The Investment Dar - TID and Creditors Debate Expense Controls

AlQabas reports that the Creditors' Co-Ordinating Committee and TID will meet in Dubai on 23 June to discuss the CCC's request that TID reduce operating expenses.   As per the article the creditors want at least a 40% reduction in expenses during the first three years of the rescheduling.   The Five Year Budget and projected financials the Company presented propose expense levels much higher than that.  

TID's argument is that it needs to maintain a certain level of expenses to manage its affairs and fulfill all the requirements of the restructuring -- and from the reports of terms of the restructuring I've seen there are many.   

The creditors for their part claim that the expenses remain elevated and are not consistent with the situation of the Company and general economic conditions and that the Company does not need the number of staff.

As I've written before, there is a natural tension in restructurings between the debtor and the creditor over expenses.  And often the creditors insist on draconian cuts which do not materially improve their repayment prospects but which often dramatically harm the Company's ability to function as a going concern.

Without details it's hard to say.  But I think you can see which side of the debate I'm leaning towards from my comments.  That's of course not to say that there shouldn't be some expense control.  But that it should be focused and relevant. 

Etisalat AED37 Million Bonuses Flap

The UAE State Audit Institution ("SAI") has raised questions about AED37 million in bonuses that the Board granted itself and its Chairman for 2009.

The SAI believes the bonuses should have been approved by shareholders at an Annual General Meeting.  The Company says that the majority shareholder (the government with 60%) has approved these in the past and that its Memorandum and Articles of Association do not required ADM approval.

"They have the right to say whatever they want. We cannot ask them not to write it, but we have our own view that we have the right to voice," Mohammad Hassan Omran, etisalat Chairman, told Emirates Business. "Definitely we are working with them in order to develop the way reporting and auditing should be done."

I thought it was pretty much standard corporate law requirement in the GCC states that shareholders approve such payments.

Gulf Finance House - Badr Al Subaiee Resigns from Board

GFH announced on the BSE today that Bader Al Subaiee (Chairman and MD at KIC) had resigned from its Board. 

And that it will be discussed at the upcoming shareholders' general meeting.

I haven't seen anything in the press on this and wonder if it's related to GFH's ongoing problems or is a personal matter.

Hashem al-Dabal Released After Repayment of AED130 Million

Business Maktoob reports that Hashem al-Dabal, former Chairman of Dubai Properties, has been released after repayment of AED130 million he allegedly embezzled in his former position.

AlGosaibi v Maan AlSanea - Bahrain Court Rules Documents Not Forged AlGosaibi to Appeal

A bit of a bombshell from Frank Kane at The National today.

The Bahrain Chamber for Dispute Resolution ruled "at the end of last month there was no evidence to show the signatures were not genuine."

The AlGosaibi's intend to appeal.  And is usual with the Bahraini Court system, it will be up to the Cassation Court (Bahrain's highest Court) to render the final judgment.

Dubai Holdings: Detailed Comments on DHCOG 2009 Audited Financials

Further to my post of 5 June, it's time for a closer look at DHCOG's 2009 audited financials.

Before getting into my usually overly detailed analysis, I'd like to highlight some big picture themes that emerge from a review of the Company's 2009 financials.

1. Most commentary has focused on DHCOG's AED15.2 billion in Borrowings. But as with Nakheel, Trade Payables (AED32 billion) and Customer Advances (AED14.2 billion) are more critical obligations. Both in terms of amounts as well as their greater direct impact on the future of the company and the local economy. When various expenses of AED4.7 billion associated with the restructuring/reduction of its projects in process (termination payments, legal claims, etc) and AED1.7 billion in Contractor Retentions (primarily due in the next 12 months)  are added in, it's clear where the potential cashflow stress really is. 
2. As noted earlier, the Company is heavily dependent on Government Subsidies for its profitability. 
3. Severe deterioration in Trade Payables – only 31% of gross receivables are fully performing as compared to 73% the year earlier. In itself this is a relatively minor problem since these represent a small "slice" of total assets. What's more important is that they reveal the profound distress in local markets. 92% of DHCOG's Receivables are denominated in AED and so are with local companies. If you think about it, the last company a local debtor is likely to "stiff" is this Company which is owned by the local Shaykh. Either DHCOG was reaching for business – doing marginal business or these companies are in very dire straits. 
4. DHCOG also seems to have engaged in a rather large amount of investment activity unrelated to its core activities. And with significant amounts committed to other entities within the Group. A clear sign that the companies were not managed in a disciplined fashion but rather as part of a "Group" – similar to the pattern in Kuwait.
   

