Adeem Investment Company - The Work Continues

Copyright Ricardo Liberato Used Under Creative Commons License

It's not a suprise that a big project takes a long time to accomplish. But it's going to really be something when it's done.

Earlier posts here and here and here.

Mabruka Ya Iqbal - Arab World's Youngest Female Medical Student

Copyright The National Newspaper Abu Dhabi

Here's a great story.

A young Lebanese girl from the Beka'a - hardworking and bright - is soon to be the youngest female medical student at Weill Cornell Medical College in Qatar.

“I’m an example: I’m a woman, but still I made it,” she said. “If you have the motivation and you have the abilities, no one’s going to stop you, whether you’re a woman or a man.”

Let us hope that no one stands in the way of her dream or any others out there.

Boubyan Bank Statement on Lawsuit Against AlAbraj Holding

In its "Disclosures" section, AlQabas has two lines giving Boubyan Bank's reason for the lawsuit.  The Bank took the action because AlAbraj stopped settling its debts with Boubyan, which the Bank states total KD 45.2 million in aggregate - owed to both the Bank and some of its clients.  Boubyan also notes that in addition to raising the bankruptcy petition against AHC it has filed a "responsibility complaints" against some of AHC's former board members.

You'll recall that in its statement to the KSE, AHC had described its debts as recently having been reduced to KD39 million.  It's not clear why the difference.  Is AHC referring only to principal, while BB is including interest?   Earlier post here.

In any case, what is clear is that BB appears to be the major and perhaps only real creditor of AHC.

Lightning Storm Hits Burj Khalifah

I am told by those who claim to know that the storn lasted over one half hour with repeated "strikes" on the Burj.  You can see the tip of the lightning arrestor above the top of the Burj. 

As far as I know, "Reverend" Pat Robertson has not yet commented. 

Boubyan Bank Lawsuit Against Al Abraj Holding

Al Abraj Holding Company Kuwait issued a press release on the Kuwait Stock Exchange today (text below) regarding press reports that Boubyan Bank had filed a bankruptcy case against it for non payment of loans.

In its press release AHC makes the following points:

1. The loan from Boubyan was made in order to purchase a majority stake in International Leasing and Investment Company.
2. The loan was secured by the shares in ILIC. 
3. With the decline in shares, the cover of the loan by the shares was less than agreed.
4. Given that fact and that the company stopped servicing its debts, BB resorted to a court case. 
5. The Company received no formal advice/warning of the case from BB nor any official notice from the Court.
6. Recently ILIC reduced its debts from KD 51 million to KD 39 million.

A bit of background on ILIC.

Islamic Development Bank Jeddah and Abraj are listed as the two main shareholders but I don't know recent percentages of holdings.  The Company states that it operates according to Shari'ah principles in providing leasing services.  It also makes investments in other companies.  This seems to be a major activity.

You'll recall that ILIC is one of the six companies suspended from trading on the KSE, due to failure to release financial statements.  The Company has not published its fiscal year 2008 nor any interim statements for 2009.  In May last year it announced that the Central Bank of Kuwait had given it permission to hire Citibank as a consultant "as a specialized consulting agency, to examine and evaluate the company development and suggest the appropriate solutions".   

The Company is clearly in financial distress. 

Many of the names in its portfolio are Kuwaiti companies.  And many of those are known to be in distress.  There was an interesting phenomenon in Kuwait in the period just prior to the crash in 3Q08.  Many industrial and other companies in Kuwait were making their profit from wise investments in the KSE rather than their core businesses.  And that profit was largely based on increases in the carrying value of investments rather than ongoing cashflow.   Money was borrowed from banks eager to increase their business to make these investments.  And when they turned out to be an apparent wise idea, more money was borrowed to make even more investments.  Banks were similarly eager to increase their business even more.  A true meeting of commercial interests.

And, as though familiar with Kuwait know, there is often a  "network" of related  individuals and companies who trade shares not only to make a profit but also to prop up share prices.   And perhaps  in so doing keep local bankers happy with their collateral values as a result.  The recent story of Nafais is just one example.  For those who read Arabic, AlQabas has an account.  For those who don't here's AlphaDinar's take.

Unfortunately, when the KSE "retreated", many an investment company ship was left stranded.  And many a local banker felt his ankles get wet.  Some their knees.  A few their thighs.

While it's unclear just how AHC reduced its debt by KD 12 million, one might understand that BB felt left out, which may be another motive for its lawsuit.  If one isn't servicing one's debts, how does one reduce indebtedness roughly 24%? 

To close out the story on Boubyan.  Like many other financial institutions in Kuwait, BB is increasing its capital.  BB by 50%.  583 million new shares are being issued at 155 fils (55 over par value).  The rights offer will take place between 24 January and 7 February for shareholders of record as of 21 January.

AHC press release below.  

[8:33:52]  ِ.ايضاح من (ابراج)بخصوص ما نشر فى احدى الصحف المحلية امس ‏

يعلن سوق الكويت للاوراق المالية بان شركة الابراج القابضة تود ان توضح ‏

بخصوص ما نشر فى احدى الصحف المحلية امس حول رفع بنك بوبيان لدعوى افلاس ‏

ضد الشركة ،تفيد الشركة، بان مديونيتها لبنك بوبيان ناتجة عن شراء الشركة

لحصة الاكثرية بالشركة الدولية للاجارة والاستثمار وقد كانت هذه المديونية ‏

قد تمت تغطيتها بشهادة اسهم تغطى الكفالة البنكية مقابل القرض وبسبب ‏

انخفاض اسعار الاسهم تم كشف التغطية الى ما دون المتفق عليه وبسبب ‏

توقف الشركة عن سداد اقساط القرض فقد لجئ البنك الى القضاء لتحصيل ‏

القرض علما بانه حتى تاريخ هذا الكتاب لم يصل اى اخطار من بنك بوبيان ‏

او من قبل المحكمة رسمي بخصوص القضية المشار اليها .‏

وتفيد الشركة بان اجمالي القرض كان 51 مليون د.ك تقريبا وصل بعد التسديدات ‏

الى 39 مليون د.ك تقريبا .‏

 

4-2 & Top of the List

CFA Kuwait Holds CFA Charter Award Ceremony

Copyright Arab Times Kuwait

I've written before about the role of institutions in promoting the development of markets.  

