The Future of Sukuk - Asa Fitch at The National

Asa Fitch over at The National has a piece on the sukuk market which you might find interesting.

Personally, I vote for a future.  As with any new financial instrument there is a bit of teething pain.  And the problems encountered today will lead to changes in structures  to correct defects.  As well, one can wish for a bit more investor intelligence though that is perhaps pushing the frontier of optimism a bit far.

Financial Times: The Great (Economic) Debate

Today's Financial Times resounded with more than its usual "plop" when it hit my doorstep this morning.  When this happens, AA knows that the issue is freighted with more than the usual amount of weighty insight and ponderous thoughts.

The FT has opened its opinion page to a one week debate between the advocates of austerity and of stimulus which promises at least five more such issues.  And at least that number of resounding thuds.  Luckily, the doorstep at Chez AA is sturdy.

Wrapped comfortably in their blankets of blind dogmatism (perhaps a bit too tightly wrapped), several learned thinkers have already weighed forth.  There have been the usual appeals to authority, though as of yet we have not heard what Master Aristotle's position is.  Prophets of various economic sects have been quoted along with the lesser works of apostles and disciples.   Holy books have been referred to.    Heretical scriptures and false prophets denounced. 

Today the abject failure of one particular sect to learn from history was noted, perhaps more in sadness than bitterness.  They are, it appears, sadly doomed (and perhaps damned) to repeat it.  One bearded chap was called out for holding a particularly laughable view - at least in the opinion of one economic "scientist".

As of yet there have been no remarks on opponents' paternity nor the virtue of their womenfolk, though like the 2006 World Cup there is still plenty of time.

While many important matters have no doubt been settled in this way, such as the number of wills and natures of Christ,  I expect this debate will prove a vain attempt to enlighten those who are manifestly in error.   

And so AA is preparing for the eventual regrettable recourse to force to secure recantations (or perhaps more precisely "refudiations") from the evil,  the ignorant and those of mixed disposition between the two.  And, if necessary to eliminate the various Great and Small Satans from the "science" of economics before they mislead others from the path of righteousness.

At present, AA is busily sharpening a rather sturdy stave for the intellectual battles to come.  What better way to make a point forcefully?

But which side to choose?  As a young undergraduate, I had fancied one day enlisting in Minsky's legions to do battle with the unbelievers.  Recently though I have considered joining the forces of Arthur Laffer.  A man whose profound insight was with Occam-like economy inscribed on the back of a cocktail napkin.  When I consider the venue, a potent motive for enlisting in his research corps.

Global Investment House - Announces It Has Paid Restructured Debt Installment

When times are good, one announces a new loan with great fanfare and self congratulation.  Once one has defaulted the situation changes.  Repayment of one's contractual obligations - previously taken as a given - is no longer certain so one announces the "successful" making of a repayment.  This is also a strategy to burnish one's now tarnished name with a bit of "good news".

Today GIH issued press releases on the DFM, BSE and KSE announcing that it had successfully repaid US$50 million in principal on its restructuring for value 21 July.

As noted, with this repayment and the first US$28.9 million repayment in April, GIH has repaid US$78.9 million on its restructuring, 46% of the amount due by 10 December 2010, Plus an additional US$20 million in interest.

It has also repaid some KD20 million in bonds (US$68,7 million).

In very rough numbers, GIH has about US$2 billion in debt.  The above amounts (excluding interest) are roughly 7% of the total.  That this amount is low is not surprising - the repayments schedule has been designed to give some breathing room for asset price appreciation.   It begins with rather modest payments in the first year which then increase in the latter years.  The problem GIH faces is that the tenor on its restructuring is an unrealistic three years.  So the increase is rather sharp.  And represents a very real minefield for the Company particularly if the economic recovery is modest or slow.

Aayan Leasing and Investment - Press Release on 2009 Financials

Below is Aayan's announcement of its 2009 financial results from the KSE.  As usual Arabic only.  If you're wondering why Total Liabilities and Equity don't foot to Total Assets of KD510 million, the difference is Minority Interests of KD 42 million.

