S&P Predicts Bank Merger Activity in UAE, Kuwait and Bahrain

Article here.

The key issue is the market for corporate control.  Many local private investors would prefer to hold the majority in a "samak saghir" (small fish) than a minority position in a "huut" (whale).  And in  the merged entity there is sadly only one chairman.  And it is hard to let go of control.

Perhaps, the sting of corporate distress coupled with regulatory encouragement can do the trick.

Zain Share Price and KSE Decline - What are the Implications?

There has been a lot of analysis about the decline in Zain shares and the implications for the Kuwaiti market.  Usually along the lines of the importance of Zain's volume.  Here's one from AlphaDinar.  A good explanation of the key role played by the blue chip Zain.

What I'd like to do is look at the implications of a prolonged decline in Zain's share price and in the KSE  on local borrowing and debt service.

First an introduction to set the stage.

Anyone familiar with the term "Kuwaiti investor" also knows that this term is generally associated with the terms  "capital appreciation", "OPM",  "leverage",  and "collateral".   And only rarely with the concept "cashflow from operations".

Let's deal with these one by one.

1. Capital Appreciation - The typical Kuwaiti investor has a unique "appreciation" for the strong potential of his assets to increase in value.   Cashflow is generally a secondary consideration if at all.  The belief is that in the not-too-distant future one will be able to sell one's assets to another party at a substantial premium. A trade sale.  A primary market sale or IPO.
   
2. OPM - Other Peoples' Money - especially bank debt - is always preferable when funding investments. If something unexpectedly goes wrong, one has not committed one's own capital to the  full entry price.
   
3. Leverage - The more that one can lever one's investment the higher the IRR.   And the more one can lever one's equity into multiple investments, the richer one can become  Also, if as is typical one's investments have no appreciable cashflow,  the ability to secure additional borrowings is a lifesaver when it comes time to pay the interest on the original loans.  As you'd expect, this works really well in a rising market.  The lender believes it has extra collateral and so can extend another loan.  Local lenders  too share the appreciation of capital appreciation.   In a small overbanked market like Kuwait, it is also difficult to get new customers.  A bank grows with its existing customers - one way or another.  And what bank does not want to grow its bottom line and balance sheet?  But a key risk is overlooked:  cash funded debt is being based  primarily on paper increases in value  - which are subject to negative as well as positive investor sentiment.   
   
4. Collateral - The way to get leverage is to pledge one's assets.   And to the extent that the same asset can be used to support more than one loan the higher one's leverage.   As the asset increases in value, one gives a second lien to another hungry banker and then builds a whole new pyramid of investments. And this brings us back to another virtue of using OPM:  in the event of a problem  with an investment, the investor (borrower) can simply walk away surrendering the asset to the lender. 
   

The result is an inverted pyramid of investments fundamentally supported by growing debt.

Second, now to the analysis.

What could go wrong?

1. In 4Q07 the Central Bank of Kuwait tightened the calculation for 80% loans to deposits ratio moving from a month-end basis to a daily average basis.  (Page 36 here).  In 1Q08, in an effort to control inflation, the CBK pushed banks to lower commercial and consumer lending.  The money tap was turned to a trickle.
2. In 3Q08, the global financial crisis hit.  Foreign banks began restricting loans.  As the tide of liquidity flowed out, asset values declined.  
3. A double barreled effect.  Not only were new funds cut off.  But as asset values declined, collateral values for existing facilities eroded.  Lenders began demanding reductions in principal of loans.  And banks might demand that interest actually be paid.
   

Where to get the cash?

One turns to one's best asset.  One that actually generates cashflow.  For example, Zain.

Plan A was to try to sell off a division or two (initial focus Africa).  Sales proceeds could be dividended to "needy" shareholders. 

That didn't work out. 

So Plan B is to sell a stake to a strategic investor.  Recently Zain shareholder(s) announced the sale of 46% of existing shares to a collection of  Indian investors "Vivasi Group".   Note:  Zain is not issuing new shares to fund expansion.  Existing shareholders are cashing out to get needed cash.

