The International Banking Corporation – Ernst and Young 2009 Investigative Report

Thanks to a reader of this blog I was shown how to obtain access to the 5 February filing by Ahmad Hamad AlGosaibi and Brothers ("AHAB") in the Supreme Court of New York relating to the case MASHREQBANK PSC vs. AL GOSAIBI, AHMED HAMAD Case # 601650/2009.

Among the many interesting exhibits to the filing (there will be at least two more posts on TIBC from this material) was what is purported to be the Ernst and Young Report on TIBC commissioned by the Central Bank of Bahrain (the "Report") in 2009.  After receipt of the Report, the CBB placed TIBC under Administration, replacing its existing management and assuming full control of the Bank.  

Let's start with an explanation for my use of the word "purported". The Report was not submitted to the Court by its author but by the defendant's (AHAB) counsel. That counsel has sworn under oath that the copy attached to the filing is "true and correct". By using the word "purported" I am not implying that counsel is misinformed or is misinforming the Court. However, I am acknowledging that I have no knowledge independent of his word that this is the E&Y Report.

The E&Y Report is contained in the 5 February 2010 filing by AHAB's counsel and is available at the Supreme Court of New York's website (http://iapps.courts.state.ny.us/webcivil/FCASMain). All the electronic filings in this case can be accessed through that website using the Case Index #601650/2009.   The Report is Exhibit 10 in Document #83.  If you initially have difficulties, keep trying.  The site appears to be temperamental.

I'll quote directly from the Report and then follow-up with some observations of my own based on the Report being an accurate reflection of the facts.   I have redacted certain names from the description below.  If you want them, you can read the Report.  In a situation like this involving multiple parties who may be accused of wrongdoing, it's also difficult to sort out whose story to believe.   And we are too far away from the facts here to sort this out.

INTRODUCTORY COMMENTS

On the chance that a reader is not familiar with this case and the larger legal issue involved. Mashreqbank has sued AHAB for failure to honor a US$150 million / SAR563.4 million FX transaction. AHAB's counterclaim is that it has been the victim of a massive fraud perpetrated by Mr. Maan AlSanea. As I read the Court filings by AHAB's counsel, they are also claiming that Mashreqbank should have been aware that the transactions were improper.

NET ASSET POSITION

The first place to start is at the end of the Report where E&Y summarizes its findings on the assets and liabilities of TIBC. This is on Page 80 in Sections 3.7.1 and 3.7.2. Using TIBC's 31 May 2009 unaudited and unreviewed financials it estimates (note that word) the potential value of assets and liabilities not linked to AHAB, AHAB's Money Exchange, Awal Bank, or of other entities allegedly under the control of Mr. Maan AlSanea. The latter are captioned "Unlinked Assets" and "Unlinked Liabilities" in the tables below. All amounts are in millions of US Dollars.

ASSETS

	All Assets	Unlinked Assets
Due from Banks and Other Financial Institutions	US$ 544.145	US$190.000
Investment Securities	US$ 461.274	US$ 9.000
Loans and Advances	US$2,154.843	-
Due from Related Parties	US$ 583.817	-
Due from Customers	US$ 25.859	-
Other Assets	US$ 45.144	US$ 5.00
TOTAL ASSETS	US$3,815.082	US$204.000

 

LIABILITIES

	All Liabilities	Unlinked Liabilities
Due to Banks and Other Financial Institutions	US$2,065.591	US$1,900.000
Due to Customers	US$ 41.475	-
Other Liabilities	US$ 57.022	US$ 57.022
Term Loans	US$ 200.000	US$ 200.000
TOTAL LIABILITIES	US$2,364.068	US$2,157.022

E&Y comments: "We have estimated he potential shortfall within TIBC to be in excess of US$2 billion."
 

OTHER FINDINGS

These are presented in the order in which they appear in the Report. Paragraph numbers as in the Report.

1. Paragraph 10:1: "Management alleged that Mr. AlSanea directed the day to day management of TIBC and we could find no evidence that Mr. Al Sanea was appointed as a delegated officer through a power of attorney to act on behalf of Ahmad Hamad AlGosaibi & Brothers Partnership." 
2. Paragraph 10:2: "We found no evidence of any formal business links between the Saad Group and TIBC, although transactions were of a related party nature". 
3. Paragraph 10:3: "We could find no evidence, nor could TIBC management provide documentary proof of Mr. Al Sanea's appointment to the Excom, no could we find any delegation of authority issued to him by the AlGosaibi family to act on their behalf as representative of the Excom or any other decision making forum." 
4. Paragraph 10.4: "We found evidence suggesting that the CEO had significant business interests outside of TIBC and was remunerated through a compensation based upon the amount of credit he was able to secure for TIBC, the Ahmad Hamad AlGosaibi & Brothers Co Partnership and Saad entities." 
5. Paragraph 10:5: "We found evidence that the final Swift authorization for the release of payments was controlled and managed by persons or a company other than TIBC. In addition we found that the SWIFT transfer authorizations were effected by individuals not employed by TIBC and from a premises outside of Bahrain. It was also confirmed by our Technology Security Risk Services that the application was accessed through the utilization of "PcAnywhere" software."  AA: See Point 23 re Paragraph 86.  
6. Paragraph 11: "TIBC at first alleged that all loan documents were created and provided by or via the Exchange ("Ahmad Hamad AlGosaibi and Brothers Co. Partnership – Finance, Development & Investment") for verification and administration at TIBC. It was however established hereafter that the Exchange and/or the Saad Group provided only the CR's, identities and passports from which the loan applications were created. We found no prior correspondence relating to the loan values and other requirements". 
7. Paragraph 12: "The signatures contained in the loan files of the executive chairman are questionable, and additional investigation in this regard will be required". 
8. Paragraph 13: "We obtained documents allegedly removed from the TIBC premises by an employee out of fear of the CBB investigation, and that these documents included official information regarding the signing of the Bank reference letters and e-mail correspondence". 
9. Paragraph 14: "We were unable to verify the existence of the borrowers listed with TIBC through telephonic interviews and physical verification. In the spirit of co-operation Deloitte provided us with a draft of their "drive by" visits to the addresses listed with the Exchange related to the loan clients, which indicated that the premises were not occupied by the borrowers or used for trade purposes". 
10. Paragraph 15: "We could verify or authenticate the deeds of property provided as collateral by alleged prospective borrowers. It is alleged that these documents were inspected by [COO/CRO] and [TIBC External Auditors] at some time, but this could not be verified as fact, and further thereto it is our assumption that these deeds were not authenticated by these entities through the First Notary Public Department". (AA: I have removed the names of the two parties and replaced with generic descriptions of their roles) 
11.  Paragraph 16: "TIBC were well aware of their cash flow problems by October 2008, but that they failed to call on matured loans, and that they instead affected additional loans and roll overs to the detriment of the Bank." 
12. Paragraph 17: "Loan applications were created on behalf of some AlGosaibi family members, and we could find no evidence that they have applied for loans or signed application forms." 
13. Paragraph 18: "We could find no evidence of any application for loans being made by any customer directly through TIBC or indirectly through the Exchange. From evidence it would seem that even the client applications were created at TIBC in most instances and that these were created by [name removed of TIBC Officer]." 
14. Paragraph 19: "The evidence contained herein could be indicative that internal collusion to commit an offense had taken place in the loan book process, and that [TIBC Officer name removed], [TIBC Officer name removed], [TIBC Officer name removed] and [TIBC Officer name removed] must reasonably have known that the loans created for this transfer of excess capital to the Exchange were irregular in that no application was made to them by any client for those amounts paid and the funds were not received by the clients intended." 
15. Paragraph 21: "We could find no evidence to confirm the existence of the Saudi Investment portfolio valued at circa $400 million as at 31 May 2009." 
16. Paragraph 22: "TIBC last obtained a confirmation of the existence of the equity investments as at 31 December 2007 as part of the year end audit process. We noted that the correspondence was sent by [name of officer at a Saudi Bank and name of bank removed by AA] and in this regard found that it is similar to the signature used on the loan documentation reviewed by Ernst and Young. We also note that the confirmation was sent "with [AA: presumably without} any responsibility on the part of [acronym of Saudi Bank removed] or its officers." However, it is alleged that [acronym of Saudi Bank removed] are the appointed custodians. We were told by [TIBC officer name] that no confirmation was sent to [name of External Auditors of TIBC] for the 31 December 2008 audit."
17. Paragraphs 24 through 26 deal with alleged deficiencies in reconciliations of nostro accounts. Paragraph 24 (nostro records did not accurately reflect all transactions). Paragraph 25 (a Saad entity reconciled TIBC's account at Citibank). Paragraph 26 (certain accounts were not reconciled though there were not copies of bank statements or balance confirmations). 
18. Paragraphs 27 through 33 deal with failed trades. 
19. Paragraphs 34 -35 deal with access to electronic records. E&Y alleges "resistance from TIBC's IT vendor to provide technical assistance" and "significant stalling from TIBC management" (Paragraph 34). 
20. At this point we are at page 10 in an 88 page report. 
21. Paragraph 53 deals with Board meetings. It's divided into six subsections. 53.6 reads "[CEO – name removed by AA] stated that he had no interaction with any of the directors since the inception of the Bank, except for Mr. AlSanea, and to his knowledge none of the AlGosaibi family ever attended a Board meeting in person in Bahrain". 
22. Paragraph 59: "It is alleged by [name of CEO removed] that major decisions and his day to day actions were directed by Mr. Al Sanea and that this had been ongoing since the inception of the Bank through the use of memoranda addressed to either Mr. Al Sanea directly or to the Excom. 
23. Paragraph 86: "We were informed by [name of CEO removed] that to his understanding all SWIFT approvals were made from the SAAD Group Offices." 
24. Paragraphs 110 through 119 detail Service Level Agreements between TIBC and the Exchange. Paragraph 119 states "From the contents of these three SLA's it is evident the SLA dated 1 July 2003 was applicable to the loan book which was intended to be managed and maintained by the Exchange. As such the content also creates the impression that the documents related to the application, and complete client relation should have been managed by the Exchange, without excluding TIBC's responsibility to perform proper due diligence". 
25. Paragraph 170: "Deloitte provided us with a draft of their relationship analysis of the loan clients to TIBC, the Exchange, Mr. Al Sanea and Saad Trading. The analysis alleges that the majority of the loan clients are either known to Mr. Al Sanea or employed by his business enterprises." 

