كوكب الشرق

 

Copyright Blago Tebi - Creative Commons License

هذا هو اليوم الذي فيه توفي الموسيقى 3 فبراير 1975

 ذكرى فاطمة ابراهيم البلطجي

إنا لله وإنا إليه راجعون

رجعوني صوتك لأيامي اللي راحوا
علموني أندم على الماضي وجراحه
اللي سمعته قبل ما تسمعك اذنيه 
عمر ضايع يحسبوه إزاي عليّ
انت عمري اللي ابتدي بنورك صباحه
قد ايه من عمري قبلك راح وعدّى
يا حبيبي قد ايه من عمري راح
ولا شاف القلب قبلك فرحة واحدة

Al Arabiyya Loses Appeal on Court Judgment Over Failure to Air Interview with Saudi Shaykh

 

Maktoob reports that the Appeals Court has upheld the judgment of the Court of First Instance fining Al Arabiyya for not showing an interview with the Saudi Shaykh who reportedly suffered immensely from this slight.   

Earlier post here.   

Warning:   Before you click on this link, you should be aware that this earlier post contains some rather graphic language describing the harm done to the Shaykh by the failure of Al Arabiyya to air the interview.    

In commenting on the case, the following quote was attributed to Al Arabiyya.

"The interview was nothing special, there was nothing new in it ... Just because he is a prince doesn't mean he has the right to have his interview broadcast," Nasser al-Sarami, head of media at Al Arabiya, told Reuters.

For a company owned among others by Saudis and one Shaykh from a delightful country on the Mediterranean who has two passports (because of this he's got to be twice a Shaykh) and operating out of Dubai Media City, it seems to me that a little more respect for Shaykhs is in order. 

Al Arabiyya does have the right of a final appeal to the Court of Cassation, though I for one wonder just how much pain they think they can inflict on the already highly wronged Shaykh.

Gulf Finance House - Requests Six Month Extension for US100 Million - It's Not Looking Pretty

Earlier post had an erroneous amount US$200 million instead of the correct US$100 million.  This has been corrected with apologies to any who have been misinformed by my previous sloppy work.

This morning I posted that the Bahrain Stock Exchange had suspended trading in GFH's shares pending clarification of press reports on their negotiations with West LB.  And earlier this morning GFH issued a press release which was notable for the lack of any concrete information on the substance of those negotiations.

Between then and now, someone has taken time to "think again".

As per an article in the Gulf Daily News, GFH has now announced that it has requested the lenders of its US$300 million facility, led by West LB, to extend the payment of US$100 million for six months from the 10 February maturity date.

Frankly, this doesn't make much sense to me.  

1. GFH's problem is that its revenue from deal placement has pretty much dried up.  
2. This is not exactly the market in which one would expect to be conducive to a highly profitable sale of an asset.  
3. It has significant commitments.  At 30 September 2009, it had US$70 million in various commitments along with US$46.6 million and contingent financing obligations of US$170 million. (Note #12).  I believe, but don't know for certain,  that the latter relate to the Dubailand venture which GFH exited just in time for its 31 December 2009 financials.  
4. It's also hard to imagine another "bright" creditor stepping up to refinance this amount.  I suppose though if they could get an "implicit" guarantee someone out there might step up.Though with its rating now in CC territory, even an implicit guarantee might not be enough.  S&P comments like "We believe Bahrain-based Gulf Finance House's liquidity position is under immediate and severe stress" are unlikely to be the sort to attract bankers.  

I find it really hard to imagine that any of the issues is going to disappear in the next six months.

What's needed is a multi-year debt restructuring to enable GFH to right-size itself, pare down expenses and focus on core businesses.  In other words to reverse its strategy 180 degrees. In my opinion six months is scarcely enough time.  That's the sort of time some obligors appear to need just to come up with a standstill request.

In this vein the following quote is remarkable.

Acting CEO Ted Pretty said: "The management team at GFH has four key priorities, namely grow revenues, reduce costs, improve its liquidity and exit non-core assets.

I'd like to suggest a fifth priority which I think is the most important, assuming that GFH intends to continue in business:  urgently address its liability structure, including significant near term maturities  by repaying/refinancing its existing debt and building a sustainable liability structure.  This is not only the key to continued existence, but also is the issue that has the shortest fuse.  The first step to dealing with a problem is to recognize and acknowledge the problem. 

