Hawkamah Corporate Governance Conference - Important Documents Released

Hawkamah held its Fourth Annual Conference "Building Middle East Markets and Corporate Governance Imperatives" the 9th and 10th at the DIFC, Dubai.   Event was in partnership with the OECD.

As usual, a worthwhile event.

Two solid documents issued:

1. Policy Brief on Improving Corporate Governance of Banks in the Middle East and North Africa Region
   
2. Study on Insolvency Systems in the Middle East and North Africa   

The Study covers 11 jurisdictions:

DIFC, Egypt, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, UAE and Yemen.

There are some global comparables on recovery rates (Page 5) based on another study the World Bank "Doing Business 2009".

As you might expect, the MENA region has lower claim recovery rates than other major countries.  Japan at 92.5% , the OECD at 68.6% versus MENA at 29.99%.  Bahrain came in with a respectable 63.2%

Anyway:  A hat tip to Hawkamah.  More evidence of  regional institutions helping develop the GCC/MENA market.

UAE Court Freezes Saad Assets (Maan Al Sanea)

12 November was not a good day for Maan Al Sanea.

Not in the UAE where a court place a protective order on the assets of Saad Group and Saad Trading Contracting and Financial Services in an amount of US$151 million at the request of an unnamed Abu Dhabi Bank.  Article here.   More coverage here and here.

Nor in the USA where the court-appointed liquidator for Saad Investments Company Ltd (Caymans)  ("SICL") made a Chapter 15 filing in Delaware to protect the assets of Saad Investments Finance  (owned by SICL) against third party attachments as per this  report.    

Some details on exposure disclosed so far to Gulf Banks.

Some links to previous SAM posts here and here.

The Investment Dar Kuwait - Standstill Agreement - 12 November Key Date - Creditor Response Uncertain

 

Today is a key date for TID and its advisor, Credit Suisse.

12 November is the deadline already extended once from 15 October for a response from creditors to a proposed standstill agreement.  A standstill would involve creditors voluntarily halting legal action against TID in return from some reciprocal actions and commitments from TID. 

Signs are not encouraging.  Failure to get creditors to agree to the Standstill would complicate matters but would not necessarily be "fatal".  The problem is the situation is complicated enough already.

While it's long past the end of the day in Kuwait, the lack of an announcement is not necessarily confirmation that creditors have not agreed.  TID is likely to have creditors in other jurisdictions and votes may still be coming in.  And if history is any guide, there will be ambiguous answers or contingencies placed on "yes" votes.  So some "hanging chads" to be resolved.

However, since votes like this don't take place on a single day, it's probably safe to assume that there wasn't a landslide of yes votes.   Otherwise, TID would have announced victory already. 

If asked to, I'd guess that the standstill is not likely to be accepted.  And if it's accepted, it will be by less than the number necessary to ensure protection from legal actions by dissident banks.

As you'll recall that in an earlier post, I noted the reported reluctance by certain participants in wakala transactions with TID to sign the standstill, preferring instead to rely on the "trust nature" of their transactions to secure repayment outside any debt restructuring.  And some speculation on the rumored resignation of an Adeem and Investment Dar Bank Bahrain director and connections with the TID restructuring.

TID's restructuring has been complicated by the fact that unlike Global Investment House ("GIH"), it has not issued any financial statements since its 30 September 2008 interim report.   Bankers don't like uncertainty.

As well unlike GIH, the Central Bank of Kuwait has appointed a temporary monitor at TID apparently at the request of creditors to oversee the completion of financials and the restructuring process  Perhaps a sign of the level of uncertainty of the creditor group.

A bit of background regarding the negotiations with creditors regarding some KD 1 billion (US$3.5 billion) in outstanding debt via announcements:

1. December 2008:  discussions with Commercial Bank of Kuwait to lead refinancing.  These do not succeed.
   
2. 25 January 2009:  announcement of engagement of Credit Suisse as a financial advisor.
3. 12 February 2009:  announcement that Credit Suisse will assist in developing a financial restructuring plan.
4. 1 April 2009:  KSE suspends trading in TID.
   
5. 12 May 2009:  TID defaults on US$100 million Sukuk
   
6. 28 May 2009:  announcement of formation of Creditors "Steering Committee" and upcoming meeting with creditors
7. 10 June 2009:  progress announcement.  (AA:  Note creditors have hired Morgan Stanley as their advisor).
   
8. 7 September 2009:  CBK appoints monitor at TID. (AA: The language used reflects the apparent concern of creditors.  There is of course always a break down in relations between banks and debtors when they advise they have difficulty paying or might have difficulty.  In effect the creditors have asked the CBK to look over the shoulder of TID's existing management.  A theme we'll see repeated with the Chief Restructuring Officer).
   
9. 26 September 2009:  announcement that "Creditors Co-Ordinating Committee" and TID had agreed a standstill agreement which was being submitted to all creditors for ratification with a deadline of 15 October. (AA:  Note the change from a "Steering Committee" to a "Co-Ordinating Committee".  That sounds like the members of the committee decided they  want to de-emphasize responsibility.  So they've taken their hands off the steering wheel and are now co-ordinating not leading).
   
10. 4 October 2009:  announcement of appointment of Chief Restructuring Officer, fulfilling a TID commitment under the proposed Standstill Agreement.  (AA: The creditors request for the appointment of a CRO is another indication of creditors' concerns.  It is not a vote of confidence in favor of existing management.)
    
11. 12 October 2009:  announcement of the extension of the deadline until 12 November.  "The intention is that the revised timeline will give a greater opportunity for TID’s banks and investors to actively participate in the standstill process. As such; the new date by when TID’s banks and investors can accede to the Standstill Agreement is 12 November."  (AA:  In other words not enough creditors signed up by 12 October and it was clear they wouldn't by 15 October. So the deadline was extended.  But their language sounds more eloquent than mine).

Failure to achieve the standstill need not be fatal.  But TID and CS will have to move quickly to create some forward momentum that will keep creditors engaged in discussions rather than court rooms.  A task as difficult as the proverbial herding of cats.

