恭喜发财 -- 恭喜發財

 

恭喜发财

恭喜發財

I've hung the Arqala Family "Fu" on our front door and re arranged various other auspicious signs, so let me wish all of you a Prosperous New Year.

Kung Hei Fat Choi!

Or, if you prefer,  Gong Xi Fa Cai!

While 紅包 are most appropriately given to children and unmarried adults, I believe I qualify on the former as Umm Arqala has on more than one occasion told me to grow up.

Abu Dhabi Islamic Bank - A Tale of Two Press Releases

Let's look at two press releases on ADIB's 2009 financial performance.  One reflects well on the professionalism of the institution.  The other frankly does not.  

Let's start with the offending press release.

First, at WAM the headline reads "ADIB Reports An Operating Profit of AED 1,527 mn for the 2009 Financial Year."

This approach illustrates another of Abu Arqala's 8 Simple Rules of Financial Analysis.  When the earnings headline doesn't mention net income, you know there's an earnings problem.  And a corollary:  the further down in the press release the net income line is buried the more serious the problem.  There were a couple of egregious examples of this in Bahrain a while back, despite a very clear statement in the Central Bank of Bahrain's Rulebook Module PD about burying bad information.

In the second paragraph, after being regaled with the year's numerous achievements we get the bad news:

After a year of multiple achievements, including: increasing total customer numbers by 27.2% to 342,097; the opening of the 50th branch in the UAE; an increase of 25.1% in total assets to AED 64.1 billion; the strengthening in both capital adequacy (to 16.96% under Basel II) and liquidity ratios (financing to deposits ratio improved to 83.9%); and a top three year-on-year improvement in customer service ratings, the Bank has taken a preemptive decision to set aside a year's earnings to enhance its total provisions and secure future growth.

You'll notice that the provisions aren't described as being necessary to cover duff loans and investments that the bank has made.  They are actually a pre-emptive decision to "enhance total provisions and secure future growth".  Right.

Equally amusing is the later statement "while the growth in customer financing comes on the back of a robust credit process that ensured the booking of quality assets."  If the credit process is so robust, why then is there a need for provisions of this magnitude?  Or are these the sins of the past? 

In regard to credit quality asset growth of  25% during the year is touted as though this were some great accomplishment.  It is really not that hard to make loans to people.  The trick is of course collecting the loans you've made.  That raises a second of AA's 8 Simple Rules of Financial Analysis.  When a bank has explosive growth in assets, look for a spike in bad loans to follow in the next 18 to 24 months.

If things are just fine, I suppose there is also an intriguing question why the Federal Government and the Emirate of Abu Dhabi had to put in additional capital in the form of Tier 2 instruments.  If I'm not mistaken the amounts are not trivial:   AED4.2 billion compared to shareholders' equity of AED5.9 billion as of 30 September 2009.

The press release then goes on to recount a variety of peripheral and not particularly important issues related to 2009's financial performance.  It seems in the hope that the bad news will be buried in so much prose that the reader will miss it or forget it by the time he finishes.

A couple of comments:

1. Provisions generally are the result of past mistakes and/or to be fair as well bad luck.  There's no real banker who's never made a bad loan unless it's someone who works in administration. That being said, precisely how booking a provision leads to further growth isn't clear.  In fact, when a bank has to take a provision this size, it might be a good occasion for it to consider whether a bit more moderation in growth (booking assets) is advisable.
2. Does whoever wrote this press release actually believe that this sort of announcement isn't perfectly transparent?  And doesn't elicit a snicker or two from just about everyone who reads it?  And leave the impression of less than kalaam sharif? 

Turning to the press release at the ADX, this is much more professional and deals with the provisioning issue in its headline:  "To Provide A Solid Base for Future Growth, Abu Dhabi Islamic Bank Sets Aside A Year's Earnings As Provisions".   

There the hard news is dealt with up front.  Some of my same quibbles would apply to the sugar coating of the need for the provisions, but at least the thorny issue is raised.   

BTW  provisions are now 4.2% of gross financings up from 1.69% the previous year.  Simply put, bankers don't take provisions for fun.  Taking provisions is one of the hardest things for a banker to do because it directly impacts his or her career and bonus.  Also it is very hard to get unneeded provisions past competent, diligent auditors particularly given the current constraints under IFRS for recognition of impairments.

So we're left with a question.  Did WAM take ADIB's reasonable press release and cut and paste to create what we saw above?  I'm guessing this is the case.  If so, then ADIB and others would be well advised to have a word with WAM to avoid "Gulf News journalism standards" in the future.

Kingdom Holding Company Completes Capital Reorganization & Initial Trading Results

The Saudi Exchange (Tadawul) has announced that following the approval by KH's shareholders at an extraordinary general meeting on 10 February of the capital reorganization, the necessary steps to achieve the reduction have been taken effective 13 February.

Announcement of shareholder approval.  As per KH's website the vote at the EGM was 100% to  approve the change.