بدون التعليق

Global Investment House - Restructuring Implementation Update

If you've been following company news in the press and stock market announcements, you've noticed that representatives of GIH have been been resigning from various companies - formerly subsidiaries and affiliates.

This is natural.  The creditors want to ensure proper control over these entities which are now owned by Global Macro Fund.  Or by Mushaa Islamic Real Estate Company.

This is also a sign that the post restructuring GIH is going to be quite a different animal than the old GIH.  Much smaller and not focused on proprietary investments.

Here's one such announcement from the Kuwait Stock Exchange.

[8:16:56]  ِ.استقالة اعضاء من مجلس ادارة الشركة الوطنية ‏الدولية القابضة
يعلن سوق الكويت للأوراق المالية بأن الشركة الوطنية
الدولية القابضة قد افادته بأن مجلس ادارة الشركة وافق
على استقالة الاعضاء الممثلين لشركة بيت الاستثمار
العالمي (جلوبل) في مجلس ادارة الشركة اعتبارا
من 1-2-2010 وهم :‏
السيد / عبدالله خلف ابو حديدة
السيد / احمد محمد خميس
السيدة / منى عبدالعزيز المخيزيم

The Investment Dar - Aref Investment Group Court Case: Judgment in Aref's Favor Apparently Upheld

Aref Investment Group announced on the Kuwait Stock Exchange that Kuwaiti Court had rejected TID's non payment of KD12,644,771 previously awarded in favor of Aref.  It's unclear if this was a judgment by the appeals court, the press release uses the term "Istishakal" and "Ishkal".  In any case it seems Aref has won another judgment and TID has been fined KD100, ordered to pay KD 50 in lawyers' costs and forfeited its guarantee.  TID had apparently filed a request with the Court to stay the implementation of the earlier judgment.

You'll recall that the Court of First Instance ruled in Aref's favor in November.  Earlier posts here and here.

This confirms my earlier comments that approval of the restructuring plan by 2/3 of TID's creditors does not stay legal actions by creditors deciding to pursue their rights outside the restructuring.  In other words that there is no legal mechanism in Kuwait to "cram down" dissident creditors.  This could complicate the implementation of the restructuring.

I expect that tomorrow TID will issue its own press release so stay tuned.

Here's the Arabic text of Aref's press release.

[12:29:48]  ِ.ايضاح من (عارف) بخصوص رفض الاشكال فى التنفيذ المقام من دار الاستثمار
يعلن سوق الكويت للاوراق المالية بانه ورد الينا الان من شركة مجموعة عارف ‏
الاستثمارية بانه قد سبق ان صدر حكم لصالح مجموعة عارف الاستثمارية ‏
فى القضية رقم (7400/2009) تجاري كلي ويقضي بالزام شركة دار الاستثمار ‏
بان تؤدي لمجموعة عارف الاستثمارية مبلغ وقدره 12,644,771 د.ك مع الزام ‏
شركة دار الاستثمار بالمصروفات واتعاب المحاماة ،واستشكلت شركة دارالاستثمار
فى تنفيذ الحكم المذكور بالاشكال رقم 3379/2009 مستعجل /7 وصدر حكم برفض ‏
الاشكال المذكور وتغريم الشركة المستشكلة 100 د.ك ومصادرة الكفالة وخمسون ‏
د.ك مقابل اتعاب المحاماة .‏

Gulf Finance House - US$300 Million Syndicate Negotiations in Process - Default Looming?

The press is full of speculation that GFH is negotiating with West LB over an extension of all or part of its US$300 million loan which is due for payment 10 February.

The company had not previously commented on the rumors in the market and so this morning the Bahrain Stock Exchange temporarily suspended trading.

GFH issued a rather anodyne press release today which provides the following information:

"In reference to a recent news article, GFH would like to confirm that it is having discussions with West LB (the syndicate manager) in London in relation to the terms of its syndicated facility. GFH further confirms that it will immediately announce the results of such discussions in line with the disclosure requirements of the Central Bank of Bahrain and Bahrain Stock Exchange. The total amount of the facilities, the terms of which are under discussion, amount to $300 million due on February 10, 2010.”