Looking at Aayan's 3Q09 financials, it's pretty clear that the bulk of the loss was due to the watchful eye of the Central Bank of Kuwait which no doubt suggested that ALI recognize  in 4Q09 an additional KD50 million of its full year losses of KD77 million.  That latter figure includes the share of Minority Interests in the loss - roughly KD3.8 million.  When the full report becomes available, it will be possible to refine that calculation. 

For those who don't read Arabic:

1. The first line is net profit/loss.  KD(73.3) million
2. The second net profit/loss per share.  KD(119.18)
3. The third current assets.  KD162.2 million.
4. Then total assets.  KD510.1 million.
5. Then current liabilities.  KD400.4 million.
6. Then total liabilities.  KD436 million.
7. Then shareholders' equity (excluding minority interests).  KD31.2 million.
8. 2009's figures are on the right with comparable 31 December 2006 figures on the left. 
9. And to facilitate your reading, I've included after each of the categories above the rounded 2009 figures.

That information is followed by standard details on related party transactions:  KD0.321 million of income and KD4 million of expenses.  The fact that the Board has decided to recommend against a cash dividend for 2009.  The longish bit is an extract from the auditors' comments on the Company's financial condition (summarized in my post yesterday so I won't repeat here) along with the comment that ALI's accumulated losses exceed three-quarters of its legal capital and so in accordance with Article 171 of the Commercial Companies Law it is required to call an extraordinary shareholders' meeting to come up with a solution.  The options are  (a) raise new equity, (b) reduce capital or (c) dissolve the Company.   A solution can involve both options (a) and (b).

[8:17:36]  مجلس ادارة (اعيان) يوصي بعدم توزيع ارباح عن عام 2009‏
يعلن سوق الكويت للأوراق المالية بان شركة اعيان للاجارة والاستثمار (اعيان)‏
افادت ان مجلس الادارة قد اجتمع يوم الاثنين الموافق 12-07-2010‏
واعتمد البيانات المالية السنوية للشركة للسنة المالية المنتهية في 31-12-09‏
وفقا لما يلي:‏
ِ1) نتائج أعمال الشركة:‏
البند             السنة المنتهية في 31-12-09   السنة المنتهية في 31-12-08‏
الربح(الخسارة) (د.ك)           (73.358.493)            413.729‏
ربحية (خسارة)السهم(فلس كويتي)   (119.18)                 0.68‏
اجمالي الموجودات المتداولة     162.182.723       259.676.790‏
اجمالي الموجودات              510.109.513        600.822.985‏
اجمالي المطلوبات المتداولة     400.371.774       333.762.993‏
اجمالي المطلوبات               436.985.779      450.438.515‏
اجمالي حقوق المساهمين        31.200.238        101.523.604‏
بلغ اجمالي الايرادات من التعاملات مع الاطراف ذات الصلة مبلغ 321.117 د.ك
بلغ اجمالي المصروفات من التعاملات مع الاطراف ذات الصلة مبلغ 3.997.962 د.ك
علما بان موافقة بنك الكويت للاوراق المالية على هذه البيانات كانت بتاريخ
ِ07-07-2010 .‏
ِ2) التوزيعات المقترحة:‏
أوصى مجلس ادارة الشركة بعدم توزيع اى ارباح عن السنه الماليه المنتهيه
في 31-12-2009 . علما بأن هذه التوصيه تخضع لموافقه الجمعيه العموميه ‏
والجهات المختصه .‏
علما بان تقرير مراقبي الحسابات يحتوي على التالي :-‏
ِ1- عدم التأكد المتعلق بالاستمرار على اساس مبدا الاستمرارية :‏
دون التحفظ في رأينا ، نلفت الانتباه الى الايضاح رقم 2 حول البيانات ‏
المالية المجمعة والذي يبين ان المجموعة تكبدت خسائر بمبلغ 77.175.466 د.ك
للسنة المنتهية في 31 ديسمبر 2009 ، وكان لدى المجموعة خسائر متراكمة ‏
بمبلغ 67.505.320 د.ك ، وكما في ذلك التاريخ تجاوزت المطلوبات المتداولة
للمجموعة موجوداتها المتداولة بمبلغ 225.892.585 د.ك . اضافة الى ذلك ، ‏
عجزت الشركة الام عن سداد التزامات دين مبلغ 78.065.913 د.ك وعلقت ‏
دفعات سداد المبالغ الاساسية لالتزامات الدين الى البنوك والمؤسسات المالية،
وهي تعمل بفاعلية مع الممولين لاعادة جدولة التزامات ديونها . ان هذه الظروف
مع الامور الاخرى المبينة في ايضاح 2 ، تشير الى وجود عدم تأكد مادي مما ‏
يمكن ان يثير شك كبير حول قدرة المجموعة على الاستمرار في اعمالها على ‏
اساس مبدأ الاستمرارية .‏
ِ2- الامور القانونية والرقابية الاخرى :‏
ووفقا للمادة رقم 171 من قانون الشركات التجارية ، حيث ان الشركة الام قد ‏
خسرت اكثر من ثلاثة ارباع رأس المال ، يجب على مجلس ادارة الشركة ‏
الام الدعوة الى عقد جمعية عمومية غير عادية لمناقشة خطط الشركة الام ‏
في المستقبل .‏