Announcement of completion of steps required to implement the capital reorganization.

On 13 February the shares opened at SAR 12.9 and closed at SAR12.10.  Today they opened at SAR12 and closed at SAR12.05.   Par value is SAR 10 per share so the capital reorganization and the asset infusion (CitiGroup shares) have so far achieved the goal of getting the stock to trade above par.

Emaar Sale of RSH Singapore

If you've been following press reports on this topic, here's an announcement on the DFM today from Emaar which includes a statement from RSH to the Singapore Exchange.

Here's a bit of background on the Golden Ace Loan and how Emaar came to hold it.

Dubai World: Deconstructing Peter Mandelson's "Time is Running Out"

The "Doomsday" Clock

I had missed this howler until just now.  And probably just as good.  AA is still on double not so secret probation imposed by Umm Arqala over the trivial matter of some Turkish coffee on "her" carpet.  Quite unreasonably she refused my perfectly cogent explanation that S&P wasn't doing its job properly and that all sorts of consequences flowed from that.  Including Turkish coffee.  So, absent a Turkish coffee in my hand, I can laugh uproariously without the danger of another spill.

"Time is running out," Mandelson told delegates at a lunch hosted for British business in the emirate. "The current uncertainties and lack of agreement can't go on for much longer. As we approach decisions, Dubai has to be as open as possible on talks with banks and construction companies."

These fearsome words conjure up the most dire scenarios.  It's the World Cup last minute.  Our team  (Arsenal of course) has the ball but will they score?  (Of course, they will!).   It's a minute to Midnight and Cinderella has only a few seconds more to impress the Prince before that golden coach turns into a pumpkin. The inmate on death row is just seconds away from walking the "Last Mile".  Will the Governor call with a pardon?  Time is indeed running out in these scenarios.

But Abu Arqala is having a hard time picturing the dire consequences to Dubai World and the Emirate from taking a bit more time.  Or their coming up with painful (for the banks) rescheduling terms.

Let's see.  

1. It's not like they're looking for new money.  They've already got the banks' money.  Lots of it.  Really lots of it.   
2. Even if they do a deal, it's unlikely that banks and investors will be rushing all over themselves to punt again in Dubai at least in the near term. 
3. If they do a deal with a haircut (and even one for much much less than 40%), banks and investors are likely to be shy for several years.  But not to worry: a bit of good press, the passage of some years, combined with the financial market's capacity for unbounded amnesia, and the cash will flow again.
4. Probably the marginal damage to reputation will be slight.  Team Dubai has already scored more than one "own goal" in the saga to date. 
5. It's highly unlikely that banks will lodge a petition for involuntary liquidation at the DIFC, though perhaps they should consider this. 

What then is the realistic danger that DW is exposing itself to?  What will happen if things go on as they are for a bit longer?

A stern letter from the BBA (British Bankers Association) to Peter?  An outcome perhaps not to be lightly dismissed as those who recall the BBA's earlier letter in re Saad and AlGosaibi.  Officials in Riyadh have yet to fully recover from the earthquake that caused.  Come to think of it, I wonder if the BBA will write to Umm Arqala in the matter of S&P's fault for the Turkish coffee stain?

On a more serious note, the tenor of Peter's comments reflects some real concerns from bankers - at least those from the United Kingdom.

As a member of the HM Government, Peter no doubt chooses his words carefully.  And since he's not directly a party to the negotiations must rely on what he is told.  If indeed he is using diplomatic speak, then the language is also muted.  But we can try to read between the lines.

When he says Dubai needs to be "as open as possible", it's a clear indication that the banks don't think Dubai is currently being forthright in discussions.

When he refers to "construction companies" as well as banks, it's clear that UK construction companies have significant exposure to DW.   If they had but minimum outstandings, there would be no real need to make a point of mentioning them.

And when he speaks of "lack of agreement" one might infer that there have been some sharp discussions between the banks and DW with the latter perhaps thinking that what DW is proposing doesn't reflect a fair deal.  This is similar to descriptions of political meetings as involving "frank exchanges of views."

On that last point, having made bone-headed loans, banks are now looking for someone to bail  them out (a fine and much honored tradition especially of those who profess to be rugged capitalists).   The first place they look is at shareholders.  Next I suppose is the Shaykh up the road in Abu Dhabi.  I sense an appeal to the implicit guarantee.

Central Bank of Bahrain Regulations: Disclosure Standards

A new feature here at Suq al Mal.  We'll look at various CBB Regulations and see how the banking community is implementing them.

Back in October 2007, the CBB issued "Disclosure Standards" - a comprehensive and well thought out set of regulations which set forth requirements for listed companies and for the offering of securities in the Kingdom of Bahrain.  The full text of the regulations is here.

The particular text I'd like to focus on today is the following:

42.1 Immediate disclosure should be made of any information regarding an issuer's affairs, or about events or conditions in the market that will affect the issuer's securities, which meets either of the following standards:

Where the information is likely to have a significant effect on the price of any of the issuer's securities.