The problem is with Zain's share price down to KD0.960 (Market Cap KD3.93 billion US$13.8 billion - down 50+%) Plan B gets more difficult.  Just this week, BSNL announced that it saw the need to renegotiate the price.  As you might guess, they're not offering to pay more.

The problem is further compounded because as the market drifts lower more investors' collateral is worth less.  Lower collateral cover is generally accompanied by higher banker anxiety and demands for additional collateral or cash.  This affects not just individuals but corporate entities - like the investment companies.  Or the "industrial" companies in the country many of whom only had profitable years in the past because of their investment portfolios.   Let me emphasize that point to make sure it's clear:  their actual business operations did not turn a profit.  They only made a profit because of   (paper) investment income.

With that as background the import of the decline in Zain and the KSE is outlined in stark fashion.

Aref Investment Group Kuwait Releases 3Q09 Financials - KD55.1 Million Loss for First Nine Months 2009

You'll recall that Aref was one of the firms whose trading was suspended this Monday for failure to file its 3Q09 financial report with the KSE.

On 18th November it announced its results:

1. KD17.1 million loss for 3Q09 and KD55.1 million loss for the first nine months of 2009.  In 2008 those figures were respectively KD12.1 million profit and KD39.6 million profit.
2. Total shareholders' equity stood at KD245.1 million versus KD329.5 million at 30 September 2008.
   

From the wording of the KSE announcement, it's clear that Central Bank of Kuwait approval was holding up release of the financials.

You can find the KSE announcement on its Arabic language page under AlBayanat AlTarikhiyya and then under 'Ilanaat AlSuq AlTarikhiyya for 18 November 2009.  There's a problem with the English page formatting.  In any case the announcements there are all Arabic language.  There are no English translations.

BTW Aref is now trading again.  

Reported AlGosaibi Settlement Offer to Creditors: 11.4%

At a meeting with creditors earlier this month, AHAB reportedly offered creditors SAR 3 billion (US$ 800 million) of assets against debts of some SAR 26.3 billion (US$7.0 billion).

The Maktoob article above refers to an effective 8.6 cents on the dollar offer.   A similar article from AlQabas.

I'm at a loss how this translates into 8.6 cents on the dollar.  When I divide SAR3 billion by SAR $26.3 billion, I  get 11.4% not 8.6% - unless there are a range of offers with 8.6 the lowest.

In any case this is probably just the first round of negotiations.

AHAB probably figured out that their creditors weren't going to bid them down.  So what better place to start than low.

And starting at this level may well frame the negotiations to their advantage by shocking creditor expectations for recovery downwards.  If creditors now get 22% or 23%, they will have doubled their recovery. 

UAE Central Bank: US$2.9 Billion in Exposure by UAE Banks to Saad and AlGosaibi

The Gulf News (Dubai) reports that CB UAE has disclosed that 13 national banks and 7 foreign bank branches in the UAE (20 banks in total) have exposure of US$2.9 billion to the AHAB and Saad Groups.

The article also reveals the identity of the bank that asked for and received a court freeze on Saad Group assets in the UAE:  Abu Dhabi Commercial Bank, which has reported exposure to both AHAB and Saad at some US$609 million.

Qatar Income Tax Clarification: Tax Rate Reduction (Foreigners) But New Tax on Local Firms

Qatari authorities have issued another clarification.

What seems to be happening is that there are two tax related initiatives:

1. Imposition of an income tax on both local and foreign companies at a rate of 10%
2. Tax relief for foreign corporations who previously were subject to 10-35% tax rate.  In effect a tax equalization so that companies both foreign and domestic pay the same rates.
   

Unless there's another clarification, this appears to be the final story.

Investment Dar Bank Website Now Password Protected - Adeem Investment Company Website Down for Maintenance/Upgrade

From time to time I like to follow up on my earlier posts to see if there have been any developments. 