At this point while all details are not available, it's a pretty safe guess that GFH is not negotiating with West LB over whether it will make full repayment via check or wire transfer.  And there would be little need for a covenant waiver (motivated by a ratings downgrade) if payment is going to be made within 8 days.

The press release is also yet another example of "disclosure" by a "Shari'ah-compliant" financing institution.

I guess when you're Shari'ah compliant you adhere to a different but much higher standard of rules.

Reminds me of another "Islamic" bank that capitalized just six and one-half years of pre-operating expenses when it opened which were used to give those who "incurred" these "expenses" some $10.2 million in equity (9.2% of the shares) in the Bank.  I asked an accountant at the firm that audits them  what accounting principle justifies the capitalization of six and one-half years  pre-operating expenses.  He responded it was "Islamic" not conventional accounting and since he only audited conventional banks, he couldn't really answer my question.  The Bank also paid cash US$12 million in fees to consultants and others in connection with the raising of the equity.  Since only US$101 million was actually raised from third parties, the cost of raising the equity was just short of 12%.  Of course, one would have to compensate someone for raising equity in an "Islamic" bank since that was quite a "hard" thing to do when the funds were being raised.  If on the other hand, there was great excitement in the GCC about stocks and the markets were booming, then it might seem exorbitant.  As they say, "God knows".

And for those of you tracking the performance of Deutsche Bank's investment in GFH which they purchased at US$0.38 per share.  The closing price of GFH is US$0.29.  With over 105 million shares, that translates into a paper loss of  roughly US$9.5 million.

That assume of course, that DB is "still holding".  They might have sold.  

Some speculation.  If I saw a rescheduling coming and had a chance to get out, I would.  The shares offer a convenient way out without creating any messy footprints.  Convert debt to shares, then sell the shares.   There is sufficient volume in the Kuwaiti market that one could do this quite easily over say a couple of weeks.  If there is a loss, it appears in one's financials as a trading loss not an impairment or provision on a loan. One might face an ethical dilemna if one's clients were in the credit.  Whose portion do you self first?  The clients?  Yours?  Pro-rata?  As noted above, this is one option a creditor might take in a deteriorating credit.  There is no reason to suspect that Deutsche Bank is engaged in this sort of behavior, which by the way would be perfectly legal. 

UAE Noor Bank Calls for More Support For Banking Sector - Central Bank Says Not Now

 

Today's The National quotes Hussain al Qemzi, the chief executive of the Dubai-based Noor Islamic Bank as saying that UAE banks need another AED20 billion (US$5.4 billion) to AED 25 billion  (US$6.8 billion) to help shore up their financial positions.  The Federal Government has already provided some AED 120 billion (US$32.7 billion).  It's unclear if Mr. AlQemzi is calling for a capital (equity) injection or additional liquidity support.

To put his request in context according to the 31 December 2009 statistics published by the Central Bank of the UAE, total bank equity at year end (before current year profits) was some AED231.4 billion (US$63.1 billion).  And monthly provisions are running just over twice the lower amount (AED 20 billion).

In a separate article the Governor of the Central Bank of the UAE was quoted as saying at the opening of Deutsche Bank's Branch in Abu Dhabi: "There is no need for more liquidity injections for the time being," Al Suwaidi told reporters. 

Same market, two views.  

It would be interesting to know what the basis for Mr. al Qemzi's view is.  That is, how he got his precise figure.

Public Service Announcement: Lost and Found - One Standstill Request Missing Since 21 December 2009

MISSING 

SINCE 21 DECEMBER 2009

ONE STANDSTILL REQUEST

GENEROUS REWARD

 

Lost on 21 December 2009 at the DIFC Gate Building.  Or maybe Dubai World Headquarters.  Or maybe in a taxicab on the way to an important meeting. 

Yellow folder containing not only a standstill request but a draft rescheduling  proposal (all pictured above).

Contents are of great sentimental and some limited commercial value.

Owners are eager for the safe and prompt  return of the folder and its contents.   

Generous reward of Dirhams 1,000.  As well as a season pass to the Burj Khalifa observation deck.

Please call Shaykh Mohammed at 971-4-555-1212.  