A very important element of that process is developing skilled ethical professionals to operate the financial infrastructure created.  In fact it is the critical element as has been shown recently with the  financial crisis in the West. 

The CFA Institute plays an important role in developing such professionals in the finance world.

Earning the right to use the CFA Charter requires three years of graduate level study and the passing of three rigorous examinations as well as practical work experience. It's a very high honor.

CFA Kuwait, a relatively new local society in the GCC, held an awards dinner for new CFA charterholders in Kuwait.

Ibrahim Dabdoub, the dean of bankers in the GCC and a bankers' banker - a sadly vanishing breed, presented the certificates.  (He's seated in the middle of the picture.)

Standing on the far left is the dynamic M.R. Ragu, SVP of Research at Markaz Kuwait.  He was instrumental in the founding of CFA Bahrain as well as CFA Kuwait.  Wherever he goes, if there isn't a local society, there soon will be.  So congratulations are in order to M.R.

A Tale of Two Countries - Dubai and the USA

Copyright GulfNews Dubai

Dubai may have the world's tallest building and the only indoor ski mountain, but here in the USA we have the smallest yet representation of the Burj Khalifah.   Sic transit gloria mundi . 

That is, until, I suppose some "Westerner" carves it on a grain of rice.  

At least we don't have to worry that Dubai will take our national debt record from us. 

Istithmar - David Jackson - "Action Jackson"

Frank Kane at The National's take on Mr. Jackson's career at Istithmar.  I'm guessing that his reference is to Detroit and not Chicago.  The former to a 1988 "action" movie.  The latter to a member of the Chicago "Outfit".

If the analysts at RGE are right about the leverage he employed, I'm sensing a honorary citizenship from a country "up North".   If the award is made soon enough, David may get his personal loans forgiven.  You have my implicit guarantee on that.

With leverage at this level, it's hard to see how even a modest recovery in prices  from the crisis induced decline could led to "attractive value" for Dubai World.  Any recovery would go first to the lenders to make them whole on principal plus interest before DW would see any cash.  That means they would have to go to roughly 90% of original cost. 

That's a bit of a climb from the values mentioned in the article.  And when buyers have a sense that a seller is motivated the pressure on price is downward not upward.

Istithmar World Chief Resigns

 The National reports that David Jackson has resigned today as CEO of Istithmar World. 

Here's another item from GulfNews which includes a critical bit of the press release:  the farewell statement thanking David for his contributions.  In a situation like this, it's important that the employer signal whether or not it had an issue with the departing employee.  Saying nothing is code for a negative view.  

 

It may be reading a bit much in from one announcement, but it seems that Aidan's role is larger than a consultant.  Then again as part of the ritual of debt restructurings, the debtor is often obliged to make a ritual sacrifice of one or two members of management.  I suppose in that case the CRO might be the right person to officiate at the service to appease the creditors.

Gulf Finance House Rating Lowered to B+

In response to a request from the BSE, GFH provided additional information on it recent downgrade by S&P  including the text of S&P's analysis.

Nothing surprising here.

GFH is trying to revise its business model and deal with upcoming maturities under very difficult market conditions.

Liquidity and upcoming debt maturities are the two main challenges to implementing this change of course - which is why the rating agency has focused its rating action on these issues.

Previous posts here and here.

EFG Hermes Raises Estimate of Dubai Inc Debt to US$130 to US$170 Billion

There have been a couple of reports in the press that EFG-Hermes has dramatically raised its estimate of the total of Dubai Inc's debt to be potentially as much as US$130 billion to US$170 billion.   Here's one such report from the Gulf-Times in Qatar quoting AFP.

Without a copy of the EFG- Hermes report it's hard to analyze the summary findings in the press reports.  It appears that EFG-Hermes believes that there are undisclosed bi-lateral loans and perhaps an undisclosed capital markets issue (private placement?) that accounts for this additional US$35 to $75 billion.

At 30 September 2009, Emirates NBD had total assets of AED291 billion (US$79.3 billion) and a total loan portfolio of AED217.1 billion (US$59.2 billion).   That would mean that the bank had  30.3 % of its total assets and 40.6% of its loans extended to its parent Group (the Government of Dubai and related entities). 

Dubai: Bank of Tokyo-Mitsubishi Joins Creditors Committee

Reuters reports that BOTM is joining the Creditors' Committee and this is being cited as a reason for the delay in submission of the standstill request by Dubai World.

Frankly, I have to admit I don't understand this.  Dubai World's standstill request should be predicated on facts.  Its estimated cashflow should drive the terms.  And it should not expect to deliver the request and have the banks meekly accept it.  They will have questions.

Unless an abundance of bankerly politeness is required, I don't see why DW can't submit its proposal and then BOTM and any other bank who joins the Committee can catch up.   As well, I presume that the Creditors' Commitee is going to go to all the creditors for their agreement.  Unless of course DW is going to the Insolvency Court at the DIFC to get a standstill.  If that is the case, then from a purely legal standpoint it need only convince the Court to grant the standstill.  Under the Insolvency Law, creditors get to vote on the proposed restructuring plan not the standstill.  Not that I'd recommend doing that.

Time is of the essence, as the lawyers say.  Dubai can't afford to lose a day. Particularly because of the artificial end of April deadline.  A deadline that bites both the banks and Dubai - as Abu Dhabi's charity is conditioned upon that deadline.  And if my guess is correct, bites Dubai a bit harder than the banks.

What was also another strange note was this comment:  "What this (Mitsubishi's addition) implies is that the negotiation process will be prolonged and we may see some more banks enter the scene," said Janany Vamadeva, banking analyst at HC Brokerage, predicting an agreement to extend maturities with interest paid out.

Perhaps, Mr. Vamadeva has a different definition of "prolonged" than I do.  But it seems a bit optimistic to expect a diverse group of creditors with differing financing instruments to agree on a US$26 billion restructuring quickly.  Bankers usually save all the caution they failed to exercise in the loan underwriting stage for the loan restructuring stage.  

It's AA's law of the conservation of due diligence.  If you don't do it at the beginning, you wind up doing it at the end.  And then usually compounded several times with manifold layers of silliness  and needless complexity added in by some of the creditors.