Global Investment House - National Bank of Umm AlQaiwain to Appeal

Following yesterday's announcement by Global Investment House that the Court of First Instance in Dubai had ruled in its favor over the long standing dispute between NBUQ and GIH over a US$250 million deposit, today NBUQ issued a press release on the ADX relating its side of the story and advising that it intends to appeal the judgment.

When NBUQ files its appeal, the judgment of the lower court will be stayed while the Appeals Court hears the case.  The party losing in the Appeals Court will have the right of a final appeal to the supreme court.

Global Investment House - Poor Performance of Funds Highlighted Why?

AlQabas has an interesting article on YTD performance through 25 June performance of funds domiciled in Bahrain.  Global has I believe some 12 or so funds listed on the BSE.

For the record, the results were:

1. European Stock Index Fund down 9.8%
2. US Stock Index Fund down 7.52%
3. Energy and Petrochemical Industries down 6.32%

Other firms similar negative performance is mentioned.  

1. SICO's Gulf Stocks Fund is down 6.53%
2. TAIB's Bank's MSCI-based GCC Stocks Fund (Islamic) down 5.77%.

Interesting article because of the focus on Global - and the performance of just three of its funds.  In an environment where other fund managers are incurring losses as well.  

Aayan Leasing and Investment - 2009 Losses of KD73.2 Million

Aayan Leasing and Investment has reported its 2009 earnings and they are dismal:

1. A net loss for the year of KD77,175,466.
2. Accumulated losses of KD67,505,320
3. Current Liabilities exceed Current Assets by KD225,892,585
4. Default on KD78,065,913
5. Breach of Article 171 of the Commercial Companies Law = Loss of more than 75% of legal capital.

Not a pretty picture, but I suspect still prettier than what happens to creditors and shareholders.

AlGosaibi v Maan AlSanea - Abu Dhabi Commercial Bank Sues Saad for US$32 Million

Asa Fitch over at The National reports that ADCB has filed suit in London against Saad Trading and Contracting over a default on a currency swap of US$32 million.

There's really not much to add on top of what's in the article.

Global Investment House Wins Round #1 Against National Bank of Umm Qaiwain

GIH announced this morning that the Court of First Instance in Dubai had ruled in its favor against NBUQ ordering it to return GIH's US$250 million deposit plus interest and costs to GIH.

This is indeed good news for GIH.  Or perhaps more precisely for GIH's creditors.

As of 31 March 2009, NBUQ had roughly AED3.2 billion in cash and banks (roughly US$859 million).  Repayment to GIH would leave NBUQ will a net positive balance in interbanks to the tune of some AED1.7 billion or so.

