Dubai World Restructuring: Implications of Low Interest Rate

One of my regular readers (or at least I think so), The Real Nick, raised a question to an earlier post of mine on this topic. "Please Sir, get to the point - what's the bottomline? How much less is this "gracious offer" from a de facto defaulter than what the original yield would have been for the lenders?"

A good question. And one that might of interest to others out there among SAM's vast readership. Heck, if Gulf Finance House can claim to have a proven business strategy, then I for sure am on much sounder ground claiming a "vast" readership. I have as the saying in Karachi goes a veritable "war chest" of readers out there.

This post addresses TRN's question and throws in a few other observations.

First, to his question what is the bottom line? How big will the discount be? 

It will depend on two factors. 

1. The original interest rate on the original loan. 
2. The repayment pattern of the rescheduled obligation.  

As to the first, the original interest rate, its effect will depend first on whether the loan or bond was priced on a floating or a fixed basis. For those on a floating rate, the question will be the margin. For any of the technically inclined out there I am ignoring basis risk.

As to repayment pattern, the longer the average life of the rescheduled debt the higher the haircut. Or in other words, If larger payments occur later in the repayment schedule the average life will be longer than if there were equal payments.

ASSUMPTIONS

To do the math we need several inputs.

First interest rates. Not all DW obligations are at the same rate. Not all margins are public. And I'm not inclined to try and estimate an average rate on US$22 billion of debt. So I've arbitrarily picked two rates: (a) 2.0% as a "margin" over floating rate LIBOR and (b) 5.5% as a fixed rate (which is the rate on the Nakheel Sukuk #2). These should be representative enough to give some ideas.

On the repayment pattern, I've come up with three scenarios. To keep things simple I've assumed annual payments of interest and principal in arrears, that is, at the end of the year. It's likely that the banks will want semi-annual payments. At least of interest. 

1. Scenario A: 6 equal annual installments. 
2. Scenario B: Staggered Installments of 0%, 10%, 15%, 20%, 25% and 30%. 
3. Scenario C: Staggered 0%, 0%, 10%, 15%, 20%, and 55%.
   

One more variable required to calculate the cash flow received for interest: LIBOR. Let's assume 1.00% for our "Base" Case. One year LIBOR is around .87%.

For the floating rate instruments, the discount rate will be the margin plus LIBOR. That's 3%.

For the fixed rate instruments, the discount rate is an invariable 5.5%.

A lot of assumptions.  Many if not all of which will be different when the deal is struck.  But, at this point, all that's really required are directional results to get a sense for likely impacts. These working assumptions will also serve to illustrate how the variables work and interact.

Here are the results.

Base Case: 1% LIBOR, Floating Rate Discount 3% Fixed Rate Discount 5.5%

Original Rate	Scenario A	Scenario B	Scenario C
Floating 2.0%	6%	8%	9%
Fixed 5.5%	14%	17%	20%

 

Alternative Case: 2% LIBOR, Floating Rate Discount 4%, Fixed Rate Discount 5.5%

Original Rate	Scenario A	Scenario B	Scenario C
Floating 2.0%	6%	8%	9%
Fixed 5.5%	11%	13%	15%

 

COMMENTS

1. The worst case under the 100% repayment is a bullet at the end of year six. With a 1% LIBOR and the 5.5% and 3% discount rates, that translates into a 22% and an 11% discount. 
2. For all scenarios, as LIBOR approaches 5.5%, the haircut on the Fixed 5.5% instrument reduces dramatically. That's because the discount rate remains fixed. With the Floating Rate, each time the rate goes up we add the 2% margin to it to determine the discount rate. What this means is that to get to a 1% haircut on the floating rate obligations, LIBOR needs to be around 200%. 
3. On an economic basis, the discount rate on both the fixed and the floating should be the same given the same repayment schedule and assuming that recovery is the same, that is, both instruments have the same probability of default ("PD") and same loss given default ("LGD"). 
4. Through the magic of accounting, one instrument (the fixed) is favored over the other. Mathematically, one can construct other scenarios where this favoritism reverses, though the issue with alternatives is the likelihood of their occurrence. As well, in an environment of 200% LIBOR, collecting DW's debt is going to be a rather minor issue among much larger problems. 
5. What this analysis suggests is that the repayment schedule is likely to be a prime driver of the haircut. A schedule with principal repayments weighted to the back-end will result in larger impairments under IAS #39 and thus larger haircuts.
   

IMPAIRMENT TESTS - PLURAL

Under generally accepted accounting principles like IFRS impairment is not a one time event during the life of a financial instrument or asset. Whenever there are signs of potential impairment, the holder must re-evaluate the asset. If further impairment has occurred, an additional provision must be booked. For non equity investments IAS #39 allows the write-up of impaired assets. Thus, provisions no longer needed can be reversed through the income statement.