Borse Dubai Extends Maturing US$2.5 Billion Loan by One Year

You've probably been reading news items about the upcoming maturity of the Borse Dubai's US$2.5 billion loan this February.  Many of these stories have presented the maturity as another test for Dubai Inc.

Well, the loan contained an option for the borrower to extend the loan for another year which is what the Borse has done.  So the problem is resolved at least for a year.

Story from the Gulf News here.

And one from The National here with some speculation on capital markets issuance by Dubai entities and the expected impact on projects in the Emirate.

Damas: Abdullah Brothers Sell Tower to Repay Obligations

Copyright Imre Solt - Usage under GFDL

The National reports that the Abdullah Brothers have sold one of their twin towers in Dubai to pay back what the The National charitably refers to as debt arising from "unauthorized" investments.  Applying that same standard, I guess one could characterize Brother Bernie's fund as having engaged in some "unauthorized" investments.  It was no doubt an oversight that he didn't give his investors up-to-date and accurate performance figures.

No word on how much was received for the building.  A safe assumption is that the sale involved a substantial haircut.

Good luck to the Brothers on raising the money to make Damas whole for their own unauthorized oversight.

Deutsche Bank Converts US$10 Million of Murabaha Loan to Gulf Finance House Shares

GFH announced on the Bahrain Stock Exchange today that DB had converted US$10 million of the earlier US$100 million murabaha financing it had provided GFH into shares.  DB will receive 26,315,789 shares.   This is in addition to its November conversion of US$30 million into 78,947,368 shares. Unless I've missed a conversion, DB now owns 105,263,157 GFH shares.

That would give DB roughly 5.7% of GFH.

DB may be building a strategic stake, though if this is the case it has a long way to go.  It may have a client interested in GFH.  Or it may see the shares as a trading investment.   GFH is listed on the Bahrain Stock Exchange, Dubai Financial Market, Kuwait Stock Exchange (Ticker 813), and the London Stock Exchange.

If it is a trading investment, liquidity will be important.  Let's take a look at how GFH trades on these four markets.

On the BSE, during 2009, the average monthly trading volume in GFH was roughly 5.6 million shares and the average monthly US$ value of US$4.3 million.  In only six months were more than 2 million shares traded.   In 2008 roughly 80 million shares were traded (1.2x 2009's volume) for a total value of US$234 million.  That's roughly just short of 9 million shares a month and US$20 million per month.  Yesterday (18 January) less than 900,000 shares were traded with the largest ticket 220,000 shares.

The story on the Dubai Financial Market is better but still in the "cold comfort" zone.  In 2009 257 million shares traded with a total value of AED417 million (roughly US$114 million).   This is 3.8 times the BSE volume and 2.2 times the value.   But it's not just a question of number of shares and values, it's also a question of frequency of trades.  In 2009 GFH's shares traded on just 80 days.   In 2008 the trading volume was a negligible 1.2 million shares for AED 16.6 million (roughly US$4.5 million) with 74 trading days.  GFH listed on the DFM - I believe - in mid 2006.

Trading in GFH's GDRs on the London Stock Exchange is even more modest both in volumes, values and days traded.

At this point, there is scarcely enough liquidity to deal with DB's position.

But, the story is thankfully quite different up North.  On the Kuwait Stock Exchange, during the first six months of June 2009 (The last report published by the KSE for 2009 is June.  Unclear what why no later reports were issued) some 3.32 billion GFH shares changed hands for KD1.65 billion (US$5.76 billion).  Yes, that's not a typo.  It's billions not millions.  Trading is daily and in substantial amounts.

How's DB's investment been doing?

Well it depends on which part of the glass you focus on.

DB acquired its shares at US$0.38 per share as per the terms of the Murabaha financing.

GFH's closing price yesterday (18 January) was US$0.345 per share.  That translates into a paper loss of US$3.7 million or a -9.2% return from inception.

If one is an optimist, one would note that yesterday's close was up US$0.03 from the previous day, resulting in a gain of roughly US$3.2 million.  Or more precisely a reduction in the loss from inception from US$6.8 million to US$3.7 million. (Rounding).

A bit of trading/price history:  at 31 December 2007, GFH traded at US$3.35 per share and at 31 December 2008, US$0.92 per share.

Dubai: Secondary Sales in Dubai World Debt

According to the Financial Times, some of Dubai's creditors have begun offering their loans in the secondary market.

This shouldn't be viewed with either alarm or amazement.  This is a perfectly natural development. Some small lenders with no core relationship will be looking to remove themselves from a potentially messy situation. And there well may be reasons why larger creditors would want out.

A restructuring is an uncertain proposition.  One doesn't know how much one will get back or how long it will take.  With a secondary sale one knows exactly how much cash one is going to get.  And there is no uncertainty about the timing of payments.  No present value issues to consider.

Some math may help illustrate this point.  Assume a $100 debt as this will enable a quick calculation of the percentage "haircut" or discount from face on a net present value basis ("NPV").

An equal principal payment of US$20 for five years at a 4% per annum interest rate (3 month Libor is currently at 0.25%) results in a cash flow of $24, $23.2, $22.4, $21.6, $20.8.  Let's discount that cash flow using three costs of capital.

Discount Rate	IRR
9%	$88
10%	$86
13%	$79

But, the restructuring is probably going to involve an uneven cash flow.  There is no way of knowing what it will be at this point.  Let's assume principal payments of $0, $10, $15, $25 and $50.  As I've posted before it's fairly typical to have a light amortization for the early years dramatically increasing in the later ones.  With the same 4% interest rate, the yearly cash flow is $4, $14, $18.6, $28 and $52. Using the same discount rates the NPVs are.

Discount Rate	IRR
9%	$83
10%	$81
13%	$73

Another key consideration for lenders is the cost of personnel and management time that will be spent on the negotiations and crafting of the restructuring and then the subsequent monitoring.  Dubai World is likely to be a complex task:  a very large amount involved, wide diversity among creditors and financing instruments, etc.  Decisions are likely to tie up not only senior loan officers, who might otherwise be out hopefully making good loans, but more senior management as well. 

Some might suggest that some lenders might sell off a portion of their debt to get the remaining amount below the need to go to the very senior levels of management or the board.  Of course, AA never would.