But it's important to note that this is also just the Court of First Instance.  NBUQ has the right of appeal in which case implementation of the judgment will be suspended.

You can also read NBUQ's discussion of the law case (prior to this judgment) in Note 13 to its 31 March 2010 financials linked to above.

AlGosaibi v Maan AlSanea - Fortis Bank versus ADIB - The Letter of Credit

See important additional information here on Bunge's role in transaction and ADIB's knowledge of the nature of the transaction.

As promised a look at the Letter of Credit ("L/C") issued by Awal Bank which Abu Dhabi Islamic Bank ("ADIB") advised and confirmed to Fortis Bank Netherlands.

The text of the L/C issued by ADIB through Fortis is Exhibit #2 to Document #24, the Declaration of Nuhaid Saliba dated 31 August 2009. Note Exhibit #1 is the text that Awal proposed to ADIB.  That of course is not the instrument on which Fortis relied and through which ADIB conveyed its irrevocable undertaking.  Exhibit #2 is the key document as ADIB is its author.

And just to be complete, as you'll recall, ADIB is asserting fraud as the basis for voiding its obligation but not fraudulent documents or fraudulent shipment or non shipment.  Most jurisdictions have held that if the documents comply with the terms of the L/C then the bank is obligated to pay.  The "fraud" defense is applicable only in very limited circumstances.  

These and other documents can be found at the NY Supreme Court Website http://iapps.courts.state.ny.us/webcivil/FCASMain  under Case # 601948/2009, 

Let's step through the details of the L/C.

1. Issue Date: 16 June 2008.
2. Expiry Date:  14 July 2008
3. Applicable Rules:  UCPURR = Uniform Customs and Practice for Documentary Credits (#600 of 2007) and Uniform Rules for Bank-to-Bank Reimbursement under Documentary Credits (#725 of 2007).  The former sets forth the rules for the handling of L/Cs.  The latter the rules for banks to reimburse or pay one another   These are pretty much the standard governing principles for commercial letters of credit (aka "documentary credits").
4. Issuing Bank:  Awal Bank BSC Bahrain
5. Applicant - AlGosaibi Trading Services Hamilton Bermuda
6. Beneficiary - Bunge SA Switzerland
7. Currency/Amount:  US$39.999,996.52
8. Payment:  360 Days after acceptance of documents.
9. Port Loading:  Any port in Brazil.
10. Final Destination: Any port in Taiwan and/or Spain.
11. Latest Date of Shipment:  30 June 2008.
12. Goods Description:  (a) 52,686.31 MTS of Brazilian soybeans, packing in bulk at US$564.90 Per MT CFR Taiwan (b) 30,000.00 MTS of Brazilian maize SLM packing in bulk at US$341.25 per MT CFR Spain.  (Note: CFR = Cost and Freight)
13. Documents Required:  (a) One copy of commercial invoice.  (b) One photocopy of the bill of lading. (c) One copy of beneficiary's certificate stating that the copies of shipping documents provided are true and correct copies of the originals.  That the original bills of lading relating to the shipment should be sent to the Notify Party stated in the B/Ls or to the agent at destination and that the goods described should be discharged at the port state in the B/Ls.

Additional Conditions:

1. Third party documents except drafts and invoices acceptable.
2. Documents showing one or more third party (ies) as shipper and/or exporter are acceptable.
3. Fax or photocopy of documents are acceptable.  Documents issued before LC issuance (including B/L) are acceptable.
4. Documents acceptable inspite of any and all discrepancies with exception that invoice value drawn may not exceed the maximum letter of credit value and the letter of credit may not be expired.
5. Typing mistakes do not constitute a discrepancies.
6. Late presentation of documents is accepted on the condition that documents are presented within LC validity.
7. Bill of lading presenting a greater quantity/amount than shown on invoice is acceptable.
8. Documents shall be acceptable as presented.
9. Abu Dhabi Islamic Bank Abu Dhabi UAE is authorise to confirm this L/C and advise it to Fortis Bank Rotterdam.
10. Fortis Bank Rotterdam is authorised to confirm this L/C at the request and for the account of the beneficiary.  The confirmation of the first advising bank, that is Abu Dhabi Islamic Bank, Abu Dhabi UAE covers the obligation of the issuing bank, that is Awal Bank BSC, Manama and the confirmation of the Fortis Bank (Nederland) NV Rotterdam only covers the obligations of the first advising bank, Abu Dhabi Islamic Bank, Abu Dhabi UAE.
11. Charges:  ADIB's confirmation charge (a cool US$500,000) for Awal.  Fortis' charge (not specified here) for Bunge.