Where such information (after any necessary interpretation by securities analysts or other experts) is likely to be considered important, by a reasonable investor, in determining his choice of action.

Now, it would seem to me as a casual observer that if a firm were listed on the Bahrain Stock Exchange and it was say downgraded to below investment grade or perhaps even to Selective Default a reasonable person would expect that such a development would have a "significant effect" on the price of the issuer's securities.  And as an investor, AA would certainly like to have such information in "determining my choice of action".  That is, if a company's debt were considered highly risky, and given that debt has priority of repayment over equity, then it would seem that the equity was even more risky.  And riskier equity should have a higher return and therefore sell cheaper.

One might argue that the best course of action was a formal announcement on the Bahrain Stock Exchange where all might see it.  Second best would of course be posting such information on its website, though that approach assumes that investors will search for information.

With that as background, what are we to make of the following facts:

1. GFH has not published any such announcement at the BSE except in response to a BSE request as happened today.  And you will note that the BSE has been actively pursuing GFH for additional information on a regular and timely basis.
2. GFH has apparently not yet had the opportunity to update the ratings information on its website, though to be fair only a scant 80 days has passed since it was downgraded to BB+.  Currently, the rating is SD.

Gulf Finance House - A Deconstruction of Its 14 February 2009 Press Release

GFH issued a press release today on the Bahrain Stock Exchange titled "GFH Announces Further Liquidity Initiatives".

Sometimes when I read things in the financial press, I wonder what were they thinking?   In many cases more precisely were they thinking?

Today is a prime example so let's take a closer look at GFH's press release.

First, in the opening paragraph we're told that GFH is "the leading Islamic investment bank".  Not "a leading Islamic investment bank" but rather "the leading" one.  For an institution whose business model has proven inadequate, that has been downgraded by rating agencies to below sub-zero status, whose last GM resigned after a scant stay, which has no discernible operating earnings, I would have expected a bit of humility.   Unless of course this is a rather adverse assessment on the state of the "Islamic" investment banking industry? Perhaps, not that unreasonable an assumption.

Second, the Chairman of GFH continues by highlighting the strength of "our innovative business model" and the "continued support" from "our investors and partners".   Again one might question how GFH's admittedly innovative business model is a strength since it is precisely the major factor responsible for its current predicament.  And until the LMC syndicate agrees to a rescheduling it is a bit premature to speak of "their confidence and support".   And, if like the West LB syndicate, the LMC syndicate's only choice is between an extension and a default, it may also be a bit of a stretch to speak of "confidence and support".  A decision taken with a gun to one's head is usually not considered a "free will" decision.

 

Third, Acting CEO Ted Pretty refers to the "support received from the Central Bank of Bahrain on our new product initiatives and also their advice on strengthening our position".   Clearly, the CBB doesn't want GFH to fail.  No reasonable person or firm does.  But this seems to be another stretch.  I'll bet that the support the CBB is giving GFH in terms of "advice" on strengthening its position is to get its house in order.  Not sure that strictly speaking that qualifies as "support".  Cynics might refer to it as a "warning".

With respect to new products, one would expect that any CBB approval would be subject to two very important conditions.  

1. That GFH resolve its liquidity issues prior to any such sale to ensure that it is a going concern able to manage the investments to be made and to look after the interests of its customers.
2. And probably more importantly that if GFH is taking investor funds today for disbursements in the future that those funds are legally segregated from GFH.  That is, investor deposits are placed with another financial institution and not with GFH so that investors do not become trapped as creditors at GFH should something untoward happen.

Fourth, and perhaps the most striking quote is that by the CEO of LMC:  "We are in an era where ratings and rating agencies sometimes have not comprehensively and adequately reflected the true standing of entities specifically the positive outcomes of GFH’s strategy and capital management program."  As I read this Mr. Abbas' view is that rating agencies really aren't capable of doing their jobs with at least sufficient frequency that we can rely on them.   

That raises quite an interesting question. GFH mentions the possibility of a ratings upgrade twice in its press release as though this were a good thing.

But if, Mr. Abbas is right and the rating agencies in effect don't know what they're doing, why should we trust them if they upgraded GFH?  Or is his position that they only make mistakes when downgrading issuers?

BTW, if like me, you're watching GFH's disclosure of its ratings, you'll notice they have yet to update their website for the first downgrade 26 November 2009 a scant eighty days ago.   More on that topic in another post.  Until then, we'll add the label كلام شريف  to this post.

Dubai World To Offer 60% On Debt?

 

Business Maktoob reports that Dubai World is considering two rescheduling proposals:

1. 60% of principal over 7 years with no interest but with a sovereign guarantee from the Emirate of Dubai.
2. 100% of principal over 7 years:  60% apparently in cash and the rest in Nakheel assets with no government guarantee.  It is unclear if this offer also is without interest. 

Some reactions.