I'll be following this and update as more news becomes available.

UAE Bankers' Bonuses to Drop 40%?

The words bankers most dread - lower bonuses.

It's worse than hearing about a bad loan.

Much worse.

Kuwait Chamber of Commerce and Industry - Golden Jubiliee

Congratulations to the KCCI on its 50th Anniversary.

Something apparently all can agree on: here and here.

Maybe some of the pioneers mentioned in the articles could nip over to the Majlis AlUmma and give a few pointers.

Qatar Airways Wins Best Business Class Award - 16th World Travel Awards

Congratulations to Qataria for winning the award for the second consecutive year for best business class.

One comment:  If the Kawkab Al-Sharq songs you're offering as part of your in-flight entertainment are no longer than 8 minutes, you've missed the best ones.

Global MENA Financial Assets Ltd (GMFA) /Global Investment House Kuwait - Review of GMFA's 31 March 2009 Financials

Following up on my earlier post, today we'll take a more in depth look at GMFA's Audited Financials for the Fiscal Year Ending 31 March 2009  (the "Report"). 

As in my last post, I will again let the Company speak for itself.  These verbatim quotes will be enclosed in quotation marks.  Any observations or tafsir I have will be in parentheses in italics and preceded by AA.

First, let's turn to one of the topics that has caught the attention of more than one observer:  funds placement transactions between GIH and GMFA.  As noted GIH owns 29.99% of the shares of GMFA and has representation on GMFA's Board of Directors.

From the Report, we learn the following:

1. Note 3 (e) Page 58:  "The total maximum lending to Global under the Murabaha contracts peaked at US$140 million and subsequently reduced to $47,765,800 at 31 March 2009 excluding wakala contracts."  (AA:  Using US$500 million as a rough estimate of GMFA's total assets, that would mean placements with GIH by GMFA were 28% of assets.  If we remove the US$250 million represented by the investment portfolio, GMFA's liquid assets were approximately US$250 million.  Thus, the placements with GIH appear to have been roughly 56% of GMFA's liquid assets using our admittedly crude analytical technique).
2. Directors' Report "Corporate Governance" Section Page 39: "Three murabaha transactions amounting to US$88 million were repaid early by Global on 15, 17 and 22 December 2008 respectively and monies were placed with the Company’s bankers, HSBC Bank plc."  (AA:  The full significance of the term "early" is not explained.  Does this mean prior to maturity?)
   
3. GIH Financials Scope Limitation Section in GIH's auditors report on GIH's interim financial statements for the first nine months of 2009:  "Furthermore on 15 December 2008 the Parent Company defaulted on the repayment of a USD 200 million  (KD 55 million) syndicated facility and subsequently suspended any principal repayments towards the banks and financial institutions falling due after the default date."
4. GMFA's Report, Footnote 11, Subsequent Events Pages 64-65: "On 4 June 2009, Global and its subsidiaries repaid US$9.6 million by way of partial repayment of the total principal amount owing under murabahas reducing the Group’s exposure to US$38.1 million.
   Towards the latter part of 2008, the Group started assessing the feasibility of acquiring two assets from Global. In June 2009, the Company, through one of its Subsidiaries, acquired a minority holding in Twenty Third Project Management Company W.L.L. and consequently an indirect interest of five per cent. in Dar Al Tamleek Co. (also known as Saudi Housing Finance Company), a mortgage finance company incorporated and based in the Kingdom of Saudi Arabia offering Shari’ah compliant mortgage financing products, from Global. The consideration for the acquisition, US$4.1 million (KD1,200,210) was set off against a corresponding amount owing under the murabaha contracts reducing the Company’s exposure to US$34.0 million.          
   The Company remains in negotiations with Global regarding the possible acquisition of a further asset, which is intended to further reduce the amount owed by Global and its subsidiaries to the Group to nil. The Company will inform shareholders, on behalf of the Group, in respect of any material developments with respect to the possible acquisition of this asset, but there can be no certainty that an agreement can be reached to acquire this asset, in which case, the Group’s exposure to Global and its subsidiaries will remain outstanding at US$34.0 million. At the balance sheet date, the Directors of the Company resolved to impair the Global murabaha by 25 per cent. or US$8.5 million, based on the principal amount outstanding US$34.0 million."

Second, some other interesting items from GMFA's Report.

1. Management Fee Expense and Payments: As per the Report Footnote 3 (a) Page 57: "The management fees expensed for the period amounted to US$6,878,143. The management fees outstanding at 31 March 2009 were US$2,175,596."  (AA:  This means that GMFA has paid the difference in cash to the Investment Manager, Global Capital Management Ltd, a subsidiary of GIH, = US$4.702,547).
2.  Management Fee Calculation:  As per the Report also Footnote 3 (a) Page 57: "The Investment Manager is entitled to a management fee, payable quarterly in arrears, at an annual rate of 2 per cent. of the Net Asset Value of the Company.  The Investment Manager is a related party of the Company and is a wholly owned subsidiary of Global."  (AA:  The Net Asset Value is equal to assets minus liabilities.  Therefore, NAV includes GMFA's cash and deposit holdings plus the Islamic finance transactions. As at 31 March 2009, the Report shows that these assets totaled some US$226.3 million or roughly 51.1% of GMFA's total assets of US$442.3 million.  As well, as per Note 4 on Page 59, US$21.3 million of GMFA's US$214.5 million  in carrying value for its Investment Portfolio was comprised of a GIH payment obligation - the Put Option Derivative cancellation fee.  At current short term US Dollar interest rates the Investment Manager has a challenging task in finding earning opportunities in the deposit market in excess of its Management Fee).
3. Intercompany Loan Repayment:   Again as per the Report Footnote 3 (a) page 57: "The initial portfolio was transferred to the Company through an intra-group loan facility extended by Global, which was repaid in December 2008".  (AA:  I didn't see the loan amount in the Report.  However, it does appear in) GMFA's 30 September 2008 Interim Report on page 40 in Footnote 8: "Since inception of the Company, an intra-group loan facility has been provided between Global Investment House, the Company and its Subsidiaries. All intra-group loans between the Company and its Subsidiaries have been eliminated upon consolidation. The loan of US$8,949,303 outstanding at 30 September 2008, is payable to Global Investment House. The loan is non-interest bearing and repayable on demand."
4. Legal and Accounting Fees:   As per the Directors' Report Page 38:  "During the period the Company incurred fees of US$432,984 comprising legal and accounting fees in relation to the work undertaken by the Murabaha Committee".  (AA:  It is unclear to me whether this is (a)  for the period from late December when the Board became aware of the transactions through 31 March 2009 or (b) from the date of the formation of the Murabaha Directors Committee on 2 March 2009).
   