Or Aidan at 971-4-555-1313.

Kuwait Stock Exchange Suspends Trading in AlAbraj Holding

If you wondered what happened, AlAbraj did not get its 31 October 2009 fiscal year end financials to the KSE.  

And so the KSE has suspended trading.  Announcement below.

[8:38:8]  ِ.وقف التداول بأسهم شركة الابراج القابضة اعتبارا من اليوم ‏
يعلن سوق الكويت للأوراق المالية انه قد تم وقف التداول بأسهم شركة الابراج ‏
القابضة اعتبارا من اليوم الاثنين الموافق 01-02-2010، وذلك لعدم تقديم ‏
البيانات المالية السنوية للسنة المالية المنتهية فى 31-10-2009، فى الموعد ‏
المحد

Spate of Pigeon Kidnappings in Kuwait: Prize KD25,000 (US$85,500) Pigeon Stolen

You'll recall the story about Sa'eed Al-Huweiti and his SAR299,000 (US$79,733) falcon.

Well here's a companion story from Kuwait, after making allowances for apparent cultural differences.

Several newspapers carried differing accounts of the theft of a pigeon or pigeons on 30 January. 

AlWatan Newspaper (Kuwait) reports on the theft of a pigeon whose owner valued it at KD25,000 (US$25,000) from the Kabad neighborhood in Kuwait.

AlAnba Newspaper also in Kuwait reports that it was five pigeons each worth KD5,000.

And finally ArabTimes also from Kuwait reports that the pigeon was worth KD20,000.

What's not reported is that this is just part of a pattern.  Here's a story also from Kuwait's Awan on the theft of a KD5,000 pigeon reported on 4 January 2010.  This theft took place in the AlSurra neighborhood.

Two unexplained things:

1. How a pigeon can be worth KD5,000 (US$17,500) much less KD25,000 (US$85,500)? 
2. Just how much more pigeon kidnapping is going on in Kuwait?

It's unclear if the Majlis AlUmma is considering a pigeon compensation bill, though my guess is they will eventually.

Saudi Emaar SAR 5 Billion (US$1.3 Billion) Loan from Saudi Ministry of Finance

Reuters reports that Saudi Emaar will receive a SAR 5 billion loan (US$1.3 Billion) from the Saudi Ministry of Finance for its King Abdullah Economic City project.   KAEC is a SR 100 billion (US$26.7 billion) mixed use city to be built north of Jeddah.  

Emaar Economic City, listed on the Saudi Tadawal, (Symbol #4220) is the developer of the project.  This entity reportedly will get the loan.  As of its preliminary 31 December 2009 financials, EEC did not have any significant loans.

The loan is being described as designed to help speed up construction and delivery of the project.  I'd guess with a project this size there are bound to be delays.

What isn't clear is if this loan is an indication of difficulty for the project in accessing finance (Dubai World fallout, general trends in the area)?

Or whether this loan had been planned from the start and is just being announced now?

Knowing the answers to these questions would be a highly useful insight.  I am guessing it is the former.

Saudi Zain Foreign US$500 Million to US$600 Million Loan - What's Behind the News Item?

 

Kuwait's Al Anba'a newspaper reports that Zain is in discussions with non regional banks for a loan of between US$500 to US$600 million to finance the development and extension of the network of Saudi Zain in the Kingdom.  The reason for the recourse to foreign lenders is ascribed to "tight" lending conditions in the GCC.  You've probably seen all this reported elsewhere.

But, there's an element to the story that you haven't probably seen.

The "bit" that many news reports have left out is that the negotiations are being facilitated by equipment suppliers to Zain.  Most of whom are European.  And thus the assumption is that the banks involved are European.  

Does this indicate anything about Zain's financial condition?

As mentioned above, the ostensible reason for the recourse to foreign lenders is that local banks are imposing very complicated conditions and requirements for guarantees due to market conditions and due to tighter supervision by central banks.  The unspoken sub-theme is that the credit of Zain is sterling.  But that its access to financing has fallen afoul of external conditions.

No doubt lending conditions are tighter in the GCC.   Lots of distress with AlGosaibi, Saad, Dubai World has probably focused previously unfocused minds.

