The Investment Dar - TID's Shari'ah Board "Slaps Down" TID's Defense in BLOM Lawsuit

TID has issued a press release that its Shari'ah Board met 22 May and reviewed the Wakala Contract between TID and Banque du Liban et D'outre Mer ("BLOM").

The Board ruled as follows:

1. The contract is Shari'ah compliant.
2. The Company should not make assertions in Court about whether a contract complies with Shari'ah or not before it has obtained the judgment of its Shari'ah Board.
3. The Company should withdraw this defense its Court Case against BLOM.  

The Company noted at the end of the press release that it had done so.

This is a rather significant development.  

First, TID's Shari'ah Board has set down a clear rule.  The determination of what is Shari'ah compliant is the Board's responsibility and not management's.  And that no actions are to be taken before the Board rules.

Second, in no uncertain terms, TID's Shari'ah Board has "slapped down" TID's  rather shabby (I'm being polite again) attempt to hide behind the Shari'ah to avoid settling an obligation.

Fugitive Banker Gives His Side of Story re TIBC

Frank Kane over at The National conducted an interview with Glen Stewart which was in the June 8 issue of The National.

To set the stage, as I understand it, there are two contentions central to the TIBC/Awal/AlGosaibi/Saad Group saga:

1. That there was massive fraud at the these entities which was the direct cause of their apparent collapse.
2. That Mr. AlSanea was improperly exercising control over TIBC and certain AlGosaibi units (the entity mentioned most was AlGosaibi's Money Exchange).  As noted in the article, a charge that Mr. AlSanea strongly disputes.

In his interview Mr. Stewart addresses the second.  He flatly contradicts the AlGosaibi's assertion that Mr. AlSanea was not authorized to exercise control over TIBC and the Money Exchange

What he does not appear to address in this interview is the first allegation.

I would also be very interested in Mr. Stewart's thoughts on the Ernst and Young report.  As per that report, it seems the CEO of TIBC had very limited authority.  Mr. Stewart deferred to Mr. AlSanea on decision making on just about every matter.  Beyond that there was the curious case of payment approvals.  E&Y stated that Mr. AlSanea used Mr. Stewart's password to release payments.  As I noted at the time I commented on the E&Y Report, it is very unusual for a CEO to be involved in  the operational aspects of releasing payments.  And giving another person one's password is generally considered a violation of segregation of duties and dual control.  

It would be highly useful to know how Mr. Stewart:

1. Saw his role as Chief Executive Officer at TIBC  and how that might compare and contrast to CEO's at other banks.  What precisely were the duties of TIBC's CEO and what were those of  Mr. AlSanea?  Is it good form for a CEO to give his password to a third party?  What does it mean when a person in the position of CEO apparently has no power to make any material decision? 
2. Understood  the requirements of Central Bank of Bahrain regulations regarding corporate governance. And, what if any, disclosures regarding Mr. AlSanea's role were made to the Central Bank.

Perhaps, Mr. Kane will have the opportunity to do another interview with Mr. Stewart.

One thing is abundantly clear from this interview and that is the emotional pain and suffering of Mr. Stewart.  Adding to that distress, we learn in this article that he felt abandoned by his own country in the midst of the "arbitrary actions and retaliations of the Bahraini legal system".   

KFIC Announces Signing of KD145 Million Rescheduling

Kuwait Finance and Investment Company, KSC ("KFIC") announced that it had signed a rescheduling agreement with all of its local and foreign lenders  - 22 in all.  The deal has a five year term ending 31 December 2014.  It was reached after 18 months of negotiation with lenders.

Both Al Watan and AlQabas have reports.  From the similarity of wording, it's clear the source was a  KFIC release.  As discussed below, AlQ has am "extra" bit:  some speculation on management changes.

Some of what I consider noteworthy points from the articles.

1. National Bank of Kuwait and AlAhli United Bank acted as lead banks in the restructuring process.
2. Ernst and Young undertook a valuation of the Company's assets and pronounced their fair value at 15% more than book value.  
3. Neither newspaper mentions a "headline" from KFIC's press release - that they serviced interest on the debts during the 18 month restructuring negotiations.  Perhaps this is well known in Kuwait?

AlQ continues with some speculation on possible changes in management.  Sana  Juma has supposedly resigned as CEO (earlier she had been at Gulf Bank) and been replaced by Riham AlGhanim, who is on the Board.  Ghadir Al Ateeqi, Head of Human Resources, is also reported to have resigned. 

You'll recall that KFIC lost KD13.8 million in 2008 and KD10.9 million in 2009.  The articles refer to 1Q10 results. These were operating income of KD4.7 million and net profit of some KD1.1 million. (Not mentioned in the two press reports cited above).

AlBashayer Investment Company - Focused on Women

ABIC will target wealthy women in the Abu Dhabi.

Gulf Bank Sues AlGosaibi and Saad Groups in Saudi Arabia

According to Marwan AlBadr of  AlQabas, Gulf Bank filed suits in Saudi against both AlGosaibi and Saad in two legal forums:

1. The Negotiable Instruments Committee - which deals with bank checks, letters of credit and similar instruments.  The NIC has set a hearing for March 2011.
2. The Committee for the Settlement of Bank Disputes - which is a SAMA committee to resolve disputes over loans and lines of credit.

It's expected that other banks will follow suit with suits in Saudi.

Al Boom Holdings

Here's an account from The National of the trial of the head of the Al Boom Holdings.

An Emirati property magnate spent almost Dh960 million of his investors’ money on parties, boats and luxury cars, a special fraud tribunal heard yesterday.