If indeed DW reschedules on a floating rate basis, then whenever LIBOR changes, the future estimated cash flows change. When the cash flows change, a new impairment test is required.  Since banks may  reverse provisions, if all that changes are interest rates increasing, then some writebacks may be possible.. Over the proposed six-year tenor, fixed rate instrument holders will have the potential for larger writebacks than those holding floating rate paper given the structural factors mentioned above including the current low level of interest rates.

ACCOUNTING HAIRCUTS & ECONOMIC LOSSES

As noted above there is a discrepancy between the IAS #39 mandated haircut for DW based solely on the nature of the pricing on the instrument. That is, based upon its original rate and whether that rate was floating or not.

In the real, non accounting world, economic loss is what matters. Economic loss is not dependent on the pricing convention on the instrument. It is dependent on the instrument's cash flows and risk adjusted discount rate. The latter a function of the holder's WACC adjusted for any additional risk posed by this instrument over its general WACC.

PRICING AND FUNDING

It's also important to understand that on loans or bond rates like LIBOR are pricing references. The holder is not required to obtain his financing at LIBOR or whatever the benchmark is. Nor is it required to match fund the loan or bond. If interest payments are based on six month LIBOR, the holder can fund with shorter date money (daily, weekly, monthly, quarterly) or longer dated money (nine months, twelve months). The funding or "gapping" pattern chosen would depend on the shape of the yield curve.

Nor does making a loan at LIBOR plus a margin guarantee the lender will be able to secure funding at LIBOR. If it has to pay over the benchmark, that is not the borrower or issuer's problem. It is the holder's Similarly, in the case where the holder can source funds for less, it gets to "keep" the difference.

If a bank has a very large base of US Dollar retail customers, its cost of funds may be below LIBOR. On the other hand, small banks and most GCC banks probably can't borrow at LIBOR – but have to pay a premium over that rate. 

What this means for DW lenders is that those whose cost of funds is above LIBOR the "accounting" haircut is going to be higher than those whose cost is lower.   Though it won't be visible as the funding cost difference will be part of the undifferentiated amount of interest expense.

You Said What?: The "War Chest" of Bad Debts

GulfNews Dubai reports on some radical thinking at the NBP, which is described as having the highest level of non performing loans in Pakistan.  Now you'd expect a bank like NBP to have a large absolute number of non performing loans ("NPLs") if for no other reason than its size relative to other banks in the country.  But according to this somewhat dated KPMG study NBP also leads the pack in terms of percentage of loans. 
 

When life gives you lemons, make lemonade is the applicable guidance.  I can think of no other good reason for this remarkable quote. Not that it's a particularly good reason.

"Our non-performing loans are a war chest for our investors," Chief Executive Officer Syed Ali Raza, 59, said in an interview at his Karachi head office.
"We always had a very passive approach to recoveries, of depending only on the courts; now we have a menu of solutions. Recoveries are our No. 1 priority."

AA always considered Non Performing Loans less a "war chest" than "war damage" so it's nice to get a different perspective.

A great way to enhance shareholder value is tighten up underwriting practices to avoid making bad loans in the first place.  Even with a 100% recovery of principal (and somehow I'm guessing that doesn't always occur in Pakistan) the time and effort spent on recovery is a dead drag on return.

Of course, banks can't control external factors - the overall path of the economy, terrorism, foreign competition -- but prudent underwriting can mitigate problems.  The KPMG study suggests some banks have done reasonably well on this front.  And when a bank has a reputation of not collecting its bad debts, it usually attracts the wrong sorts of borrowers.  

Golden Belt Sukuk 1 - Inching Closer to Dissolution Event

Citicorp as Delegate has posted another update on the Bahrain Stock Exchange.

1. 22.2% of Certificateholders have voted for Dissolution.  A vote of at least 25% is required.  Earlier this month the vote was 13.62%.
2. The Delegate notes that it is not sufficiently indemnified to its satisfaction.
3. Saad has responded that as long as its assets are frozen it will not be proposing any rescheduling agreement.
4. The matters referred to in the Delegate's 2 February 2010 communication, e.g., Saad's failure to provide a promissory note for the next rental payment and failure to pay BSE fees remain outstanding.

Three comments:

1. It's unclear why it is taking so long for the Certificateholders to vote for dissolution.   This is an important step to protect their rights.  If we believe recent press reports, a large number of lenders are preparing to launch legal actions against Saad.  One doesn't really want to sue after other lenders have obtained judgments and may be in the process of enforcing them.  It's usually first come first served.  
2. Note the comment about the Delegate's lack of indemnification.  If you look closely at the announcement, you'll see that dissolution involves two things:  reaching the 25% vote and indemnifying the Delegate.  The Delegate is looking among other things for a commitment to be paid.
3. It's unclear why Saad would at least not provide the new promissory notes.  As you'll recall from my analysis of the structure of this transaction, the notes are a device designed to try and avoid a messy discussion about the "rent' (or interest) payments in Saudi Courts.  As the Offering Circular for the transaction warned, the periodic Payable Rental Amount (the "Rent") did not bear any discernible relationship to the underlying economic value of the land and thus just might be challenged in Saudi Court.  The pro note is an attempt to get around this by having the Rent as simple debt.  It couldn't be that Saad is attempting to weaken its creditors' case in a Saudi Court. The BSE listing fee is a trivial amount.  It would seem to be well within the living expenses granted Mr. AlSanea by the Courts.