Unmentioned is the simple fact that Zain Saudi has not turned in stellar performance.  Also unmentioned is that it did not make the EBITDA earnings target covenants under its existing loan.  Or that existing lenders on that facility had to grant a waiver to remedy an event of default. 

Any foreign lender should exercise caution when it is told that the local banks don't understand the credit, aren't as sophisticated as the foreign bank, are over reacting  to market difficulties, or under pressure from allegedly strict regulators.  While it is nice to be told that one is smarter than others,  sometimes a "great" opportunity to take advantage of others' lack of sophistication and nerve is not so great after all.    

If a prospective lender also notices that the borrower needs to enlist help of others to secure financing, that may also suggest additional caution is prudent.  If the borrower cannot find any banks who "know" it who are willing to lend (and note the article says that negotiations with local banks for financing this new loan have stopped), then could be another red flag.  Having said this, once a firm I was with extended a financing offer to a prospect whose lead bank was unable to providing financing, though this was a skill set deficit not a credit issue.  We then became the lead bank.

Equipment suppliers have a keen interest in moving their merchandise.  And to the extent they can lock in a buyer to their equipment or increase "switching costs", all the better.  When their customers can't raise financing on their own, suppliers first turn to other sources of credit, e.g., export credit agencies, and financiers they know.  Often leaning on those sources to do the deal, explaining just how important it is to them and promising they won't forget.   Sometimes, as a last resort, they will even take the receivables on their own books.  During the "Asian Century" (which if I remember correctly began in the early 1990's and abruptly ended in 1997, though I believe it may have restarted again in 2009) one French and one US supplier found themselves later to their financial chagrin with a lot of duff receivables - which may in part have motivated a merger.

Another bit of information in the article which may be an indication of distress (though it need not necessarily be) is the statement attributed to the CEO of Zain Saudi, Saad AlBarak, that Saudi Zain was not "rescheduling" its existing murabaha loan but merely "refinancing" it.  

A refinancing certainly sounds much better than a rescheduling.  A rescheduling implies all sorts of problems.  A refinancing, well that's just the rollover of a great asset.  

The devil is as usual in the details.  If the existing lenders were to say "no",  is the alternative a rescheduling? Are there any new lenders ready to step up and "take out" some or all of the existing lenders?  Sometimes when a bank is stuck in a credit, it "refinances" rather than "reschedules" because reschedulings raise all sorts of  messy problems.  First, there is the need to report restructured loans under IFRS.   Auditors may insist on impairment tests.  Provisions may become necessary.  Second, as a general rule, Central Banks get nosy about rescheduled loans and start asking about provisions as well.  Third, equity analysts may form unfortunate conclusions if restructured loans increase.  Something one might want to avoid if one faces other loan problems.  Fourth, clients and depositors may get nervous.

And sometimes a refinancing is just that - bankers renewing a performing asset that they are happy to have on their books.

So, to be clear, all of the above do not prove there are serious problems at Saudi Zain.  

What they do suggest, however, is that a closer look at the company is warranted.

GCC China Economic Forum - Inaugural Meeting Bahrain 23-24 March

 

The GCC-China Economic Forum will hold its inaugural meeting this March 23-24 in Bahrain under the patronage of Bahrain's Prime Minister, HH Khalifa Bin Salman Al Khalifa.  Among the topics for discussion is the finalization of Free Trade Pact talks.

Trade and economic relations between the PRC and the GCC states are increasing.   Something that is in the political and economic interests of both sides.  Something that gives both sides greater options vis-a-vis certain other powers in the Western end of the Eur-Asian continent and in the Americas.  An earlier observation here. 

Saudi Supreme Court Stands Up for Treatment of Women According to the Shari'ah

Copyright The National Newspaper Abu Dhabi

Once again the Custodian of the Two Holy Mosques' intervention rights a wrong. 

As a result, Saudi Supreme Court takes a firm stand overturning taqlid from the Jahiliyya.

The National Newspaper Abu Dhabi "Beauty Queen Dazzles the Judges"

 Copyright The National Abu Dhabi

A long, slender neck, full lips, a well-shaped nose and long legs – Ruwayda had all that, and then some.

Sporting long, curly lashes, a full hump and even spacing between her toes, the one-year-old purebred Omani Asayel finished first in the beauty pageant at the Al Dhafra Camel Festival which began yesterday.