Now to the tafsir.

First, as is pretty clear from the text of the L/C this is not a typical documentary letter of credit.  It is closer to a standby letter of credit - which you can think of as a guarantee of payment.

1. At no time do any of the banks involved have an original bill of lading in their possession.  An original bill of lading is generally required by a shipping company to release goods it has shipped.    Having the B/L provides a measure of collateral security, if the applicant does not pay.  Now in a transaction in which the bank is giving its obligation to pay the beneficiary in the future (in this case 360 days after it accepts the documents) having the B/L only provides collateral comfort for a short period while it is at risk for the applicant or issuing bank's failure to pay.
2. In Additional Conditions #4, the issuing bank has explicitly waived all and any discrepancies in the documents except for the amount drawn under the credit and presentation within the L/C validity.  That means any other condition.  Hardly the stance that a party concerned with the underlying commercial transaction would take.  The power to refuse payment for discrepancies (in the documents) provides a way to enforce the terms of the contract on the seller. Giving this right up doesn't make a lot of commercial sense.
3. In Additional Conditions #7, B/Ls showing a larger quantity are acceptable.  Under UCP 600, for bulk commodities, a variation of +/- 5% is allowed (Article 30 (b)) unless prohibited.  5% of the amount shipped would be roughly US$2 million.  Would all of you out there who think that Bunge is going to ship another US$2 million worth of crops but not get paid for them, please raise your hands?  Didn't think I'd see any.  Of course there is no harm in this clause as it benefits the applicant.   But what is the commercial reason this would be included?  
4. A couple other conditions are worthy of mention.  As noted above, Additional Condition #1  allows third parties on the shipping documents.  Meaning the shipper need not be Bunge and the party receiving the goods need not be AlGosaibi.   Additional Condition #3 allows documents to be dated prior to the L/C issuance. Faxes of documents are acceptable.  Coupled with the earlier waiver of  all discrepancies except for payment amount and presentation within L/C validity, all this looks like setting up the conditions for document shopping.  That is, making it very very easy to find conforming documents from another trade transaction not involving the parties named in the L/C.  All one needs is access to documents and a photocopier.

Second, is there a commercial reason for such a structure?  Possibly but how likely?

1. The above conditions would be useful if both parties were engaged in rapid turnover trading.  Bunge strikes a deal with ATS at price X but finds another seller willing to sell at less than X.  Being able to substitute sellers/shippers allows Bunge to make an additional profit by buying the goods from this other party and delivering to ATS.  This condition allows ATS to sell the goods  to a third party, Buyer B, before it has taken possession by switching the delivery party.
2. But waiving the right to refuse to pay for any discrepancies could be problematical if ATS has on sold the goods as described to new Buyer B.   One would think Buyer B would have stipulated certain quantity and type of goods and reserve the right to refuse payments if these and other conditions that it required were not met.  Now perhaps Buyer B has waived these.  But what are the chances?  The goods are the commercial heart of the transaction.
3. On that score it might be more typical to see an inspection certificate (of the goods) particularly since a third party shipper might not be as reliable as Bunge. 
4. Now it's not unheard of that cargoes already at sea are sold (remember that documents issued prior to the L/C issuance date are acceptable).  But at that point, one should know the exact quantity of the goods and the identity of the parties.  And this could be incorporated into the L/C.  Now, I suppose the transaction could be taking place so quickly that speed was of the essence - a split second response required.  However, the documents submitted in the case indicate that ADIB cogitated for a while (though perhaps not long enough) before agreeing to the transaction.  And then it appears the transaction amount was increased after it had given an approval for a lower amount.  And so it had an opportunity like Proud Edward "tae think again".  Though to be fair, ADIB seems like Proud Edward to have thought again after "24 June" and not before.
5. Generally, transactions of this sort would be secured (from the intermediary buyer's perspective -- here ATS) by use of a transferable letter of credit (opened by the final buyer Buyer B in favor of ATS).  Or through a "back to back" L/C which is a particular favorite among many MENA banks though it is technically less sound from a protection perspective, including for the issuing/confirming banks of the second or "back to back" L/C.