Most recent earlier post here.  Other posts can be accessed using the label "Golden Belt Sukuk 1".

Dubai World - More Speculation on Rescheduling - 6 Years at Libor Flat

AlQabas has an article quoting informed bankers (are there any better kind?) on the latest proposal said to be "on the table" from DW:

1. 100% of principal
2. Six Years
3. Libor flat
4. Deal to be announced next week (I believe we heard that last week too.  And maybe the week before. Or the week before that one.)

AlQ then goes on to point out that if banks accept Libor flat, they will have to recognize a loss based on the difference between the interest rate on their existing loans and Libor.  And that this loss will have to be recognized in this year's financials (that assumes they agree this year).  

That's something I've noted before.  Since AlQ is agreeing with me, I'll have to note their keen acumen and clear thinking. 

While IAS #39 forces this unhappy event on the banks, one benefit is those banks who carry their DW loans at cost (e.g., "originated loans") get to use their current contractual rates as the discount rate.  These rates, granted in happier times, do not reflect the current higher margins applicable to Dubai. Those investors who carry DW as "available for sale" have to use the current market rate for DW debt which will be higher and thus their impairments will also have to be higher. 

Are there many lenders carrying DW's debt as available for sale or mark-to-market? Generally commercial banks carry loans at cost.  Depending on the investor, it may have booked the bonds at cost.  Or available for sale.  Or trading assets.  The latter two will need to be discounted using current market rates.  Ouch!  Though rates should come in a bit after the restructuring is finalized.  There's a good bit of "uncertainty" in the current margin.

One thing not mentioned by AlQ nor here at SAM earlier.  As part of the test for impairment, the banks will have to assess the likelihood of DW fulfilling its promise to pay 100% of principal. and be reasonably certain of full recovery.  If this is  doubtful, then an impairment has to be taken as well for the unrecoverable amount of principal.  

Frankly, from where I sit I think a lender to Nakheel or Limitless would be hard pressed to make such an assessment - unless of course there was adequate additional support - collateral, a government guarantee., etc.   Imagined islands in the Gulf or vast tracks of  undeveloped waterfront property onshore might pose some challenges in collateral valuation.

Finally, a flat Libor will cause some "blood in the waters" for those banks who do not borrow at Libor.  This will be buried within their net interest margin (by virtue of a higher funding cost) and so not explicitly visible as related to DW.  Smaller banks and wholesale banks are likely to suffer the most.  Those banks with large retail franchises where they are largely (but not entirely) price setters for cost of  retail deposits will be slightly better off.  Price takers won't fare as well.

Al-Abraj Holding Company Kuwait - Latest Developments in Bank Boubyan Lawsuit

AlQabas has a short item on the lawsuit by Boubyan Bank against AHC under the headline "Banks Request Delay in Bankruptcy Proceedings Against AlAbraj".

Two days ago the High Court - Commercial Section - adjourned its session until 20 April to study the case raised by Boubyan against AlAbraj Holding.   Legal sources are quoted by AlQ as saying that the delay was in response to a request from the Company itself as well as from three local (Kuwaitit) banks.  In its original complaint, BB asked that the Court freeze AHC's accounts with other banks and declare the Company bankrupt.  The banks want time to study BB's legal complaint as well as their records regarding AHC's account with them.

For those reading this post, there are at least three companies which use Towers (AlAbraj or Abraj) in their names.  AHC is a Kuwaiti company.

Earlier posts can be accessed using the label "AlAbraj Kuwait"

Saudi Capital Markets Authority - Changes to Corporate Governance New Definition of "Independent Director"

Well, it really is the season for corporate governance (or at least official announcements  about it).  The Saudi CMA has issued an amendment to the definition of "independent director" today.  So far only the Arabic text is posted.

A few quick comparisons:

1. Both codes set forth certain points which make a director not independent.  Bahrain's test is within the past one year.  CMA's the past two years.
2. The definition of "associate" is spelled out in detail in terms of personal relationships in the Saudi code.  The Bahrain Code just uses the term "associate" which does not appear to be defined in the Code itself.
3. The Bahraini Code has a relatively low threshold of BD31,000 (US$82,150).  Payments over this amount mean an individual is not independent.
4. The CMA definition includes owners of a controlling interest in auditors or advisors.  The Bahrain Code does not explicitly state this, though it does use the term "indirectly".