 Link to earlier post.

Falcon Market Poised to Soar

By now many of you are probably "long" sand based on my earlier post.

Now is your chance to get in on ground floor in the falcon market.

The Saudi Gazette reports that Sa'eed Al-Huweiti recently sold a bird he found in the Qais Mountains for SAR 299,000 (US$79,733).

As Sa'eed said, "The price for falcons seems to still be on the rise"

Tell your broker you heard it from Suq al Mal.

(Picture copyright Saudi Gazette)

ADCB to Disclose Executive Salaries?

There's a report in The National (Abu Dhabi) that Abu Dhabi Commerical Bank ("ADCB") is in the early stages of considering to:

1. disclose the remuneration of key executives in its financials
   
2. submit executive remuneration policies to a shareholder vote
   

It should be noted that neither step has been finally approved.

If ADCB implements the compensation disclosure, it will be the first regional bank to do so. 

With respect to compensation policies, there already are some limited requirements for shareholder approval- at least in Bahrain - of stock option plans.  It sounds as though ADCB's plan is broader.

By way of comparison, in the USA, shareholders vote on generic descriptions of plans rather than on individual compensation for members of senior management.  And usually the approval is at a very high level of principles.

The topic of disclosure of senior management salaries was raised  in 2004 or 2005  by the Central Bank of Bahrain as part of extensive enhancements it proposed to make to its corporate governance regulations.   Most of which were finally accepted in the revised regulation.  Only one point was fiercely resisted by local banks - disclosure of individual key officers' salaries.

I once asked the CE of a bank there why there had been this opposition. 

His response was:  This isn't New York.   In New York, a senior officer of Citibank would be unknown to 99% of the people of the city.  And  fewer would know what that officer made even if they knew who he was.  Here it would be completely different, not only would everyone know who I am but also what I make.  That could be a big problem for me.  Not just security.  But having people ask for money.

Global MENA Financial Assets Ltd (GMFA) /Global Investment House Kuwait

GMFA is a closed-end investment company incorporated in Guernsey on 2 June 2008.  It is listed on  the London Stock Exchange.   LSE link here.

GMFA was formed with the intent of investing in financial assets in the MENA region (including Turkey)

Global Investment House Kuwait ("GIH")  holds 29.99% of GMFA.   GIH is in the midst of major debt restructuring - which hopefully will be the subject of another post in the not too distant future.

Other major shareholders, aggregating 42% of the total, are detailed on page 41 in the Annual Report mentioned below.

Global Capital Management Limited (“GCM”), a subsidiary of GIH, is the Investment Manager for GMFA.

I've just seen GMFA's audited Annual Report and Consolidated Financial Statements for the period 2 June 2008 (inception) through 31 March 2009 (the "Report").

These are their first audited financials and so are of interest, especially given the current GIH debt negotiations and the links between the two companies outlined above.

Rather than interpreting the Report, I'm just going to quote verbatim from it to let the Company speak for itself.  I think you'll find this informative even though you'll have to spend a bit of time reading.  Plunge in.  I think you'll find it well worth your time. 

In a few places I have added some comments in italics preceded by "AA" to identify them as mine and distinguish them from the text of the Report.  These are references to other portions of the Report or to information on the LSE website.  Because the LSE website uses pop-up boxes, I can't provide links.

I would strongly encourage you to read the entire Report to hear all that the Company and its Directors have to say.

From the Chairman's Statement

(1) Islamic Money Market Instruments (Pages 5-6)

"As at 31 March 2009, the Company held cash, deposited with HSBC, Citibank and Standard Chartered Bank of US$145.1 million and Islamic money market instruments in the form of agency agreements (wakalas) and murabahas with various entities: Global and its subsidiaries, two Kuwaiti companies and one Jordanian company, with an aggregate face value, gross of impairments, of US$107.2 million (plus profit).

In the unaudited non-statutory interim accounts as at 30 September 2008, cash deposits of US$273.8 million were shown. Due to a misunderstanding between the Company’s service providers, money market instruments amounting to US$140.0 million, which had been acquired in August 2008 with Global and its subsidiaries, were recorded as cash at Bank of New York and shown in the accounts as such, whereas the wakalas with two Kuwaiti companies of US$74.9 million were shown as foreign currency cash. Although this was a wrong description, it did not affect the net asset value of the Company.

The Board was not aware that the Company and its subsidiaries (the “Group”) had entered into Islamic money market instruments until late December 2008. Following this discovery, the Board engaged its Auditors to review the Group’s accounting entries so that the Board could be satisfied that the Group’s accounting records accurately reflected the Group’s assets. In addition, the Independent Directors gave instructions to the Investment Manager to seek the immediate repayment of monies invested in murabaha arrangements, to terminate all the murabaha arrangements, and not to enter into any further murabaha arrangements or to agree revised terms without the Independent Directors’ approval.

At this time, the Board also learned that the Company, through its wholly-owned subsidiary, FAB, had entered into a further three Islamic money market instruments with Global, a substantial shareholder of the Company and the parent company of the Investment Manager, and its subsidiaries, for an aggregate principal amount of $47.8 million (plus profit). Subsequently, this amount was reduced to US$34 million. The Board also learnt that the Company, through its wholly-owned subsidiary, FAB, had entered into two Islamic money market instruments with two Kuwaiti companies (other than Global) in August 2008, which were later renewed in November and December 2008, on which Global acted as Islamic financing agent, for a total principal amount of US$74.9 million (plus profit) and an Islamic money market instrument was entered into with a Jordanian company in December 2008 for a total principal amount of JD3.0 million (US$4.2 million) (plus profit).