Considering all of the above, it's not to hard to see some lenders willing to exit at  20% to 30% discounts just on a present value and hassle factor basis.  From a credit perspective, the greater the uncertainty about the ultimate recovery the higher the discount rate.

That may make it sound like lenders will be rushing for the exit.  The situation is a bit more complicated.  The decision involves an initial calculation of the trade-off of the pain of the loss to be recognized versus the economic benefits. But other factors are also important. Sometimes it is a question of capacity.  An institution is facing bigger problems elsewhere.  Loss recognition needs to be rationed with some losses deferred to future periods.   Large enough losses can also harm one's career.  In either case, extend and pretend provides a convenient way out.  A miracle may happen.  If not, then the problem has been pushed forward, often onto someone else's watch.      

Purchasers of the loans will be looking at cash-on-cash returns.  Their goal a high IRR.  They have no interest in a "relationship" with Dubai.  They don't care if they offend someone in the UAE, the GCC, MENA, etc.  They will, as QVT did with the Nakheel bond, play hardball.  They will be looking to maximize their price on exit. 

Their exit can take place two ways. First, a 100% discounted cash payout – probably not likely here given the large amounts involved.  Second, via a secondary sale of the loan after it is restructured and the usual price bump occurs.  Third, if the buyer is a fund, it may choose to retain the restructured debt as the ongoing return (based on its original cost) will enhance the overall fund return. And the asset can be opportunistically sold to enhance returns if other investments' returns decline.  Just the asset for one's Emerging Markets Fund.

Turning back to the FT article, the estimate of potential secondary sales of 20% of DW's debt is uncomfortably close to the 25% that could block the approval of a restructuring plan under the DIFC Insolvency Law. It would take just a few additional recalcitrant creditors to join them and frustrate a deal.  That could complicate Dubai World's life.

Kuwait Stock Exchange Approves Transfer of Majority of Global Investment House Assets

AlQabas reports that it has learned from secondary sources that the KSE has approved the transfer of assets by Global Investment House to Global Macro Fund in Bahrain.  The assets comprise listed stocks, private equity holdings and as well holdings in various funds.  As per the article, the KSE did not approve the transfer of one company and has requested additional explanation from GIH before rendering its decision.

You'll recall that earlier the KSE had required the GIH obtain approval from its shareholders for this asset transfer as well as for the transfer of real estate assets to a separate company in addition to their approval for the pledge of these assets under the restructuring.  And that GIH had obtained such approval.

Esterad Convertible Bond Offer Period Extended to 31 January

 

As per its announcement on the BSE today, Esterad has extended the offer period for its new convertible bond issue seven days (to 31 January) in response to a request by institutional investors for more time for due diligence.

Clearly, the issue is not flying off the shelves or Esterad would not be extending.  On a positive note, it's nice to see investors exercising a bit of due diligence before making a commitment.  Previous post here.

IMF Study on Spillover of Global Crisis on MENA Emerging Markets and GCC

The study finds that most of the slowdown in MENA Emerging Markets (Egypt, Jordan, Lebanon, Morocco, Pakistan, and Tunisia) and the GCC is due to the Global Crisis.  Or, as those of us who are less politically correct refer to it, the "Western" Financial Crisis.  

There is a logic here beyond the equations:  MENA is a samak saghir in terms of the world economy.  And in a variety of ways is linked to the Western/World economy. And so likely to be buffeted by storms in the West.

What I think is interesting about this study is what it says about the impact of the GCC in MENA Emerging  Markets.

Using the Financial Stability Index for his study, Moriyama-san finds that it increased from -0.3 (22005 through 3Q08) to 4.0 (4Q08 through 1Q09).

His analysis (Table 2) decomposes the latter FSI:

1. "Advanced" Economies Direct:  1.8
2. "Advanced" Economies Indirect through the GCC:  1.1
3. GCC Other than Advanced Economies:  0.3
4. Other Factors:  0.8   

No big surprise that Moriyama-san found that "Advanced" Economies were responsible for about 75% of the effect.  But, what's remarkable is that the GCC's role was about 35% - as the "Advanced" Economies fallout on its economy was transmitted to the MENA Emerging Markets countires as well as a lower amount for GCC factors not related to the "Advanced" Economies.  

Explaining in part Patrick Seale's comment about the center of political gravity in the Arab World shifting to the East, though one would also have to recognize the impact of the financial arrangements surrounding the Camp David Accords which have re-directed Egyptian foreign and economic policy.

Central Bank UAE to Tighten Provisions?

Emirates Business reports that the CB UAE will soon issue regulations tightening loan provisioning in the UAE:

1. Non Performing Loans:  Changing the definition so that loans past due 90 days or more will be classified as non performing.  The current standard is 180 days.  In most jurisdictions it is 90.  This initiative was reported in November.  Earlier post here.  It's important to note that most of the UAE's banks seem to be using a 90 day rule already.
   
2. Mandatory Provisions:  Requiring banks to hold a general provision between 1.25% and 2.0% of their outstanding loans.  While not state presumably the provision level will be scaled by type of asset, e.g., consumer loan, credit card, commercial loan, etc.

The effect of these moves will be to strengthen the banking sector's ability to withstand a hit on an aggregate basis.  As history shows, however, regulations are not a bar to unwise underwriting and business decisions.  And if there is one group who suffer from hereditary ADD, it is bankers.

National Bank of Oman 2008 Preliminary Earnings Announcement - 42.5% Lower Than 2008

You've probably seen the press headlines that NBO's 2009 earnings were 42.5% lower than 2008.  But probably not much more than the headline.

While the announcement on the Muscat Exchange is  naturally brief (this is an announcement of preliminary results after all), we can look at earlier quarterly reports  on NBO's website to get sufficient information to make an informed guess about the full year's results. 

At 30 September 2009, NBO's net income was OR 26.1 million which was down some 43.8% from the comparable nine month period in 2008.  For the full year (FYE) net profit was down 42.5%.

What drove this decline?  Without the 4Q09 numbers, we don't know for certain, but with the 3Q09 financials we can infer the difference. 

First, Operating Profit (profit before provisions and taxes) was down some 4.9% at 3Q09.  At FYE 2009 it was down 13.3%.  That implies some deterioration in 4Q09 but not sufficient to cause the 42.5% drop in net income.