Now to the detailed comments. (Warning:  A cup of caffeine may be required to remain awake as you read what follows).
 

Balance Sheet

Investment Property (Note 6) (page 45) is carried at AED56.5 billion in 2009 down from AED60.3 billion the year earlier. In 2009 DHCOG recognized an AED27.2 billion impairment charge against Investment Property. AED6.9 billion of this was reflected in the income statement. The remaining AED20.3 billion was reflected as a reduction in Government Grants. Thus, bypassing both the income statement and equity. (More on that topic a bit later).

While DHCOG carries its Investment Property at cost less impairment, it also provides details on fair value. Based on an open market valuation, the fair value of Investment Property at FYE 2009 is reported as AED 81.6 billion down from AED141.8 billion at FYE 2008. Clearly, there is a very serious disconnect between the value of the property calculated using discounted cashflow ("DCF") (which is the basis for the impairment) and the market price (based on what some "wise" investor is believed to be willing to pay for the property). That gap is AED25.1 billion. 

The "market" price is 144% of the price determined using discounted cashflow. Even allowing for the impact of some conservatism in the DCF, the gap is too large. What that suggests is that market price remains high. Essentially when market values like this occur, the implied "capitalization rate" ("cap rate") of the rental streams is very low.   Unrealistically low.

Turning to the liability side of the balance sheet, it's clear that Borrowings (Note 28) (page 69) at some AED15.2 billion are not the Company's major liability problem. Current and non current payables of AED32.1 billion are more than twice Borrowings (Note 32 (a) page 74). Customer Advances of AED14.2 billion (Note 33) (page 75) represent much more significant and potentially critical demands on cash. Of particular note is that all Customer Advances are carried as Current Liabilities – meaning DHCOG has to complete projects within the 2010 to satisfy its obligations to customers. As it builds and hands over properties, then these obligations are extinguished. If it fails to do so, there is potential (note that word) requirement to reimburse customers or renegotiate with them.  And these are not all the liabilities towards the "trade" that the Company faces.  There's an additional AED4.7 billion for Provisions and Other Charges - largely related to termination of contracts.

Another key liability account is the AED36.8 billion in Government Grants (Note 29) (page 72). As discussed in my earlier post (referenced above), DHCOG's profitability and cashflow is essentially based on generous subsidies from the Emirate of Dubai. Strip these out and the Company's performance is much diminished. Notes 2.22 (a) and 6 also discuss Government Grants.

Income Statement

Here the role of Government Subsidies is directly obvious. In 2008, the Company had AED19.2 billion in subsidies and had net income of AED9.8 billion. In 2009, subsidies were only AED0.6 billion. That and substantial provisions led to a loss of AED23.6 billion.

As a side comment, I'd note that there are provisions of some AED2.2 billion included in "General and Administrative" expenses (Note 38) for trade and other receivables as compared to a mere AED0.1 billion in 2008. A strong indication of the distress in the local market.

Consolidated Statement of Cash Flows

See the comments in my earlier post. Cashflow generation is constrained. And to flog a downed horse highly dependent on government subsidies.

Detailed Comments

Here are some items that caught my eye.

Note 2.1 (page 8) – The auditors did not raise a matter of emphasis on management's assumption that DHCOG as a "going concern" because of the availability of external support from the Holding Company and the DFSF.

"As a result of the sudden and sharp downturn in the Dubai real estate market, the Group's cash flows have come under severe pressure. The Group is currently considering various means to manage its cash flows which include roll over of maturing loans, sale of certain assets and renegotiation of trade and contractors balances. The holding company has confirmed its willingness to provide such financial support as may be required to manage the process and has confirmed that it has access to funds from the Dubai Financial Support Fund for the specific purpose."