Due to the conflicts of interest existing between the Company, its Investment Manager and two of its directors (by virtue of their position within Global), a committee comprising the  independent directors of the Company was established at the beginning of March 2009 to deal with all matters and business relating to and arising out of the entry into of all of the Islamic money market instruments (the “Murabaha Committee”). The Murabaha Committee, comprising myself and John Hawkins (joined by Terrence Allen and Kishore Dash when they became directors of the Company in April 2009 and July 2009, respectively), has been working with the Investment Manager and the Company’s legal advisers, Ashurst LLP, on the recovery of the amounts invested in the Islamic money market instruments."

(2) Corporate Governance (Page  8) 

"You will see from the Corporate Governance Report that a number of issues have arisen during the year.  The directors believe that the issues have been satisfactorily addressed and that the appropriate internal controls and systems are now in place. There is an issue as to whether or not murabahas were permitted investments but the Board has clarified the position by restricting the holding of cash to deposits with banks of high credit standing and with strict exposure limits.  The Board hopes that it will succeed in negotiating a satisfactory recovery of the monies invested in these murabahas. The Board recognises the importance of the continued co-operation of the Investment Manager in attempting to recover the outstanding monies owed under these arrangements."
(AA:  The Directors' Report on Corporate Governance is on pages 39-40.  The Directors' Report also contains discussions of other matters relevant to corporate governance, various board committees, internal controls, special committees formed by the Independent Directors, etc).
  

From the Directors' Report

(1) The Put Option (Page 38-39)  

 "At Admission, the Company acquired six unlisted companies from Global comprising part of the initial investment portfolio at a cost of US$152 million. Global granted the Company a put option on these unlisted assets at an aggregate strike price of their acquisition cost, such option to be exercised by serving notice on Global during the period beginning on the first anniversary of Admission and the close of business on the thirtieth day thereafter.

The Directors have considered carefully whether or not to exercise the put option, balancing the attractiveness of the investment portfolio against the deteriorating economic outlook caused by the dramatic events in global capital markets, the current financial position of Global and the Company’s existing outstanding murabaha with Global.

                                                                                         
As announced on 17 July 2009, following discussions with Global, the Directors agreed, subject to all necessary regulatory requirements, to terminate the put option agreement for a payment of US$21.259 million from Global. The Board believes there is significant value which can be derived in time from these six investments and indeed the value of two of the investments transferred has increased over the period from Admission to the first anniversary of Admission. Thus whilst the investment portfolio has, as a whole, continued to perform well, the valuation of four of the six investments concerned has been impacted by the fall in markets. The payment to the Company of US$21.259 million represents the difference between the value of these four investments as at 30 June 2009 and their acquisition cost.

 
The Directors propose to distribute this cash, which is expected to be received on or before 15 September 2009, by way of a special dividend to shareholders in due course."                                        

(AA:  As per information at the LSE website link provided above, at the shareholders' EGM on 29 October 2009, roughly 82% of shares present voted for the Board's proposal to cancel the put option against the US$21.259 payment.  Shareholders representing roughly 30% of GMFA's total shares were present for the vote.  In effect then the motion was carried by approximately 25% of GMFA's shareholders.  I'd also note that it is common that many shareholders do not show up for an AGM or EGM, even when very important matters are on the agenda). 
          
(2) The Investment Manager (Page 40-41)

"Having considered all the issues, the Directors consider that in the circumstances the continued appointment of the Investment Manager on the terms agreed continues to be in the best interest of the shareholders and the Company. In reaching this conclusion, the Directors have considered a number of factors, including the views of Global and a number of the Company’s other shareholders (see the section below entitled “Relations with Shareholders”), as well as the options available to the Company.

The determining factors were the Investment Manager’s relationship with the unlisted investments, the regional investor base and the support for the Investment Manager expressed by a number of shareholders."

                                                                                                   

DFSA to Tighten Corporate Governance Standards

Abu Dhabi's The National reports on DFSA plans to tighten corporate governance.

Key elements of the proposed reforms are:

1. Mandatory separation of role of Chairman from CEO
2. Abolition of share payment for non executive directors
3. Mandatory number of non-executive directors on audit, remuneration, and nomination committees

The full article is here.

Some comments:

1. I hope the reference to non executive directors is really to independent directors.   A non-executive director could be a major shareholder or the representative of a major shareholder.  An independent director as that term is understood elsewhere, e.g., the UK or Bahrain is someone with sufficient expertise and a degree of independence both from management and the major shareholders so that he or she will truly look out for the interests of all stakeholders of the firm.
2. The comment about the various board committees seems to imply that current regulations allow executive directors to sit on those committees.  An executive director is one involved in the management of the firm.  It is hard to think of a situation where any executive directors should be a member of the audit committee of the board of directors. The audit committee is supposed to be checking very carefully that the management of the firm is applying  appropriate accounting principles and standards as the basis for its financials on a consistent basis and that any estimates involved in the preparation of the financials are well founded and documented.  That the controls in the company are adequate to prevent honest errors or fraud.  And that both the internal audit function and external auditors are independent of management, have assigned competent staff to do the audit and are discharging those responsibilities fully and professionally.  Similarly, it would not be a good idea to have an executive director on the remuneration committee where he might set the salaries of other directors and thus give them an incentive to support his actions as a member of management.  Or on the nomination committee where he might pick a friend to be a director.  There is a fundamental conflict of interest for an executive director to sit on any of these committees.
   