Second, the major culprit in depressing 3Q09 net income were expenses related to loan losses.  Provisions were OR10.4 million a whisker higher than 2008. So the culprits are in recoveries on previous provisions, charegoffs as well as other items.

Here are the details- again for the first nine months of the year:

1. Net recoveries of OR4.7 million versus OR12.9 million - a difference of OR8.2 million.
2. OR3.1 million in impairment losses on available for sale investments versus zero the year before.
3. OR4 million in credit loss expense for bank loans versus zero the year before. 

The total is OR15.3 million in additional expenses in 2009.

We can expect a similar pattern to hold in 4Q09 with net income in that period an additional OR6 million (which appears to be the average run rate per quarter for the year).

Two more observations.

First, if we look at comprehensive income (which includes changes in fair value that did not pass through the income statement), NBO's (comprehensive) income for the first nine months was OR22.5 million versus OR30.2 million for 2008.  On this basis the decline is only 25.5%.

Some additional information on the additional credit loss expense.  The bank loans comprise OR1.9 to a bank in Kazakhstan (my guess is Alliance but it may be BTA).  And OR6.6 million in exposure to Awal Bank and The International Banking Corporation.  NBO took a 50% provision on the Saudi Group exposure and 37.5% on the Kazakh bank. 

Update:  While I haven't been following Kazakhstan, I suspect 37.5% may be a bit light for a provision.  As to Awal and TIBC, this provision is probably light as well.  The Governor of the Central Bank of the UAE is on record as requiring his banks to provision 100%.  According to the press reports, he is quoted as saying this level is on par with local and international regulators' views. Earlier post here.

Hammer For Sale in Kuwait

Hammer 2009 for sale in Kuwait as per an advertisement in the Arab Times.

While it doesn't say, I'm guessing it's only had one owner.  I'm imagining Ms. K is a careful lady and probably only used it to hang a picture or two.  Certainly, not used on a construction site.

In any case, it's a fairly new model hammer.  One owner.  Low mileage.

Low mileage?

I'm not sure how one measures kilometers on a hammer, but this one has 10,000.

Dubai's New "Strata" (Real Estate) Law

If you missed it,  The National has an explanation of this law designed to clarify the legal status of common (shared) areas and individually owned units in real estate projects where a building or complex has been sub-divided into separately owned units.  The new law (once implementing regulations are issued) will legally define these spaces and set rules, including how common areas are to be managed. 

As the article notes, an important step in protecting owners' rights and thus enhancing the local real estate market.

Dubai: Abu Dhabi Support - US$5 Billion Less Than Meets the Eye

Very interesting news item in Monday's The National.

Probably, most observers out there including me assumed that the US$10 billion committed to by Abu Dhabi in December for the last minute payment of the Nakheel bonds was in addition to the November US$5 billion sale of bonds by Dubai to National Bank of Abu Dhabi and AlHilal Bank.  That is, that Abu Dhabi had provided US$10 billion in additional aid on top of the  US$5billion committed to by these two banks.  US$15 billion, which when considered alongside the US$10 billion purchase by the Central Bank of the UAE in February 2009 (fronting for Abu Dhabi) meant US$25 billion in assistance.

As to the actual payment of funds, in an analysis of the Government of Dubai's 14 December press release, I noted that the language used suggested that the entire US$10 billion had not been disbursed.

The first of these beliefs was wrong.  The second appears to have been right.

Instead of providing new money of US$10 billion, Abu Dhabi has apparently purchased the US$5 billion commitments of NBAD and AlHilal.   That means that the  December net commitment was only US$5 billion.  In other words the total  amount from Abu Dhabi Inc in November and December was US$10 billion not US$15 billion.  And, thus, the total aid to date is only US$20 billion not US$25 billion.

But there's more to the story:  the disbursement of funds.  Two points.  The quantum of funds disbursed so far.  The method of disbursement.  Both of which I think show that Abu Dhabi is keeping Dubai on a rather short leash.

As I commented in an earlier post, these two banks gave a commitment to buy the bonds over one year with a modest immediate cash payment. And, as I noted at the time, this gave Abu Dhabi continuing leverage over Dubai.  It seems that this pattern continues with the December US$10 billion.   Instead of cash disbursements of US$11 billion in November/December, the amount is roughly half that, leaving approximately US$5 billion to be drawn down over some unspecified period.

What's also intriguing is the comment attributed to unnamed bankers that the Abu Dhabi Department of Finance made the payment to settle Nakheel's bonds directly.  That sounds as though DOF paid the agent and did not remit the funds to Dubai to then pay the agent.  In this modern age there's no reason why the DOF couldn't have transferred the funds to Dubai and let Dubai make the payment.  There are really only two reasons why something like this would be done.  Either (and I think this is highly doubtful), Abu Dhabi was concerned that the funds would be diverted by Dubai.  Or to make the point of Dubai's dependence very clear to everyone.

My sense is that both of these tactics are intended as ways of keeping Dubai on a short leash.  A very short leash. The remaining US$4.9 billion will probably be disbursed on an "as needed" basis.  At each disbursement Dubai will have to ask for funds, probably provide some sort of justification/explanation and thus be reminded of its dependence.  As well, Abu Dhabi will be able to condition disbursement on compliance with previously agreed deliverables.   Or, if it wishes, to extract a new quid pro quo.

On that topic, I still think that Abu Dhabi's goal is primarily political, though I expect that Shaykh Khalifa is also keeping a sober eye on the absolute amount of spending devoted to Dubai.  It is the Abu Dhabi way.  And to be clear, I don't think Abu Dhabi intends to be vindictive with Dubai or needlessly embarrass the Emirate or Shaykh Mohammed.

A bit more on the article's explanation for the reason for buying out NBAD and AlHilal's commitments. As banks both institutions would have had to  reflect diminution in  value in Dubai bonds in their financials.   If held as trading assets through their income statements.  If as available for sale, through the fair value reserve.  And, if as held to maturity, by disclosing in a footnote current market price versus historical cost carrying value.  Any of these steps could potentially impact their credit ratings as well as their Basel II capital adequacy ratios.  As a government, Abu Dhabi is immune from the requirements of IFRS as well as  detailed disclosure of its financial affairs.