BIS Issues Consultative Document on Corporate Governance

Apparently, it's the season for corporate governance.  The BIS has just released a consultative document on the topic.  Text here.

The Central Bank of Bahrain is pretty well known for its practice of incorporating international standards into its regulations.  It will be interesting to see how they deal with this development given the release yesterday of Bahrain's much labored over Corporate Governance Code (which applies to all joint stock companies in Bahrain not just those regulated by the CBB.

AlGosaibi v Maan AlSanea - Other Information

(This is the fourth of a series of posts which look at more detail at recent filings in New York Supreme Court Case #601650/2009 - Mashreqbank v AlGosaibi with Mr. AlSanea as a Third Party Defendant.  More detail here on this series).

Here's a list of some other items that might be of interest.

1. Exhibit 32 (NY Supreme Court Document #108):  A dual language copy of the "Law of Procedure Before Shari'ah Courts" which deals with procedures in Saudi Arabia.
2. Exhibit 33 (NYSC Doc #108-1):  AHAB's Counsel's Argument about Mashreqbank's alleged culpability in what is alleged to be Mr. AlSanea's fraud.  On page 9, it's stated that the Money Exchange's volume of remittances during the period January 2008 through April 2009 was approximately US$66.67 million while the volume of FX transactions between Mashreqbank and the ME was approximately US$4.97 billion.
3. Exhibit 34 (NYSC Doc #108-2: Review by Jamal Al-Muzein (Mr. AlSanea's Saudi lawyer) of the legal system in Saudi Arabia.  As noted in an earlier post, one of Mr. AlSanea's arguments for forum non conveniens in New York is the robust nature of the Saudi legal system. So factor that in as you read this paper.  Also be aware that the King currently has a project ongoing to "modernize" the Saudi Court system - which may give you an idea of his view on its state.

As you read these documents - and all others related to this case - bear in mind that at present there has been no judicial determination made or verdict issued.  Mr. AlSanea is vigorously denying any allegations of wrongdoing on his part. 

AlGosaib v Maan AlSanea: Special Saudi Committee& Legal Procedures in the Kingdom

(This is the third of a series of posts which look at more detail at recent filings in New York Supreme Court Case #601650/2009 - Mashreqbank v AlGosaibi with Mr. AlSanea as a Third Party Defendant.  More detail here on this series).

This is another of Appendices to the Supplemental Affirmation of Robert F. Serio, Esq., of Gibson, Dunn & Crutcher (NY Supreme Court Document 107) , who represent Mr. AlSanea in these proceedings.  He is arguing in his submission in support of the contention that New York is a forum non conveniens.

The Appendix is Serio Exhibit #29 (NY Supreme Court Document 107-6).  It is expert witness testimony by Ian David Edge, Esq., who is the founding and present Director of the Centre of Islamic and Middle East Law in the Law Department at SOAS at the University of London.  He was hired as an expert witness by counsel for Mr. AlSanea. He also provided a similar brief regarding Saudi and Kuwaiti law in support of Mr. AlSanea's similar forum non conveniens argument in Ahli Kuwait's suit against Mr. AlSanea in the Supreme Court of New York.

Before we proceed any further, the usual caveat about looking at the sources of information and realizing that they are not completely disinterested parties.  They are working to promote the interests of their clients.  So as usual have your saltshaker in hand as you read.  Bear in mind that the goal of Mr. AlSanea and his attorneys would be to convince the London Court that the Saudi Committee and other legal procedures were robust and capable of dealing with this case in a professional manner resulting in the administration of true justice.  From what I've seen AHAB and its counsel are arguing that the Committee has limited powers and is not adjudicative (i.e., does not have the power to issue a legally binding judicial verdict).

It is probably a fair statement that counsel for Mr. AlSanea are presenting this testimony because it advances their contention that the trial should be held in Saudi Arabia.  One would be hard pressed to imagine them calling a witness to support AHAB's interests.  And the same can be said for AHAB.  They are likely to call witnesses who support their arguments.  Ever wonder how attorneys find witnesses who just happen to hold views congenial to their clients from among all the witnesses out there?  "An unexplained mystery of the law" as one of my buddies who took the "legal holy orders" and labored for an appeals court once told me.

