powerless to stop the downdraft.  Not the manipulators, nor the market makers, nor even the Government with its National Portfolio.   Al Joman refers to it as like a snowball rolling downhill, getting bigger as it goes and crushing all in its path.
6. As it has done before it faults the regulator and the weakness of the existing system, noting that many companies violated their corporate charters by investing in economic activities outside of the one listed in their Articles.   There's a biting comment about some real estate companies that own no real estate - not even a single apartment or shop.
7. In closing it notes that some out there may say that Al Joman is "beating a dead horse" on this topic.  But that it's intent is to remind the Kuwait CMA of the necessity of ending such "deviant" practices.

Here's an abbreviated version of the chart in the report.

Sector	# w Cross Hold	KD Millions	% Total
Banking	6	836	27.5%
Investment	31	1,237	40.8%
Insurance	4	44	1.4%
Real Estate	17	286	9.4%
Industry	9	371	12.2%
Services	11	108	3.6%
Food	2	4	0.1%
Non Kuwaiti	3	148	4.9%
Parallel Market	1	2	0.1%
TOTAL	84	3,035	100.0%

One final note, an appeal actually for some linguistic help.  There are two expressions that Al Joman uses in the report, the precise translation of which elude me.  Appreciate it if someone will post to give me not only a translation but a  ذوق of the expression.

1. الضحك على الذقون       
2. طاح الفاس بالراس