Third, so what could be another reason for this structure?   To provide Awal and/or ATS financing.  But this requires a few bits more in the structure.

1. This L/C provides for a payment to Bunge 360 days from documentary acceptance.  At this point there has been no movement of funds.  Now it's not uncommon in such situations for the seller (Bunge in this case) to ask the confirming bank (Fortis) to make an immediate payment.  The bank would "buy" (discount) the acceptance for an amount less than its face value.  You can think of the difference as interest.  This could get the money to Bunge, though strictly speaking that's not necessary to get funding to ATS/Awal.  
2. If you reflect on the typical "Islamic" "trade" financing described above, you'll see that the ADIB L/C is the equivalent of the purchase of the goods on deferred payment basis.
3. Getting the funds to Awal/ATS requires the other half of the "Islamic" "trade" financing structure: the offsetting transaction the sale of the goods for spot settlement.  Such as sale could be either back to Bunge.  Or to a third party.  This may be a reason why ADIB's lawyers are pushing for further disclosure by Fortis to see if they are involved in this critical leg.
4. Just to close the Bunge circle.  The usual "Islamic" "trade" finance transaction keeps the deal "all in the family" so it's not inconceivable that they might have been involved.  If Bunge were involved, one would presume that it discounted the Fortis payment to use as the purchase price back from ATS/Awal - of course with a suitable commission for its trouble.   Note:  This is hypothetical.  I have no knowledge of Bunge being involved in the second leg. This discussion provides an illustration of how the transaction may have been structured.  Not that it was so structured.
5. Presumably, ATS did not hang on to the commodities with the intent of selling a year later.  Equally, it's unlikely that ATS has a "factory" in which to process the goods.  So the likely disposition of the goods is a sale.  If the goods were sold on a spot basis, then ATS/Awal have a one year loan due when the Fortis acceptance "matures" - irrespective whether Fortis has or has not discounted that obligation.
6. It's well known out there that commodity companies and brokers (including the one named in the TIBC  BNPP / ADIB legal dispute) specialize in providing "trade documents" for "Islamic" "trade" transactions that are really disguised financings.  Because Shari'ah Boards have become a bit more alert, many of these parties have established special purpose subsidiaries with completely different names so the buyers and sellers appear to be unrelated parties.   And have made presentations to  banks who wish to engage in "Islamic" "trade" transactions (or loans if you'd prefer) on how they  can help.
7. How does this work?  The financing bank arranges to acquire goods from Company A (Let's call it Dewey Night Company).  It then sells them to the Buyer (borrower if you will) on a deferred payment basis (the tenor of the loan) at original cost plus a mark-up.  At the same time it offers to sell the goods spot for the Buyer (borrower) to another company (Let's call that one "Eagle" Trading Company).  Usually the Murabaha contract (for this is a Murabaha trade transaction not a loan!) specifies that the spot sale cannot be for less than the original cost. The helpful commodity firm or broker provides all the required documents for the two sales   The mark-up miraculously just happens to equate to the interest on the loan.  Proving that in some forms of "Islam" miracles are indeed common. The commodity company makes a fee for its role - just as the innkeeper makes a profit for renting you a room for a night.  Documents are available for the Shari'ah Board to review if it wants.  These on their face document a trade transaction.  It seems everyone is happy.  و الله اعلم
8. And if you'd like to place a deposit with a bank, you can do the reverse transaction.