Some comments. These are predicated on the assumption that the Report is reasonably accurate as to its description. 

Here are a few things that deviate from the banking practice I am familiar with. Of course, sometimes there is a sound reason why there is a deviation. If we were given the reasons for these practices, we might be able to better understand why they were adopted. 

1. Generally CEOs are not involved in the mechanics of releasing payments. That is, the operational step of inputting a password into a funds transfer system like Swift which then transmits the payment instructions to the bank's correspondent. Depending on the size of a transaction and a bank's internal control system a CEO might sign the approval for a payment, but then the bank's Operations Department would input the payment into the funds transfer system and release the payment. The procedure E&Y describes at TIBC would be to give greater control to executive management. What would be interesting to understand would be why such control was needed. 
2. According to the internal control principles I've been taught one never allows another person to use one's password. Each authorized party should have his or her own unique password. It's unclear to me why there was this alleged departure from this standard. 
3. While I had understood from TIBC's 2008 Annual Report that the Exchange acted as collateral management agent and nominee for the Saudi Investment Portfolio, I was surprised to see the role ascribed to them in the Report with respect to credit origination and relationship management.  TIBC seems to have been operating more as an investor than a commercial bank.
4. I was also surprised to read the statement attributed to one of TIBC's officers that no confirm for the Bank's Saudi Investment Portfolio was obtained for Fiscal 2008 by the Bank's external auditors. It would be interesting to know if this is true. And if true, what the reason was? 
5. Just a short "end note".   What is quoted above is a report.  It is not a judicial determination of guilt or innocence.  Merely a report. 

 Post on Hibis Europe Limited Report on Awal Bank here.
 

Zain Deal Motives Under Scrutiny

And the FT does a bit of scrutinizing.

As to the basic story, this really isn't "news" nor is it a revelation.  Nor was it when you read it earlier here or elsewhere.

The basic story is Kuwaiti "investor" overextends self while using OPM and high leverage.   

About as remarkable as the headline "Sun Rises in East". 

And the point to note is that it is not just one family business group advocating the sale.   Kuwait is blessed with an abundance of "wise" "investors" who overextend themselves with OPM and leverage.

Economist: The Collapse of TIBC - A Mystery in the Gulf

In case you missed it, an interesting post over at The Economist with some details about the alleged mechanics of the collapse of TIBC.

One question occurs to me whenever I read accounts like these.  What were the AlGosaibis doing?  Were they having Board meetings that weren't recorded?  Didn't they think that as directors they should be attending board and executive committee meetings?  That the Chairman should be signing the annual accounts?

I also love the use of the term "Potemkin Bank" - which I believe I've read somewhere else.

Finally, if anyone can make available a copy of the Ernst and Young report, I'd be most grateful.  I still haven't been able to get one.

Dubai Announces That An Announcement About the Dubai World Restructuring Plan is Immiment - Clever Post from Wall Street WTF Blog

A pretty good post that pretty much sums it up.

Here's the link.

Public Service Announcement: Maan Al Sanea NOT Arrested

19 February Update:  I was advised that it is highly likely that Mr. AlSanea may be prohibited from traveling outside of the Kingdom of Saudi Arabia.  And that this may be considered a form of "arrest".

I've gotten a couple of hits from readers using the search term "Al Sanea + Arrest".  So it seems there are rumors floating around out there.

I have seen nothing in the press (Arabic or English) about any arrest.  I have checked with someone in the area who advises that as far as he knows Mr. Al Sanea appears to be moving about as he did in the past.

Where I think this is coming from are one or more Arabic language blogs which have recently  run commentaries on Mr. Al Sanea's career. 

This one here  has the headline "Arrest of Maan AlSanea for Money Laundering" in very large letters.  Then in the second line of the headline in much smaller type is the word "previously" (سبق).  It's easy to miss this if you're reading quickly.  Here's a second - again with a headline that might be misinterpreted.