I've read through Mr. Edge's comments and extracted some points about the Committee and what it has done to date: 

1. In late May 2009 in response to a personal complaint from Yousef AlGosaibi (Chairman of AHAB) the King of Saudi Arabia issued a "High Order" ("amr saami") establishing the Committee.  Its goal is to study and the matter and recommend to the King how this dispute should be resolved.
2. The Committee is composed of 12 members appointed by the King, including three judges from the Ministry of Justice, representatives from SAMA, the Saudi Capital Markets Authority, the Ministry of Interior and the Ministry of Commerce.  The Committee is chaired by the equivalent of the Saudi Attorney General.
3. On 28 May 2009, the King issued another "amr saami" freezing various of Mr. AlSanea's assets and those of his wife and his children as well as of Saad Trading Contracting and Financial Services Company.  
4. Around 8 June 2009, a High Order was issued to freeze all assets held in the name of AHAB and its partners in Saudi Arabia.
5. On 1 September 2009, upon further hearings from the Committee and requests from some of AHAB's Saudi Arabian creditors to SAMA, the King imposed further restrictions on AHAB by extending the SAMA freezing order to include assets held in the names of spouses and children of prominent AHAB partners.  
6. On 4 October 2009 AHAB's lawyer sent a petition to the Committee asking them to order that Mr. AlSanea return some 58.4 million shares of SAMBA Finance Group and previous dividends amounting to SAR 975 million. The Committee rejected this request.  AHAB is reportedly appealing in one of the Kingdom's courts.

While I'm not an expert witness in Saudi law, my opinion (which I like to think is reasonably informed) is that there will be strong inclination on the Committee to look for a way to achieve a compromise between the two parties.  This is the general approach in this part of the world as opposed to the West where I think we can safely characterize the judicial system as more adversarial.  It's not uncommon in the region for an individual to be found guilty of murder and then released when the relatives of the victim forgive him.  There's a lot more "gray" in this judicial system than in the more "black and white" world in the West.

And I'll close with my usual caveat which is that as far as I know as of today no Court has ruled in this case or issued any judicial finding.  Mr. AlSanea is vigorously denying any wrongdoing on his part. 

Kuwaiti Banks Prepare to Sue Saad and AlGosaibi

AlQabas reports today that KFH, Commercial Bank of Kuwait, Gulf Bank, and Burgan Bank today launched the first steps towards suing the two groups after becoming convinced that negotiations had reached a dead end.  From the article, it sounds like negotiations never took place.  Quoting unnamed banking sources, AlQ says that the complaints were lack of response to repeated contacts (no answers) or agreeing to meetings but not showing.  Kind of hard to conduct negotiations under those conditions.

The four banks are owed some US$1.5 billion.  Legal advisors have apparently been selected.  Formal launch of legal proceedings is not expected for at least one month while loan files are put together (I'm assuming this refers to work at the lawyers since presumably the banks had their files together for their negotiations) and a decision is made as to where to file the suit.  Complicating factors are the diversity of governing laws for the debts (English, Kuwaiti, Saudi are mentioned), different types of credit extensions - bi-lateral loans, syndicated loans (in which Kuwaiti banks are participants). And I'll presume since KFH is involved some are structured as "Islamic" loans.   The latter point - where to file - will be a choice of the  most preferred/advantageous law (from the creditors' standpoint)  as well as the opportunity to put "hands" on the two group's assets.  

The Central Bank of Kuwait is said to be fully supportive.

The article notes that international banks are also reported to be getting ready to launch legal actions.

It also comments that Ahli United Bank has already (and it's been some time now) sued Saad Group in New York.

And what is perhaps the most relevant point here, the Central Bank of Kuwait has told the banks that they must comply with its request for 100% provisioning for the two groups by 31 December 2010.

Judging by that latter comment, I suppose the appropriate thing to do here is wish the banks in Kuwait الله معكم

Bahrain Issues New Corporate Governance Code

Copyright Gulf Daily News Bahrain

 

Today the MOIC and Central Bank of Bahrain officially announced the new corporate governance code which will be become applicable 1 January 2011.

Here is the text of the CGC as per the CBB website.

While the CGC has been a while in the making (and involved some co-ordination "issues" between the MOIC and CBB as well as the usual consultation process and objections by industry), the struggles to get the text finalized will pale next to securing effective implementation at the company level.

That being said it's a step in the right direction.

GDN article here.

AlGosaibi v. Maan AlSanea: UK Proceedings Witness Statement of Andrew John Ford - Allegations Against Mr. AlSanea

(This is the second in a series of posts which reviews documents filed on the Supreme Court of New York's website in connection with Mashreqbank v AHAB to which AHAB has added Mr. AlSanea as a Third Party Defendant. NY Supreme Court Case Index # 601650/2009.  More details here).

The document in question is one of the Appendices to the Supplemental Affirmation of Robert F. Serio, Esq., of Gibson, Dunn & Crutcher (NY Supreme Court Document 107) , who represent Mr. AlSanea in these proceedings.  He is arguing in his submission in support of the contention that New York is a forum non conveniens.

The Appendix is Serio Exhibit #25 (NY Supreme Court Document 107-2).  What's interesting is that this document is a Witness Statement given in London by AHAB's lawyers.  Mr. Serio has introduced it because he believes it shows that in this document  AHAB (a) "acknowledges the burden of transporting those witnesses from the Middle East to testify", (b) it intends to present in evidence in England "expert evidence on 'Saudi law ... in relation to issues of authority'" and that (c) AHAB further admits "some of the factual evidence will require an interpreter". 

