Update Gulf One Investment Bank Bahrain

Last December while commenting on the ongoing woes of Dana Gas, I mentioned that there were other firms in even worse shape and cited Gulf One Investment Bank in Bahrain.

It’s time to take another look at G1 as AA ventures off his well worn path of larger institutions in Bahrain.

As per its 2018 annual report, G1 has extended its string of losses in 2018 to five years.

Over the period from FYE 2013 (its last profitable year) through FYE 2018, G1 has:

1. Lost (but not in the sense of misplaced) approximately USD 92 million in equity, a 69% drop from FYE 2013.  Driven primarily by cumulative net losses of some USD 82 million over the period.
2. Suffered a decline of approximately USD 79 million in investments, a 73% drop from FYE 2013. Driven primarily by USD 57 million cumulative net losses in Investment Income.

You can see the details in G1’s 2018 and 2017 Annual Report both on Page 8.

This is rather a dismal record.

But Gulf 1's Board is confident in the future as evidenced by these quotes from the MD&A section of the 2018 Annual Report.

“The Bank made important strides in 2018 towards repositioning its business on a sustainable path, including expanding its income-based business and realising value from its private equity portfolio. In particular, the Board has undertaken a critical review of the challenges facing the Bank and is now evaluating significant structural changes that would put the bank on a stronger footing without affecting the range of activities it currently undertakes.”

So far the important strides have yet to be reflected in the financials.

As to the critical review, лучше поздно, чем никогда.

And again.

“The bank’s journey towards the realization of the value of its private equity investment continues into 2019. This process will have a favourable impact on the Bank’s ability to grow its successful income generating investments to take the bank to profitability and growing shareholder value.”

With cumulative losses of some USD 57 million in investments the bank’s journey towards the realization of the value of its private equity portfolio would seem to a very long term journey.  It will take some rather incredible multiples to cover these losses and generate an appropriate return.  But then 千里之行，始於足下.

 A few other observations.

Regulatory Issues

It pays to read the auditors’ opinion carefully.  In the section “Report on Other Legal and Regulatory Requirements” tucked away in the third bullet point is the phrase “except for the matters discussed in note 1” we are not aware of any violations of ….

The violations in question are:

1. Accumulated losses exceed 50% of paid-up share capital.  Resolution can be by an increase of paid in capital (raise new capital) reduce paid in capital to offset the accumulated loses, or wind up the firm.I’m guessing that of the three shareholders would opt for the second – a capital reduction. If that option is chosen, then G1 would have a short respite, if losses were to continue at the levels of the past five years.
2. But there's a wrinkle that complicates this strategy. G1 has insufficient shareholders equity. Central Bank of Bahrain Rulebook Volume 1 LR-2.5.2B requires wholesale bank licensees to maintain minimum total shareholders’ equity of USD 100 million.

G1’s Board has decided to surrender their wholesale banking license in favor of Category 1 Investment Firm.  There are no set amounts for minimum capital required for this license.  Rather the firm and the CBB will agree an amount based on the firm’s business. 

As I noted in December, G1 has no borrowings. There are no deposits taken from other banks or from individuals or corporates.  Its miniscule USD 7 million in liabilities consist of internal accruals.

Shifting from a bank to an investment firm seems to make eminent sense.

Other signs of distress.

1. The last press release on G1’s website is from 2012.
2. The last weekly update if from 2014.
3. The last research bulletin is from 2013.

Unintended (?) Political Commentary from Gulf News on BREXIT

Has today’s Gulf News, the newspaper of record for the GCC, taken a stand on BREXIT in Sir Kim fashion?

“Rats” indeed!

AA has heard of rats leaving a sinking ship.

But not rats sinking the ship.

As to the news article itself, AA has his doubts.  A BofE official with the name Gertjan Vlieghe?  Not likely on PM Bojo's watch.

Analysis of DG Restructured Sukuk Terms - Amended

Lasciate ogne speranza, voi ch’intrate

It's a lot more than just a forum non conveniens 

at least for some folks

In this post we’ll take a look at how investors in DG’s restructured sukuk (the “Nile Delta Sukuk”) fared in the restructuring.

Are they better off?

Our primary source is the Nile Delta Listing Particulars.   Details on the previous sukuk “Dana Gas Sukuk” are here.

This post should be read in conjunction with the post on “DG Sukuk Restructuring - Lessons for Other Investors” (hereinafter “Lessons”) for a more extensive analysis of the replacement sukuk.

First, let’s go back almost two years when AA in his capacity as (الفاضي يعمل قاضي ) gave some sage advice to sukuk holders about elements they should incorporate in the restructured sukuk, if possible.

To wit:

1. Recast the legal agreements to reduce exposure to Abu Yusuf-y legal maneuvering by the obligor/issuer.
2. Get more collateral and take possession now rather than relying on the obligor to deliver it later.
3. Increase amortization via interim payments and a cash sweep.
4. Shorten up the tenor to keep pressure on the borrower.