Note 2.23 (a) (page 28): DHCOG primarily recognizes revenues from land and building sales on a "completed" contract basis as opposed to a "percentage of completion basis". What this means is that there is likely to be a greater mismatch between the timing of cash receipts and the recognition of revenues. When cash is received before the contract is completed, the contra entry to the receipt of cash is "Deferred Revenues". As per Note 32 (a) (page 74) DHCOG has some AED17.1 billion of Deferred Revenues as of FYE 2009. When these revenues are recognized in the Income Statement, there will be no accompanying cashflow. Something a careful creditor should have his or her eye firmly fixed upon.

 

Note 3.1 (c) (page 34): Of some AED24.7 billion in liabilities due within the next twelve months, repayment of borrowings represents only AED3.7 billion. Roughly 15%.

 

Note 4.2 (b) (page 39): Management has estimated its liability for contractor claims for termination or delay of contracts for construction and consultancy, demobilization of contractors, staff repatriation costs, etc., at AED4 billion. Up AED1.4 billion (54%) from 2008.

 

Note 12 (page 56): The Company recognized AED1.5 billion fair value loss in 2009 for its investment in a fund managed by a related party Dubai International Capital. This is in addition to AED1.9 billion fair value loss on the same investment in 2008. Also see Note 20 (a) page 65.

 

Note 15 (page 60): There is clear distress in DHCOG's Trade Receivables. At FYE2008 AED1.9 billion (83%) of DHCOG's AED2.3 billion in Trade Receivables and Advance Payments were "fully" performing. At FYE2009 AED0.8 billion (58%) of AED1.4 billion were. At year end 2009 AED0.8 billion of AED2.6 billion in gross Trade Receivables were fully performing. That's 31% fully performing. At 2008 the comparative numbers were AED1.9 billion out of AED2.6 billion. Or 73%. Past due but unimpaired receivables also showed a jump from AED0.4 billion at FYE 2008 to AED0.6 billion at FYE 2009. This is significant deterioration in a single year. And reflects widespread distress given DHCOG's comment that it "has a broad base of customers with no concentration of credit risk within trade receivables". Looking at currency composition of receivables, some 92% are denominated in AED. That indicates most of these are to local counterparties. So the distress is local. And it must be significant since it's highly unlikely that a local company would "stiff" a company owned by the Ruler. Generally, when there is a serious sudden deterioration in receivables, the suspicious banker takes a look for an APP scenario. Sales or other transactions against receivables can be a highly convenient way of spiriting value out of a company. Since there is no concentration in the receivables, this probably can be ruled out.

 

Note 28 (page 71): DHCOG failed to comply with 2 of 3 financial covenants as of 31 December 2009. It bankers waived these breaches. That means the covenants remain in place. Given the Company's financial condition, they are likely to be breached again. And the creditors will have another chance to use these to apply pressure.

 

Note 30 (page 72): AED1.1 billion of AED1.7 billion in Contractor Retention payments are due within one year. Two observations. The first is the contractual cashflow demand this represents – though contracts may be renegotiated. The second is that this shows that there have been no significant new construction activities undertaken. Another sign of the slowdown.  (Note:  These liabilities are included in Trade and Other Payables).

 

Note 32 (a) (page 74): AED17.1 billion of Deferred Revenues. As discussed above, when these are recognized, there will be no accompanying cashflow.

 

Note 32 (b) (page 75): Provision for Liabilities and Other Charges is at AED4.7 billion up from AED3.0 billion (2008). Important as another potential cashflow demand. As well, this amount has grown rather significantly in one year. Future trends in these provisions should be watched. Note 46 (page 82) has additional information.

 

Note 38 (page 77): General and Administrative Expenses of AED4.7 billion include AED2.2 billion for impairment provisions on Trade and Other Receivables.

 

Note 40 (page 77): Other Operating Expenses provides details on the composition of provisions.