So I decided to check today to see if indeed Mustafa Ibrahim AlSalih had resigned his board directorships at Investment Dar Bank Bahrain and Adeem Investment Company Kuwait as had been rumored in AlQabas, a Kuwait newspaper.  For the record:  I have seen no further news confirming that press account.  One would expect that both websites would note the resignation of a board member as significant news.

Investment Dar Bank's website is now password protected.  And the previous link on The Investment Dar Kuwait's website has been removed.  The links to TID's other two banks:  Bahrain Islamic and Boubyan are, however, still there.

In an interesting coincidence Adeem Investment Company's website is also down for unscheduled maintenance so they can upgrade their systems to improve service.  

Transparency International Publishes 2009 Corruption Perceptions Index - How Did the GCC Do?

By now you've probably seen other reports on the rankings of the GCC countries in TI's 2009 CPI.  Before we turn to the numbers, a few words.

First, how does TI itself describe the CPI?

Here are their exact words:  "The Corruption Perceptions Index (CPI) measures the perceived level of public-sector corruption in 180 countries and territories around the world. The CPI is a "survey of surveys", based on 13 different expert and business surveys."

A few points to emphasize:

1. The second word in the name says it all.  It is a Corruption Perceptions Index.  It is the perception of the level of corruption not necessarily the reality. 
2. It is public sector corruption only.
   
3. It is based on surveys (there are a universe of 13 different surveys).  Not all surveys use the same methodology.  Not all cover the same set of countries.  Usually, countries are ranked using 5 or 6. 
   

Despite these factors, the results are set forth with apparent Cartesian precision.   New Zealand is the least corrupt with Sweden two places below.  Not three.  Not one.   Similarly, at the other end of the scale, Somalia is more corrupt than Afghanistan.  Really?  How do they get to this fine a level of distinction?  Are the same set of respondents doing business in both Somalia and Afghanistan?

I commented on this phenomenon before and so I will turn to the rankings.

GCC states CPI ranking (best to worst):  World rankings follow the country name.

1. Qatar             22
2. UAE              30
3. Oman             39
4. Bahrain          46
5. Saudi Arabia  63
   
6. Kuwait           66
   

Qatar Sovereign Bond Successful - US$7 billion + Long Tenor

Qatar's sovereign bond offering was a roaring success:

1. US$3.5 billion Maturity 2015 Margin 185bps
2. US$2.5 billion Maturity 2020 Margin 195bps
3. US$1.0 billion Maturity 2040 Margin 215bps

Note the 30 year maturity on the last tranche.

There have been some press reports which have noted that this bond is now the largest US$ bond issuance by an emerging market investor as it surpassed the US$6.1 billion in bonds issued by the PRC's Ministry of Railways back in November 2007.

But, let's look at the details of that issue to see that more than size matters with Qatar.

The PRC issue consisted of and were priced as follows:

1. US$1.2 billion 7 year bonds at 5.38% (fixed rate)
2. US$3.5 billion 10 year bonds at 5.6% (fixed rate)
3. US$1.4 billion 15 year bonds at 5.75% (also fixed)

Much longer tenors.

Qatar to Introduce Corporate Tax From 1 January 2010

See updated post here.

The local GCC press is abuzz with the news that Qatar has passed a law establishing an income tax  effective from 1 January 2010.

That would make it the first GCC state to have a general income tax with the exception of the Bahrain income tax which is only on oil companies.

Some accounts differ on whether the tax will apply only to companies or individuals as well. 

AlQabas (Kuwait) huna is in the no personal tax column.

Maktoob takes an opposing view here.

AlRiyadh (Saudi) huna shares Maktoob's view.

Qatar Tribune with the apparent definitive answer:  companies only.

MP's Protest New Real Estate Tax in Bahrain - Haflat AlShayy (Tea Parties) Can't be Far Behind

Deputies in Bahrain's lower house of parliament are pushing for a repeal of a recent decree by the Prime Minister establishing a real estate tax in Bahrain.