Fourth, how does this transaction differ from a typical "Islamic" "trade" transaction?

1. The ultimate financing bank in the transaction is ADIB.  While it is true that it does not advance funds, it is ultimately on the hook if Awal does not pay.  Under its confirmation it is obligated to pay Fortis if Fortis claims within the validity of the L/C and complies with the miniscule conditions provided.
2. For this transaction it only requires half of the set of documents.  A bit less financial engineering.
3. More importantly what is in effect a guarantee or a standby L/C is treated as a commercial L/C with a lower capital charge under Basel II.  Thus, ADIB's risk adjusted ROE/ROA is higher.  And more importantly, its CAR is higher.

Fifth, how credible is ADIB's sudden charge that something was wrong with the transaction?  That there was potential for fraud.

1. First, to accept ADIB's contention, one has to begin by assuming that ADIB has a very limited understanding of letters of credit and UCP600.  Or that the L/C Department personnel assigned to this transaction were incompetent.
2. Second, one also has to assume that ADIB is rather new to structured transactions.  However, since AA has seen ADIB's "Islamic" "trade" documentation of various flavors, at least for AA accepting that is more than a "bit of a stretch".
3. Third, the documents submitted by lawyers in this case indicate what would appear to be scrutiny of the transaction by ADIB's credit department.  If this transaction "slipped by" and wasn't recognized as a "structured" transaction - a payment guarantee and not a trade transaction - then one has to draw some rather unfortunate conclusions about credit analysis and risk management at that bank.
4. Rather what seems to have happened is that ADIB decided for about 500,000 good reasons (the US$ equivalent of the confirmation commission it received from Awal) to go forward with a structured transaction.   One that had some CAR advantages.  
5. Now that Awal has hit the wall, in what sadly seems to be a tradition of some "Islamic" banks (paging TID in re BLOM)  it's looking for a legal way out. (Paging Abu Yusuf).  At least in this case, it doesn't appear they're resorting to spurious arguments regarding the Shari'ah.
6. Finally most of what is labeled "Islamic" "trade" finance  is structured with manufactured transactions   All the parties (save perhaps for the Shari'ah Boards) know that these transactions are structured.   That they are really money on money loans, dressed up in thaubs and ghutras to disguise the reality.  For ADIB to suddenly claim ignorance of this is well beyond the plausible. 

A bit later I'll post some more comments on this case.  In the interim, you can look at the NY Supreme Court website.  Documents #78 and #79 contain letters by the two sides recapping the main points of their arguments.

UGB to Purchase Burgan Bank Shares at KD0.390?

Citing informed sources, Jamal Ramadan over at AlWatan reports  that UGB will purchase the additional 13% of Burgan shares using an auction mechanism.  The contemplated starting bid is reported to be KD0.390 per share. 

Three separate tranches are envisioned.  The first two for 5% each and the third for 3%.

I'd like to note the following which I hope will put the purchase into perspective:

1. BB last traded at KD0.390 or higher on 24 March 2010.
2. During April this year BB offered new shares amounting to a 35.47% increase in capital at KD0.280 fils per share.
3. The KD0.390 starting auction price is a 16% premium over 18 July's close.
4. An auction process where the buyer's starting bid is KD0.390 is likely to result in a higher price.  

If successful, the auction will lift BB's share price having a favorable impact on its collateral value and allowing selling shareholders to cash out at a nice profit.  Particularly those who bought shares at KD0.280 in April.  

Over the past three or so months the KSE  Index has, if I'm not mistaken shed some  1,000 points.  This sale marks a truly unique value creation event.

Kuwaiti Listed Companies – Who’s on the Boards?

Augustus Pugin Senior and Thomas Rowlandson - Public Domain

In a recent article, Eissa Abdul Salaam at AlQabas published a study on the board seats held by various Kuwaiti families. Here's the more important link to the detailed results.  