Abid al Boom, the chief executive of Al Boom Holdings, and his six co-defendants cheated some 3,700 investors out of their savings.

Only one per cent of the embezzled money was recovered, the prosecutor, Younis al Baloushi, told the tribunal.

As reported in the article, Mr. Al Boom's counsel did not offer a defense.

PRC Economic Penetration of the GCC

This brochure tells the story.

June 8-10 Dubai.  1,300 firms.  6 product categories.  One stop shopping.

And note this is part of a well organized trade promotion effort - not just in the GCC.  There'll be a fair in Miami in 2011.

To update Chairman Mao:  While power may come from the barrel of a gun, a country's economy is the basis for all power.

Dubai Rentals - Bargain Time

What's interesting about this article is the assertion of a new found willingness by landlords to negotiate rents.

Apparently, tenants are taking advantage of the market to move from older to newer properties.  Or to properties that are more convenient.

As a result not only are the explicit rentals coming down, but landlords are offering incentives like free months, absorption of utilities, enhanced maintenance, etc.

A key factor going forward will be the balance of inward and outward migration by expatriates.  A negative trend will depress rates.  A positive one may lead to stability and some increases.  And the balance will have clear implications for property and development firms as well as their creditors.

According to Colliers estimate, average rental rates have declined by 25 per cent between Q2 2009 and Q1 2010. As per Harbor's calculations, International City rents are 20 per cent lower than Q4 2009 and eight per cent lower than Q1 2010; Discovery Gardens rents are 13 per cent lower than Q4 2009 and eight per cent lower than Q1 2010, while rents in Dubai Silicon Oasis are five per cent lower than Q4 2009, but remain stable compared to Q1 2010.

Robinson points to a one-bedroom apartment being leased in December 2009 in Discovery Gardens for Dh57,000, which came down to Dh50,000 in March 2010 and is available for Dh40,000 in May.

However, a studio apartment in International City, leased for Dh30,000 in December 2009, declined to Dh22,000 in March 2010 and is being still leased for the same rate.

Dubai Holdings: Review of DHCOG 2009 Financials – The Business Model

DHCOG's 2009 audited financials as well as the CEO's commentary are available at this link at NasdaqDubai. Earlier audited financials are in the "Related Documents" section here.

Before I get into detailed comments on the 2009 annual report, I'd like to start by looking at DHCOG's business model, particularly its ability to generate cash. This will provide context for understanding DHCOG's ability to address the issues it faces.  A robust cashflow can pay bills directly.  And, if they are lumpy, a sound cashflow provides a basis for accessing finance to pay bills immediately.

In that regard, DHCOG is heavily dependent on Government Grants for both income and cashflow.

Let's start with net income

All amounts in AED billions. Percentage = Government Grants/Net Income.

	2009	2008	2007	2006	2005
Net Income	(23.6)	9.8	13.9	7.6	1.5
Govt Grants	0.7	19.2	10.0	6.6	0.7
Percentage	NM	196%	72%	87%	47%

 

Notes 2.22 (page 27) and 29 (page 72) in the 2009 financials discuss respectively the accounting treatment of subsidies and the amounts involved. 

With respect to the first, when the Government gives DHCOG land, the Company records the land as an asset with the contra entry to the liability account "Government Grants". Upon sale of the land, DHCOG recognizes profit based on the cost of the land. It then also recognizes the gain on the Grant as a separate item. This enables readers of the financials to determine the value added by DHCOG  through its own efforts by separating out the subsidy it has received.

A hypothetical example illustrates the point. 

Let's assume that the Emirate gives the Company a piece of land fair valued at AED100 on 1 January 2009. DHCOG books an addition to Land of AED100 and reflects a liability of AED 100 under Government Grants.  Then assume a sale on 1 July 2009 for AED 110. The Company's total profit is the sale price AED110 since it paid zero for the property.  In its accounting, DHCOG splits the AED 110 into two components:  AED10 in "Revenues" and AED100 in Government Grants.  In this case the Company is only responsible for 9% of the profit. The subsidy for 91%.

That was a hypothetical example.  Let's look at actual profitability.  Over the period 2005 through 2009, the Company earned AED9.2 billion. During the same period, Government Subsidies  were AED37.2 billion. Or 4.04 times net profit! In fact without the subsidies, DHCOGwould have had a net loss of AED28 billion.

As a side comment, the subsidies result in an interesting transfer of wealth from the Emirate to the private company owned by the Ruler of the Emirate.

The pattern is the same when we examine Cashflow From Operations (2009 Note 47).

Again all amounts are in AED billions.

	2009	2008	2007	2006	2005
Gross Operating CF	2.1	5.4	4.7	2.1	0.6
Net Operating CF	0.8	10.0	16.9	4.6	1.3
Govt Grants	0.7	19.2	10.0	6.6	0.7
Govt Grants/NOPCF	88%	192%	59%	143%	54%
Customer Advances	(4.2)	0.5	2.7	8.2	4.5
Deferred Revenues	3.3	7.0	6.4	0.3	NM

 

Not surprisingly, the above table shows a similar critical dependence on Government Subsidies, this time for cashflow. In four out of the five years, Government Grants were larger than Gross Operating Cashflow – that is Cashflow before changes in long term assets and liabilities and short term assets and liabilities (e.g., Working Capital).   By way of explanation, Gross Operating Cashflow is a better measure of the ability of a firm to generate cash from its operations than Net Operating Cashflow as the latter involves transient sources and uses of cash not resulting from the basic business process.