 

Note 42(a) (page 82): The Company eliminated its commitments to invest in private equity funds from AED259 million in 2008 to zero in 2009. It's unclear why an Operating Company like DHCOG is investing in private equity funds. Nor why it was investing rather substantial sums in the DIC fund on which it has lost some AED3.4 billion.

 

Note 42 (b) (page 82): As DHCOG has scaled back its projects, Commitments for Projects in Progress have declined dramatically from AED34.2 billion in 2008 to AED10.9 billion in 2009. The trade-off is increased Termination Claims.   Clearly, one does not shrink oneself to greatness.  Reduction in contracts is a necessary step given the state of the real estate market in Dubai.  All well and good.  But the question then is what is the future for DHCOG.  If its real estate business is reduced to a more modest level what does this mean for the Company - particularly since its profitability was basically driven by selling real estate it acquired at zero cost due to the kindness of the good Shaykh.

Dubai Rents Continue to Fall

Emirates Business reports that rents in Dubai continue to fall with new supply responsible for the price pressure.  Lower rates in Dubai are tempting relocations from the Capital.  As if the Abu Dhabi - Dubai deathway isn't busy enough.

Given the number of new units coming on stream in the next two years - estimated here at 100,000 - it seems this trend is likely to continue.

"Tenants are increasingly seeking more value for their rental dirham and are able to leverage alternative options to negotiate very attractive deals. This is pushing up bid-ask spreads and illustrates that landlords are conceding in negotiations with ever more discerning and value-seeking tenants. More significantly, this is a trend now observed in high-quality units in prestigious locations, which is a segment that has experienced relatively minimal volatility in late 2009 and the first quarter of 2010 due to relocation trends.

The lower limits for a one-bedroom on the prestigious Jumeirah Lakes Tower (JLT) have fallen six per cent while one-bedroom apartments in JLT have fallen a further 10 per cent since publishing the previous lease guide."

The Investment Dar - Update on Implementation of Rescheduling

Both AlWatan and AlQabas have articles on the latest developments on TID's restructuring - presumably from a Company press statement.  I suspect we will see that published on TID's website on Tuesday.  Probably as with the last announcement in Arabic only.

Here's a hasty translation.

1. The Creditors' Coordinating Committee ("CCC") announced that most of the commercial aspects of the rescheduling have been agreed with TID.
2. That the English language version of the legal documentation will be completed in one week.
3. Thereafter an Arabic translation will be prepared and given the the Shari'ah Board of TID for a final review (this will take several weeks) before the legal agreements are given to the Special FSL Court for its review. 
4. That in order to speed up implementation of the restructuring, TID has agreed that whatever the date of FSL Court approval, it will use a date no later than 30 September 2010 to begin the calculation of "profit" (interest) with the first interest payment no later than 31 March 2011.  And that the first principal repayment will be no later than 30 September 2011.
5. That TID has voluntarily agreed to be bound by the conditions of the restructuring - including the management of the Company's affairs -  as if the Special FSL Court had already approved the restructuring plan.
6. That the CCC and Chief Restructuring Officer are revising the five year budget/plan and projected financials presented by TID at the 24 May meeting with creditors and will present a revised version to the Company.
7. There is a final quote from Bader Abdullah Ali - the CCC's spokesman.  The most significant part of the quote is that the CCC's role will be concentrated on (a) the revised budget, (b) supervision  of the activities of the Company and (c) the stages of entry under the FSL.

Within the progress update, there are two key points - #5 and #7 and #4.   The creditors have persuaded TID (no doubt gently)  that they should be in control now prior to the anticipated approval of the FSL application.  And as part of that the Company has agreed to an absolute "last date" for starting the timing of interest and principal repayments. 

New Central Bank of Kuwait Regulations on Investment Companies - Practical Difficulties

Muhammad Shabaan at AlQabas has an article that several investment companies have held urgent meetings with the CBK or are trying to arrange meetings to discuss the new regulations on investment companies which pose difficulties for them - particularly those in distress.

In particular one firm with a three year rescheduling recently agreed (clearly Global though its name is not mentioned) pointed out that it cannot comply with the regulations and the terms of its rescheduling.