I just couldn't resist.  The article not the camel.

Dishonest Taxi Drivers

In reading this story, I am reminded of the story of the Prophet Shu'aib who God sent to the People of Maydan.  I don't see any exemption for taxi drivers from the strictures of the below ayya  (7:85) as I have pointed out on more than one occasion to a rapacious taxi driver in one of the GCC states.   

BD151 for a short ride is really beyond the pale.   Looks like Discover Islam may just have discovered some constituencies in need of the دعوة‎ , though they shouldn't forget the manifest need for some preaching in the court system as Ms. Zaid recently noted.

باسم الله الرحمـٰن الرحيم

صدّق الله العظيم

Saudi Capital Market Authority SAR278 Million (US$74.2 Million) in Penalties and Fines re 2006 Trading in Tihama Shares

 

The Saudi CMA announced today (30 January 2010) that the Appeals Committee for Disputes in Securities had issued its final judgment upholding the levying of penalties and fines in the aggregate amount of SAR278,122,905 (US$74,166,108) against several individuals for trading in the shares of Tihama Advertising and Public Relations Company (Tadawul #4070) during the period 23 July 2006 through 19 August 2006.  The penalties are composed both fines and return of illegal gains on the trades.  Of the two amounts, as you might expect, the disgorged profits are more substantial - 99.8% of the total to be precise.

These are I believe record penalties imposed by the CMA.  

The Appeals Committee upheld the following earlier findings and penalties:

First, that Muhammad Bin Nasir Bin Jarallah Al Jarallah violated Paragraph "و" ('waw") of Article 30  of the Saudi Capital Market Authority's Listing and Trading Rules and the imposition of a fine of SAR100,000. (US$26,666.67).  (This Article requires that anyone with 10% or more of the shares in a company may not trade them without CMA approval.  The standard is not only direct ownership but also an interest in the shares.  Debt securities or debts capable to be transformed into voting shares are also subject to this Article.)

Second, the trading violations of each of Jarallah Bin Muhammad Bin Nasir Bin Jarallah Al Jarallah, Said Bin Muhammad bin Nasir Al Jarallah, Fa'iz Bin Salih Bin Abdullah Bin Mahfuz (Mahfuth) as agents for the portfolios of Muhammad Bin Nasir Bin Jarallah Al Jarallah and to return illegal gains in the amount of SAR90,142198.89 (US$24,037,919.17) to the CMA.

Third, confirmation of the violation of each of the three individuals mentioned in #2 (Jarallah, Said and Fai'z) with contravention of Article 49 of  the Capital Markets Law and Articles 2 and 3 of the Rules of Market Conduct.  (All of the regulations cited deal with market manipulation, false trades etc.  Article 49 also deals with insider trading).  The following are the consequential regulatory actions:

1. Jarallah Bin Muhammad Bin Nasir Bin Jarallah Al Jarallah to pay SAR142,844,770.38 (US$38,091,938.79)  in illegal gains to the CMA.  
2. Said Bin Muhammad bin Nasir Al Jarallah to pay SAR26,088,174.83 (US$6,956,846.62) of illegal gains to the CMA.
3. Each of Jarallah Bin Muhammad Bin Nasir Bin Jarallah Al Jarallah, Said Bin Muhammad bin Nasir Al Jarallah, Fa'iz Bin Salih Bin Abdullah Bin Mahfuz (Mahfuth) to pay a fine of SAR100,000.  A total of SAR300,000 (US$80,000).
4. Each of Jarallah Bin Muhammad Bin Nasir Bin Jarallah Al Jarallah, Said Bin Muhammad bin Nasir Al Jarallah, Fa'iz Bin Salih Bin Abdullah Bin Mahfuz (Mahfuth) prohibited from (a) trading in shares listed in the Saudi Stock Market (Tadawul) and (b) working in companies whose shares are traded in the Tadawul for three years.

Fourth,  that Abdul Rahman Bin Abdul Muhsin Al-Muajil assisted  Fa'iz Bin Salih Bin Abdullah Bin Mahfuz (Mahfuth) the violations.  He is subject to the same three year ban on trading and working as described immediately above.  As well as a SAR100,000 (US$26,666.67) fine.