Another key component of cashflow has been customer advances (deposits) on purchases. As the real estate sales machine slows down so will the pace of new investments by clients.  As the Company's CEO, Ahmad Bin Byat, noted in his commentary on 2009, "The real estate market is expected to continue to face challenges in 2010 and 2011 until the excess supply of the existing and expected inventory is absorbed by stronger demand." That likely means no real meaningful additions to Customer Advances. Rather these will be drawn down. And if the recovery in 2012 is delayed or tepid, the situation will continue.

Also the Deferred Revenues point to another issue for the future.  The Company has been receiving cash for projects underway. These cash receipts have been booked as deferred revenues.  That is cash  is received but income is not recognized.  When the projects are completed and handed over, DHCOG will book substantial revenues. As of 31 December 2009, the amount of outstanding Deferred Revenues was some AED17.1 billion. However, when it does, these revenues will not be accompanied by cashflow of this amount.   To the extent that liabilities have increased during this period, a creditor would have to ask where the Company will get the funds to settle these obligations.

As hopefully this analysis makes clear creditors face two issues with DHCOG. The first largley trivial. The second critical. 

1. Continuance of Government Subsidies. A slowdown in real estate may mean an inability to utilize the remaining Government Grants, AED36.8 billion at 31 December 2009, in line with the "Master Plan's" timing. Theoretically, this could result in termination of the grants or a change in the their cost basis. However, since the good Shaykh is giving himself land, he is probably inclined to revise the terms of those grants to accommodate any slowdown. The maintenance of subsidies is the key to the Company's ability to generate significant net income and more importantly the cash necessary to repay debts. With a zero cost of land, the Company is uniquely positioned even  if real estate prices are sharply lower.  It also benefits because it does not have to finance the land prior to sale. No need to raise debt, leaving "spare" borrowing capacity, assuming it has access.  And no interest expense, improving both the bottom line and cashflow.
2. The overall state of the real estate market. While it's highly likely that the Shaykh will continue to see the wisdom of granting land to DHCOG, the real question is whether there will be significant demand for new projects. Property in the Company's "land bank" will do creditors little good if it cannot be sold. As noted above, Byat does not expect a recovery in the next two years. And there are some critical amounts due in that period.  And if he is wrong about the vigor or timing of the recovery, the situation will be even more difficult.

With this the stage is set for a second post on the 2009 financials.
 

International Investment Group: KPMG Report Ready But 2009 Financials Not Approved

IIG issued a press release on NasdaqDubai advising that while KPMG had completed its interim report, the Company could not release it yet because the Central Bank of Kuwait had not yet approved IIG's 2009 audited financials.

That latter statement indicates that the news in those financials is going to be what we in the financial world describe as "disappointing".

Here's the text of the press release:

Reference to the subject above and our announcement dated 22/04/2010, relating to the interim KPMG  report, to be received on 31/05/2010 and submitted to Sukukholders, which includes a preliminary  assessment of the company’s financial position and the options available to the company. 

Kindly be advised that KPMG has finalized the report referred to above, but IIG is yet to receive Central  Bank of Kuwait’s approval of its financial statements for the fiscal year ending December 31^st, 2009.  Accordingly, IIG is not in a position to release the aforementioned report, which includes references to the  31^st December financial statements, before obtaining such approval. 

We shall provide the interim report to all sukukholders who has signed confidentiality agreement, as soon  as the Central Bank’s approval is received.

IIG's Audited Finacial Sattements for the year ended as on 31st Dec 2009, shall be released to the market upon receiving Central bank of Kuwait's approval.

Earlier post here.

Dubai Debt Rescheduling Watch: DHCOG AED23.6 Billion Loss

DHCOG's 2009 audited annual report is out.  AED23.6 billion loss.  Equity at AED14.6 billion versus AED37.1 billion.

More commentary hopefully later today.

Dubai Debt Rescheduling Watch: Dubai Holdings Commercial Operations Group Misses Doctor's Appointment

Following up on Frank Kane's earlier article at The National, I was eagerly anticipating reading DHCOG's financials at Nasdaq Dubai.  Sadly they weren't posted.  Seems DHCOG missed its appointment.

Dubai Debt Rescheduling Watch: Drydocks and Maritime World to Restructure US$1.7 Billion

GulfNews reports that there's a new board at Drydocks and Maritime World and that the Company is in talks with its banks to restructure some US$1.7 billion maturing this November.

The new board comprises Hamed Mohammad Mattar Bin Lahej, Ahmad Eisa Hareb Al Falahi, Khalid Ahmad Bin Turkiya, and Geoffrey Taylor.  Taylor will be CEO.

"We are going through a process of discussions with the banks to restructure our $1.7 billion loan ... Obviously the market changes which occurred significantly slowed down our ability to meet our original schedules," said Taylor.

"We are going through a restructuring process," he added.

Kuwait: The Myth of the Asset Purchase Solution

 Apple House II  Danny Bradury   

Creative Commons Attribution 2.0 Generic license

Muhammad Al-Itrabi over at AlQabas had a positively brilliant article with a rather longish title "Companies have misled the people and want to deceive them when they call for the government to purchase assets".

Trust me, the article is much better than the title.  And much better than this rushed translation.

From the opening sentence "Perhaps frankness is the missing link in the local crisis" to its final  one describing trash assets he's both funny and scathing.

He says that despite all the official rhetoric about purchasing assets, when you interview officials off the record, then you really obtain the true story - the refutation of the equivocation that confuses many. 

"What is behind the reluctance to embark on the purchase of assets when the Governor of the Central Bank and the team with him which was created to solve the crisis first began discussing this solution and then just as quickly abandoned it?"