The substantial haircut in the first offer is actually larger than it seems.  Assuming equal annual principal payments and an annual 5% discount rate, on a present value basis the "generous" 60% turns out to be something more like 49.6% of face value. Loading repayments towards the back end of the maturity schedule or increasing the discount rate obviously reduces the net present value of the debt. For example, increasing the discount rate to 10%, leads to a 41.7% recovery - again on a NPV basis.  And it's probably a safe bet that the principal repayments will be back ended.  So let's say an effective 40% recovery is probably a good working assumption.

In the second proposal the banks are offered Nahkeel assets in settlement.  Presumably, these are assets that Nakheel believes it cannot realize during the next seven years at a  reasonable price.  Otherwise, it would hang on to them.  So, of course, it makes eminent sense to let the banks have a go.  After all, they've already demonstrated quite a high level of competence in selecting investments.  And a track record of financing them. Seriously, the only reason the banks would rationally consider taking these assets is if they want to pretend that they're not taking the haircut.  That will assume that someone will be willing to put a cosmetic value on the assets for financial statement purposes.

So here's how I see this working out to everyone's benefit.  There's that big piece of  undeveloped land on the seacoast which if I'm not mistaken serves as "security" under one of Nakkheel's "Islamic" financings.  It's an ideal spot for a new addition to the wonders of Dubai Land.  

Like Dubai World I have two proposals:

1. "Bankers' and Investors' Folly City".   A multi-billion dollar city devoted to Great Moments in Investing and Financing.  I know just the guy in Bahrain to flesh out the concept.   I see a recreation of the Chunnel,  a replica of Enron's Headquarters,  SubPrime Acres, etc.  And rides too, the Bernie Madoff  Rollercoaster,  The Dot Com Boom,  The Implicit Guarantee.   All life size. This is after all Dubai.  It's good this is a very large piece of land because there are many many more great moments in banking to choose from.  
2. Or perhaps a Burj al Balaaha (برج البلاهة) twice as tall as the BK.  Each floor designed around a financial disaster theme.  But with the observation deck in the basement.  When one has the right sort of vision, one doesn't need to be on the 124th Floor to see the glorious horizon.

On a more serious note.  It's unclear if these two proposals are really serious or are merely the opening positions in what will be prolonged negotiations.  Positions designed to "frame" the debate.  Scare the banks with an effective 50%  to 60% haircut (present value basis).  Then when they settle on a 30% haircut they will feel they've gotten a great deal.  And no doubt brag about how clever they were in negotiations with the borrower. 

In any case, with this sort of opening bid, I expect that negotiations are going to be prolonged.  This may explain in part the delay in the standstill request.

Finally, at recovery levels like these the banks should seriously consider putting the two subsidiaries into liquidation and taking ownership.  With a bit of luck and some patience, there should be a good chance of a much higher recovery.   After all  if you're willing to wait 7 years for 50%  (or less) of your money, why not stretch it out to 10 or 14 years and get back much more?  Also the threat of taking over the assets could be quite salutary in getting the owner to rethink his offer.

Esam Janahi - AlQabas Analysis of His Career

 

Sunday's AlQabas has a long article dissecting the career of Mr. Janahi since 1999 (the year he burst on to the GCC financial scene) under the headline "From Sparrow to Peacock Back to Sparrow". 

As you might surmise, this is not the usual puff piece about a visionary leader and financier.  

Rather it postulates that Mr. Janahi's success was due more to skillful media relations, including expenditures, than substance.  It also claims that substance was rather short: that after announcing grand projects Mr. Janahi did not see them through to completion but jumped  to announce new billion dollar projects.  Потёмкинские дере́вни if you will.

There is also additional commentary by the lawyer of Mr. Khalid Bin Ahmad AlSuwaidi about the lawsuit he brought against Mr. Janahi.  Obviously, Mr. AlSuwaidi's lawyer is not neutral in this matter.  The new data offered here are Mr. AlSuwaidi's allegations (note that word)  that Qatar Energy City was his idea, that he and Mr. Janahi were supposed to be equal partners in it, and that Mr. Janahi set up a company in Bahrain which he controlled (registered in the name of his brother Rashid) and then illegally transfered assets in the original company (founded by both parties) and thus took control of the project.

The publication of this article seems to mark the official "fall from grace" of Mr. Janahi as this sort of article has not appeared before. 

GFH In Another Round of Debt Restructuring Negotiations - US$100 Million

The Gulf Daily News reports (presumably based on an announcement we'll see published Sunday when the Bahrain Stock Exchange opens) that GFH is involved in negotiations with the holders of its US$100 million facility to push forward next month's US$50 million maturity - presumably again the request is for at least six months.

GFH has engaged the Bahrain-based Liquidity Management Centre to help it in negotiations with the lenders, who are reported to be four regional Islamic banks.  

LMC is an Islamic financial institution whose mission is to help Islamic banks manage their liquidity in a Shari'ah compliant way.  It's  equally owned by four major Islamic financing institutions:  Dubai Islamic Bank, The Islamic Development Bank, Bahrain Islamic Bank and Kuwait Finance House.   Wonder if any of them are creditors?