The tax has a sliding scale:

1. 1.5% for properties less than BD70,000
2. 2.0% for properties BD70,001 to BD120,000
3. 3.0% for properties BD120,001 and up.
   

There would be exemptions for those receiving financing from Bank ElEskan (Housing Bank) to buy or build a home.

Not mentioned in the article, Bahrain also has or at least used to a registration fee for changing the legal titleholder of a property.

With all the agida in the Kingdom over taxes, can haflat al shayy be too far over the horizon?

Note to the planners:  AA fancies shayy ahmar.

Another Truckers' Delay on the Saudi-UAE Border - But What is the Real Story Here?

 "There are three whose adversary I shall be on the Day of Resurrection: a man who has given his word by Me and has broken it; a man who has sold a free man and has consumed the price; and a man who has hired a workman, has exacted his due in full from him and has not given him his wage."

Hadith Qudsi #21

SAA

If you'll look closely at this article,  you'll see in the fourth paragraph that driver, Mohammad Jolan Mustafa, gets the princely sum of AED200 (US$54.50)  to make the trip  to Doha regardless of the time spent.

Usually it only takes three days, which would make the per day wage the exorbitant sum of  AED 66.670 (US$18.17).

This time it will take eight days so his per day wages will be merely  AED25.000 US$6.81. 

I will leave it to readers to perform the wage per hour calculation.

On the border story, there was also a delay on the Causeway between Bahrain and Saudi Arabia, which the Gulf Daily News ascribes to a computer glitch in Saudi, speculating that this may have also affected the UAE/Saudi crossing.

UAE Banking Statistics - New CB UAE Monthly Report - Aggregate Banking Statistics

The CB UAE has begun publishing monthly UAE Banking Indicators which give an aggregate "snapshot" of the banking sector.

While there are a variety of data series, separate lines for general and specific provisions enable more in-depth analysis of this critical area.

Here's the inaugural October 2009 report.

November and December's data should reflect the provisioning for AHAB and Saad Groups recently mandated by the CB UAE.  

UAE Revises Corporate Governance Code

On 12 November the UAE Ministry of Economy/UAE Securities and Commodities Authority issued a decree amending certain aspects of the previously issued April 2007 Code which will come into effect on 1 May 2010 after a period of voluntary compliance.  Here is the Arabic press release.  The English translation is here.

The new measures are include the following:

1. Definition of material transactions as 5% of capital or AED 5 million, whichever is less.  Definition applies to the total of transactions.
2. All such transactions with Board Members must be scrutinized to ensure their appropriateness.
3. The Board Remuneration Committee must set compensation policies for the Board and staff, review these annually, and as well review the compensation of senior managers to ensure that it is appropriate/reasonable given the performance of the company.
4. Existence of a robust functioning internal control/risk monitoring group whose full independence of management is to be guaranteed by a mandated direct reporting by the committee to the Board of Directors.  Its areas of responsibility include risk management, review of compliance with internal policies and as well with various external regulations and laws.
5. Steps to ensure the full independence of external auditors.  The decree itself contains warnings against specific practices which might compromise an auditor's independence.

The decree applies to all listed companies in the UAE except for those owned by the Federal Government or one of the individual Emirates.

Investment Dar - Announces Majority Approval of Standstill

On 16 November Investment Dar issued a press release that a majority of its banks and investors had approved the Standstill Agreement.

This means that Suq Al Mal's earlier post was incorrect.  Or at least is as of today,

From the wording in today's press release, it's clear that a majority was not achieved  until today.   Unlike formal political elections, there is always room to count positive votes after the "deadline".  Presumably votes from the more distant precincts trickled in over the weekend.  Or a few "hanging chads" were resolved.

In any case, this is good news for TID who are now set to present their proposed restructuring plan to  their banks and other creditors on 24th and 25th November.

Who knows in the next day or two we might actually see a press release that both mentions who the Co-Ordinating Committee are and hear an endorsement of the plan from them!