Basically, the answer is that assets on offer are duff assets:

1. Minority shares in companies that are in trouble where the purchaser will have to invest additional funds to rescue them.
   
2. Only a very few good assets are on offer.  Due less to the desire of companies to hold on to good assets than the fact there aren't very many.  The KIA was only able to find a single orphan asset - Global's stake in Bank of Bahrain and Kuwait.  KIPCO allocated KD100 million for asset purchases and couldn't find a single one. 
3. He also notes that companies are hanging on to their few good assets as their way out of the crisis - generation of funds to pay debt service, presence provides a comfort to lenders, etc.
4. Of the assets for sale many are illiquid due to both the quality of the asset and the inability of purchasers to obtain financing.  These assets don't have a market and are unlikely to.
5. Toxic assets that are a burden on companies.  Purchased for exaggerated prices and financed with debt.  Thus placing heavy burdens on the owners balance sheets and requiring large expenditures.  In effect practically non existent assets.
   
6. Real estate composed of unfinished/undeveloped properties plus  القسائم parcels(?) coupons (?).   Anyone out there with the correct translation, please post.   Land in artificial islands where ownership has reverted or where millions are needed for development.
   
7. Undeveloped tracks of land in foreign countries "in the desert" as is the case in Dubai and Bahrain acquired at gigantic cost and financed with loans at high interest rates.  And which cannot be disposed of at any price.
8. Many of the prices are unrealistically high as though we were still in normal times and not where cash was dear.
9. Assets that don't fit with the guidelines (trends?) for government entity investment.
10. Duplicative assets (I suspect he's referring in part to the pattern of cross holdings among Kuwaiti "Groups") where one would have to buy a myriad of companies to get control of the assets.
11. Assets that consist of licenses to develop real estate or "empty boxes".

Well worth the read.

Gulf Finance House - Exits Bahrain Financial Harbor for US$40 Million and Land

GIH released two announcements on the Bahrain Stock Exchange today regarding its sale of its remaining stake of 49.88% in BFH Company to Emaar, a Bahrain based investment company with its headquarters in Bahrain.  You'll recall that at the end of 2007, GFH sold the buildings at the "heart of the BFH" to Emaar Bahrain for some US$425 million.  At that time they buyer was described as a 100% Bahraini owned company.

The second contained financial information - that the contract was for US$262 million and that GFH's cash return was US$40 million plus some plots of land in the area of the BFH, which the Bank (GFH) intends to sell piecemeal.  Presumably Emaar didn't think much of the land and so didn't want it.  I'm guessing that the sale contract was for US$262 million and in return for its BFH Company shares, GFH got the valuable land (US$222 million) plus US$40 million in cash.   Assuming that the land was transferred at book, then GFH would not have to recognize a loss on its sale.  But note this is all speculation.

Anyone out there got an update on ownership of Emar or Emaar? 

Saudi Arabia Capital Markets Authority Levies SAR7.3 Million Penalty Against Saudi Telecom Ex Director

The Saudi CMA announced today that a final judgment had been made in the case of Mr. Saleh Bin Mohammed Bin Saleh AlHajaaj.  He had been accused of insider trading in shares of Saudi Telecom on 19 and 20 December 2004.

The judgment consists of the following:

1. Payment to the CMA of the SAR7,249,365 representing the profits on his trading those two days from information he obtained as a member of the Board.
2. Payment of SAR100,000 in fines.
3. A three year ban from working for any company traded on the Saudi Stock Exchange (Tadawwul).

The Investment Dar - Restructuring Update: Moving Forward Toward Implementation

Quoting informed sources "close" the Creditors' Co-ordinating Committee ("CCC"), AlQabas reports that the advisors to the CCC will finish drafting the documents and all preparatory steps to begin implementing the restructuring just before the end of the coming week. And that these will be discussed with the Company in the weekly scheduled session Thursday.  Then implementing regulations to the restructuring plan will be submitted to the Shari'ah boards of TID and the CCC's advisors, Morgan Stanley as well as to Ernst and Young who the Central Bank engaged to review the Plan as required under the Financial Stability Law.  The article notes that the Plan will be submitted at a later stage to the Court for final approval and that this may help in getting final approval for the Plan leading to its implementation under the FSL.

AlQabas also notes that the CCC and TID have been discussing the Company's five year budget/financial plan (the period of the restructuring) and the details of repayment of the debts which is expected to begin this September once the Court approves the Plan and the Central Bank gives the "green light".  The article ends by noting the complicated and thorny condition of TID.

Dubai Debt Rescheduling Watch: Check-Up Time for Dubai Holdings

Photographer’s Mate 2nd Class Johansen Laurel - Picture in Public Domain

As Frank Kane at The National reports, DHCOG's financials are supposed to be out "later today".  And when released will give an insight into Dubai Holdings' financial position.

Moody’s, another one of the other large ratings agencies, still issues reports on DHCOG and recently issued a relatively upbeat assessment.

Nonetheless, Moody’s also confirmed that it rated DHCOG at “B1 and under review for downgrade”. 

Dubai Rescheduling Watch - Dubai International Capital

An article from The National provides a bit more detail on DIC's asset sales and remaining assets as well as its debt postponement.

Dubai Debt Problems - Someone Else's Fault

As per this article from The National

Dubai’s financial slowdown should be treated as a “special case” caused by the downturn in world trade and had nothing to do with the intrinsic productive capacity of the emirate’s economy, the UAE economic report says.