Awal Bank (Maan AlSanea) 7% Stake in Global Investment House "Disappears"

Friday's AlQabas carries a summary of a weekly statistical report prepared by Noor Investments Kuwait.  The report notes that two major shareholders in GIH no longer appear:

1. Awal Bank (owned by Mr. AlSanea but under CBB Administration) no longer appears as a shareholder.  Previously, it held around 7%.
2. As does Tarek Khalid AlHumaidi and others associated with him who once held 8.9%.

GIH's shares traded at roughly US$0.29 per share today.  At today's price that would make Awal Bank's stake worth something between US$25 million to US$27 million.  And Mr. AlHumaidi's between US$32 million and US$34 million.  If I'm not mistaken AB bought shares several years ago.  In those more happier days, GIH's shares traded for roughly 10X what they do now.  You can figure out the loss both parties sustained.

If you're like me, you probably wonder what happened.  It's unclear if all the shares were sold or just enough to cause the remaining shares to fall below a reporting threshold - perhaps 5%.  It would also be interesting to know who acquired these shares.  Have one or more new major shareholders  emerged?  Or an existing shareholder dramatically increased its position? Unfortunately, I can't find Noor's report to try and answer that question.  Nor can I find any reports at what I assume the source is - Maqasa.

If anyone out there can post a link to the report or the source data for the report, I'd be most appreciative.  Arabic language is fine.  If I get something I'll post a follow-up.

Gulf Finance House: S&P Downgrade More Info Than Just the Downgrade

You've probably seen the news that Standard and Poors has downgraded GFH to SD (Selective Default) based on its failure to pay the full US$300 million due on 10 February.

Interestingly, GFH's website still shows it with an investment grade rating (BBB-) from Standard and Poors.  You may recall that S&P downgraded GFH on 26 November to BB+, 14 January to B+ and 3 February to CC prior to the very recent downgrade to SD.  That's what we in the "Islamic" banking game call an example of  كلام شريف

The rationale for the downgrade?  S&P considers the US$100 million for six months to be a distressed debt exchange and not a voluntary new facility.  

But there are three other items in the press release worthy of comment.

First, that GFH is in discussions with other lenders for a similar partial payment extension on another  US$100 million facility.  I think this is due in two equal tranches in 2010 and 2011.   Unfortunately, GFH's 3Q09 interim financial is silent on the pattern of upcoming maturities of debt. 

Second, the US$100 million announced 10 February was apparently not a new facility but the extension of maturity of part of the amount of  the existing facility. S&P comments that  GFH achieved the partial extension by executing the facility's "deed of extension" clause.  

Yet in its 10 February press release GFH said: "GFH has replaced its $300m syndicated facility with a maturity date of 10th of February with a new $100m murabaha which has a tenor of six months, having repaid $200m on the initial due date."  

Referring to this as a "new facility" sounds much better than an extension of maturity.   A refinancing always has much better connotations than a rescheduling.  If S&P is correct (and for some strange reason they have more credibility at SAM than GFH does), this is what it was - a rescheduling.   كلام شريف

Calling it a rescheduling may also sound better from an Islamic standpoint, though one presumes the Shari'ah Board will look closely at the "new" and/or "extended" facility.  

Third, S&P said that after the second rescheduling is accomplished, it will look at GFH's credit again and anticipates that it could upgrade them to CCC.  That I suppose is comfort.  It will represent an increase over the CC level assigned them on 3 February.  It will, however, leave them in "high yield" territory.

Gulf Finance House Denies AlQabas Article

In response to a letter from the Bahrain Stock Exchange, GFH has replied with with this letter published on the BSE.

Two things from this exchange:

1. GFH is clearly still on the "watch list".  The BSE wrote to them immediately this morning.  Maybe I have  reader at the exchange?  
2. Interestingly enough most of the article was a repeat of GFH's press release.  The only item that diverged was the bit about asset sales.  GFH has publicly announced that it would be selling "non core" assets.  So is the denial that it will be selling assets, hopes to sell up to US$400 million, hopes to sell 40% of its Syrian bank, hopes to do that by an IPO.  Or is this like its earlier denial that it was in discussion with WestLB for a new Sukuk of US$50 million to partially fund the 10 February repayment.  You'll recall that it received a US$100 million sukuk from the syndicate.  All of which goes to prove that many (but not all)  "Islamic" banks play by different rules than conventional banks.  As we say, "God knows".

Boubyan Bank - Capital Raising Follow-Up

It really does pay to think carefully about things, especially if one writes for a prestigious blog like this one.

There was another solution open to Boubyan Bank as Thursday's AlQabas reveals.  One that a moment or two of reflection should have occurred to at least one self proclaimed financial expert:  extend the subscription period.