One final comment, I think it would be a very good idea for Dubai to reflect carefully on the handling of the December announcement of Abu Dhabi's support.  If the market finds out now that in effect only US$5 billion in additional aid was given instead of US$10 billion, then it may conclude that an attempt to mislead was made.  Or that there is some fairly basic skill lacking.  Neither of which will be helpful at this critical juncture - especially since so much confidence has already been eroded.

2-0 Today and 2-2 Earlier

On to Wednesday.

Damas - Manifest Absurdity

The National has another article on the Damas saga.

This one about the plight of the Abdallah Brothers who are having difficulty making restitution for the unauthorized withdrawal of funds from Damas to fund speculation in the Dubai real estate market.  They may have to sell their yacht pictured above and fish from two smaller boats.  It takes a hard soul to hear a story like this and not feel compassion, I suppose.  Mark AA down as having no sympathy. 

But the gem in the article was this quote.

“There is nothing mysterious in the unauthorised withdrawals. It was an oversight in getting the approvals,” said the source, who declined to be named because of a continuing investigation into the transactions.

As I understand it, the funds were withdrawn from Damas to make personal investments in real estate.  That is, these assets are not registered in the name of Damas.  Call me old fashioned but when you take someone else's money and use it for your own purpose, that's not an oversight. 

Commercial Bank of Kuwait - Entire Board Resigns

CBK announced at the KSE this morning that it's board had tendered its resignation effective as of the next ordinary general shareholders' meeting ("OGM")  Shareholders may submit the names of prospective candidates for election during the period 17 January through 31 January.

No reason was given for the mass departure.  You'll recall that two board members have already resigned:  Fouad Dashti and Ahmad Muhammed Mishari.

The current Chairman and MD, Abdul Majeed AlShatti, has been on the Board since 2000 and Chairman/MD since 2004.

So this is a rather significant development.

Given the woefully inadequate disclosure at CBK's website, it's not clear when the last board election took place.  If board terms were expiring, board members could take the more politically correct stance of not standing for re-election.  They are not.  (As an aside, AlQabas has several articles in today's issue about lack of transparency, inadequate regulations and lax supervision being the "father" of the problems in the Kuwait Stock Exchange.  One particularly interesting article is here and not just for its title -----------" صمٌ بكمٌ عميٌ لا يفصحون")

When an entire board resigns, that is generally a sign of a very serious issue.  There have already been two resignations in the past month which  was the first wave.  Perhaps, the 2009 financials will shed more light.

Below is the announcement from the KSE.

[10:2:21]  ِ.استقالة اعضاء مجلس ادارة البنك التجاري الكويتي
يعلن سوق الكويت للأوراق المالية بأن البنك التجاري الكويتي
افاد بأن اعضاء مجلس الادارة في اجتماعهم المنعقد بتاريخ 12‏
يناير قدموا استقالتهم اعتبارا من تاريخ انعقاد الجمعية العمومية
العادية لسنة 2009 كما قرر مجلس الادارة في نفس الاجتماع ‏
فتح باب الترشيح لعضوية مجلس الادارة اعتبارا من يوم الاحد
الموافق 17 يناير 2010 ولغاية يوم الاحد 31 يناير 2010‏
حتى يتسنى اتمام الاجراءات الرسمية وتحديد موعد انعقاد الجمعية
العادية لسنة 2009 ليكون موعدا لانتخاب مجلس الادارة الجديد.‏

ADACH Publishes Volume #1 of "Soul of the Soul"

An important work of Arabic poetry.

Damas - Looks To Sign Standstill With Lenders

The National reports that Damas is on the verge of signing a formal standstill agreement with its creditors, noting that an informal standstill had been in place since last November.   As per the article, the plan is to freeze principal repayments until 31 May though to continue to accrue interest.  Clearly, this is just the first step.  A revised repayment plan will have to be devised.  For that purpose and probably to give creditors some comfort, there are rumors that the company will hire a partner from PricewaterhouseCoopers to act as chief restructuring advisor.  It is unclear if this will be an advisory assignment in which Damas engages the firm.  Or whether a partner will be engaged to work at Damas in a capacity similar to that used by The Investment Dar (Mike Grant) or Dubai World (Aidan Birkett).

Assuming The National's sources have the correct story, what's revealing in the article are two comments which go to the heart of corporate governance as well as raise issues of defalcation.

First, that the conversion of Damas' loan to Dubai Ventures to a managed investment account was not authorized by the Board.  What is even more relevant is the authorization of the loan in the first place.  What on earth was a jewelry company doing in the loan business?  A reasonable guess would be that the loan like the conversion was not authorized by the Board.

Second, that the funds that Mr. Abdullah borrowed from Damas and which he and his brothers have agreed to pay back were used for real estate speculation in Dubai.   No doubt the belief was that the investments were a "sure thing" and that the profit could be realized and the original funds returned without problem.  The Brothers now are faced with trying to sell these assets in a depressed market.  I believe that the Board should resist any attempt to have them accept these assets as satisfaction for the obligation.  The risk on the assets should remain with those who purchased them.

Also as I've noted before, it's always very wise idea when investing in a business with a dominant shareholder to make sure the boundaries are very clearly set between that shareholder's money and the company's and that there are adequate controls in place to minimize "crossover" transactions (via signing authorities, etc) and robust mechanisms to monitor the company to detect any violations.

Orion Holdings Overseas - Involuntary Liquidation at DIFC

You've probably seen the press reports that OHO has been put into involuntary liquidation.  Here's one from The National  Here's another from Business 24/7.

Often a closer look at news items is quite revealing.  Here's a bit more of the story.  Since OHO's financials do not appear to be available on the Internet, we'll use Shuaa Capital's and some other information to reconstruct the story.

Here's the link to OHO's registration at the DIFC.  While the DIFC says it was incorporated in 2008, the company seems to go back at least several years earlier.   It owns Orion Capital, also registered in the DIFC.   OHO's shareholders as per the DIFC are Petra Invest Ltd, Shuaa Capital, Primavera Holdings (Cayman) Ltd., MHK Investments LTD, AJ Capital Limited, and Shihab Ahmad Khalil.  Petra is identified as the majority shareholder, though The National article says it owns 32%.  Manara Capital, a Lebanese related investment company, is mentioned in Shuaa's press release as a shareholder.  It acquired an interest in OHO in September 2007.  It's unclear which of the entities above represents it - MHK, AJ Capital, etc.