It seems the culprits were:

1. Banks and investors who didn't provide sufficiently long-dated capital to finance Dubai's real estate projects.
2. Foreign investors whose tremendous and apparently imprudent large capital inflows contributed to a form of the "Dutch" disease causing rampant inflation.
3. The global financial crisis.  Long time readers of this blog will appreciate our standing comment that this is a "global" and not a "Global" crisis.

Despite the short-sighted actions of these external parties, there are a few bright spots:

“The case of Dubai is ‘special’ also because very large investments have been made in its soft infrastructure, in both industry and government, which will have highly positive effects on the long-run development of the emirate,” the report says.

Besides being "special", and I trust you'll note the comparison here is Emirate-wide:

“But perhaps the biggest improvement in the overall productivity of the UAE in general, and specifically in Dubai, is the high efficiency of Dubai government agencies and departments which adopt first-best policies and international best practices …,” the report says.

 And

When these factors are recognised, it will position Dubai as one of the “most competitive cities in the long run”, the report concludes.

A hat tip to The National for helping to set the record straight.

Il Accuse! -- Former TIBC CEO Flees Bahrain

 Copyright Allied Artists

As reported in the Torygraph, Glenn Stewart has managed to escape from the apparently intolerable conditions he was being held under in Bahrain.  And has filed a formal charge with the International Court of Human Rights for false imprisonment designed to "deliberately inflict mental cruelty and torture". 

You'll recall (if you force yourself to think some rather unpleasant thoughts) that instead of being incarcerated in one of Bahrain's jails (by all means the sort of thing one should definitely avoid),  he was forbidden to leave the island while investigations into the collapse of TIBC were ongoing.  A sort of a modified house arrest with Bahrain as the house.  I guess the nearest comparative would be the French penal colony known as "Devil's Island" for more than one reason.

As he aptly put it, having escaped from these conditions of inhumane treatment, he is akin to a runaway slave.

If that weren't disturbing enough, from the article it's hard to avoid drawing the conclusion that the parties the Bahraini authorities have detained in connection with the collapses of TIBC and Awal believe they are victims of an unjustified conspiracy against them involving the Bahraini authorities, Ernst and Young, and Hibis and perhaps others.   The Bahraini Authorities would seem to include at a minimum, the Central Bank of Bahrain, the Attorney General of Bahrain and various investigative organs of the CID - though it is unclear whether other entities and individuals might be involved.  Nor how high up this goes!  I'd also hasten to add that it's unclear whether all these parties are alleged to have been active co-conspirators.  Or whether some of them may have been unwitting dupes.

According to direct quotes from Mr. Stewart it also seems this conspiracy has sinister undertones of persecution of "Westerners".

It's reports like this that make Abu Arqala wonder when justice will be done, if ever.

 

And finally a hat tip to Rupert Bumfrey, I would have missed this disturbing story if he had not reported it on his blog.  It doesn't seem to have been reported elsewhere yet. And that could, perhaps, be a chilling indication of the extent of this plot.  Or then again perhaps not.

Former Tamweel CEO Sentenced to Jail

Maktoob Business reports that a local court sentenced Adel Shirawi, former CEO, and three other officials to jail terms ranging from three to one years for financial crimes during their tenors at Tamweel.  Mr. Shirawi's sentence also includes a fine and the repayment of funds.

As noted, lawyers for three of the convicted parties (Messrs. Shirawi, Abdul Razak, and Khalthoum) said they would appeal the sentence.  There was no statement regarding the fourth party (Abdullah Nasser, former Deputy CEO), but presumably, he is appealing as well. 

Dubai Debt Rescheduling Watch: DIC Sells All Liquid Securities?

 
Here's a report from Maktoob Business that DIC has sold the last of its listed securities.

F for Fake: Another Look

Both images generated at Images Graphics.

And here's the error level analysis output for the first picture.

And for the second.

You can see the pattern on the sign differs from the rest of the pictures.

You Said What?: No, Really You Did? The "Nonsense" of Transparency

Indeed you did as this extract from a BIS publication shows.

Cross-border investment flows should be welcomed by recipient countries and encouraged by source  countries, as many countries in our Area need to set rules to enable the establishment of large projects for  the purpose of creating jobs. That will also enhance peace and stability on the national level, which will certainly improve the prospects for the regions in this vast Area. Any help by the World Bank in improving and unifying investment laws in addition to watching their implementation, will go a long way in achieving this important regional objective.

Sovereign Wealth Fund source countries should also be interested in investing in mega projects in the region for three reasons, as follows:
1. The Global Financial Crisis proved that investments through Industrialized Advanced Countries’ investment banks are not totally risk free.
2. There is a need within SWF source countries to safe guard flow of food imports at reasonable prices, and the possibility for incorporating companies as direct investment projects in countries in the region is a realistic possibility, when investment laws are enacted and maintained at international standards.
3. SWF source countries should be interested in the maintenance of social order, peace and stability in the regions of this Area.

Another reason that makes me think that SWFs from our region might change the flow of their direct investments, is that once we see the proposed Regulations re Sovereign Wealth Funds in the Industrialized Advanced Economies start being implemented, when economies in the West start doing well, more questions will be asked and more forms will become necessary to fill and more disclosure and transparency will be demanded. This behavior will signal that there is no strong need for foreign capital in the West, and that the political mood has changed.

Therefore, we might see gradual tightening of the scrutiny on capital flows from SWF countries, at one stage, especially funds that are destined for direct investment in certain companies.

Faced with all this nonsense, SWFs will certainly come to the conclusion that it is time to change strategy. This could make SWFs avoid direct investment in certain companies, or even avoid direct investment in all companies, and become more of passive investment vehicles in the West. As, SWFs have large sums to  invest, this might make them direct part of their investments to existing or newly created companies in the region. This situation, if it happens soon, will lead to creating a new regional developmental cycle.