When you read the entire second article you'll see this refers to unsubstantiated allegations that he was arrested in 2007.  The blog also notes that despite the news of his being jailed  then then he turned up at a Chamber of Commerce meeting a day or so after the report and threatened to sue the newspaper for printing defamatory remarks about him.  Again just to hit the nail on the head one more time - these are unsubstantiated allegations from 2007.

It would therefore seem there's nothing to the current rumor.

Islamic Legal Experts Discussion on Dubai, Dubai World and Nahkeel

 

Reuters presents a  short video streaming panel discussion among Islamic financing experts.    

I've included it here primarily because it contains some interesting comments, including something similar you may have read elsewhere about the "Implicit Guarantee".   

There is also an added cultural benefit.  Some rather interesting camera work.  Who would have thought of having the camera linger on water glass or a pencil during a discussion of Islamic financing?  Financial videos saved from being overly boring by a bit of avant garde framing.

Fitch Downgrades Dubai Holdings Commercial Operations Group

You'll remember a while back there was quite a "war of words" between S&P and DCHOG when S&P downgraded them to B.   Among one of the countercharges levied by DCHOG was that S&P really didn't understand what it was doing.  That it had a  "lack of understanding of DHCOG's business, its operations and relationship with the Government of Dubai."

Yesterday Fitch weighed in with a downgrade to B+ - marginally higher than S&P's,  However, their comments will give cold comfort to DCHOG.

1. The rating action reflects Fitch's amended rating approach for DHCOG. The agency now rates DHCOG on a standalone basis rather than a top down parent and subsidiary basis. This is due to a continuing lack of substantive information on the government's ability to support the group in case of need.
2. DHCOG is on ratings watch negative.  The resolution of the RWN could result in a downgrade of DHCOG's ratings by more than one notch.  
3. A resolution of the RWN will be contingent upon the receipt of DHCOG's audited 2009 annual accounts, confirming the group's ongoing ability to generate cash flow, retain adequate liquidity and avoid a potential covenant breach at the December 2009 test date. The removal of the rating watch will also be contingent upon DHCOG successfully refinancing the upcoming July 2010 facility, or obtaining additional government funds to repay the facility.

In terms of the basic standalone credit analysis, the two rating agencies are in broad agreement.  The difference between their two ratings is immaterial.

DHCOG can take comfort from the fact that there is no harsh criticism about information flow and adequacy of documentation.  Otherwise Fitch seems to be pretty much on the same page as S&P.  And as well perhaps from Fitch's apparent willingness to factor in government support.  It's question mark seems to be "ability" not "willingness".

IMF Public Information Notice on Article IV Consultations with the UAE

The IMF released today the Public Information Notice ("PIN") on its Article IV Consultation with  the UAE Government.  The PIN begins with a review of the country's condition and then Executive Board recommendations.  The latter are the heart of the PIN in terms of getting an understanding of what the IMF considers the major issues and the solutions (at least in broad terms).

The recommendations are written in diplomatic language.  So criticism is indirect.  Areas for improvement may be "noted", "stressed", "emphasized".  The tone of these words suggests both the size of the shortcoming and the intensity of the Executive Directors' recommendations.   Also there is "on the one hand but on the other hand" mechansim which is a polite way of raising issues. First, the IMF praises something as having been done well, then it turns to the meat of issue by raising that which has not been done or not been done well.  One can of course also look at the positive statements as an assessment of the achievements of the country.   Like all other such reports, it's best to look at several years to get a sense of progress made, recurring or unsolved issues and new issues that may have emerged or where the emphasis may have changed.  Interpreting PINs is an art not a science so one should have a bit of healthy skepticism about the absolute accuracy of one's analysis.

That's my introductory tafsir.  There is also an IMF prepared guide to the defining what certain terms used in relation to the Directors mean.  This is useful in determining how many directors held a particular view.  For example, in this PIN, you will note that it says that "most directors" agreed that the US$ peg made sense.  That means 15 or more.  Here's a list of the 24 current Executive Directors.

So what were the recommendations and what might we infer (note that word: infer not know for certain)?

1. Commended on actions taken in face of global crisis but noted that DW restructuring poses significant challenges to the economy.  Not just a statement of fact but setting the stage for further comments.  And note this is the first topic addressed and you will see it as a sub theme or motivator for most of the recommendations. 
2. Directors agree on the fundamental strengths of UAE economy but it will be important to have balanced and sustainable growth.  Translation:  No more indoor sky mountains and other uneconomic fripperies.  No artificial real estate booms.
3. Re the DW restructuring they want a speedy, orderly, cooperative, and predictable approach to debt restructuring.  The implication here is that they don't see this taking place at present.
4. They underscored that the process should seek to enhance transparency and information disclosure and ensure comparability of treatment among creditors.  Concern about some creditors being favored over others.  Perhaps the Nakheel Bond? Perhaps a worry about side deals for UAE banks?  And as we have heard before "transparency".  So some of this is forward looking - not an admonition regarding sins of the past but an encouragement not to sin in the future.
5. Emphasized need to restructure GREs.  The language here is strong.  "Emphasized" "vigorous".  Basically the message is to kill non economic GREs. And again probably pretty clear which Emirate's GREs are of primary concern.
6. Then a push for updated provisioning etc with banks. And I'm reading a strong concern about shortcomings in regulation of systemically important banks.  In other words how the heck did some of the large banks get such large exposures to DW?  As well as rather poor regulations.  The CBB UAE has already taken steps to address some of these issues and new regulations are expected in the very near future.
7. The comment on greater co-ordination rationalization of investment decisions at the Federal level.  It's doesn't take a crystal ball to figure out that they are commenting primarily on one Emirate's "investment" decisions.
8. Directors stressed the need for increased transparency of economic and financial data, including financial accounts and business strategies for GREs. Together with improved corporate governance, Directors concluded that these steps would contribute to facilitating access of viable GREs to capital markets.  The clear implication is that they feel that GREs are not up to standard on these issues.  The recent article in The National about the mess in Dubai World's entities is precisely the sort of thing they were referring to.  Also note the choice of the adjective "viable".  That implies to me that the Executive Directors think there are some non viable GREs.
9. And finally a recommendation for improvement in national accounts.  Pretty much a standard mantra for the IMF.  And as has been demonstrated recently, even in Europe there is some fudging of national statistics.

Some "Islamic" Lenders Didn't Follow the Shari'ah

A  theme you may have heard earlier here is in today's The National (Abu Dhabi).

For those of you don't know, Mohammed Daud Bakar is Malaysian.  A very sharp fellow.  He spoke at a conference I attended once.  And gave a succinct insightful analysis of Islamic banking as well as the differences of opinion between the "Malaysian" and "Gulf" interpretations of which transactions are permitted.

The point of this is not that there is something wrong with Islamic banking.  But rather that bankers can  cut corners while claiming they are following the Shari'ah just like conventional bankers can do the same with whatever code of ethics they claim to be following.  The pursuit of the buck (a form of shirk) affects many.

Limitless US$1.2 Billion Debt - Limitless Maturity?