Fifth, that Jarallah Bin Muhammad Bin Nasir Bin Jarallah Al Jarallah engaged in illegal activity with the portfolios of Nasir Bin Muhammad Bin Nasir Al Jarallah and that he pay SAR18,547,761 (US$4,946,069.60) to the CMA.

As mentioned above, not only is this I believe a record fine for the CMA but the scope of the profits made in roughly one month is truly remarkable.   If you go to the Tadawul website to Tihama's page and look at historical data (hopefully this link will work) you'll see a Burj Khalifah like spike in trading volume in the latter half of 2006 just around the time the individuals named above were allegedly engaged in their manipulation.  For those who don't read Arabic, the scale on the left hand side of the chart is millions of shares.  The scale on the right hand side the price per share in SAR.  SAR3.75 = US$1.00

Ring in the Old: Part 2: Suq Al Manakh The Crash

Symbol of the Suq Al Manakh

The Crash

When we left the Suq Al Manakh ("SAM") everything was going well, or so it seemed.  (Earlier post here). There was one worrying sign though, the premium on the deferred sales (post-dated checks) had climbed to 400% per annum.

In August 1982, a nervous or perhaps savvy investor (by some accounts a woman) presented a post dated check early. There was nothing under local law which required that the check be held until the future date. The check was due. The writer could not cover. Word got out. Panicked investors started presenting checks for payment ahead of their due dates. The entire house of cards came tumbling down. With a resounding crash.

Most of the stories you'll read about the wreckage of the SAM involve very large amounts. You'll hear that there were some 29,000 (I've seen, or think I have, the figure of 28,815) or so unpaid and apparently unpayable post dated checks issued by 6,030 or so investors totaling KD 26.7 billion (roughly US$94 billion dollars). And that was when a billion dollars was real money.  In 1984 Kuwait's GDP was US$21.7 billion. It didn't reach US$94 billion until 2006 when it surpassed that figure by US$7 billion.

The KD 26.7 billion is mind boggling, but it is the total of all the checks added together. If Investor Jawad owes Punter Jassim KD15 billion and Punter Jassim owes Investor Jawad KD14 billion, the real debt between the two is KD1 billion not KD29 billion.

There was significant concentration among the traders:

1. 18 traders were responsible for 95% of the amount. 
2. Some 8 of these traders (the so-called Knights or the Manakh, Fursan Al Manakh) were responsible for approximately 55%.
   

After the Government established a clearing house for the SAM post dated checks and netted bi-lateral deals against one another, the net amount outstanding was KD5.7 billion (US$20 billion). Still enormous in terms of Kuwait's GDP, but only about 21% of the original amount.  And cold comfort as five of Kuwait's six operating banks were bankrupt with uncollectable loans more than twice their equity. The one bank that escaped this fate, due to the prudence of its management, was the National Bank of Kuwait.

The Government's Rescue Plan

As you'd expect unwinding a problem this big was not easy. Nor was it accomplished quickly.

The first step was the passage of Law #57 in October 1982 which established:

1. A clearinghouse company to determine each trader's position after the process of conducting a bi-lateral netting of his obligations and receivables from each other trader. The first step in this process was reviewing, verifying and tabulating the payables and receivables of each trader. This process involved comparing Trader A's record of payables due to and receivables due from Trader B to Trader B's records of his dealings with Trader A and then determining the true position. 
2. A small investors' fund of KD261 million (US$1.7 billion). A small investor was someone with a loss less than KD261 thousand or US$1.7 million. Small investors were compensated for their losses. The first KD100,000 in cash. Amounts over that in Government bonds (I think six year tenors). 
3. An arbitration panel to assist traders in working out settlements, including the schedule of payments, and as well monitoring these payments. 
4. September 20, 1982 as the due date for all checks. This was done so that all obligations "matured" on the same date and all premium charges stopped as of that date. Initially the original premium (interest rate) agreed between the buyer and seller on each postdated check was retained with the only adjustment in the amount of the check being the truncation of the premium (interest) accrual on this date (20 September 1982).  Later the premium was reduced to no more than 25% per annum.
   