Having an Identity Crisis?

Not sure who you are?

Well, the staff here at Suq Al Mal are continuously on the look-out for ways to help.

And  so we recommend this site as you attempt to address that question.

Of course, under our long standing policy, we don't make recommendations before thoroughly testing them in our state-of-the-art laboratory.  In keeping with this blog's policy, we don't use animals in the process. 

Rather Abu Arqala himself served as the test subject using some of the deathless prose from previous posts at Suq Al Mal.  

For the first time ever, we are able to report the results that on an informal basis AA is a male, but on a formal basis a weak male - with the explanation that he may be "European".   

Quel dommage! 

Though it wasn't immediately clear if that was an "old" or a "new" European.

Real or Fake? AMENDED

Dave Roberts published this picture over at TheGulfBlog.

And as you'll see there was some question about whether the picture was doctored.

Here's an interesting article analyzing a picture from Victoria's Secret showing how various tools are used to catch manipulations in pictures.

One of the tools that's available on the net is here.

I've had some outside technical help and am revising my earlier comment that the picture can't be analyzed on the Error Level Analysis site.  The problem was not the jpg format but the extraneous "bits" after the jpg in the link location.  Once removed, ELA performed an analysis.

Here's the results page.

While I am told this is not conclusive, you'll notice there are some areas on the sign where there is not random "noise" and this can be an indication of modification.  You'll notice these are  black.  Also something may have been done with the horizon above. 

You Said What?: Europe Can Learn Debt Management from Dubai

The following was reported in The National on 26 May.

European countries grappling with Greece’s financial crisis could learn from Dubai’s handling of its own debt problems, Sultan Ahmed bin Sulayem, the chairman of Dubai World, said yesterday.

The Dubai Government had intervened positively to provide a solution to the emirate’s debt problems and ensure no banks were in financial danger, Mr bin Sulayem said.

Dubai’s response to the financial crisis “should be adapted and learnt by the European countries in facing and tackling the crisis in Greece”, he said during a speech in Dubai yesterday.

From the Gulf News 27 May: "DIC Seeks Three-Month Repayment Delay".

"It is not a standstill. It is a request for extension of maturity,"  "The extension period would allow the implementation of a consensual longer term plan that would enable DIC to maximise the value of its business for the benefit of all its stakeholders,"

From the Financial Times 9 May:  Dubai Holding Advisers Engaged".

From Trade Arabia 26 May:  Dubai Holding Debt Restructuring "Risk Mounts"

"Dubai Holding is seen as the next subject of the emirate's debt restructuring programme which started with Dubai World in November, Saud Masud, head of research for the Middle East and North Africa at bank UBS, said in an interview.
'We believe Dubai Holding has roughly $15 billion in loans and bonds but this does not include any off balance liabilities arising from investor or end-user default on properties that have dramatically declined in 18 months,' Masud said."

From the Financial Times 27 May, Simeon Kerr reporting.

"Government cash flows remain meagre and analysts worry about its ability to raise more debt in the current environment. The banking system remains tight and in need of more liquidity to finance businesses and real estate projects.

UBS, for example, has said Dubai developers may need to raise another $11bn to finish semi-complete the real estate projects that haunt the city.

More hard work is necessary for Dubai to turn the corner."

If you decided to swim the Channel and had to be pulled out by the scruff of your neck in order to save your life, it's probably not a good idea to boast about your aquatic and athletic prowess.  If other members of your family are still flailing around in the water, it's probably an even better idea to avoid making similar comments about your family's skills.

The Curious Case of Al Thouraia Project Management Company WLL

This company has come up more than once in earlier posts on Global Investment House ("GIH"). 

Today it's time to take a closer look. 

Documents related to the Offering of AlThouraia can be found here. If that doesn't work, go to GIH's website.  Click on the Investor Relations tab. And then Global News. And then scroll down to 2 June 2008.

On 2 June 2008, with great fanfare GIH announced this KD180 million (US$630 million or SAR 2.5 billion) private placement.

Global announced the launch of Al-Thouraia Project Management Company's capital increase to KD180 million.  Al-Thouraia shall be utilized as a Special Purpose Vehicle (SPV) to invest its whole capital in Mazaya Saudi for Commercial Investment Company "Mazaya Saudi", which has been incorporated in the Kingdom of Saudi Arabia, and will be managed by Mazaya Holding Company "Mazaya". Global Acts as Lead Manager Al-Thouraia Project Management Company. Mazaya Saudi will operate as a real estate development company in the Kingdom of Saudi Arabia in order to capitalize on the opportunities available in the Saudi Arabian real estate sector, which is known to be a vibrant, growing and a lucrative market.  Mazaya Saudi will have a paid-up capital of SR2.5bn.  Mazaya Saudi shall conduct its business in accordance with Islamic Shari'a.

The Al Thouraia Summary outlined the attractiveness of the deal:

1. The market opportunity in Saudi. 
2. Strategic partners from Kuwait (Al Mazaya Holding) and Saudi (Abdullatif Alissa Group and Abdulaziz AlAjlan) plus some unnamed other strategic investors. As noted in GIH's press release above, to include Global itself. 
3. Excellent promised financial results: An IRR of 20.1% with solid cashflow -- an average dividend payout ratio of 60%. All achieved with moderate use of debt. Leverage ratio (no more than 35% at its peak). 
4. As well as the prospects of a liquidity enhancing listing on the Saudi Stock Exchange.
   