Reuters reports that Limitless' US$1.2 billion "Islamic Loan" due next month is likely to be rolled over.  It's noted that lenders have been rolling over significant amounts of Dubai World and Nakheel debt - billions it seems.

The major additional bits of news from this article:

1. Limitless' lenders want to negotiate the repayment of their loan separate from the DW rescheduling.
2. They are currently valuing Limitless' holdings.
3. The loan is from 2008.  It was led Emirates Bank (now part of Emirates NBD),  Emirates Islamic Bank, Arab National Bank, and National Bank of Abu Dhabi.  The syndicate also includes Royal Bank of Scotland, Hypo Real Estate (Germany) well as banks in Malaysia, Pakistan and Taiwan.
4. I see the lenders have decided they'll try an amortizing loan this time.  A very wise move.  In fact an extremely wise move.   One that helps limit one's exposure and keep it from becoming limitless.

Central Bank of UAE Limits Bank Dividends for 2009

AlKhaleej Newspaper (Dubai) reports that the CB UAE has written to banks advising them not to pay cash dividends more than 50% of 2009 profit and not to issue bonus shares more than 60% of 2009 profit.  You may have seen the article in The National (Abu Dhabi) which makes this sound like a "request".  The language here is of an "order" or "decision" -   قرار

Some experts are said to favor this move as it forces banks to strengthen their financial positions.  And some baniks as well no doubt relieved that a CBB order gives them cover from angry shareholders about a lower payout ratio.  On the other hands other banks objected asserting that the Board of Directors and shareholders were the ones best qualified to determine how much of current year profit needed to be retained.

7 banks are named as having received orders to lower their payout ratios: Dubai Islamic, Sharjah Islamic, Abu Dhabi Islamic, Investbank, United Arab Bank, Bank of Sharjah, and National Bank of Umm AlQuwayn.

The article states that the majority of the boards of national banks have proposed partial distributions of profit contrary to expectations of greater conservatism in dividend distribtuions in order to strengthen banks' financial positions in order to meet fundamental challenges in the coming stage.

That I think is understandable.  I was once told by an "old grey beard" from the GCC that there were two things GCC investors loved:  real estate and dividends.  No cash dividends would be a difficult pill to swallow.

The only question I'm left with is - why the restriction on dividends in the form of additional stock? As part of the process of granting stock dividends, the bank would capitalize the dividend amount in paid in capital removing it from retained earnings.  Once this is done that amount (like the rest of paid in capital) is not available for ordinary dividends.  In fact, it is not to be distributed to the shareholders -usually - until the dissolution of the company.  One would think the CBB would encourage stock dividends as a way of preventing cash dividends this year.    Anyone out there have any ideas?

Gulf Finance House - Board Meets with CBB Governor

Update 18 February:  Here's link to GFH Press Release which is source for the news articles.

The Gulf Daily News reports that the Board of GFH and some of its senior officers met with HE Rashid AlMaraj, Governor of the Central Bank of Bahrain and other senior officials of the CBB.

There are several possible interpretations as to the reason for this meeting.

My take is that the CBB is concerned about GFH and wants to make sure that GFH is fully engaged and has a proper strategy to extricate itself from its current constrained position.  Boards aren't generally invited to tea at the CBB.  And certainly not if everything is going swimmingly.

I think it's also telling that one of the indirect quotes attributed to Mr. AlMaraj related to the "importance of of updating the central bank with the latest developments at GFH".   One presumes this comment was made because of a perceived shortcoming in this area.  Otherwise, there would be no reason to mention it.  And of course those of you who read this blog will know that I've expressed a concern about this area more than once in the past.

The word "debated" is used in relation to discussions on GFH's strategy.  This could either be significant - in that the CBB raised some serious questions about the strategy.  Or just a poor choice of words by the journalist or even perhaps a less than artful translation of an Arabic word (if the story is from the GDN's Arabic "parent" paper).  On that score I'd note that the article on the meeting in AlBilad Newspaper does not use the term "debated".  The thrust of that article was a presentation by GFH of various elements of its strategy.  The term "debate" was not used.

Clearly, one would expect that during the presentation the CBB would ask questions and on certain points probably challenge the bank - at least to see how well thought out its plans were.  And perhaps to point out areas it thought were weak areas.  Since we don't have a transcript of the meeting, we don't really know the nature of these discussions.

Hopefully, GFH will find an exit and a path to a profitable future.

1-2

 
Hard to swallow indeed.  But swallow we must.

On to Saturday.

Dubai Rescheduling: "The Murky Gulf"

 

Speakers' Corner Hyde Park

Copyright Heniz-Josef Lucking

Creative Commons Attribution-Share Alike 2.5 Generic license. 

I almost burned my hand earlier today when I picked up my copy of the FT. Luckily I was still wearing my mittens. It's cold here.

It's been more than a few hours since that encounter.  So now the FT is safe to handle.

It didn't take me long to find the source of the heat - there are scorch marks on the editorial page.  

The Murky Gulf indeed.

Of late lots of people have been mightily exercised about transparency.  A Lord, A Deputy, the IMF (a topic for a separate post) and now the FT adds its voice to the chorus.

Certainly, there could be more transparency in Dubai as some might even wish for in the management of the finances of certain members of the EU.  And perhaps even on the other side of the "pond".  Kalaam sharif is not only a good idea from a business perspective but an ideal shared across many borders as this phrase suggests.  It's the right thing to do.  Despite what follows in this article, make no mistake AA is partisan of transparency.

But I think all this hub bub over transparency is a bit misplaced.   

Many of the current critics of Dubai would be silent on the issue of transparency if the Shaykh up the road wrote a check and paid off the foreign bankers.  I don't recall any jeremiads when Shaykh Khalifah put his pen to cheque book for Nakheel.  No demands for transparency on that transaction.  Demands, if any, were more likely that he keep his cheque book out.  

The fundamental issue, I believe, is that the handwriting has appeared on the wall.   And it seems to say:   "Mene, Mene, Tekel Parsin".  Which as any good banker knows means "Long tenor.  Probable loss.  Haircut rather short". 

And so the Lord and the Newspaper no doubt have many good reasons, perhaps as many as 5 billion, to raise the banner of transparency.

It's also a bit of a stretch to bring this topic up now.  Did anyone - even those naive financiers who believed and perhaps still do in the "Implicit Guarantee" - think that Dubai was a paragon of disclosure when they entered the market?  A modern financial Athens on the Creek?  Do they also believe that the PRC is one?

Did they miss L'Affaire Philip Thorpe in 2004?  Were they asleep when the Head of Dubai Customs was jailed much earlier for some rather serious wrongdoing and then miraculously pardoned?  Was this the first foreign country they ever did business in? 

The most economical and profitable due diligence is done before one makes a loan or investment.   Think of it as one's annual physical.  Later due diligence often turns out to akin to an autopsy - interesting but not particularly useful to the subject.

The Sky is Falling: Doomsday Regulation Scenario

The FT has an ominous article today quoting research done by JPMorgan Chase (a completely disinterested party, by the way) on what will happen to banks if all the regulations currently being considered are imposed on banks.

It's actually quite scary.  The projected average return on equity would drop to 5.4% from a projected 13.3%.  This could cause untold pain on shareholders and management.  And no doubt could have a very bad effect on the functioning of the economy because banks wouldn't engage in the sort of behavior that has given us our recent prosperity.