3. While this is a good step, it is very important to understand that regulations are not a panacea. Like the traffic signal at the corner or the posted speed limit, corporate governance reuglations are only effective if people obey them.  So they are a necessary first step.   But, if they are ignored, no matter how elaborate and well constructed they are, they will not work.   Enron Corporation had an extensive code of ethics  - some 65 pages.  That document proved ineffective.  Not for want of not being there.  Rather because the people who were supposed to implement it, didn't.  More on Enron here.  Both Enron Corporation and Hollinger  International had an impressive list of independent directors.  And elaborate procedures to vet related party transactions. Reading the Breeden Report on Hollinger will illustrate better than I can the critical importance of people in making whatever process a firm has work.  Sometimes group dynamics - the desire to avoid confrontation, the fear of appearing ill-informed - cause even the most honest to make bad decisions.  Corporate governance like religion is in the heart not on a piece of paper.  Paper provides a guide, but it's no substitute for the heart.
4. People from the region should not be overawed by experts from the West preaching their particular mathhab of corporate governance.  Enron, BCCI, Madoff, LTCM and many more all occurred in these self-proclaimed exemplars of world class standards and regulation.  Though I suppose the counterargument is that the doctrine is sound but was not followed, or, perhaps more precisely not enforced by the regulators.
5. Finally, if any banker out there thinks that corporate governance code or set of regulations is going to protect him from someone determined to cheat him, I'd refer him or her to my traffic light example above.  Traffic laws have not proven to be a "grail" holy or otherwise in preventing violations or deaths.
   

IFC/World Bank Group "Doing Business in the Arab World 2010"

Today the IFC/World Bank Group officially released its annual report on regulations in the Arab World  "Doing Business in the Arab World -2010".  Those watching the GCC press have been aware of the report for a couple of days as it was discussed in several of the UAE papers under headlines calling for reforms of UAE insolvency law.  Here's one link.

This report is part of a larger project undertaken by the World Bank Group to measure regulations affecting the 10 stages in the life of a company - from birth (registration) to death (closure) in 183 countries.   The goal is not only descriptive.  It is as well prescriptive - to encourage reform.

Like many such efforts, it reduces very complex matters to a single number for ease of comparison.  The report ranks countries not only at a macro level (overall ease of doing business) but  at various sub levels (the ten regulations, e.g. starting a business, dealing with construction permits, etc).

Because the ease of doing business is not directly observable or measurable like the amount of rainfall during a year or average daily temperature, one measures it indirectly by using proxy variables.  The WBG has chosen 10 regulatory issues mentioned above.  These are also measured for ease of accomplishment.  That leads to the choice of a second level of proxies.  One then has to specify the relationship and relative weights of the proxy variables (write the equation).  Once the equation is specified, one needs data.

This is a difficult process.  How does one choose the proxies - both at the first and the second levels?  How does one determine the equation and the relative weights of the proxies?  How does one ensure that data across 183 countries is consistent - both in terms of definition and standards for reporting?  For example, if the measure is days to get a license  for a new business, how does the local MOIC  track dates?  From the date of a properly completed application?  But what if there are numerous rejections of an application as incomplete?  Are  those days counted?  Does the clock start ticking from the date the applicant drops off the completed application?  Or the date the MOIC enters it into its records?  What is the quality of the record keeping?  I posted a comment to a blog about Yemen LNG with articles raising doubts about the GDP calculation for the USA and Japan, two countries whose statistical accuracy might be assumed above reproach.

All in all a daunting task.  Because it is difficult does not mean it should not be done.  Because it involves interpretation (there is no single right answer) does not mean it should not be attempted.

Efforts like this are to be applauded and encouraged. That being said, the issues involved should not be overlooked.  The results should be recognized for what they are:  interpretations not facts.

And that gets to perhaps the central issue here:  the report is designed as prescriptive.   A country can reform by using the WB specified equation.  But what if it is mis-specified either with the wrong proxies or the wrong weights?  Reform will be mis-directed. 

There is another issue.  I am a bit uneasy about  the  individual numerical rankings.  Singapore is rated #1 for ease of doing business.  Hong Kong #3.  As a businessman, would I really notice a perceptible difference between the two in the running of my business?  If I could, would it really matter?

I think that such studies should be directional rather than locational.

Instead of individual rankings, determined with apparent Cartesian precision,  countries should be grouped into bands chosen where there is a very perceptible break in "ease".  The difference between Hong Kong and Singapore may be too minor to notice.  That between Singapore and Yemen is probably not. 

Anyways to the report, first the overall rankings for the GCC states for ease of doing business:

(Note:  The report rates 183 countries).

1. Saudi Arabia  (#13 in World Rating) 
2. Bahrain           (#20)
3. UAE               (#33)
   
4. Qatar              (#39)
   
5. Kuwait           (#61)
   
6. Oman              (#65)

Drilling a little bit further into the report, here are the rankings for investor protection with world ratings again in parentheses:

1. Saudi Arabia   (# 16)
2. Kuwait            (# 27)
3. Bahrain           (# 57)
4. Oman /Qatar   (# 93)
5. UAE                (#119)

Had I been asked to come up with ratings based on personal experience, I would have a different order.  For the record, the rating is determined by equal weights of the following three index proxies: disclosure, director liability, ease of shareholder suits.

Rankings for contract enforcement:

(The report includes details on the average time to settlement and the average cost of enforcement - lawyer's fees, etc. - measured as a percentage of the claim.)

1. Qatar               (# 95) 
2. Oman               (#106)
3. Kuwait             (#113)
4. Bahrain            (#117)
5. UAE                 (#134)
6. Saudi Arabia    (#140)

This ranking is based on three equally weighted variables: number of legal steps, average number of days to a settlement and the cost of enforcement as a percentage of claim.  It seems to me that outcome of the case would be a very important measure. Legal procedures might be very simple (a few steps), get completed quickly (say 60 days), and cost relatively little as a percentage of the claim.  But,  if  the result is unjust,  how is the contract enforced?   That gets back to my comment about the difficulty of measuring abstract qualities.  How does one measure a just decision?  Clearly, the plaintiff and defendant are likely to have quite opposed views.

As one of my lawyer friends says the clearest commentary on the state of GCC legal systems is that both the DIFC and QFC use as a major selling point the fact that  their centers have their own imported law and judges separate from the local on-shore legal system.  That is hardly a ringing endorsement for local justice.  And it is coming from a governmental or quasi-governmental authority in the country!