As far as Shuaa Capital is concerned the saga began in February 2008 when it acquired 20% of OHO  and controlling stakes in 5 Orion brokerages initially for AED 193 million (US$ 52.5 million).  If you look closely at the press release you'll notice it's dateline is 11 January 2008, though it was released 12 February.

In October 2008, Shuaa announced its preliminary results for 3Q08, including that it had taken a one time charge of AED 45.8 million for OHO.

There's a bit more detail in Shuaa's 3Q08 financials.  Note #7 discloses that Shuaa booked the investment at AED 277.1 million.  There's no explanation for the AED 84 million increase.  The Note discloses that AED 137.7 of the carrying value of OHO has been reversed.  This amount represented a contingent payment due upon OHO meeting certain financial performance targets which it was clear it would not given its year to date results.   The offset was probably a reduction in Payables and Other Credit Balances, though no details were provided. 

Based on OHO's results Shuaa  also booked a provision of AED 36.7 million.  Initially I thought that the difference between the two provisions was due to refinement of Shuaa's numbers from the October press release until the issuance of the financials on 3 November.  However, in the 3 November press release Shuaa repeats the same AED 45.6 million provision number.  No explanation is given for the AED 8.9 million difference.  At this point, the carrying value of OHO on Shuaa's balance sheet was AED 93.7 million.  At year end it was AED 92.2 million, perhaps due to FX movements and/or share of losses.  Since Shuaa  accounts for OHO on an equity basis, this may explain both the AED 8.9 million provision difference and this change.

In its 1Q09 financials, Note 6, Shuaa disclosed a further provision for AED 59.2 million resulting  in a carrying value of AED 23 million.  As you'll notice there is a further AED 10 million in decline in carrying value which is not explained.  More equity earning accounting?

In its 2Q09 financials, Note 6, there is no change in carrying value but legal action by Shuaa is noted.  Apparently, this is related to the July press release discussed in the next paragraph.  Shuaa's 2Q09 financials were released 2 August and the news of the 8 July lawsuit is included within but not specified as a "post balance sheet event". 

On 8 July 2009, Shuaa announced that it had filed a legal claim at the Dubai International Arbitration Centre against Mohamed Abdel-Khaleq Mohamed Abu Al Haj and Orion Holdings Overseas Limited (“OHO”) for breach of obligations in respect of the Company’s investment in OHO.  At that point Shuaa claimed it had lost AED115.9 million on OHO.  The press release states that a full write off of OHO was in Shuaa's 31 March accounts.  As noted above, as of both 31 March 2009 and 30 June 2009, Shuaa showed AED 23 million in carrying value for OHO.  It is unclear what this represents, perhaps the carrying value of controlling interest in the five Orion brokerage firms that were part of the initial purchase?  Also at this time, AlHaj and Petra Invest (a related company) filed a counterclaim against Shuaa.

Unfortunately, in its  September 2009 financials, Shuaa no longer provides a breakdown of its various investments in associates.  See Note #6.   Two interesting bits of information though are contained.  First, that Shuaa took impairment charges of some AED 225 million (note as per information from earlier reports during 2009, the total provision for OHO was AED 59.2 million).  Second, that Shuaa is in discussions "to sell its shareholdings in a number of associates".  

Note 6 also contains: "Orion Holdings Overseas has ceased to trade. The Group owns 20% of this company. The Directors of the entity have voted to liquidate the company but a resolution to liquidate failed to achieve the necessary majority in a vote by the shareholders. It is anticipated that the shareholders who favor liquidation will soon petition the DIFC Court and that thereafter this entity will be placed in insolvency. In these circumstances the Group has written off this investment. The Group has a legal case ongoing in connection with the Orion Holdings Overseas acquisition. It is management's view that the likelihood of the Group incurring a material liability as a consequence of these legal cases is remote."

In November the DIFC Court froze OHO's assets after former employees lodged claims that they had not been paid and that the company was engaged in asset sales.

And finally just recently, the DIFC Court has ordered an involuntary liquidation of OHO.

With that background, some further thoughts:

1. Shuaa made its investment in OHO in 1Q08.  By 3Q08 it was clear that that OHO was not performing.  Ignoring the contingent payment, on a cash basis at 3Q08, Shuaa had lost some 33% of its investment.  By 1Q09, that is within one year of its investment, Shuaa had lost 84%.  It's hard to understand how this happened.  If OHO's main lines of activities were brokerage, fund management and technology, that is a great deal to lose in this period, even given the economic meltdown.  Was OHO taking proprietary positions that turned against it?  Was it trading in oil?  Or other commodities?  OHO was a member of the Dubai Mercantile Exchange.  Were original values overstated?  
2. Also as noted above, Shuaa seems to be selling its other associates - which appear to be focused on industrial activities.  AlKout Industrial Projects (listed on KSE, water projects);  Taghleef Industries LLC (Dubai registered plastics manufacturer),  City Engineering  (a Sharjah construction company) and Septech Holding (a Sharjah company in the waste water and water infrastructure business).  OHO, City Engineering and Septech were acquired during 2008.
   

Snake Plague in Bahrain

Copyright Gulf Daily News 

There appears to be a veritable scriptural plague of snakes in Bahrain, appearing in all sorts of unaccustomed places, though no sightings reported yet in City Center.

As I read this article I thought of the recent post over the The Gulf Blog and wonder what "enlightened" commentary the "Reverend" Pat has on this topic. 

Hawa Taxi - Think Pink For Safety and Then Think Again Why This is Necessary

A saddening revelation that in a "Muslim" country women have to be afraid to go out of their homes and ride in taxis. 

Perhaps, we can take up a collection to bring the دعوة‎ to Kuwait.

The Lights Are Off

انا لله وانا اليه راجعون

Good night, Teddy.  Rest well.