Or on the other hand banks could simply raise their prices - 33% we are warned - and the poor consumer would be hurt.  And you will notice that is really the focus of JPM's study.  They are warning against over regulation not for their own selfish purposes but to protect the innocent consumer.  I'd like to stop here for an observation.  You know if more of us would show just a bit of the concern for our fellow men that JPM displays in this research report the world would be a much much nicer place.

There's only one rub with this dire scenario:  the bit about "if all the regulations ... are implemented".

If a bright person at Motors Liquidation Corporation discovers a way to make a highly energy efficient  battery to power an electric car, MLC's stock will increase at least 20x.

Of course,  the probability of either of these happening is not high.  

The purpose of studies like these is to oppose attempts to impose greater regulations on banks by painting "doomsday" scenarios in a future that will never come to pass.  In the final analysis I suspect the  financial "reform" in the USA though perhaps at least or even more "radical" than the current health care bill in the Congress will prove to be "small beer".  Though one cannot discount that "death panels" for bankers may be just around the corner.

As usual, Suq Al Mal was way ahead of the market in identifying this manifest danger  See  SAM's earlier post - "Mr. Obama's War".  Though I'd note this post may not be suitable for the faint of heart.  It is rather graphic.

Analyst Disclosure:  The author of this blog holds a significant block of shares in a single "money center" US bank holding corporation. Suq Al Mal, however, does not trade in the shares of any company mentioned in this report  or any banking corporation or provide any investment banking or other advisory services to them. 

Duba Metro Payment Deal Apparently Reached

The FT reports that a payment deal has been reached and that work has resumed in earnest on the Metro.

Apparently, a multi-year repayment plan with some sort of a haircut on the amount claimed.  Earlier reports put the amounts due at around US$3 billion or so.

Gulf Finance House - Pretty Interview on Asset Sales

Reuters has an interview with Ted Pretty.  

Here are my comments.

1. Sorry to keep singing the same old tune, but I think the matters discussed in this interview are such that there should be a formal announcement on the BSE.  Not all of GFH's shareholders have access to Reuters.  Articles 42.1 and 42.5 of the CBB's Disclosure Rules seem the relevant chapter and verse.  After all I do remember reading somewhere earlier today about the need for transparency. This doesn't mean of course that management shouldn't give interviews, but that significant matters be disclosed promptly at the BSE - in my opinion.  The Reuters interview is from Tuesday.  Ample time to prepare a release for today.
2. With respect to the US$100 million facility (of which US$50 million matures 3 March), earlier I had understood from a press release that LMC had been engaged as an advisor.  It seems they are the arranger of the facility as well.  That doesn't appear to have been mentioned before.  
3. US$420 million of assets have been identified for sale (excluding the Bahrain Financial Harbor) with US$250 million to be sold.  US$250 million of asset sales are targeted for 1Q10.
4. Salim Rahimi, the long serving head of Real Estate, has left GFH.  A total of 35 staff members have been released.
5. The venture in Syria is still pending Central Bank of Syria approval and GFH is still in talks with investors about the bank.  You'll recall that this was mentioned earlier as a source of cash via an IPO within the next six months.  It's unclear to me if six months is a realistic time frame.

Two Emirati Women Scale Mt. Kilimanjaro

 

Copyright Paul Shaffner, Iringa, Tanzania

Creative Commons License 

Congratulations to Dr Nawal Khalifa Al Hosani and Ms. Ruba Yousif Al Hassan.

Press release here.

Zain Press Release on Bharti Offer to Purchase African Assets

Here are the main points from the press release (Arabic only - which is below). Comments in  italics in parentheses are my interpretations.  To be clear: these are not in the press release.

1. Zain has entered into exclusive negotiations with Bharti over the potential sale of some of its African assets and granted Bharti exclusive rights to conduct due diligence until 25 March 2010.
2. If I've translated properly, Sudan and Morocco are excluded from the potential purchase.
3. The potential sales price is US10.7 billion with US$10 billion due on contract and the remainder one year later based on certain conditions (probably earnings targets).
4. There is a penalty (breakup fee) on both parties of US$150 million if the deal is not completed (with an out no doubt for Bharti related to reasonable due diligence satisfaction).
5. The sale will have an effect of US$9 billion (not clear why the lower number - minority shareholders?) and after settling obligations the profit impact at a maximum will be US$5 billion which is expected to be realized in 2Q10.  
6. It's up to the Board and an ordinary general meeting of shareholders to decide whether to distribute the profit or not.  (AA can think of at least two major shareholding groups that will be voting happily to distribute).
7. Bharti's offer is subject to satisfactory due diligence and obtaining governmental, regulatory and/or similar approvals.
   

[7:54:47]  ِ.ايضاح من(زين) بخصوص عرض بيع زين افريقيا ‏
يعلن سوق الكويت للاوراق المالية انه استلم كتابا من شركة الاتصالات ‏
المتنقلة (زين) بشان عرض بيع زين افريقيا هذا نصه (بخصوص الموضوع ‏
اعلاه نود افادتكم بان مجلس ادارة شركة الاتصالات المتنقلة (زين) قد ‏
وافق على منح المفاوضات الحصرية بخصوص بيع زين افريقيا غير ‏
شامل كل من السودان والمغرب وحق القيام بالفحص النافي للجهالة حتى ‏
تاريخ 25-03-2010 وذلك بناءا على العرض المقدم من قبل شركة بهارتي ‏
ارتل لمتد .‏
ويتضمن عرض شركة بهارتي قيمة لشركة زين افريقيا بما يقدر ب10,7 ‏
مليار دولار امريكي على ان يتم دفع مبلغ 10 مليار دولار امريكي عند ‏
اتمام الصفقة ومن ثم مبلغ 700 مليون دولار امريكي تدفع بعد سنة من ‏
اتمام الصفقة مع وجود شرط جزائي على الطرفين قدره 150 مليون ‏
دولار فى حال عدم اتمام الصفقة .وينتج عن ذلك حقوق للمساهمين بحدود ‏
ِ9 مليار دولار امريكي .‏وبعد سداد التزامات محددة فان الشركة تتوقع ان تبلغ ‏
العوائد بحد اقصى 5 مليار دولار امريكي ، علما بان هذه العوائد فى ‏
حال تحقيقها من المتوقع ان تدخل فى حسابات الارباح والخسائر للشركة ‏
فى الربع الثاني من هذا العام ، اما قرار توزيعها من عدمه فهو قرار يخضع ‏
لمجلس ادارة الشركة والجمعية العمومية . هذا ويخضع عرض الشركة ‏
حاليا للفحص النافي للجهالة وسيتم بعدها اخذ الموافقات الرسمية (حكومية ‏
او هيئات رقابية او ما شابه ذلك) والتوقيع النهائي على مستندات الصفقة ،
ومن ثم عرضها على مجلس ادارة الشركة لاخذ الموافقة النهائية على اتمام ‏
الصفقة .) ‏
هذا وسوف تقوم الشركة بموافاة ادارة السوق باى جديد بهذا الخصوص .‏

Saudi Zain - Capital Increase RIghts Offering Also Being Considered

Saudi Zain issued an announcement on the Tadawul today advising that it is considering a Rights Offering as a way of increasing capital.  It seems from this that AlRajhi Bank, Calyon, and Samba have also been engaged for this role as well.