What's interesting are some of the other bits in Mr. Ford's statement.  Before we delve into these, it's very important to note that Mr. Ford represents AHAB and just as Mr. Serio has the interests of his client foremost in his mind so does Mr. Ford.   So as you read both documents, make no mistake that we are dealing with impartial disinterested parties in either case.   Also with respect to Mr. Ford's Witness Statement, he makes several assertions, observations and interpretations.  We need to be very clear of the distinction between an assertion - even one made in the most rigorous good faith - and a proven fact. 

Let's go to his Witness Statement.  The following are direct quotes from that statement:

1. "Paragraph 13. AHAB says that this borrowing was obtained by the forgery of the signatures of the chairman of AHAB by or at the direction of Mr AI Sanea on hundreds of banking document number: LN65977/1-EU-5542569/2 3 documents. It has submitted many of the banking documents to  forensic examination by Dr Audrey Giles, head of the Giles Document Laboratory and formerly  head of the Questioned Documents Section of the Metropolitan Police Forensic Science Laboratory. Dr Giles' work has been hampered by the lack of original documents (many of which were removed from the Money Exchange by Mr AI Sanea and which he has refused to return). Nevertheless she has so far concluded that there is evidence that the signatures on at least 286 banking documents are not  genuine. On some documents, signatures have been applied by colour photocopying or by an inkjet printer and then traced over with a porous-tip pen; on others, the signatures are identical matches of  those on other documents and therefore highly unlikely to be genuine. In some cases the signatures  were applied to documents at a time when it would have been physically impossible for the  purported author to have signed because of incapacitating illness."
2. "Paragraph 14. The scale of the alleged fraud is enormous. A large team of forensic accountants from Deloitte has been investigating the fraud on behalf of AHAB since the end of May 2009. Their work is continuing, but their analysis to-date shows that over US$5.2 billion has been paid out from the Money Exchange to Mr AI Sanea or to companies controlled by him. The outstanding total of  unauthorised borrowing arranged by Mr AI Sanea, including accrued interest, commitment fees and related charges, appears to exceed US$9.2 billion, sourced from some 118 banks around the world."

And just to end where we began.   The above are allegations by the counsel for AHAB against Mr. AlSanea.  As you might expect, both Mr. AlSanea and his counsel vigorously deny any wrongoing.  As far as I know, no Court has rendered a judgment in this matter yet.  And so these remain allegations.

AlGosaibi v Maan AlSanea: What Does Arrest Mean?

(This is the first post reviewing documents submitted in Case 601650/2009.  More details here).

There's been a lot of speculation on this issue - some of it informed and some not so well informed, including right here on this blog.

Some new information has emerged on this topic in the form of a legally sworn statement by one of the parties.

As you perhaps know, Ahmad Hamad al Gosaibi and Brothers (AHAB) added Maan AlSanea as a Third Party Defendant to the case brought against them in the Supreme Court of New York (Case Index #601650/2009).

Mr. AlSanea has been arguing that New York is a forum non conveniens. Therefore, the case should be dropped or that he should be severed from the case.

On 9 March 2010, Document #106 was published on the Supreme Court's website under Case 601650/2009.  

It is an affidavit from Mr. AlSanea containing arguments why NY is inconvenient.  These include the usual arguments you'd expect:  (a) many documents relating to the case are in Arabic, (b) the sudden discovery of profound lack of English skills among witnesses (including several who previously  were able to routinely negotiate and conduct complex multi-million dollar transactions in English and who were involved in the running of global multi-billion dollar businesses in English), (c) none of the witnesses live in the USA, (d) the robust legal procedures in the Kingdom of Saudi Arabia,  and so on. You should, of course, read Mr. AlSanea's affidavit to understand his argument in full so that you can judge its merits for yourself.

What's pertinent to this post is a new defense:  many of the key witnesses are under travel bans. And  taking this document on its face enables us to make some definitive statements about the legal status of some of the parties involved.

First, we learn that these parties are not currently incarcerated.  Nor would it appear that they have placed under house arrest - where they are confined to their residences.   

Rather they are forbidden to leave the Kingdom of Saudi Arabia or the Kingdom of Bahrain.  Usually, this procedure involves the surrender of one's passport and a "notation"  in the records of  the "Customs and Immigration Officers" at border crossings, including airports.