One might well criticize local courts.  I know that I could easily recite a list of complaints and anecdotes.

That being said, I would not want to bring a lawsuit in Texas.  Texaco could testify more eloquently  (perhaps 10 billion times more!) than I could about the legal system in that state.  Or a bank  I know that tried to foreclose on an office building loan, only to have the judge dismiss their case on the grounds that under Texas law a lender may not take a debtor's primary residence.  Seems the borrower moved a bed into the building  the night before the trial and claimed it as his home!  

Headlines Say UAE Central Bank to Tighten Regulations - But the Real Story is Personal Loan Losses Loom

Under current CBUAE regulations a sub-standard loan is defined as one on which debt service is 180 days or more late.  This regulation dates to 1988.  Other countries in the Gulf have a 90 day time frame.  The latter is pretty much the international standard.

The National in Abu Dhabi is reporting that the CBUAE intends to tighten its requirement and bring UAE regulation in line with the 90 day standard. 

This report sounds rather ominous.

The immediate thought is that if these new rules are adopted, the amount of non performing loans will balloon.

But is that the case?

The article states that most UAE banks are using the more standard 90 day time frame.  A quick check of several banks' financial statements shows that to be the case.

What I think is more important in this article is some information about personal loans  that is tucked away in the middle of the article:  the estimate of a  potential 10% non performing rate.

One might quibble about the implication that credit bureaus (and quibble I will in a bit) are largely responsible for bad loans, but the ticking time bomb that personal loans represents is unmistakable.

Some signs of distress:

1. A group of Kuwaiti MPs is pushing for the government to buy Kuwaiti financial institutions' personal loan portfolios (Kuwaiti citizens' loans only) to relieve distress of the average Kuwaiti.  Estimates of the cost of doing this range from KD 2.2 billion to  KD 6.5 billion depending on which loans are included.  The appeals are usually accompanied by statements that the cost of living is higher than citizens' income and so borrowing is the  only way they have been able to make ends meet.  This AlQabas interview with Nasser AbdhulMuhsin AlMarri, Deputy Chairman and Managing Director of Noor Investment Kuwait, is one example.  See the first question.
   
2. Living beyond one's means through the use of debt is not uncommon.  In one country I'm familiar with, a lot of the locals I know at the junior level have debt service ratios over 70% of their monthly income - meaning that to make the minimum required payment each month, they should pay the lenders 70% of their salaries.
3. As I've noted in an earlier posting, the Central Bank of Bahrain issued a regulation to set a maximum that banks could lend consumers at 50% of gross monthly income because it was concerned citizens were getting in over their heads.
4. Cars in the Dubai airport parking lot. 
   

Some signs of lending practices that might make a sub-prime lender blush (though I'm told these folks are made of pretty stern stuff);

1. A local I knew was in over his head with credit cards.  With some help he negotiated revised payment terms and a lower interest rate.  Once this was done, one of the banks where he had been max-ed out and which had frozen his credit card wrote him a letter thanking him for clearing up his debt.  And now since he was a customer in good standing, they were not only re-instating his credit card but increasing the limit.  Yes, while his rescheduled debt sat in their work-out group's portfolio.  By the way this bank has won several awards in the GCC for banking excellence of one sort or another.  Marketing seems a natural category, though I think the awards were for something else.
   
2. I received a couple of SMS's from that very bank promising me that if I transferred my outstanding credit card balances from another bank to their fine institution not only would they happily accept my balances, they' also give me a credit line equal to 110% of those balances.  That way I could "afford" to spend a bit more.  Since my phone was registered in a company not a personal name, it seems fairly clear that this bank was happily blanketing the market with mass SMS mailings.  
3. One of my local friends advised me that rotation of creditors was a common strategy. Max-out at Bank A.  Go to Bank B to get a larger line.  Max-out at B. Go to Bank C.  Eventually one winds up back at Bank A and notes one's sterling credit.  Not only did I pay in you (Bank A) and Bank B in full, but look Bank C gives me  this  big a line.  I've got to be a really great credit.  To get me to move to your esteemed bank,  you'll just need to give me a bigger line.
   
4. I've seen outdoor billboards from one Shari'ah compliant lender offering to lend me and everyone else who passes by 95%  of the price of a new home.  Not much margin for error there if the price of one's new house drops just a bit.   To be fair, they no longer offer this level of financing.
5. There were ads from another retail bank offering to make a loan for a vacation with five year repayment terms. 

So now to the quibble.

Yes, a functioning credit bureau (with access to all borrower data) will make my job as a banker easier.

But, how much help do I need?  Do I need to be as smart as Gail Trimble to figure out:

1. Credit cards aren't used to purchase houses.  Or cars.  If they are, that's probably not a sign of good creditworthiness.  By and large they are being used for consumables.  If a prospective borrower already has a very high ratio of existing debt to income, that's also probably a sign that he or she is living beyond his or her means.
2. If this new customer is such wonderful business, how come my competitor is letting him slip away?  If the price of luring this customer to my bank is the simple act of increasing his/her credit line, whey doesn't his existing bank do this?  Am we really that much smarter than they are?  Really?  If this is such a great idea,  then why don't we do this with our existing customers?  After all, we do it with new customers about whom we have even less data.

By the way a tip of the hat to the folks at Emcredit  the Emirates credit bureau.

MECRA Regional Credit Bureau: Bahain, Oman, UAE and Pakistan

A significant development in improving the institutional architecture for banking in the region.

This will give banks a clearer picture of the exposure of their existing and potential customers.

Gulf Women's $40 Billion in Wealth - News or Marketing Campaign?

The local (GCC) press is abuzz with the story that women in the Gulf control US$40 billion in wealth.  Here and here.

And elsewhere, but you can Google that yourself.

However, since this was first reported in 2007, I guess we can draw the conclusion that the original 2007 article's statement that they have a conservative investment strategy of holding money market assets has been proven correct.  If they had invested in the market, they'd hold considerably less today.