Global Investment House - Treasury Share Purchases 4Q08

As companies encounter financial difficulties, their business comes under more intense scrutiny.  This is part of the breakdown in trust that initially occurs when a borrower tells a lender that it cannot meet scheduled repayments or when a formerly high flying company has reversals. 

Suddenly the best customer in the world is a scoundrel - proving once again the old definition of  the commercial banker is well founded.  What is a commercial banker?  He's a guy who gives you an umbrella on a sunny day.  And at the first drop of rain wants it back immediately.

GIH is not immune to this process.  In an earlier post Suq Al Mal looked at the funding relationship between GIH and GMFA, a London Stock Exchange listed fund (of which GIH holds 29.99%) which has come under the review of at least one regulator.  The link to that earlier post is here.  There are several open questions from that post.  The key one is how GIH reportedly repaid deposits  taken from GMFA early (presumably before maturity) after it had declared a principal standstill on bank and bond debt.

Another topic that attracted attention is the dramatic 4Q08 increase in GIH's holdings of its own shares ("Treasury Shares"). Many analysts noted that between 30 September 2008 and 31 December 2008,  these increased from 20.5 million shares worth KD20.1 million to 81.9 million shares worth KD59.0 million.

This is the topic of this post.

One unsubstantiated rumor was that GIH had bailed out a substantial shareholder as it ran into difficulties.

As noted above, that theory is a rumor.

 

In the absence of Kuwait Stock Exchange mandated public disclosure of  details by a company in dealing in its own shares (as occurs on the LSE, for example) there is no conclusive answer.

However, it is possible to use GIH"s financials to investigate this issue a bit further.

The first line of inquiry is to see if Treasury Share purchases are out of the ordinary.  In other words, did these only occur to any extent during 4Q08?  Or does GIH have a consistent pattern of dealing in its own shares?

By looking at the Consolidated Statment of Changes in Equity GIH's quarterly financials, it is clear that at least during 2007 and 2008, GIH regularly traded in its own shares often in sizable amounts.

The following list summarizes 2007 activity:

1. 1Q07 Opening Balance: KD20.5mm Purchases: KD5.8mm Sales: KD1.8mm Closing Balance :KD24.4 mm.
2. 2Q07 OB: KD24.4mm P: KD16.8mm S: KD36.3mm CB: KD5.0mm.
3. 3Q07 OB: KD5.0mm P: KD12.1mm S: KD13.6mm CB: KD3.5mm.
4. 4Q07 OB: KD3.5mm P: KD41.4mm S: KD43.3mm CB KD1.5mm.

And here's 2008's activity.

1. 1Q08 OB: KD 1.5mm P: KD 8.6mm S: KD 2.5mm CB: KD7.7mm.
2. 2Q08 OB: KD 7.7mm P: KD30.3mm S: KD25.2mm CB: KD12.7mm.
3. 3Q08 OB: KD12.7mm P: KD 7.4mm S: KD 0.0mm CB: KD20.1mm.
4. 4Q08 OB: KD20.1mm P: KD49.0mm S: KD10.1mm CB: KD59.0mm.

I have not seen an explanation by GIH for this activity.  My guess is that these transactions were undertaken to support GIH's share price.

The next line of inquiry is to see if the price paid during 4Q08 was out of line with the market price.

The first step in that process is estimating the average cost per share GIH paid for the shares purchased during 4Q08.

Looking at the above information in conjunction with that in the Treasury Shares Note in GIH's financials, we can do just that.  At 31 December 2009,, GIH held 81.924 million of its own shares acquired at a cost of KD59.029mm or KD0.721 per share.

We can further decompose that aggregate cost into two components:  shares purchased during 4Q08 and those acquired earlier.

From an analysis of GIH"s financials, it seems Treasury Shares are accounted for on a FIFO basis.  If that assumption is correct, the average cost of the shares acquired during 4Q08 is KD0.683 per share.  Cost allocation to the KD10.1mm of share sales in 4Q08 would be from shares purchased earlier.  Using 3Q08 data, that would mean that after the 4Q08 sale, 10.438mm shares (from those held at the end of 3Q08) with an aggregate cost of KD10.236mm were part of the 4Q08 ending balances.