No mention is made of conversion of debt to equity.  That being said, the first step in a debt conversion would be a rights offering to allow shareholders the right as they have a legally mandated right to any new shares.  I'm guessing that the shareholders will be asked to approve the rights offering and a mechanism to accommodate the debt conversion.

Shuaa Capital 2009 Audited Annual Report

Shuaa released its 2009 audited annual report on the DFM today.

You can read the details about performance (they had a net loss of AED538 million versus a net loss of AED965 million in 2008), two things are worthy of comment:

1. The Board of Directors report is pretty straightforward.  Unpleasant news is not avoided, buried or sugar coated.  Admittedly, there's a bit of puffery in the press release but nothing too egregious.  One does not expect self flaggelation.
2. The annual report is very good in terms of disclosure.  My only quibble (and AA always must have a quibble) is Note 10.  I would have liked to see details of the values for each individual investment.

Also if you're interested in hearing the company speak for itself, here is a link to their press conference on their preliminary results. Their CEO, Sameer AlAnsari, about SC's expectation for the market and its business and its strategy.  And what more comforting that to hear what sounds like a good Scots burr talking about financials.

GFH Press Release on Janahi Resignation from Khaleej Commercial Bank

Today GFH issued a press release on the reasons for Mr. Janahi's resignation as well as advising that Mr. Ted Pretty, Acting CEO, had been appointed to replace him on the Board.

In commenting on the reasons for his resignation, Mr. Janahi is quoted as saying.

“Considering the current difficult circumstances, there needs to be an even greater effort from everyone to manage and overcome the crisis affecting the regional and international markets. It demands transparency and dedication to lead Gulf Finance House’s activities in coordination with the executive management. I want to continue concentrating my efforts on supporting GFH, and position it for success as we seek to return to profitability. We enjoy fantastic support from the Board and its shareholders and God willing,  target returning to profitability in the first quarter.”

Indeed, especially the transparency part.  Being honest with the market, in other words كلام شريف  is highly important.  GFH was downgraded from BBB- on 26 November 2009.  It's current rating is SD.  It's website still has to reflect the first downgrade.  Of course, that first downgrade only occurred 83 days ago so let's not be too harsh.

Dubai World Changes "Tack" on Debt - May Forego Standstill?

 

 

Today's The National (Abu Dhabi) has an interesting article under this title.

Here are the main highlights (but please read the article in full as a prelude to your own evaluation of my comments):

1. DW is hopeful it can craft a deal with creditors without necessarily formalizing a standstill.
2. It hopes to accomplish this before an April 30 deadline. 
3. The Group's many subsidiaries, its intricate network of joint ventures and other investment links complicate the efforts to value its assets.
4. Until value can be established no restructuring plan is likely to be crafted or accepted by lenders.
5. DW and the Creditors' Committee are in weekly meetings - in person or via phone.  
6. "That kind of co-operation appears to be behind Dubai World's hopes that it can win a restructuring deal without getting a standstill agreement first".
7. Efforts to obtain a standstill have "run into headwinds" over bankers' objections to the DFSF's insistence that its loans have priority over existing creditors.
8. DW has a trump card with the DIFC.  It can go to the Court and get up to 10 months' grace to negotiate with lenders.

Let's step through these observations one at a time.

1. There is no reason that a standstill is required to craft a restructuring agreement or finalize one.  The purpose of a standstill is to keep a creditor from lodging a lawsuit and complicating matters.  Even if a lawsuit is filed, as happened with The Investment Dar in Kuwait and in fact happened more than once, a deal can be pushed through.
2. DW hopes to (a) craft a restructuring deal and (b) secure bank acceptance by 30 April 2010.   That is 73 days from now.  I think that would be quite ambitious even if there wasn't the apparent problem there is in sorting out DW's assets (Point #3).  That wrinkle is going to add to the time.  Once the accountants prepare their report on asset values and holdings, a series of asset cash flows are going to have to be prepared.  This will also include some asset sales.  On that issue the borrower is going to want to delay these in the hopes that values will recover. Lenders are going to have an oppositie view:  give me the cash now.  So even if there were no issue over asset values and ownership, 73 days would be extremely ambitious - especially given that DW's creditors are such a diverse group of creditors with so many different types of instruments.  Also I'd note that the 30 April deadline is an artificial one.  It could as easily have been 15 April or 31 May or 22 November.  Deadlines are useful tools to get peoples' minds focused, but if need be, they can be changed.  If an extra two weeks or two months were required, no rational person would destroy the company.
3. I think I've misunderstood the point about the difficulty of valuing DW's assets.  Presumably, all the DW Group companies have financials prepared according to IFRS or some other globally recognized accounting standard.  And all have been audited by major international firms.  One can't imagine that major international lenders - even the credulous sort who believe in the Implicit Guarantee - would plunk down US$22 billion before first obtaining satisfactory financial reports.  Accounting principles require that a firm's financials reflect only the assets it owns or controls and set standards for valuation.  So is the problem that the financials were improperly prepared? Is that the meaning of the phrase "sorting out the mess"? As part of an audit, the accounting firm should confirm a representative sample of both assets and liabilities.  Generally, major assets would be chosen for this.  So, for example, the auditor would take on faith that office equipment belonged to the company.  But  it would check to make sure that legal ownership and title of major holdings of shares, of bonds etc were confirmed by a third party.  Not necessarily each and every one, but enough to form a reasonable basis for concluding they belonged to the company.  The next step would be to  review the basis of valuation.  IAS #39 has some fairly strict requirements for assets carried at fair value - mandating which ones have to be carried at fair value and outlining acceptable methods for valuation.  That of course does not mean that the values are correct nor that the auditor certifies the values.  Nakheel's auditor, a major international firm, gave the company a clean audit opinion on its  2008 fiscal year financials.  As late as 26 November 2009, when it reviewed but did not audit Nakheel's 30 June 2009 financials, that same international firm did not express any concern over valuation or ownership of assets.  Rather its only adverse comment was about funding difficulties.  Is the problem that the auditors did not carry out their engagements properly?  And thus are part of the "mess"? Both of these are rather serious charges.  Or is the problem that asset values are uncertain? Welcome to the real world.  Once one leaves cash and near cash equivalents, values are uncertain and fluctuate.  One can get an appraisal/valuation of assets but  that comes with all the uncertainties that asset valuation entails.   
4. An eminently sensible position: don't agree a standstill until you understand the financial condition of the borrower and its projected ability to repay.  If the same due diligence were exercised at the inception of a loan, banks would be exposed to fewer reschedulings - especially if this were accompanied by thinking hard about the purpose of the loans and whether they make economic sense.
5. The fact that DW and its creditors are in frequent dialogue is a sign that talks haven't broken down.  That is good.  But what are the two sides talking about?  If the press accounts are correct, they're not talking about any concrete proposals for a rescheduling.  And apparently not about a standstill.  It's very easy to have friendly discussions when you're really not talking about anything difficult.
6. So that seems to belie impressions of "great co-operation".   Perhaps, the lack of sharp disagreement and the appearance of great co-operation are related to that fact  that there is nothing contentious on the table.  So I don't understand how DW can reasonably draw the conclusion that they will be able to conclude a rescheduling termsheet by the end of April. 
7. Bankers are objecting to signing a standstill because DFSF is requiring its loans have priority over theirs.  Perfectly understandable.  If I were a creditor, I would.  The central issue  is the status of DFSF's loans. Not whether there is a standstill or not.  As I understand it, DFSF have and are making loans to fund DW's interest payments and operating expenses.  If so, presumably they are requiring priority.  So not asking for a standstill doesn't solve the fundamental problem.  From the banks' perspective the problem is solved if DFSF's loans are not senior to their own.   No doubt the banks would like them to be junior on the theory that DFSF is in effect "the shareholder" and its loans are protecting its equity. So unless either of these has occurred the problem has not been solved.  It is merely being ignored.  And will raise its ugly head when the rescheduling proposal is presented. Sorting this out will delay reaching a deal quickly.  Does this mean that the banks won't finally accept DFSF's priority?  No.  But one expects that if they cave, it won't be at the first request.  Or the second.  
8. I'm not sure the DIFC is a trump card.  Or frankly for that matter that DW need one.  The Investment Dar spent over a year negotiating with its banks without recourse to the DIFC Court.  Global Investment House roughly 12 months from default to signing.  So I'd discount this statement pretty heavily.  It's hard to see - as Lord Peter apparently does - "time running out".  What precisely do the banks do if the negotiations drag on? Have the BBA write a letter?  Ask Deputy Neal to scold Shaykh Mohammed? Hold their breath till they turn blue?  Go to the DIFC and ask to have the companies liquidated?  A court ordered liquidation would probably destroy significant value.  The fact that Lord Peter and Deputy Neal are "applying pressure" shows that the banks can't.