What's likely to happen is that the CBK will have to give some firms a "pass" on the implementation dates under the argument that they are taking significant steps to improve their financial positions in the spirit (but not the letter) of the regulations.

Kuwaiti Funds - The Impact of Investment Firm Distress

Isa Abdul Salaam at AlQabas has an interesting article on one of the knock on effects of the distress among Kuwaiti investment companies.  Many of the distressed companies have borrowed money from money market and other funds managed by other Kuwaiti investment companies.

What caught my eye particularly in the report was his brilliant phrase:   فعند صباح كل يوم جديد ننتظر أن نسمع عن أزمة جديدة لهذا القطاع الذي لطالما ملأ الأرض بالحديث عن إنجازات لم نعد نراها فعلياً على أرض الواقع

Indeed each new day's morning we expect to hear about a new crisis for this sector which has long filled the earth with talk about achievements which we do not see actually existing.

The distressed companies have not repaid the sums borrowed due to their financial conditions.  For a while apparently with Central Bank of Kuwait tacit approval the funds have been rolling over these obligations on a six month basis.  Recently again with CBK consent, the terms have been changed to monthly.

As per the article several of the investment companies who manage funds have written to other investment companies demanding immediate payment in full and threatening legal action if payment is not made.  KIC has supposedly written such letters on behalf of its Islamic Crescent Fund.

The difficulty is that depressed prices for assets are below cost (and no doubt many of the original purchase prices reflected imaginary values).  The funds are similarly constrained as they have their investors to answer to.

The solution as usual in Kuwait is a call to the government to help resolve the problem:  to bail out imprudent lenders and imprudent borrowers.

The article closes with the comment that some investors in these distressed funds have begun taking provisions against their exposures - up to a reported 50% in some cases.

BP Coffee Spill

Dave Roberts over at The GulfBlog has a positively brilliant post.

KFIC: Sana Juma Resigns as CEO

KFIC announced on the DFM today that its CEO Sana Alaa AdDin Tawfiq Juma had resigned effective 13 June 2010.  No word on her replacement.   There doesn't appear to be an announcement on the KSE.

You'll recall from an earlier post that AlQabas had predicted her imminent departure.  You can access other posts on this Company by using the label KFIC to search.

A helpful reader has pointed out in the comments below - that Ms. Juma also resigned from Kuwait International Bank's Board due to insufficient shares in KIB to serve as a director.

Ted Pretty Resigns from Khaleeji Commercial Bank

A very puzzling announcement by KHCB on the Bahrain Stock Exchange today.  Ted Pretty resigned from the Board. 

Putting aside the fact that it took three weeks for KHCB to bring this news to the attention of the BSE, it would seem that GFH would want a senior officer on the Board since it appears to have reversed its decision to sell its 37% stake in the Bank.  There is no announcement on his replacement.

Could this mean that it has changed its mind again?  US$120 million in looming debt repayments could be a compelling reason.   

Is Mr. Pretty too busy at GFH to give KHCB the attention it deserves?

Or is Mr. Pretty headed for a less stressful position?

Dubai World - Implication of Loan Sales

The Financial Times reports that some banks have begun selling their almost restructured DW loans.  Apparently, the price is something in the 55% of nominal range.   The article goes on to say that DW is considering using "Decree 57" which created a special regime for DW to seek protection under the DIFC Insolvency Law.  Under that law, a company may cram down dissenting creditors and force them to accept a restructuring - similar to the Financial Stability Law in Kuwait.

Some observations:

1. It's not surprising that some banks would be heading for the exit and perhaps taking a larger than required "haircut" just to be free of the restructuring - including those often overlooked indirect costs of administering and following a "special" loan.   Exitors will generally be smaller banks with no real ongoing business with the Emirate.
2. A US$25 million sale out of US$23.5 billion does not a trend make.
3. It's unlikely small trades will give dissidents control unless the existing lenders are highly divided on the restructuring.  On this topic recall that the Co-Ordinating Committee accounts for some 60% of the debt.  Local lenders are likely to go along.  If required, local governments can promise them a capital infusion or low cost deposit to compensate for any direct pain they may feel on the restructuring.  Both methods of course would strictly speaking not constitute preferential treatment.
4. From an investment point of view, assuming a bullet repayment, the IRR on the cited transaction is something around 11%.  With more frequent principal repayments the IRR is higher.  Not a bad return.
5. The public announcement of the readiness to pull the DIFC trigger no doubt is designed to dissuade vulture investors.