By simple arithmetic the number of shares GIH acquired in 4Q08 would be 71.486 mm shares (81.924mm - 10.438mm).  These "new" shares would have been responsible for KD59.029mm - KD10.236mm in cost (KD48.793mm)  which is fairly close to the cost of 4Q08 purchases reported in the 4Q08 financials.

Turning to KSE price data for GIH shares, we see the following:

1. From 1 January 2008 until 31 August 2008, GIH's shares traded in a fairly narrow band oscillating around KD1.000 per share.
2. In September the shares began a decline reaching KD0.770 at the end of the month.
3. During October the shares declined further to approximately KD0.485.
   
4. In November the shares traded in the KD0.400's ending the month at KD0.410.
5. In December the shares traded downward reaching KD0.242 on 23 December where they remained for the rest of the year.

Clearly, in order to achieve an average price of KD0.683 on the shares bought during 4Q08, they would have had to be purchased during October.

Let's look at KSE volume data based on the assumption that all share purchases and sales have to clear through the KSE.

There were several large trading days during the month: 

1. 8 October 16.7mm shares for KD9.7mm
2. 9 October 15.5mm shares for KD10.3mm
3. 14 October 14.7mm shares for KD9.8mm
4. 15 October 13.5mm shares for KD9.1mm
   

With the assumptions and analysis above, it is during this period that the shares would have to have been purchased if they cleared through the Exchange.

I'd also note that there were a series of six large identical trades on 4, 7, 8, 9, 10 and 11th December.  All for 55,920,000 shares at a price of KD21,530,950 at a per share price of KD0.385.

These trades seem to have been a calculated attempt to stem the decline in share price.  Besides pride there are a variety of other possible reasons for supporting a share price as anyone familiar with the closely related terms "Kuwaiti investor", "pledge", and "leverage" would know.    

You may be thinking:  why don't these trades - which total KD129.2mm -  appear in GIH's 4Q08 financials. Why aren't both Purchases and Sales for 4Q08 each KD129.2mm higher?  Good question.  I'm presuming because they were rollover transactions or offset by other transactions GIH did not have to include them.  If they were not GIH trades, then there is a very intriguing (notice I did not say interesting) question as to who did and why?

After this intervention stopped, the share price declined to KD0.242 at year end dropping eventually to double digits in 2009 before recovering later this year to just under KD0.100 today.

So this analysis has not provided a definitive answer to the rumor cited above.  One bit of further information, the timing of the purchase dates could go a long way to resolving this issue.

Kuwait Stock Exchange Suspends Trading of 13 Companies (6 Previously Suspended)

Last week the KSE warned 23 companies that failure to provide their 3Q09 financials to the Exchange  by 8:30 AM this morning would result in suspension of their trading.  See earlier Suq Al Mal post on that topic.

This morning at 8:44 AM local time, the KSE announced the suspension of trading of 13 companies.

As noted in my earlier post of the 23 companies so warned, 6 had already been suspended for failure to provide financials for previous periods.

The 13 suspended today include 6 previously suspended, so the incremental number of suspensions (in this announcement) is 7.  The KSE already suspended IFA and Watha'iq last Thursday.

New suspended companies:

1. Industrial Investments Company (Investment Company)
2. Aref Investment Group (Investment Company)
3. Aayan Leasing and Investment Company (Investment Company)
4. Al-Madar Finance and Investment Company (Investment Company)
5. Salbookh Trading Company (Industrial Company)
6. Safwan Trading and Contracting (Services Company)
7. National Ranges Company (Services Company) a/k/a "AlMadayen"
   

Previously suspended still suspended.