Here are the main points from a press conference held by the Chairman of BB, Ibrahim alQadi (as reported by AlQ):

1. BB raised over 85% (apparently just enough to be over).
2. All the major shareholders participated:  NBK (40% shareholder); Commercial Bank of Kuwait (20% shareholder) [You recall that there are legal cases ongoing involving CBK, The Investment Dar, and Kuwait Finance House - with the latter two disputing CBK's ownership.  Acquired or not acquired as a result of a default by TID on a repo transaction involving the BB shares,   And, of course, depending on the view of your learned counsel and perhaps as well your own economic interest]; the Social Insurance Institution (4% shareholder) and other unnamed large natural person and legal entity shareholders.
3. But since BB has over 80,000 shareholders many with holdings less than 2,000 - less than 15% of the shares offered were not subscribed for.
4. According to the approval at the previous ordinary general shareholders meeting ("OGM"), the unsubscribed shares were to be offered in a public auction but the Government Department of Fatwa and Legislation refused to allow this.  The Department is I believe part of the Kuwaiti Finance Ministry. If anyone out there knows the reason for this, please post a comment.  Is it designed to protect shareholders' rights - even if they're too "lazy" to exercise them?
5. So the plan is to hold another OGM and extend the subscription period for shareholders registered as of 21 January 2010.  Presumably the dates will be set by the OGM and the price will remain KD0.255 per share.  The Board met yesterday and formally approved recommending  this course of action to the OGM.   No timing for the OGM is mentioned in the article.

Gulf Finance House - 5% Margin on US$100 Million & Plans for US$400 Million in Asset. Sales

Two articles provide some additional information on GFH's situation.

The first is from Zawaya which reports that the margin on the US$100 million six month murabaha from the WestLB-led syndicate is an eye popping 5%.   How does that compare to what they were paying on the US$300 million facility that matured today? Sadly, there doesn't seem to be any disclosure in GFH's financials about the profit rate on the "old"  US$300 million WestLB facility that this "new" one partially replaces. A non Shari'ah compliant bank would be required to give that sort of disclosure in its financials, but apparently Shari'ah compliant banks follow a different, if not necessarily higher, standard.    However, we can make an estimate as to the previous margin by reference to GFH's DB-led Sukuk.  The profit margin on that facility is currently 1.75% (after the 0.5% step up due to the recent ratings downgrade).  Using the Sukuk as a proxy, the new facility is paying somewhere in the range of 2.9X to 4.0x the earlier WestLB margin.  Probably at the higher range because the WestLB facility was granted in much happier times.  When one considers that the margin is 5% for a six month facility, the effective multiple is even higher.  Ouch!

The second is from Thursday's AlQabas and deals with asset sales.  It has the headline "GFH Compelled to Relinquish Assets". 

The first paragraph quotes Acting CEO Pretty as saying that GFH hopes to raise US$400 million from sales of its shares in financial firms and real estate.  The plan is to sell 40% of its interests in a bank in Syria via an IPO within six months.   

This seems an unfortunate time to be engaged in asset sales much less IPOs.  It's not clear to me that  there is any significant demand out there.  Especially for Syrian assets given all the recent saber rattling between Israel and Syria.  As well, prices are likely to be less than stellar, particularly because  potential buyers know that GFH is a "motivated seller".  This asset sales plan is reminiscent of the  Hail Mary Pass in American football.  Throw long.  Hope someone from your team catches it.  And scores the winning points.  It works sometimes: Staubach to Pearson.

One intriguing thought that comes from AlQ's headline:  Did GFH have to commit to crash asset sales as a condition of the US$100 million loan?

The rest of the article goes on to repeat items from the press release along with the standard refrain of companies in trouble that they are selling "non core" assets.  The latter particularly caught my attention.

Whenever I read the phrase "non core assets", a series of scenes flashes in front of my eyes.  Various scenarios to explain how and why these assets were ever acquired.  Scenarios that need not be mutually exclusive I'd add.

Did they know they were "non core" assets when they bought them?   I imagine a board meeting or perhaps the risk committee of the bank getting together to approve a "non core" asset purchase program.  "We've got lenders eager to lend.  Why don't we buy some 'non core' assets?  Definitely don't have enough of them."    What's even harder to understand is that usually the purchases are for rather substantial amounts.  The kind that could bring down the firm if they went bad.   You'd think that in pursuing something "non core" you wouldn't bet the proverbial ranch.  Rather you would be spending those precious borrowed funds on your main lines of business - what you might call your "core business".

Or were they just willy nilly buying assets and then later decided that some were "core" and some "non core"?  Abundant and cheap liquidity often has the same effect on judgment as خمر.  Metaphorically, one wakes up with a splitting headache the next day,  opens one's eyes and "Oh, no, how in heck did that get here?"  Struggling for a while one remembers that one thought it looked pretty good last night and brought it home.  But not now, especially  in the daylight.

Or did the assets turn into "non core" assets?  Like the  yogurt you bought two weeks ago at Jawad's but didn't eat.  One day you open the refrigerator and there it is festering in the back.  Maybe having grown a  small beard.   If it's been in there long enough, perhaps even scurrying about a bit. Or at least stirring. One hopes not ominously.