As is common, the "teaser" was accompanied by a Private Placement Memorandum . That link will take you to the copy posted on GIH's website. Surprising for a deal this size, this document is rather disappointing. Certainly, this is not as polished or professional as efforts by say Arcapita or Investcorp – two firms that I would expect GIH considers its peers. Perhaps, this is an earlier version which was revised later. Perhaps, this fundamentally reflects on the relative state of Kuwaiti regulations vis-à-vis some other GCC states?

As I read it, some items caught my eye. And some did not – that is, while I was expecting them, they didn't appear. 

The language and content of the Disclaimer need work and tightening. No doubt for some a technical quibble. But how one deals with the details is often a good indication of how one deals with the big picture.  The sort of thing a professional looks at to gauge the professionalism of his or her competitor.

The Term Sheet is rather short and incomplete. It should discuss all significant aspects of the deal, thus, providing the investor with a summary snapshot of the transaction in a single place. Besides the financial aspects, the identity of major parties, relationships/contracts among them, expenses and fees, length of the Offer including various steps, e.g., Offer Period, Allocations, Issuance.  And so forth

The Saudi Real Estate Market section does not discuss major items such as:

1. Laws and Regulations affecting a landlord's right and ability to increase rentals, including requirements, timing, procedures.
2. Commercial Issues:  The types of leases commonly used in the Kingdom, e.g., short or long term, escalation and early termination/cancellation clauses, whether operations and maintenance are separate from rental and what controls exist on increases in those critical cash outflows, etc.  The prevalence of rebates, decorating/finishing allowances to tenants, etc in the market.
3. Legal  Issues including mechanisms for challenges to rental and fee increases.  The ability, procedures and timing to evict of clients in breach, etc. 
4. Status of Mazaya Saudi.  There is a disconnect between the press release  ("has been incorporated") and the PPM ("being established").  A small point admittedly.  One simply explained no doubt.  But one wonders why the two weren't conformed.
5. Mazaya Holding Kuwait:  On Page 25 we learn that Mazaya Saudi will be "positioned to leverage on Mazaya Holding (Kuwait's) competitive market advantage". One that provides as we are told an "absolute advantage against competition". Certainly an enviable position to be in for this Kuwaiti Company not only in its home market but in what is for it the relatively new market of Saudi Arabia.  On Pages 26 -28, we get more details on the remarkable Mazaya Holdings. Formed in January 2004, it has 18 projects – of which it has completed a grand total of 4.  Of the 4, there is the 22 storey Global Tower, 32 villas in the Al Maha Project, the Al Roya Tower and 6 buildings in Dubai Healthcare City.  With these major accomplishments under its belt, it already enjoys an absolute advantage. Imagine its market position today. I'm guessing The Donald may be its latest apprentice. He's going to have to hustle to make the cut!  Or "You're Fired!"
6. Strategic Shareholders:  We also get a partial glimpse into the proposed shareholding structure. There's a list of three entities and the promise of other strategic investors. Perhaps for competitive or business confidential reasons the target holdings of each are not disclosed, though one might expect a prospective shareholder to wonder just what level of financial commitment these entities were going to make to the venture. 
7. Management:  There's no mention of the proposed members of the Board and CEO, their CVs and  perhaps more importantly what rights the investor has in choosing them. Recall that the investor is a unit holder in Al Thouraia and Al Thouraia is the shareholder in Saudi Mazaya. Al Thouraia as an entity will vote for the Board at Saudi Mazaya.  And that is precisely where the assets and cash generation take place.  As an aside, I'd guess (note that word) that this structure is used to "get around" Saudi Capital Markets Authority regulations on floating shares in Saudi companies. The share flotation is outside the Kingdom and therefore outside the CMA's regulations. 
8. Investor/Shareholder Rights: The usual enumeration of rights is missing. Such things as voting for the board and management, pre-emptive rights, requirements for the mandatory provision of periodic information (financials and otherwise) by the company as well as rights to demand information.  
9. Use of Proceeds: No separate page. No real discussion. From Page 7 we see there is a 1% placement fee and 4% marketing fee – both non refundable. Unclear if this means that GIH earns 4% even if it doesn't place the Units? 

Risk Factors are Jenny Craig slim. 

At one level to the point of being obscure. I'm really not sure but it seems that what is being said regarding Regulatory Risk is that the investor only has to fear regulations that are "vague and incomplete in nature". Would that mean that a clear imposition of tax or a definitive cancellation of a permit would therefore be benign? 

On the other hand there are some very clear and very true statements here, such as "Future Performance is Difficult to Predict". 

Mostly though  there's a lot that I would have expected to see but didn't.  And to be fair it's not only in GIH's PPM but in many many others issued not just in the GCC:

1. A clear statement that this is a speculative investment.  If you build it, they may not come.  This is after all spec real estate.  New developments. 
2. Contractor performance issues:  If you hire them they may not build on time or to specification. 
3. Availability and sufficiency of utilities and other public services. If you build it, you might not have electricity, water, sewage. And maybe no or  inadequate roads into the area. 
4. Re-letting rental risk. If they move out, you may get less rent from the new tenant.
5. A wider definition of competition – more than price:  quality, location, amenities, etc. 
6. Increases in operating and maintenance costs above rental increases. 
7. Structural Issues: an SPV in Kuwait stands between the investor and the income generating property in Saudi. Repatriation of funds. Potential tax issues. FX risks. 
8. Potential Conflicts of Interest:  I was surprised that this wasn't discussed since Mr. Omar El-Quqa, EVP at GIH, was also a member of the Board at Mazaya Holding. As we learn in this press release from July 2007, GIH then sold some 48 million shares in MH, but remained the second largest shareholder with 5.5%. Perhaps, between July 2007 and June 2008, there were further changes in shareholding. I didn't see anything on GIH's website, nor in its first three quarterly reports for 2008. But I may have missed something. Depending on the various stakes the proposed Strategic Partners might hold, it would seem that good form would require some contemplation of potential conflicts of interest.In any case, I suppose we can conclude that GIH saw no conflicts of interest nor any potential for them and so rest comfortably. At the end of 2008, GIH reported in Note 19 (a) that it owned 21% of Mazaya. Note this year end shareholding is well after the private placement. And it may have been a Victor Kiam moment. "I liked the razor so much I bought the company". Having done the deal and seen more evidence of MH's absolute advantage, it may have seemed like a good deal to reacquire some shares.  In which case perfectly innocent.
9. Material Contracts:  Summary of contracts with Mazaya Holding and any other parties.  All fees they are entitled to. On Page 35 we see they get an annual fee of 0.75% of paid up capital. KD1.35 million a year seems a rather small incentive for MH to apply its "absolute advantage" for Mazaya Saudi instead of for its own projects where it gets to keep the lion's share of the profits.
   

As we know GIH's placement effort was successful, though I couldn't find a press release on GIH's website. In fact there seems to have been almost total radio silence on the topic going forward. No mention in its 2008 annual of its great success in raising KD180 million. No press release. But then I may have not looked hard enough. The only GIH driven publicity I could find was a Bloomberg press item referring to advertisements that GIH placed in the Kuwaiti press in November 2009. Those trumpeted the fact that the Appeals Court had ruled it was not guilty in a civil case brought by a Japanese real estate firm regarding this transaction. There were, to be fair, the mandatory disclosures in GIH's financial reports.

Subsequent to the Offer, Al Thouraia placed roughly KD83 million with GIH in an "Islamic" transaction. A KD43 million deposit was also placed with a Kuwaiti bank. It's unclear to me why the funds were not immediately transferred to Saudi Mazaya. The 2 June 2008 press release was clear. "Al-Thouraia shall be utilized as a Special Purpose Vehicle (SPV) to invest its whole capital in Mazaya Saudi for Commercial Investment Company "Mazaya Saudi". And we're told on Page 24 that among its other activities, Mazaya Saudi would engage in Portfolio Management to "amplify shareholder value". No mention that Al Thouraia would do more than invest in Mazaya Saudi.  So shouldn't investments, if any, be in Mazaya Saudi's name?  The need for the funds in Saudi would seem to be manifestly urgent. The PPM (Page 24) discloses that Saudi Mazaya intended to begin work on three projects the first year. What better preparation for that than to get the funds in Saudi so they would be ready to be employed?

Perhaps, out of caution in a deteriorating market, the Board at Al-Thouraia decided it would be wise to keep the money in Kuwait where it would be safer. Perhaps just about the same time that the Board at Global MENA Financial Assets decided to park a significant portion of its assets and liquidity at GIH. Two rather strong market endorsements of the financial stability and security of GIH. A possible example of the market phenomenon known as "a flight to quality". And as I've noted before both entities were well positioned to well understand the financial condition of GIH.

Anyways let's follow the story using GIH's 2009 financials. 

1. Note 24 Page 57: It seems that a KD43.3 million AlThouraia deposit with a local bank was offset by that bank against a loan made by that bank to GIH. It's unclear to me what the legal basis for this offset is. Did AlThouraia guarantee the loan made by the bank to GIH? If not, how does the bank cross legal entity lines? Particularly, if GIH only owned about 83.36% of AlThouraia, what is the basis for stiffing the minority shareholders on the offset? There are all sorts of theoretical possibilities. And without picking one, let me just list some of them. Was the problem at the outset, when the deposit was placed? Perhaps, Kuwait doesn't have an ironclad "trust" law covering such deposits? And GIH placed the deposit with the bank "in trust for Al Thouraia" only to be rudely surprised later? Perhaps, there was an innocent clerical error about the name of the bank account holder when it was set up? Perhaps, the funds were mistakenly described as collateral? I'd appreciate a post from anyone out there with any insight on this. 
2. Note 25 Page 57: GIH acquired Al Thouraia through an asset swap – a non cash transaction. The assets exchanged are described on Page 58. It would be interesting to know if Al Thouraia's Articles of Association provided for Al Thouraia conducting the sort of activity that this asset swap implies. Or if Al Thouraia's shareholders either approved this step and/or amended the Articles. In any case through this transaction, GIH acquired control.  In so doing it added KD28 million or so to its cash balance, and removed KD83 million in borrowings (from Al Thouraia) from its balance sheet on consolidation. Note GIH did not necessarily obtain control over that cash. And it's likely that the KD83 million in debt remained a legal obligation of GIH.  In addition to these benefits, GIH's shareholding also implied the right to disconnect the feeding tube.
   

As we learn in Note 5 to the Company's 1Q10 financials, on 14 March 2010, GIH liquidated Al Thouraia recognizing a KD0.824 million accounting profit, while experiencing a KD18.725 million cash outflow. What explains this rather perplexing move by a Company desperately in need of cash to pay hungry creditors? The liquidation extinguished GIH obligations in the amount of KD125.6 million. The rationale for KD18 million tradeoff is suddenly a lot clearer. 

It also closes the book on Al Thouraia. A story which GIH no doubt wishes to forget as well hopes that its clients and the market will as well.

As indicated by the title, a curious case indeed.  And one subject to many interpretations.