In his affidavit, Mr. AlSanea lists the following individuals subject to travel bans:

1. Himself - by Saudi Arabia
2. Yousef, Saud, Dawood, AbdulMuhsin, Waleed Kamal Ahmad Hamad Al Gosaibi - who Mr. AlSanea understands are subject to similar travel bans imposed by Saudi Arabia.  Note that caveat.
3. Mr. Alistair McLeod, Former Acting CEO of Awal Bank, resident of Bahrain and subject to a travel ban imposed by Bahrain.
4. Mr. Anthony James, Former COO of Awal Bank, resident of Bahrain and subject to a travel ban, imposed by Bahrain.
5. Mr. Cliff Giddings, Former Head of Operations of Awal Bank, resident of Bahrain and subjectd to a travel ban imposed by Bahrain.
6. Mr. Mateen AK Mirza, Former Head of Treasury at Awal Bank, resident of Bahrain and subject to a travel ban imposed by Bahrain.
7. Mr. Yasser Al Sharif, Former Risk Manager of Awal Bank, resident of Saudi Arabia but subject to a travel ban by Bahrain.  (Confess I'm not clear how this would work legally.  If he's not resident in Bahrain, he would seem to be outside Bahrain's legal control).

It's very important to note two things:

1. The imposition of a "travel ban" on an individual is not a finding of guilt.  Nor is it necessarily an indication of the suspicion of guilt.  Often witnesses who can give testimony material to an investigation are banned from traveling so that they will be available to the court.  Of course travel bans are also imposed on individuals who may be  later charged with some wrongdoing.   Though being charged and being guilty can be two different things.  As per Mr. AlSanea's affidavit, you will note that both sides in the dispute - the AlGosaibis and Mr. AlSanea himself - are subject to a travel ban.
2. The Court will make the final legal judgment of quilt in this matter.  As far as I know, no Court has yet rendered such a verdict.

New York Supreme Court: Mashreqbank v AlGosaibi - 9 March 2010 Documents

Last week a new batch of  documents relating to the legal case between Mashreqbank and Ahmad Hamad AllGosaibi and Brothers ("AHAB")  (NY Supreme Court Case Index # 601650/2009) and  the legal case between Mashreqbank and the Partners of AHAB (NYSC Case Index # 602171/2009) was published on the Supreme Court of New York's website.  You can go to that link to read these documents in their entirety - which I highly recommend.  There's no substitute for the original source documents. 

In addition to the usual partisan pleadings common to such cases, these documents contain some interesting information.  And you might find some of the assertions in the documents submitted by both sides a source of hilarity.  I still get a chuckle about the guy who ran a multi-billion dollar empire in English but suddenly can barely understand the language.

We'll largely ignore the former and concentrate on the latter in a series of posts to follow. 

Dubai World - When is a Haircut Not a Haircut? Apparently, When We Say It Isn't.

The National has an article describing the various options to be offered creditors of Dubai World which contains some real howlers:

Creditors will be offered "new debt".  

While I'll admit this is conventional "banker speak", a rescheduled loan is about as new as that recycled left over on your dinner table.  It's the same old debt in a slightly different package..  It's like the dinner from Saturday that you quite didn't finish that turns up on your plate on Sunday.  It's not a new meal even if your wife has added Hamburger Helper.  A new loan would be a voluntary extension of credit.  Trapped money is the financial equivalent of a leftover.

But the real gem is the following.

“Receiving 100 per cent of the principal and zero per cent interest is better than taking a 30 to 40 per cent haircut. On this basis, the banks involved will not have to incur a loss other than the time value of money which is not insignificant but may be better than the alternative,” said Jawad Ali, the managing partner of the Middle East offices of the law firm of King and Spalding.

If you get back less money from a debtor than you advanced after taking into consideration the time value of money, it's a haircut.  A loss is a loss.  Pretending it is something else makes as much sense as saying that Dubai World wanted to help banks have solid earning assets on their books so its extending the maturities on its loans to help them out. 

As I pointed out in an earlier post, equal amortization of a loan over five years at a 5% interest rate is equivalent to a 13% haircut and at 10% a 24% haircut if one were being paid back immediately.   

Also as I noted, reputable firms of accountants working in reasonably developed  markets would apply IFRS (or US GAAP) and require a bank to  recognize an impairment against the asset.  And guess what, the loan would be written down using present value techniques - which recognize the time value of money.

However, in this matter I will defer to learned counsel's assessment of the firms and markets he practices in.  Financial institutions from developed countries will see right through this transparent scenario.

Idiocy Knows No Borders: The Manifest Danger of Women's Football

Several MPs in Kuwait have discovered a fundamental threat to Kuwaiti civilization and Islam.  

No, it's not misleading practices in the Kuwaiti stock market, where unwary retail investors are periodically sheared like sheep, nor a woeful lack of ethics in the conduct of business that has led to the looting of many a company and banks being stuck with duff loans, nor is it corruption where the wealth of the country is whistled away.  

No, it's something much more serious.  It is women's football!

But the Reform and Development Party has taken one of its usual principled stands against this dire threat.  

As a side note, we've got to find the guy who named this group the  "Reform" and "Development" Party.  I would have thought in a rich country like Kuwait dictionaries would be available.    