1. The Investment Dar (Investment Company)
2. International Leasing and Investment Company (Investment Company)
3. Pearl of Kuwait Real Estate Company (Real Estate)  a/k/a Lu'lu
   
4. Safat Global Holding (Real Estate)
5. Villa Moda Life Style (Services Company)
6. Network Holding Company (Services Company)  a/k/a "Shabka"
   

Company type corresponds to KSE classification.

Central Bank of UAE Weighs in on Al Gosaibi and Saad Restructurings - Establishes Mandatory 50% & 100% Provisions

The Board of Directors the Central Bank of the UAE officially mandated that all local banks and branches of foreign banks operating in the UAE  take certain prescribed provisions against their exposure to the Saad Group and to Ahmad Hamad AlGosaibi and Brothers ("AHAB") Group.  Provisions apply to both funded and unfunded exposure (e.g., letters of credit, etc) - that is to all exposure to the two Groups.

Yesterday, the Governor of the Central Bank issued an official circular setting forth the provision requirements which are to be implemented no later than 31 December 2009:

1. 100% of all exposure to Awal Bank Bahrain (owned by Maan AlSanea)
2. 100% of all exposure to The International Banking Corporation Bahrain (owned by AHAB and partially by Maan AlSanea)
3. 50% of all other exposure to AHAB 
4. 50% of all other exposure to Saad Group companies.

Governor AlSuwaidi emphasized in his circular two further points:

1. The level of provisions is consistent with that deemed appropriate by regional and international supervisors.  The reference to other supervisors' assessment is particularly telling.  This is not simply the CB UAE's view.  Nor apparently is it only a regional view.
   
2. The CB UAE will revert in 2010 if additional provisions are required.

This announcement is noteworthy because Central Banks generally do not get involved in publicly  mandating specific loan loss provisions.  This is only done exceptionally for cases  involving large amounts where the Central Bank has made a determination that the prospects for recovery are low.

As such then, this announcement represents a highly negative assessment of both Groups' prospects.

1. Failure of and no recovery at all on the two banks, Awal and The International Banking Corporation.
   
2. At least a 50% loss on other exposure to the AHAB Group and Saad Group - though there is a hint that additional provisions may be required.

For those who don't read Arabic, a much shorter English language press account.

Global Investment House Kuwait - Seized Deposits

As per GIH's financials, two deposits totaling KD115 million (US$402.6 million) have been attached or otherwise seized by third parties and are now the subject of legal actions. 

KD71.75 million of this amount relates to an investment that GIH had intended to make in National Bank of Umm AlQawain ("NBQ") for KD183.6 million (US$642.5 million) to purchase a 20% stake.  The two parties signed an MOU in July 2008.  GIH placed the equivalent of KD 71.75 million (US$249.9 million)  with NBQ.  (I suspect the amount placed was US $ or AED as the amount fluctuates from one quarterly report to another.  It would not if the amount were denominated in KD). 

Subsequently, GIH obtained commitments for a US$410 million loan to fund the remaining amount of the purchase price.  In November 2008, it decided not to proceed, canceled the loan and asked for its deposit back.  

NBQ refused alleging breach of contract.  See NBQ's 2008 Annual Report Note #13. (You will have to page through this as it is interactive).

Reportedly, a court in the Emirates gave the first round to NBQ.  No doubt there will be several more rounds.  The two parties' legal arguments are summarized in this article.

The second amount, KD43.2 million (US$148 million), is a deposit placed with a Kuwaiti bank by a subsidiary of GIH (AlThouraia) which that bank offset against obligations owed to it by GIH.  

The total KD 115 million represents roughly 0.1% of GIH's total cash of KD89.6 billion.  From that standpoint it's not a highly significant amount.  

From an equity standpoint, if GIH were to lose the court case against the Kuwaiti bank, the result should be no impact on equity as it would merely be a substitution of liabilities - the liability of GIH towards the bank replaced with one towards AlThouraia.  At some point GIH would have to make its subsidiary whole by transferring funds or other value.

With respect to the NBQ case, it's difficult to make a statement.