Interesting how these news articles seem to be less about women's wealth than about the capacity of an investment firm to help them with it.

Global Forum VI For Fighting Corruption and Safeguarding Integrity - Doha Qatar

Doha is hosting the "Sixth Global Forum for Fighting Corruption and Safeguarding Integrity".

Fairly distinguished attendees and speakers.  A worthwhile and highly relevant topic.

Some press articles here and here.

And more background here.  It appears that speeches will be published at this site later.  QNA has already published one or two.

Yemen LNG US$2.8 Billion Financing in Yemen - How'd They Ever Pull That Off?

When you read my earlier post about the first LNG shipment from Yemen, did you wonder how the project was able to raise its financing?

Yemen LNG posed some difficult financing challenges:

1. Size:  US$ 5 billion dollars with a high percentage of foreign costs which can't be financed in local currency.   So quite sizable foreign currency loans are required.  Raising a loan 1% this amount would be a challenge.
   
2. Tenor:  A project like this requires long tenors.  To compound matters bankers aren't keen to even make short term loans in the country. 
   
3. Yemen:  Lots of problems - economic, political, social.  A weak country = a weak sovereign credit.  Not exactly a prime target for bankers.
   

Standard and Poor's, Moody's and Fitch do not bother to issue a credit rating for Yemen.  There really isn't any demand.   Other ratings agencies do.  But the ratings are not good.   Capital Intelligence assigns Yemen a "B" and the Economist Intelligence Unit "CCC".   Unlike the academic world, a  credit rating of "B" is not a passing grade.  Except perhaps in the sense that bankers usually  "pass" on the opportunities to extend credit to borrowers with that grade.

Putting aside the project finance structuring issues (upon which I'm sure you can imagine I could wax, if not eloquently, at least profusely), there are two answers to how the deal got done - both of which gladden the heart of flinty-eyed bankers:

1. Equity - To provide a cushion to lenders: project cashflow pays lenders first before it pays shareholders.   The more equity the less risky the project.   If you were a lender, which of two identical US$1 billion projects (except for equity) would you prefer to lend  to?  The one with  $500 million in equity?  Or the one with  $100 million?  But there's more to equity.  It's not just the quantum of equity provided up front but also the credit quality of the shareholders that comforts lenders.  Having parties with both a significant monetary interest in the project (something to protect) and the capacity ("deep pockets") to lend a helping hand if the project hits a rough spot is very good.   Securing this kind of quality shareholder is a common goal in project finance everywhere.  In Yemen it was, no doubt, even more important.  Both  to the commercial lenders and the export credit agencies ("ECAs") involved in the transaction.
   
2. Guarantees - There's nothing that makes a banker's life easier than someone else taking the difficult bits of risk.  In this case 100%.   Especially if the guarantors are major sovereigns  acting through their ECAs or a major MNC like Total. 

Yemen LNG reports that the project has 40% equity (US$2 billion) and 60% debt (roughly US$3 billion).

Let's look at the equity first.

Shareholders are:

1. Total France - 39.6% (International oil and gas major, active in the ME since 1924 and Yemen since 1987.  Other LNG projects in the GCC - Qatargas, Dolphin).
2. Hunt Oil USA - 17.2% (Founded by HL Hunt.  Ray Hunt supposedly is on a first name basis with the President of Yemen.  Active in the country since 1981.  Hunt Oil, that is, not Ali).
3. Korea "Inc" - 21.5%   (SK at 9.6%, Korea Gas at 6.0% and Hyundai at 5.9%)
4. Yemen Gas Company - 16.7%. (Yemeni Government company).
   
5. GASSP (Yemen) - 5% - Yemen's General Authority for Social Security and Pensions.

More details on these entities here.

The majority foreign ownership involving oil companies like Total and Hunt would give lenders  and ECAs comfort.  Why?  They have demonstrated technical competence with similar projects from discovery through successful commercial operation as well as marketing of the offtake -the project product, LNG.  If something goes wrong (and bankers should always worry about that), these shareholders should be able to fix the problem if indeed the problem can be fixed.

Kogas is a major buyer of LNG.  Having it as a shareholder, gives it incentive to continue to buy from the project.  If suddenly it needs less LNG, instead of canceling its contract with Yemen LNG, it could cancel its contract with another seller (unless of course it's a shareholder there as well).   In the case of a problem with another offtaker, Kogas might step up to buy more to protect its equity in this project.  (As an aside, the offtakers are:  Kogas at 31%. of planned project production.  Total 31%.  And Suez 38%.  Twenty year contracts with highly credit worthy parties -- another comfort to those holding project risk).

The other two Korean parties were involved in the construction.  By buying equity they have reinvested part of their profit into the company.  If the project fails, they lose all or part of their profit margin - an incentive for them to help to make the project work if it has problems.

The Yemen government agencies mean the government has a direct stake in the project's success.  It's not just in their country.  They're owners.

Turning to the project debt, US$2.8 billion was raised.

1. US$1.3 billion in senior limited recourse project finance facilities extended by a group of international banks but bearing comprehensive risk cover (both political and commercial). This  cover is being provided by the official export promotion programs of France (Coface for US$648 million), Japan (Nexi for US$80 million), Korea (KEXIM for US$160 million).  The lead banks involved are Bank of Tokyo Mitsubishi, BNP Paribas, Citigroup, ING, Royal Bank of Scotland, Societe Generale, Lloyds TSB, and SMBC (Japan).  They make  and administer loans to the project.  In the event of project non payment, they can call upon the ECAs to repay their loans.
   
2. US$240 million direct loan to the project from KEXIM (the Korean Government ECA).
3. US$120 million direct loan to Yemen LNG from JBIC (the Japanese ECA).
4. US$1.1 billion commercial facility guaranteed by Total France. Same banks as in #1 above.  I'll comment a bit later about an interesting feature of this guarantee.
   

It's clear that Total did the heavy lifting necessary to make the project a success:  contributing the majority of the equity and guaranteeing the US$1.1 billion loan.  