Recast the Agreements

1. Well, agreements were recast.
2. As described ad nauseam in Lessons the sukuk holders’ legal position hasn’t really improved. 
3. In fact they may be worse off because the Listing Particulars state that the if the Trust Assets (Ijara assets) have not  been transferred and legally registered in the name of the Trustee, then the learned courts of Sharjah may characterize the sukuk not as a financing transaction but a Sale and Purchase agreement.
4. In which case, DG will be obliged to take possession of the assets and return for any monies paid, including interest payments (so-called Periodic Distributions).  This as you will recall is one of the bogus arguments that DG raised with the previous sukuk.  Now the sukuk holders appear to have signed on to this interpretation.
5. AA hopes if this situation comes to pass, the learned courts of Sharjah will NOT opine that the sukuks are a single transaction and include the interest from the year dot in their calculation.
6. As noted in Lessons, the Listing Particulars highlight the risk (lay out a legal strategy?) that this new “ijara” structure may be subject to challenge on what are simply technical matters and not changes in interpretation of Shari’ah compliance principles though the latter remain a risk.
7. As also outlined in that post, the risk of Abu Yusuf-ery remains, the sad result of a confluence of factors associated with so-called Shari’ah compliant transactions, exacerbated by the risk of having to litigate in the eminent courts of Sharjah.
8. Hint:  If you’re looking for Shari’ah compliant structures, AA suggests equity in a firm that does not engage in transactions contrary to Shari’ah. Or you might want to consider sovereign sukuk issuers who are expected to be less prone to employing Abu Yusuf or his “tricks”.

Obtain More Collateral and Take Possession

1. More described “security” was ostensibly obtained, including some promises of  future security arising from what might charitably be described as high unlikely events, e.g., sale of DG’s fine Egyptian assets or payment of an arbitration award by Iran.   
2. One would need an electron microscope to assess the practical impact on the sukuk holders’ security position of the additional collateral, including the (  في المشمش ) type.
3. AA recommended taking possession of security now rather than waiting to attempt to exercise rights after default.  That didn’t happen.  One sad example: the Ijara assets apparently have not been registered in the name of the Trustee. As noted in Lessons and above, that opens a potential loophole big enough for Donald Trump’s ego to pass through comfortably.

Increase Amortization, Add a Cash Sweep

1. The sukuk holders had a partial victory here.  The sukuk has been reduced to just under USD 400 million.
2. But only the down payment was mandatory.  The additional payment got DG a reduction in rate.  DG made both.
3. But as of now DG have no further obligations to make principal repayments until final maturity of the sukuk in October 2020.
4. To add insult to injury, DG won the right to pay dividends of 5.5% of paid in capital (roughly USD 95 million) a year with the only requirement that after payment of dividends DG maintain USD 100 million in cash and equivalents.
5. To spell it out, it doesn’t matter what DG’s cash flow or income is.  If DG has money in the bank, it can pay dividends of roughly USD 100 million a year as long as after payment it still has USD 100 million in the bank.  
6. A very key point: DG prepares "consolidated" financials that include assets and liabilities of investee companies, including Pearl Petroleum.  Legally, DG does not own these amounts and cannot use them.  
7. In the past I've focused on the Pearl Receivables.  Now it's time to look at Cash and Banks.  Note 15 to DG's FYE 2018 AR page 89 contains information on Current Assets of Pearl appearing on DG's balance sheet - some USD 131 million which would include Pearl cash and A/R.  
8. From the MD&A (page 36) we know that DG's share of Pearl A/R was some USD 18 million.  A rough estimate (note the double caveat here) then is that about USD 100 million of Cash on DG's balance sheet is likely to really be Pearl's cash.  Unless Pearl dividends this money to DG, DG cannot use it for sukuk repayment or other purposes.  
9. The key issue here is whether the dividends restriction is based on the cash appearing on DG's consolidated financials or its parent only financials (not disclosed in the AR).  
10. By AA’s calculation USD 100 million is 25% of the amount due at final maturity.  Of course DG cannot reduce its cash to zero if it is to remain a going concern. Equally it cannot use Pearl's cash for its operations or for debt service.  
11. DG's cash is USD 400 million in bank as per consolidated financials. And on a parent only basis, perhaps USD 300 million.  In either case, DG can pay away just under USD 200 million before final maturity.   
12. Leaving USD 200 million (consoldiated) or USD 100 million (estimated parent only).   50% of the final principal repayment, ignoring cash it must retain for operations. Or in the worst case 25% of the final payment.
13. That appears to leave sukuk holders in the position of hoping that DG can generate aggregate net cash of about USD 300 million during 2019 and the first 10 months of 2020 (consolidated basis) or USD 400 (million parent only).  That’s based on the assumption that DG would not reduce its cash to zero to make the final payment and probably needs to retain at least USD 100 million to assure ongoing operations.
14. If it does not generate that cash, then there will be another restructuring.  As outlined above, the sukuk holders have scant legal leverage.

Shorten the Tenor

1. Tenor was kept reasonably short.
2. While the sukuk holders’ legal and collateral position is weak, the short tenor does keep some pressure on DG.  The threat of another messy restructuring and resultant worsening of banking and public relations may provide some leverage on DG.
3. Perhaps, the sukuk holders just trod the path of a typical commercial bank restructuring.  The lenders know that the proposed terms are not economically based.  That is, the borrower will be unable to make the payments in the time frame given.  But the terms will “sell” back in the head office.  And when the maturity is missed, someone else will be charged with restructuring.
4. In any case the sukuk holders may be in for the financial equivalent of a “Zeno’s dichotomy paradox” restructuring.  Each time they restructure they’ll get half way to full repayment.  At some point, I suppose, the amount will be such that a write-off will be less costly than the professional fees associated with another restructuring.
5. AA gives sound advice or so he imagines.  But, clearly,  (اليد في الميّة مش زي اليد في لنار ). 
6. Sukuk holders probably did as well as they could.  In the desert any water will do.
7. The lesson is to avoid the desert if possible.  Sound advice as usual from AA but of little use to those already "invested" in Nile Delta.
8. A cautionary tale that shows the importance of (فكر في الخروج قبل الدخول )