It is hard to understand the basis for this lawsuit.  In other words hard to fathom how a properly worded MOU could create a contractual obligation.  But then again AA didn't understand the structure of the convertible bond agreed to by Shuaa Capital and Dubai Banking Group.  Since the NBQ/GIH deal is also structured as a convertible, it may be that some cutting edge financial innovation in the Gulf has produced  a breakthrough in convertible deal structuring.  Or then again maybe just a breakdown. 

In any case, it's hard to imagine the UAE court confiscating GIH's deposit in toto.   

However, even if it did, the damage should be containable.

Global Investment House Kuwait - Debt Restrucuting Update - GIH Offers Collateral

Having devoted some attention to The Investment Dar over the past few days, it's time to turn to Global Investment House, where the story appears better.

 
On 25 October GIH announced that its creditors have overwhelming approved the terms of a proposed debt restructuring.  And contrary to TID, where the creditor Co-ordinating Committee is largely invisible and silent, here at GIH that is not the case.  WestLB, the head of the Bank's Steering Committee, (and you'll recall I made a point of the significance of the  change in name of the creditors' committee at TID in a recent post) is front and center selling the deal.

 
There have been, however, two intriguing developments since then - or at least public reports of these events.  

The first was contained in GIH's 3Q09 earnings announcement:  "The size of total bank debt to be restructured is expected to be KD500 million (USD1.75 billion).   The outstanding bonds of KD89.5 million (USD312 million) are expected to be paid as per their scheduled  maturities."

 
There is always a tension in creditor groups between lenders and bond holders with the latter claiming that it is impossible to restructure their obligations and so they must be paid according to their existing maturities.  The images bondholders usually conjure up are scores of unsophisticated investors - widows and perhaps even orphans - who simply  just can't be persuaded to attend bondholder meetings and vote.  

Lenders push to have all obligations restructured as they don't want to see precious cash flow used to pay off another material creditor in full while they are waiting for their rescheduled debt to be paid.

GIH"s bonds represent roughly 15.2% of the outstanding debt obligations .  So this is not a trivial amount.  Maturities are as follows:  December 2009 KD 14.4 million (16.1%), April 2012 KD 40.9 million (45.6%) and November 2013 KD 34.3 million (38.3%). (If you're wondering why numbers differ from those in GIH's press release, I am using the amounts due after GIH Group holdings of the bonds are eliminated.  These appear to be KD 25.5 million.)

Just today GIH issued another press release (though there was a rumor at least one day earlier) that it had granted the bondholders collateral.

GIH states that it has "offered to the bondholders security on the same terms and basis as is being proposed to be offered to the banks and financial institutions currently in discussions with the Company for restructuring of the debt".

 
Since the bondholders are not restructuring their debt, the question is what is the quid pro quo for the collateral.  Is it to forestall their taking legal action?  As part of a bargain to keep them from accelerating repayment of their bonds? 

 
It seems the bank lenders may be acquiescing not only in the bondholders' exemption from the restructuring but are as well their sharing in the collateral. 

Of course without details of the negotiations it's hard to draw a firm conclusion.   However, it seems the bondholders have gotten quite a nice deal indeed.  One wonders if it extends to the GIH Group entities who are bond holders? Perhaps as much as KD 25.5 million as outlined above. 

It would be interesting to know who the holders of the bonds are particularly the 2008 issue which was raised around the time that it should have been apparent to GIH's management that things were getting difficult.   

From GIH's 3Q09 financials, it's clear that the Group itself stepped up for roughly KD 15.7 million of the issue.  That, of course. is based on the assumption that there were no prepayments of that debt.  The 3Q09 financials show no evidence of that.

And finally don't overlook the central message here - the price of the restructuring is collateral.  Not an uncommon requirement of creditors in a restructuring.  There will also be  covenants in the restructuring agreement designed to protect the lenders' interests by limiting what the borrower can do.  Depending on how onerous these are, GIH could find itself with limited room to conduct / expand its business.