Zain: A Pro-AlBarrak Article from The National

The National has an article in favor of Dr. AlBarrak's stewardship.

The problem is not at Zain.  

The fundamental problem is simply that some of its Kuwaiti shareholders have characteristically overextended themselves and now need cash.  Typically what would have happened in the past is that  the "investor" would go to a "wise" local bank who would lend him additional money based on what might be charitably described as an optimistic collateral valuation.  No cash flow on the assets  of course but really good assets nonetheless.  Really good.  The Central Bank of Kuwait stopped this game of charades over a year ago by imposing additional lending restrictions.

So now all that's left to the "investor" is to raid his good investments to bolster other "wise" but less profitable investments or to repay maturing loans.  

And so value that was created in Zain will be destroyed.

What's a bit sad is that one (at least I this one) doesn't usually think of MAK Group as being a typical Kuwaiti "investor". 

That isn't to say of course that Dr. AlBarrak made all the right decisions at Zain or that Zain's strategy was necessary flawless.  But what does a telecoms company in a small market like Kuwait do to build value?

A couple of other things from the article:

1. An absolutely brilliant quote from Saad:  “There will be peace with Israel before there is an independent regulator in Kuwait,” he once said in a magazine interview.  Of course unlike the old joke about Gorbachev and God, he did not address when the regulator would be effective.
2. Another quote this time from The National:  "Kuwait’s practically unregulated stock market does not require investors to disclose their total holdings in a company, including shares controlled by related parties."  Another charitable comment.  There is precious little disclosure required on most topics.  A glance at the websites of listed companies in Kuwait would confirm this.  And for all those out there who advocate less regulation and allowing the market to police itself, there could be no more compelling example of "success" this approach will bring than the KSE.
3. And another:  "In the past decade, Vavasi has announced a number of multibillion-dollar projects, including a pan-Indian mobile network, an advanced silicon manufacturing facility and an aircraft manufacturing joint venture. None has materialised."   That this ever was taken seriously is a testatment to the truth of yesterday's post Stage #4.  In any case, later this week  we may be announcing Vavasi's participation in the US$1 billion build out of Suq Al Mal.  There will be exciting new features and an overall improvement in your experience here at the site.  And an even more dramatic improvement in Abu Arqala's lifestyle.  Or at least AA hopes so.  With this dramatic change in fortunes imagined, it may be time to submit that loan request to my favorite banker in Kuwait.  Well, actually no, I think Abu Shukry is liable to turn me down.  Luckily, there are "wise" lenders in Kuwait who may not.  And as demonstrated by my postings here, I can take either conventional or "Shari'ah" compliant financing. 

Dubai World to Submit Standstill Request During February

 

 

According to an article in today's Al-Ittihad Newspaper quoting an unnamed lender, DW will submit a formal standstill request this month.

The article states that DW has spent the period since its 21 December meeting convincing its lenders that its assets were good and that prospects for a successful restructuring were high.  

However, it's really hard to buy this.  I can't imagine why lenders would not agree to a standstill:

1. If they think there is no hope for a successful restructuring, wouldn't the wise thing be to take the DFSF money and pull the trigger later?  At least they will get the interim cash flow. 
2. If they're not sure, take the DFSF money and spend the next six months doing the most rigorous of due diligence.   And make a decision then with a bit of cash in one's pocket.
3. If they procrastinate in coming to a decision, there is a danger that the cash flow will dry up - unless the Government changes its mind about continuing to pay (often negotiating positions are just that) or there is a miracle in DW's operations (miracles do happen but sadly not often enough to be a reliable credible second way out).
4. Another highly motivating factor is that more than just a few of the lenders have very significant sums at stake.  Thus, a good number of creditors have a very strong incentive to "extend and pretend" regardless of whether the rescheduling has a low, medium or high probability of success.

So, what could account for resistance to a standstill?  

1. A group of lenders determined to make such a nuisance of themselves that they get taken out - maybe by those larger banks with so very much more at stake.  
2. Stupidity and or incompetence (a sadly not uncommon occurrence).
3. Failure to submit a standstill for other reasons.  And that could be a "client" issue rather than a Aidan issue.  That is, he is giving advice but the decision process is stalled.
4. Other issues.

On that last topic, you'll recall that another reason has been given for the delay in submitting the request:  negotiations over the terms on which the Dubai Financial Stability Fund would provide funding to DW to enable it to continue operations and to pay interest.  Press reports suggested that the DFSF was looking for collateral.  Since lenders are only being paid interest what that would mean is that the lenders would be effectively "mortgaging" their future principal repayments to get interest now.  On an economic basis cash inflow is cash whatever one calls it.  However, on an accounting or regulatory basis there could be consequences.  I'd have to vote for this as being the impediment.

Business Maktoob has an article today based largely on the Al-Ittihad article which offers another explanation, though I don't find this in Al-Ittihad:

"It's difficult to coordinate an agreement with so many banks...the process has been slow," said one Dubai-based banker, who asked not to be identified.