Most reviews of this transaction - at least the ones I have seen - don't  discuss the fact that Total has counterguarantees in its favor for roughly 32% of its US$1.1 billion guarantee from other equity partners in the deal.  One alternative would be for all the parties to give guarantees to the lenders:  Total for 68% of the amount and the other shareholders for 32%.

But that would pose some problems.  First, some of the shareholders are not acceptable to lenders for any amount or tenor.  That would mean a loan for less than US$1.1 billion (and remember the project needs US$1.1 billion not less).  Second, Total's credit rating is easily higher than the other shareholders.  It can get the best terms - the best interest rate and the longest tenor.

By giving its guarantee for 100% of the loan, Total substitutes its credit for its partners.   In effect Total is intermediating credit risk .  It accepts the relatively weaker credit risk of its partners (the 32% counterguarantee) so the lenders don't have to. If Total's guarantee is called by the lenders, it is obligated to pay whether or not the other shareholders honor their counterguarantee to it.

And one final comment.  The Yemen LNG financing won several awards in 2008 for "Deal of the Year".  Since bankers like to give themselves awards (and who doesn't),  there are a large variety of contests and awards, though as of yet I don't believe Donald Trump is hosting any of them.  Besides that bankers also devote their creative talents to designing titles for participants in a deal.  Having a fancy title and a good position on the deal "tombstone" (on the left at the top of the list of the banks is preferred in case you're wondering) is very important.  Some of the most intense discussions in a deal are not with the borrower or issuer but among the banks.  On one deal we contented one bank with the title "Technical Modeling Bank".

Trackback to previous related post.

Yemen LNG Makes First Shipment

A bit of good news for this beleaguered country - which is desperately in need of hard currency earnings, not to mention water, peace, progress .....

Most estimates are that over its 20 year or so life the Yemen LNG project will generate US$20 billion for Yemen.  The Yemeni Government's own "conservative projections" estimate US$30 to US$50 billion.

Much needed because oil exports, Yemen's current major source of FX revenues (roughly 90%),  are rapidly running out.  Estimates are for 10 years more production, though the Yemeni Government disputes these figures.

Anyways a few random data points to illustrate the importance of Yemen LNG to the country:

1. In 2003 Yemen exported 450,000 barrels of oil per day.  In January 2009 the total was down to 280,000 bpd.
2. During the first six months of 2009, FX earnings from oil exports were down 75% from the same period in 2008.  Most of that is due to the decline in oil prices, but a worrying 25% drop in volumes exported was also a major cause.
   

So Yemen LNG's first shipment is good news for Yemen.  A substitute for dwindling oil exports.

For those interested in more on Yemen LNG, here's a link to their website.

The project has been "kicking around" since the 1990's.  As one might expect, putting a deal of this magnitude together in Yemen is not an easy task.  The shareholders' group has been a bit of a revolving door - ExxonMobil withdrew after the 1994 civil war.  Enron sniffed around a bit but declined. At one point Hunt Oil (an old Yemeni hand) was rumored to be contemplating withdrawing from the project.  Competition from Qatargas and Dolphin in which Total (the major shareholder in Yemen LNG) has interests also were obstacles.

For those interested in a bit more information on Yemen, two suggestions:

1. Christopher Boucek's "Yemen Avoiding a Downward Spiral" at Carnegie.
2. The IMF's Public Information Notice ("PIN") on  Article IV Consultations with Yemen released this March.
   

Boucek's piece is an overall analysis of all factors - political, economic, and social.   It is also written to promote a particular policy response so factor into your evaluation how that goal may affect his diagnosis and conclusions.

The IMF PIN is focused on economics only.

Some background on the Article IV process and PINs.

Each country that has joined the IMF  (there are 186 or so) undertakes certain obligations with respect to the conduct of its affairs.  A key part of those are reflected in Article IV.   Each year the IMF "consults" with countries about their obligations focusing on Article IV. Member countries have the right to decide how much detail is released to the public about the results of those consultations.

Two other things are relevant to Article IV consultations.

1. Diplomatic Speak:  The position of the IMF is couched in diplomatic language.  Criticisms come in the form of "encouragements" or "strong encouragements".  Issues are described in similar gentle language.  Instead of stating that a member country's economic statistics are deficient, the PIN will speak about improving the timeliness and accuracy of statistics. 
2. Mathhab:  The IMF holds more or less to a certain economic philosophy.  It's important to understand this when reading both their diagnosis and prescriptions. 
   

A second post will follow to hopefully shed some light on the intriguing story of how US$2.8 billion in long term financing was raised for a project finance in a country in Yemen's situation.

The "Two Powers" Continue Their Check Flap

The check flap is now a legal battle royale (in more than one way!).

There's also an account in AlQabas of debate earlier this Summer in the Majlis AlUmma on the Executive Branch's proposed 2009/2010 budget along with an extract of key comments by MPs - which gives some background flavor on the nature of the dispute and the various issues.   For those who don't read Arabic, the headline discusses secret payments and preferences in land (presumably the latter refers to allocation of lands).

An Updated Tale of One Market: Dubai

A bit of an update to my earlier post "A Tale of Two Markets" as well as to the "GCC Business Confidence Survey".

1. Japanese contractors owed billions by Dubai firms.  The fact that the usually polite Japanese are going public means that they have been stiffed for quite a while and are really hurting.  You'll also note that this appeared in an Abu Dhabi paper not a Dubai one.
2. Nakheel offering purchasers in The Palm Jebel Ali the option to move to other developments.  The project is delayed no doubt to conserve cash.  See #1 above.
3. Dubai debt levels as percentage of GDP versus other GCC States.  Perhaps, an explanation for #2 and #3.  On an aggregate basis, Dubai Inc (both sovereign and publicly owned companies) has something in excess of US$80 billion in debt with US$50 billion coming due over the next three years.

There is also a bit of flash news on a Moody's estimate of US$25 billion in bad debt in Dubai. 

When and if  I get access to more details, I will update this post.

All of the above may explain the depressed business sentiment in the UAE.