Aayan Leasing and Investment - Recourse to Financial Stability Law Remains a Possibility

AlQabas quotes Aayan as saying that the Central Bank of Kuwait has not told it to refrain from using the Financial Stability Law as an option to deal with its problems.  Instead the Central Bank has been urging the Company to take the appropriate decision in the interest of creditors and shareholders to exit its financial crisis as soon as possible.

Aayan said that it will continue in a positive manner with its creditors.  And that if it decides to use the FSL, it will only do so after consultation with its creditors.

You'll recall from earlier posts (which  you can retrieve using the label "Aayan") that the Company has some KD416 million in debt.  As well KFH is a significant shareholder and seems to be trying to shepherd this case to a positive conclusion.

Dubai Holding Dissolves DIC Board and Takes Direct Control

GulfNews reports that Dubai Holding announced that it had dissolved the Board at DIC and taken direct control over the Company.  The cover story is that this was done to "implement a new (corporate) governance structure".

I suspect that as well it reflects a new corporate strategy.  Given the less than sterling performance of DIC and much more limited resources available to Dubai going forward, the Emirate has probably wisely decided to slowly unwind DIC.  That grandiose dreams of an international empire will have to be shelved in favor of making sure the economy back home is taken care of.  

The first step on the new path will be trying to get creditors to extend maturities until markets improve and assets can be sold.  Then triage on the existing portfolio.  Letting those entities that cannot be saved go.  And focusing limited cash on retaining control of and building value in those that have potential for a price rebound.

No longer on the Board of DIC, Samir AlAnsari will have a new role at Shuaa Capital.  Instead of building an empire through acquisition, he'll be tasked with building a business the old fashioned way - disciplined growth.

The Investment Dar - Update on Financial Stability Law Process

AlQabas reports that Ernst and Young has presented its preliminary report on TID to the Central Bank of Kuwait.  It's expected that its final report will be presented in July.  The Central Bank will then study both reports to determine if TID is solvent and should be allowed to used the Financial Stability Law to implement its restructuring.  After completing that study, it will make its recommendation to the Special FSL Court.

The article goes on to note that if the Plan is approved the Central Bank will retain a monitoring role.  If the Company fails to abide by the restructuring, then the Central Bank would recommend whether TID should be given a second chance or should be put into liquidation.

I suspect that this means that a final decision on TID's entry under the FSL will take place in late July or early August.  A September implementation - as discussed earlier in the Kuwaiti press - might take place.  One potential timing issue could be Ramadan - which is expected to begin somewhere just before mid August.

Earlier posts on the Financial Stability Law can be accessed using the label "Financial Stability Law".

IIF Report Criticizes Central Bank of Kuwait Re Investment Companies

AlQabas has a summary of a recent Institute of International Finance ("IIF") Research Note on the Kuwait financial sector - June 1 "Financial Sector Strains are Easing". 

Much of the analysis is familiar.  Banks have been hurt by the slowdown in commercial real estate, the weakness in the Kuwait Stock Market, the problems of Kuwaiti investment companies.  Banks are expected to have another weak year in 2010 as the need for provisions continues.  The IIF also noted the unevenness in the banking sector with some banks having relatively low levels of distressed loans 2% and some much higher at 30%.  IIF is rather sanguine on the banking sector's prospects. 

What is the most interesting "bit" is reflected in the headline that AlQabas used.  "Report issued by IIF:  Central Bank of Kuwait issued licenses to investment companies but left them without strong supervision/regulation".  And this probably explains in part the recent new tougher regulations the CBK issued.

English text of the IIF report here - though you need to be a member with a password to access.