It's not uncommon that there are many creditors in reschedulings.  That's why  lenders form a steering or creditors committee to facilitate communication and negotiations.  On that latter point the rescheduling process is a "negotiation" as opposed to a "dictation".   One side proposes something.  The other side may not immediately accept it.  And then a solution - often but not always a compromise - is worked out. 

Professional advisors in the business understand that there is a particular psychology involved in restructurings and that reaching a deal requires accommodating oneself to this dynamic.  Looking at it from the  borrower's advisor's point of view, the first step is getting the client to realize that he has gone from hero to zero notwithstanding the  earlier creditor talk of a "relationship'".  That creditors now aggrieved are likely to want revenge for the borrower's "faithlessness".   The wise borrower then makes a sacrifice or two.   Often the first step is a bit of blood in the form of sacking someone in management: throw a handy virgin or senior manager into  the volcano.   Undertake some perhaps needless  but symbolic cost cutting (which is completely irrelevant to the prospects for recovery) so that creditors can see one is not only contrite but also suffering as they themselves suffer.  Another way is to give  some tactical victories to the other side during negotiations.  Propose more than one wants so that the lenders can reject it and score a victory.  Later around the syndicate campfire the bankers can tell stories of their bravery and cunning and how they faced down the borrower and forced him to bend to the inexorable wills.  And conveniently forget the original underwriting decision that got them into this fix.

Let's say one wants a six month standstill.  The banks may not wish to go that long.  One proposes a six month period knowing this.  The banks balk offering only three.  One then reluctantly proposes a three month standstill that is renewable for a further three months crying at how cruel and unreasonable the banks are being.  Sensing blood in the water, the banks pounce.   One has one's six month standstill or close enough so that one has gotten what one wants.

GM of Lu'lu (Pearl) Real Estate Kuwait Resigns

Lu'lu Real Estate announced the resignation of its GM, Mr. Ahmad Muhammad Ahmad AlAjlan.  No word on replacement.

Below is the KSE announcement.

[10:12:0]  ِ.استقالة مدير عام شركة لؤلؤة الكويت العقارية
يعلن سوق الكويت للأوراق المالية بأن شركة لؤلؤة الكويت
العقارية افادته بأن مجلس ادارة الشركة وافق بتاريخ 9-2-2010‏
على استقالة السيد احمد محمد احمد العجلان مدير عام الشركة.‏

GFH Announces Payment of US$300 Million and Six Month US$100 Million New Debt

GFH announced today that it had reached agreement with the West LB syndicate on its US$300 million loan maturing today.  It will repay the full amount of US$300 million and has received a "new" US$100 million six-month murabaha facility from the lenders.  In effect, it will pay US$200 million in cash and the lenders are deferring payment on the US$100 million due today for six months.

GFH's press release touts this as a significant accomplishment  and a vote of confidence by its lenders.

However, I think there is a subtle message in the statement of West LB's Representative.

“We were pleased that we were able to act as a bridge between the syndicate and GFH in finding an acceptable solution to all parties within such a short period of time. We believe that the terms of the refinancing provide GFH with the necessary time to execute the comprehensive plan presented to the banks to return to profitability. The fact that GFH was able to secure unanimous support of the banking group is as a direct result of the pragmatic way in which all parties approached the situation,” added David Pepper, Head of CEEMEA Syndicate at WestLB.

First, his language is that of a problem solved:  "acceptable solution", "pragmatic way".  This is not the language of unbounded enthusiasm.  The banks were presented with two alternatives.  The first was to insist on full repayment.  This likely would have meant a default on the US$100 million.  All sorts of unpleasant consequences for the lenders (and for GFH) would have followed.  The second option was to extend and pretend.  From where I sit the decision seems quite an easy one.  As well in terms of  pragmatism it will be interesting to see the terms on the new facility and how they differ from the previous one.  Unless there is disclosure from GFH in the interim we will have to wait until the release of the 31 March financials for that data. 

Second, the extension is billed as providing "GFH with the necessary time to execute the comprehensive plan presented to the banks to return to profitability".  It is unclear how an institution with a fundamental problem in its business model is going to return to profitability within six months.  I certainly don't believe it's possible and frankly wonder if Mr. Pepper does as well.  Of course,  the banks had to give some justification for the six month tenor.

Saudi Capital Markets Authority - Corporate Governance Seminar in Partnership with Swedish Trade Council 9 February 2010

 

Copyright AlRiyadh Newspaper Saudi Arabia

Last December I had noted that the CMA had planned a corporate governance seminar for February in partnership with the Swedish Trade Council.

Here's the report and pictures from AlRiyadh Newspaper on the seminar.  Impressive list of speakers and good topics.  Summary here.  You can use this link to view additional information on the seminar.

Also here are the CMA's Corporate Governance Regulations (issued in 2006).  Definitive text here in Arabic.