At this juncture the Government faced a difficult choice. Did it enforce the law on checks written against insufficient funds? To do so would mean the jailing of a large number of Kuwaitis with all the  societal and economic stresses and strains that would cause. The answer was no. The law was suspended.

The plan was that each trader would pay 100% of his net debt. A position some attributed to the influence of the then Minister of Finance and Planning, Mr. Abdulatif Yousuf AlHamad., who was reportedly adamant about the dangers of bailouts.   

Not many traders settled their debts over the next 12 months. The arbitration panel began to take legal action against some of the defaulters. Not unlike other jurisdictions in the region, the bankruptcy process is a long and difficult one. There were rather dire societal implications to taking this action  on a widespread basis as well as the crushing burden this would place on the courts.

So in April 1983, the Government looked for a new way. The first step was the creation of the Office for the Settlement of Deferred Share Sale Transactions. The office was to design and then implement a way for the settlement of the debts. Around this time, Mr. AlHamad left his position as Minister of Finance and National Planning. The Government then adopted a plan to resolve the aftermath of the Suq al Manakh through a debt settlement program that was not predicated on 100% repayment of debts.  

The idea was that each individual involved would pay according to his ability. Determining that ability would be through the calculation of a Debt Settlement Ratio ("DSR") for each investor. The DSR was the ratio of assets (cash, real estate, shares, and amounts due an investor from post dated checks) to his liabilities (the checks he had written, loans taken from banks, etc.)

An elegant, simple concept. But practical implementation was extremely difficult.

After the operation of the small trader compensation fund about 370 traders were left whose debts had to be settled.   But there was a very important complication:  Trader A's DSR was dependent on what his counterparties could pay him. That is, what amount of the face value of the post dated check in his favor he would receive.  His counterparties' ability to pay him depended on what their counterparties could pay them. If that wasn't complicated enough, many of those counterparties' ability to pay would depend on what Trader A paid.  And that as outlined above was dependent on what he was paid.  Even with the number of investors reduced to around 370, figuring all this out posed quite a challenge.

The Government turned to the Kuwait Institute for Scientific Research and some bright academics there came up with the idea of running a linear program. (Yes, that math you may have learned in business school does occasionally prove relevant in real life).

After a crude first pass, the 370 were divided into four groups: 

1. Bankrupt with No Payables from Other Investors
2. Bankrupt with Payables from Other Investors
3. Possibly Solvent (depending on the outcome of the LP exercise), and 
4. Definitely Solvent. 

The LP was run in batches for each of these groups.

The 18 names responsible for 95% of the trading were definitely bankrupt. And were the first whose DSR was calculated. DSR's were published in the newspaper. My mentor recalls seeing an article in AlQabas (where else?) listing the 18 and their individual DSRs. It took another two years to calculate the remaining DSRs.

At the time there was speculation that not everyone had disclosed all his assets. It is not uncommon in this part of the world as elsewhere that nominees (either trusted individuals or companies or trusts) hold assets to shield the identity of the true owners. Of particular concern were assets outside the State of Kuwait.

About one year after the last batch of DSR's were calculated, the Council of Ministers approved broad settlement outlines. Debtors were divided into two groups. Those with income producing collateral and those without. Those with got up to 15 years rescheduling with 0 to 7% interest. Those without 10 years and 0% interest.

There was not a great rush to settle debts. The unsettled burden of the SAM weighed on Kuwait's economy along with other factors. After the Iraqi invasion/occupation of Kuwait ended in 1991, a new tack was chosen. To aid in the recovery of the country which had suffered from the Iraqi invasion plus the lingering effects of the SAM crisis, in 1982 the Government bought up all "difficult" debts outstanding as of 1 August 1990 (the date of the Kuwaiti invasion) against the issue of Kuwaiti Government bonds. These included the unpaid Suq Al Manakh debts.

In 1993 the Government set the repayment terms for the debt it had assumed. This was followed by several further steps to give discounts for early payment of the debt, etc.   It appears from the news item about Mr. Bu Khamseen that some of these debts may still be in the process of being paid. 

Endnote:  This account of the Suq Al Manakh is not meant to be a definitive study. It is not based on original government sources nor on the accounts of insiders.  Much of it is drawn from recollections of those who worked in the area at the time supplemented with some additional written sources.