Saudi Zain Financial and Business Plan for 2010 - Conversion of US$577 Million Debt to Equity

Saad AlBarrak gave an interview in Riyadh today.  I haven't found anything in the Saudi Press.  The best account so far is from Zawaya Dow Jones.  Unlike other reports like this one from Reuters, ZDJ has much more detail.

Here are the highlights from the article:

1. Saudi Zain wants to convert US$577 million of its outstanding debt to equity with the goal of finishing the process before the end of 2010.  Calyon, Samba and AlRajhi Bank have been engaged as advisors.
2. The ultimate goal is leverage of 50:50.  A structure he described as "the best financial structure". No further loans are being sought at present. 
3. Conservative projections are for an 80% increase in revenues and 1.5 million new subscribers taking SZ to 7.5 million at FYE 2010. 2010 EBITDA is expected to be positive. 
4. Mentioning his resignation from Zain (Kuwait), he noted that he will remain as CE of SZ as he is personally committed to the firm.
5. The US$6 billion license fee paid by SZ is small in consideration of the opportunities in the Kingdom and when scaled for market size a bargain compared to other regional license fees.
6. SZ will abide by the Saudi Telecoms Authority's prohibition on providing free connections on incoming calls to SZ's customers when they have switched to international roaming.  However, SZ intends to pursue all legal channels to overturn this prohibition.

And now for the usual comments.

As a reference points, a link to SZ's 31 December 2009 financials.  Here's the updated financial link. You will notice that some of the numbers below do not match those in the financials and that's because I was working with an earlier preliminary set which as you'll notice from the first link no longer are posted.

First, Uncharacteristically for a self-proclaimed "cashflow guy", let's start with the Balance Sheet.

1. Over 79% of assets are represented by Intangibles, almost all of which represents the US$ 6 billion (SAR 22.5 billion) license fee.  This is being amortised over the license term.  25 Hijri years (roughly 24.3 Gregorian years).  The license fee is a flat fee, which imposes the same burden whether or not the company is successful.  I don't follow the telecoms market but I do recall that at one point, some countries' license fees were scaled by number of customers the firm got.  The more customers the higher the fee.  The point here is that SZ starts off with a very high fixed cost base.  And note the components of operating leverage - the license fee is 85% of non-current assets. If you're wondering, the Saudi Government has already collected the fee from SZ.
2. Notes Payable reflect "supplier credits" from Nokia/Siemens for SAR1.6 billion (US$427 million) and Motorola SAR0.6 billion (US$160 million) due within 12 months from 31 December 2009.
3. Syndicated Murabaha Loan of SAR9.4 billion. SAR7.1 billion in Saudi Riyals and US$710 million in USDollars (SAR2.66 billion).   Arranged by Banque Saudi AlFransi ("BSF").  4.25% over the respective benchmark rate. Bullet (single payment) maturity on 12 August 2012)  This loan refinances a SAR9.1 billion loan which matured 27 July 2009 also be BSF.  One might look at the increase in the loan as providing financing for roughly 50% of the interest due during 2009.  SZ has about 2.5 years before maturity to demonstrate significant progress in its business (particularly in getting additional subscribers) to roll over the loan.  I say that because I expect it won't have the cash flow to repay the loan by then.
4. From the accumulated losses account under shareholders' equity we can see that the company has yet to be profitable.  Some 38% of original capital has been lost.  One would expect a start-up to have a loss particularly in this business.  The amortization of the license fee is some 34% of the loss so the rest of the losses are from operations.

Next the income statement.

1. Let's look at AlBarrak's statement that 2010's EBITDA will be positive.  For our crude estimate, we'll use 4Q09 figures as these probably more accurately reflect the revenue efficiencies associated with reaching 6 million subscribers at FYE 2009.  The Gross Operating Profit Margin is roughly 39.5% (SAR355 million/SAR895 million).  Distribution/marketing and G&A expenses annualized are running SAR1.7 billion.  To break even revenues would have to be SAR4.3 billion.  Annualizing 4Q09 revenues of SAR895 million, we get SAR3.6 billion at a 6 million subscriber level.  Assuming that the additional 25% have a similar spend pattern we get SAR4.5 billion in revenues.    So this doesn't seem like an impossible task.  Of course, seasonality in revenues, increased price competition, etc could throw these calculations off.
2. When we look at AlBarrak's prediction for an 80% increase in revenues over the full year 2009 figure and using the same assumptions in the point immediately above, SZ would show EBITDA of some SAR 355 million.  A couple of additional comments.  Full year 2009 revenues were SAR 3 billion.  Using 4Q09 revenues, SZ has a SAR3.6 billion run rate so projected 2010 revenues are roughly 151% of the current run rate.  That may make the projected jump a bit more credible.
3. Net income profitability will take more.  First there is the SAR1.5 billion a year in license fee amortization.  Then the SAR 880 million in financing charges.  
4. Based on that, I'd guess that profitability is a few years off at the least.  
5. This explains of course the focus on the debt to equity swap to reduce the interest burden.  The proposed conversion of US$577 million to equity should bring the annual financing charge down roughly 18% or so (based on the assumption of a 6% cost of debt).  By itself this does not solve the company's income statement issues.  Getting more subscribers will.  This probably explains the issue regarding roaming charges.  SZ is competing on price in an effort to snare more subscribers. 