As JD Hayworth will not doubt helpfully point out, first comes women's football, then the next thing you know there will be music lessons in schools, and then it end with camels marrying horses.   Or watchmen on farms ....

I suspect a constitutional amendment to ban burning of the Kuwaiti flag might just forestall collapse -  if it's not too late already.

Adeem Investment Company - Significant Progress Made

As you know, we at Suq Al Mal have been closely following progress over at AIC on its project to complete "their unscheduled maintenance to upgrade our systems to better serve you".

Significant progress has been made since we first noticed this effort was underway 18 November.

Since then, we've learned that Adeem's crack IT Team is a a virtual F-1 race with GFH to see who will get their corporate website fixed first.

Gulf Finance House are laboring day and night to update GFH's ratings page on their website.  As you probably know, they have yet to reflect the November 2009 downgrade by S&P.

While many think that AIC has an insurmountable lead because they started first and because S&P has downgraded GFH multiple times since that first November downgrade, I'm not yet ready to count out the GFH Team.

The heart of the Gulf is racing!  And we here at SAM are calling the "play by plays" as they occur.

Stay tuned.  It looks like this race is going to be down to the wire.  Por una cabeza as the saying goes.

Kingdom Holding Company Makes Offer to Acquire Minority Shares in Kingdom Hotel

KHC has made an offer to acquire the minority shareholders' stake in Kingdom Hotels at US$5.00 per share, contingent on achieving a minimum 75% ownership.

Here's the press release on the offer and summary 2009 financial results.

Global Investment House - Press Release on 2009 Financials

GIH has issued a press release on its 2009 financials.  I thought you might want a more optimistic take on their 2009 performance than that published yesterday on this site.  When you've got the right attitude, you can find success just about anywhere.  And I suppose the contrary may be true as well.

Note the whopping KD5.6 million paid for the restructuring.  

A couple of comments in the press release caught my eye:

In commenting on 2009 legal expenses GIH said: "Global believes that legal and advisory costs relating to the Company’s debt default were of a one-off nature."   Seems reasonable unless they're planning another restructuring.

"Global has adopted best international practices in corporate governance to ensure not only the achievement of a strengthened corporate governance environment, but  to also lead the industry by example."   Лучше поздно чем никогда! 

The Investment Dar - Court Accepts TID's Petition to Enter FSL Process

TID announced on the KSE Sunday that Advisor Muhammad Abdullah AlWunyan, Agent for the Court of Appeals,  Member of the Technical Committee, and Head of the Special Office for Company Restructuring had accepted the petition and accompanying documents submitted by TID to place its restructuring under the Financial Stability Law.

According to the FSL, the acceptance of this request means that legal proceedings are now stayed.   However, this is not the end of the matter.   This now launches the procedure described in my earlier post.  Here's some additional background on the FSL.

Creditors have fifteen days after receipt of notice to object to the stay.  If there are no objections or if there are but the stay is upheld, then the Court has to determine the financial position of TID and whether with the restructuring TID can function as a going concern.   Whether the Court will accept the work already done by the Creditors' Co-Ordinating Committee or require this work to be performed again will become clearer as more time passes. 

Arabic text of TID's press release below.

[13:0:22]  ِ.تطورات خطة اعادة الهيكلة المالية لشركة دار الاستثمار ‏
يعلن سوق الكويت للاوراق المالية بان شركة دار الاستثمار افادت بانها تقدمت ‏
بطلب الى رئيس الدائرة الخاصة بطلبات اعادة هيكلة الشركات بمحكمة الاستئناف ‏
طبقا لاحكام المرسوم بالقانون 2 لسنة 2009 بشان تعزيز الاستقرار المالي .‏
وبتاريخ 11-03-2010 قرر المستشار محمد عبد الله الونيان وكيل محكمة ‏
الاستئناف وعضو المكتب الفني ورئيس الدائرة الخاصة بطلبات اعادة هيكلة ‏
الشركات بمحكمة الاستئناف قبول الطلب المقدم من شركة دار الاستثمار بشان ‏
الدخول فى قانون تعزيز الاستقرار المالي والمستندات المرفقة به وامر ادارة ‏
الكتاب بالمحكمة باستيفاء باقي الاجراءات المقررة بالمرسوم رقم 2 سنة 2009 ‏
بشان تعزيز الاستقرار المالي.‏
واستنادا الى نصوص المرسوم بالقانون رقم 2 لسنة 2009 بشان تعزيز الاستقرار ‏
المالي يترتب على قبول رئيس الدائرة الخاصة بطلبات اعادة هيكلة الشركات ‏
بمحكمة الاستئناف لهذا الطلب وقف كافة اجراءات التقاضي والتنفيذ المدنية ‏
والتجارية المتعلقة بالتزامات الشركة وذلك لحين الانتهاء من التصديق على خطة
اعادة الهيكلة .‏