The International Banking Corporation's Administrator Secures US Recognition of Bahrain Administration

The Gulf Daily News reports that a a US Court (presumably Federal Court sitting in New York City) has ruled upholding an early interim order which recognized the Bahrain administration of TIBC.  What this means is that legal action in the USA against TIBC is effectively frozen, thus allowing the Central Bank of Bahrain appointed Adminstrator, Trowers and Hamlins, to proceed unimpeded by US legal actions.

This is the sort of legal acceptance by a foreign jurisdiction of a local (GCC) bankrutpcy/insolvency procedure that I was thinking of with respect to my earlier post on the implications  of using the DIFC Insolvency Law and regime for any similar proceedings involving Dubai World subsidiaries.

You'll note that in conformity with Bahrain regulations, TIBC has amended its logo to include the phrase "in administration".

Earlier posts on TIBC and AlGosaibi as well as Maan AlSanea and Awal Bank can be accessed by using the respective labels on our home page.

Efficient Manifest Absurdity

As demonstrated here, ideology can be quite a potent antidote to reality.

An example of the strong version of the EMA hypothesis?

Lysistrata Updated for the Arab World: Coffee

Inadvertently it seems the The National in Abu Dhabi has shown Arab women a way to break the jahilliya inspired oppression of women in Arab society.

“We ran out of coffee!” I heard a male voice in distress telling the hostess as she opened the door just a tiny crack to see who it was.

Distress indeed!

Imagine if there were a coffee sitdown.  The male world as we know it could well come to an end.   That's why AA always makes his own cup or two or maybe more of Turkish coffee.  Anyways, Umm Arqala decries the use of sugar (and AA is a fairly dynamic supporter of that industry). 

Interesting as well was the testimony of the two religious shaykhs.  It would seem sadly that there has been some bid'a since the time of the Prophet with respect to the proper treatment of women.  

Arab Trade Finance Program - Union National Bank US$40 Million Line

An announcement on the ADX re ATFP's US$40 million line for Union National Bank.

I presume the $638 million is a cumulative total over some period and doesn't represent current outstandings as indicated in my earlier analysis.

Manifest Absurdity: The Christian (?) God

Proving once again that idiocy knows no borders, the FT published an article 13 January in which FT correspondent, Kevin Brown in Singapore, states:  "The roots of the conflict lie in an Umno decision three years ago when, as part of a licensing regime through which the government controls the mainstream media, but not the internet, the home minister barred the Herald from using the arabic word Allah to describe the Christian God." (Emphasis mine).

While I cannot produce either my long form or short form Doctor of Divinity degree, I think it is fairly commonly accepted that the same God was involved with Moses, Jesus, and Mohammed.  That I believe is pretty much what is taught in the Quran.  The Christian Bible also holds that the God of the Old Testament is the same One as the New Testament.

I suppose if I had an open mind I might ask if there was a Catholic God distinct from say the Lutheran One.

And has anyone out there ever wondered if  Catholics in France have a different One than those in the USA.  After all the French refer to "their" God as Dieu, while we in the States call Him by His proper name, God.   And what pray tell are we to make of the  Russians' name for God?

Women Poets Advance in Million's Poet Competition UAE

A bit of encouraging news on two fronts.

1. Women poets marking their mark and getting recognition.  Best wishes to Ruba, Hisa, Halima and Mastura.
   
2. A real effort - male and female - to preserve and promote a very important language - which is sadly eroding under the attack of  global McDonalidization.
   

The CFA Institute Middle East Investment Conference - Strategies for a New Financial Reality - Bahrain

The CFA Institute in collaboration with the very dynamic local society in Bahrain,  CFA Bahrain, will hold the conference 23 March 2010 at the doyen of Bahraini hotels, The Gulf Hotel (recently reburbished).

The first ever CFA Institute Middle East Investment Conference brings together expert speakers from around the world to evaluate new investment strategies and discuss the most pressing topics for serious investment professionals in this fast-changing environment. Join your colleagues from around the region to hear from leading investment practitioners and researchers as they examine the present macroeconomic environment, the impact of policy responses to the financial crisis, shifts in asset allocation, alternative investments, and more.

Looks like a first rate program.  And Dr. Doom and Gloom himself will be there to provide much needed cheer to depressed local bankers, analysts and investors.

Women Drivers

This statement by a son of King Abdullah stands on its own.

“I’m not against women driving cars, but personally I wouldn’t be comfortable with my wife or daughters driving. I hope that it is not interpreted as me being against women driving cars, it’s just a personal view due to the ideas, customs and traditions that pervade society and need to be improved for the better.”

I for one would like to assure the Prince that I don't think he's against women driving cars.  After all, he did suggest in the same article:  "Perhaps we could first permit the recruitment of women drivers from abroad and then assess the positive and negatives." 

Definitely he's not against women driving cars. 

He's just a prisoner of backward ideas. 

I will, however, give the Prince two thumbs up for not conflating his retrograde views with the teachings of a noble religion.  In which case then we can safely assume these  social norms are unfortunate survivals from the jahiliyya.

Arab Trade Finance Program - Role in Providing Liquidity for Arab Banks

There's an article in Kuwait Times in which Dr. Jassim Al Mannai, Chairman and CEO, of ATFP is quoted as stating that banks particularly in the UAE were borrowing from the ATFP to supplement their liquidity and take advantage of the lower cost.  A rate of Libor with a small margin to cover administrative costs was cited without apparently too much detail.  Dr. Al Mannai is also  Director General (Chairman of the Board) of the Arab Monetary Fund.

A bit of context.

Eligibility Criteria

ATFP loans are tied to the financing of Arab trade.  Like similar government programs, there are national content requirements (minimum 40% Arab) and mandated tenors.  Money cannot be borrowed to fund, say, a wise investment in Austin Martin.

Financial Capacity

How much financing can ATFP provide?  Let's turn to their 2008 financials (the last issued).

1. At 31 December 2008, ATFP had total assets of approximately US$772 million funded almost exclusively by equity of US$769 million.  
   
2. Total loans were only US$416 million (2007: US$485 million).
3. Turning to Note 5, in 2008 there were new drawdowns of  US$774 million in loans (2007:  US$729 million) against repayments of US$844 million (2007: US$683 million). 

Even at 100% of shareholders' funds, this amount is unlikely to be significant on a macro level, though it might be significant for an individual institution.

That being said, the program is a worthy initiative particularly in supporting interArab trade.