And finally the cashflow statement.

1. A key issue will be the need for and amount of  continuing capital expenditures.  Right now SZ is obtaining supplier credit, shareholder support and as well there is a buildup in payables and accrued liabilities.
2. The issue to watch here and on the balance sheet is whether SZ is riding the trade on these latter two categories and how long it can continue to do so.
3. Why?  Let's look at how SZ is financing its expenditures.
4. First, it has net cash from operations of SAR983 million. But this was dependent on increases in payables and accrued liabilities - some SAR2.8 billion.  If this amount comes due for cash payment or further increases are not possible, what other sources of financing does SZ have?
5. That suggests a look at cash generated from net financing activities.  A positive inflow of SAR817 million in 2009.   But, I'd expect that banks are unlikely to lend more, particularly since SZ is requesting a debt conversion.  Can shareholders continue to provide cash in the form of  additional loans?   Or new equity?  Now that Saad is not on the Board of Zain, will they be as eager to support a company in which they have only 25% equity?  Note that shareholders provided a cool SAR1 billion in 2009 between loans and new equity.   And Zain represents the lion's share of the Shareholder Loans - some 64% of the total and almost all of the increase in 2009.

The company's financial situation remains fragile - as one would expect of a start-up in a capital intensive business (I'm including the license as a capex).  The solution is growth in subscribers.

With 25 million or so people in the Kingdom and three other competitors - two of whom -- Saudi Telecom and Mobily have upwards of 80% of the market, SZ has its work cut out for it.  And there is a hungry newcomer on their tail --Bravo.

Hard for me to see how more than 2 companies can make a profitable "go" in the Kingdom - especially given the license fees.  Profitable in the sense of a good return on equity.  It's that license fee which is the "rub" on that topic.

Central Bank of UAE - New Regulations on Loan Classification and Provisioning Immiment

 

AlKhaleej Newspaper (Dubai) reports on an interview with Saif Hadaf AlShamsi, Chief Executive Director of the CB UAE's Treasury Department that the CBB has prepared the final draft of regulations on loan classification and provisioning and submitted these to the Board for approval.  Approval is anticipated very shortly.   The regulations will apply to banks, finance companies and investment firms.

The new regulations contain the following:

1. A loan will automatically become substandard when payment is delayed 90 days from due date.  The current standard is 180.  90 days is pretty much the global norm.
2. Mandate a general reserve of 1.25% of total assets (a provision for the unrated portion of banks' portfolios).  (I'm not sure of the exact translation here of "الجانب غير المصنف في محافظ".  I believe this means for risks not recognized in specific provisions.  If anyone has a better translation or explanation, please post a comment).
3. Require that all borrowers (individuals, public sector, and private sector) be classified into one of five categories: Performing (Normal) Loans, Watch (Under Review) Loans, Substandard Loans, Doubtful Loans, and Loss.  Covered firms will have to have detailed procedures for classification and monitoring of their loans.
4. Each of the five categories will also have its own "days overdue" rule as well as required (presumably minimum) provisions.
5. Implementation will be immediate upon Board approval and financial statements will have to be prepared accordingly.   He noted that last October the CBB advised banks and other covered firms to prepare.
6. Also during October, firms were advised to transfer any interest accrued but not collected to a special account "Suspended Interest".

Finally on another topic he noted that UAE banks had excess liquidity with the CB UAE.  And that not a single bank has taken any "emergency" liquidity funding.  You'll recall that after DW' November announcement of its intention to reschedule certain of its subsidiaries' debts, the CB UAE had said it would provide liquidity if required. 

The revised standards represents a big, if somewhat belated, step forward for the UAE.  My hope is that this information will released in the aggregate by the CBB  (system wide) and by individual banks about their own portfolios in their financials.

Esam Janahi Resigns from Khaleeji Commercial Bank Bahrain Board

Here's the announcement.  Resignation was effective 8 February 2009.  

Unclear why it took seven calendar days to report this to the BSE.  One (at least this one) is reminded of Article 42.5 of the CBB's Dislcosure Standards.  

It all I suppose turns on one's definition of "prompt". 

KHCB shareholding:

1. Gulf Finance House owns 36.99%
2. AlImtiaz Kuwait 14.01%
3. Dr. Esam Janahi 10%.
4. Emirates Islamic Bank 9%

Moodys Predicts "Fire Sale" of Dubai Inc Assets

Again as per Maktoob Business.

The problem with this thesis is that if it were to occur, Dubai would be likely to receive much less than what it paid for the assets.  Given the use of leverage, particularly at Istithmar, that could lead to insufficient proceeds to repay debt.

Some fire sales may be needed now to raise a bit of cash and to demonstrate to banks that they are serious.  But I don't think they're going to have to sell everything.

I'd expect that if a credible case can be made for a bit of patience on any asset disposal, banks would be willing to listen.  As long as the period is reasonable.  That is, a measured sale of certain assets targeted to occur after asset values have recovered.

Dubai Inc has a lot going for it in its negotiations.  The government link, the prospects for future transactions.  This is not some small borrower that the banks will want to extinguish to get their money back. 

Saudi Mortgage Law to Allow Foreclosures?

So says Reuters according to  Maktoob Business.

As well a prediction that initial lending forays will be for commercial space - which seems to make sense.

It may be socially a lot easier to foreclose on a shop than on someone's residence. 

The Investment Dar Financials Update - 2008 and First Three Quarters of 2009 To Central Bank by End of Month

AlQabas quotes sources that TID has acceded to the Central Bank of Kuwait's demands that it increase reserves and provisions in its year end 2008 financial statement.  The CBK has earlier (much earlier in fact) rejected the statements presented by TID.  AlQ's sources expects that the earliest the financials, including those for the first three quarters of 2009, will be submitted is at the end of February.  It will take some time for the CBK to complete its review before the financials are approved for release.  The period will depend on to what extent TID has met all of the CBK's requests.

Hopefully, the news is accurate.  And that TID will be able to publish its financials and move on with its rescheduling.

When the Ratings Get Tough, the Tough Change the Ratings Standards: S&P Announces A New Ratings System for the GCC

As we are informed by The National, Standard and Poor’s (S&P) yesterday launched a regional credit-ratings system through which companies in the Gulf will be judged against each other, instead of against their global peers.

Officials at S&P said the regional ratings will generally be higher than their ratings on a global scale.

Don't measure up to Global Standards?

No problem, try our new GCC "meter stick".  At just 500 mm long, you're suddenly twice as tall.

And with all great ideas, there are many applications.

1. Criticized by Lord Peter and Deputy Neal about your transparency?  Remind them that on a regional scale your transparency certainly beats that of some other countries in the area.
2. Your stock not doing so well since you announced that US$700+ million loss?  Inform your shareholders that you're beating the performance of Enron and Lehman Brothers shares.
3. Smart aleck boggers attacking your business model?  Remind AA that you're innovative business model has held up quite nicely when compared to those of The Investment Dar or The International Banking Corporation.
4. Distressed about a Turkish coffee stain?  Recall that your spouse's former roommate once washed the oil filter and pan from his car in the kitchen sink.