Sukuk Investors Need Protection? Or Just to Read the Prospectus

There's an interesting article in The National about the need for greater protections for investors in Sukuk.

“What good is it in the event of a default if you can’t have access to the underlying assets?” said Rifaat Abdel Karim, the secretary general of the Islamic Financial Services Board, a body based in Kuala Lumpur that sets standards for Sharia compliance. “As an investor you need to know what you get.”

Indeed, you need to know what you get.  That requires that you read the Offering Circular.

 

Every sukuk Offering Circular or Memorandum that I have read sets forth whether or not the investors have a collateral interest in the underlying asset.  Generally, legal issues (including ownership, enforcement and other risks) are set forth as well.

In TID's Global Sukuk I Offering Memorandum, the first Risk Factor (page 11) clearly states that  if there is a default,  the investors have no direct recourse to the underlying assets and have to rely on the obligor (TID) to repurchase the sukuk.  

In the Offering Memorandum for Saad's Golden Belt Sukuk, the second Risk Factor (page 24) also makes a similar statement.  As I've noted before, the potential for  a legal  challenge to the determination of the Periodic Rental Payment ("interest payment") is disclosed as are potential difficulties in enforcing rights. (pages 25 and 29).  The fact that the land remains registered in the name of Mr. AlSanea is noted on page 26.

For IIG's Sukuk, turn to Risk Factors (page 17) under Limited Recourse make a similar statement about access to the underlying assets as TID and Golden Belt.  Page 24 discusses that while the certificates are convertible to shares, the Company has not obtained shareholder consent or approval from the Kuwaiti authorities to issue new shares.

There's a very simple rule in finance.  Don't buy an investment if:

1. You're not capable of figuring out what you're buying.
2. And you don't want to hire a professional to help you.
3. Or you're capable, but just don't want to spend the time reading the Offering Memorandum and asking a few questions.

Central Bank of Kuwait - New Regulations on Investment Companies

AlQabas published a summary of key elements in a recent Central Bank of Kuwait general circular to investment companies subject to its supervision.

Here are the main points.

The new regulations were approved by the CBK's Board of Directors on 8 June 2010.  More details to be advised later. 
 

They apply to both parent and affiliate/subsidiary investment companies.  And on a consolidated basis.

Three key ratios are at the heart of the new regulations.

1. Leverage Ratio:  Total Liabilities to Equity may not exceed 2:1.  Liabilities are "all" liabilities except for general and specific provisions.   This definition appears to include accounts payable, other liabilities, etc.  Not just debt to financial institutions or bondholders.  Total Equity excludes Treasury Stock and losses.  What's not clear is the treatment of  "fair value" and similar reserves. representing unrealized profits.  Those familiar with "history" in the area know that a lot of financial firms got in trouble by borrowing against "fair values" which later reversed.  And in some cases may never have existed in the first place.  Declaring profits against these fair values, paying bonuses and dividends against them, etc.  So the treatment of this element in equity is key.  Probably a limit on the amount of fair value that can be included in "Equity" is one solution.  What I'm thinking of is something similar to Basel II's treatment of the components of equity - Tier 1, Tier 2, and Tier 3.  Otherwise, "clever" bankers may discover  or manufacture hidden value in their balance sheets and thus undo the constraint. 
2. "Quick" Ratio:   Liquid assets equal to 10% of Total Liabilities must be held.  Liquid assets are those than can be liquidated within a month and are composed of cash and deposits with the Central Bank and other financial institutions; Kuwait Treasury Bonds and similar Government paper including Central Bank of Kuwait paper;  other sovereign debt rated BBB or above.  Ratings must be from S&P, Moody's, or Fitch.
3. Maximum Foreign Debt Ratio:  No more than 50% of Equity as defined above.  Foreign debt appears to be defined by location of the creditor (credit from "non residents") not the currency in which the debt is denominated.   At a leverage ratio of 2:1 then only 25% of debt can be to non residents.

The new regulations and ratios apply as of 30 June 2010.  If a firm is not in compliance, it must make efforts to improve its compliance with the final date to meet all the requirements no later than 30 June 2012.