The study considers families with 5 or more board seats on listed companies.  It also notes the legal and regulatory requirements to be eligible to be a director as well as restrictions.

At first blush, this report might be considered a way of getting an insight into economic influence in the country, though one has to recall that owners often have a corps of dedicated retainers known in local parlance as رجال النعم who serve in a variety of functions, including as board members. As well, one would expect that certain prominent families, especially those with a particularly noble and regal presence, might be asked to adorn the board of this or that company as happens in the "developed" West.

In any case there is some utility to the report. It gives a snapshot of the prominent families. And perhaps to a limited extent a relative ranking of wealth.

Here's a quick summary.  Note:  I'm using the numbers in the details not the article.  Below is only a partial list.  Those families with  14 seats and above.  As noted above, the AlQabas list extends to  five seats and above - giving a grand total of  583 seats.

Family	# Seats
AlSabah	42
Cadet Branches	37
AlGhanem	30
AlKhorafi	23
AlOsaimi	19
AlBahar	19
Behbehani	19
AlMutairi	18
AlShaya	16
AlWazzan	15
AlKhalid	15
AlHomaidi	15
AlMarzouk	14

Cadet Branches are identified as Sultan, Bin Eissa, AlBadr, AlMutawa by AlQabas.

AlQabas also provides a breakdown of the number of directors, though again it seems there is a difference in totals. The article refers to 192 listed companies. Excluding Non Kuwaitis and parallel market stocks, I believe 198 companies are listed on the KSE. Unless I've done the maths wrong, the total companies accounted for are 186.

 

# Directors	# Companies	Total Directors
4	4	16
5	74	370
6	14	84
7	65	455
8	10	80
9	16	144
10	3	30
TOTAL	186	1179

 

International Investment Group: Draft 2009 Financials KD 36.6 Million Loss

IIG Funding Limited announced on Nasdaq Dubai this morning that the Central Bank of Kuwait had accepted IIG's 2009 financial statements, though it didn't post a copy.  I didn't see the financials at the KSE but over at the DFM there's a copy - with some of the notes provided.  Also at the BSE but without the notes.

IIG advised the Deloitte is preparing an English language version.  AA certainly hopes with a larger type than in the Arabic extracts provided so far.

If like mine your microscope is in the shop for it annual servicing, you'll  have  to join me in squinting as we review the DFM material.

Accounting/Legal/Regulatory Matters

1. No Audit Opinion:  Due to a variety of factors (including a concern over the "Going Concern" assumption), IIG's auditors have decided not to express an opinion on the financials.
2. CCL Article 171:  IIG has accumulated losses which exceed 75% of its legal capital.  It has called a shareholders' meeting to approve a plan to eliminate some KD40.7 million in accumulated losses by (a) reducing legal capital some KD25.5 million (from KD45.7 million to KD20.2 million) and  (b) using share premium (KD4.3 million) and reserves totaling KD12.1 million).  See Note 22.
3. Violation of Limit on Related Party Transactions:  As its auditors' note, IIG is in violation of the Central Bank of Kuwait's limit on exposure to related parties.  I presume this breach resulted from the collapse in IIG's capital from KD64.5 million to KD23.4 million and not from any new extensions of credit. 

As we continually hear on this blog, debts are settled with cash.  So why the initial focus on non cash matters?  Because these "events" are likely to further sap confidence in IIG.  That will have a direct impact on  the attitude of various market participants towards the Company's future.   And IIG needs all the goodwill and forbearance it can muster.

But in the final analysis cash is king.  A pocket full of money can buy a lot of goodwill and burnish the most tarnished of reputations.

So let's turn to the financials.  We'll begin with the balance sheet because repayment is unlikely to come from operating cashflow.  Rather asset realisation (sales) are the most likely (theoretical) source of the cash necessary  to reduce debt.  I'd note that all that follows is preliminary because we don't have a legible copy of the Company's full 2009 audited annual report.

Balance Sheet

1. More 50% of the Company's assets are with related parties.  And are not only in "Investments in Associates" but as well Receivables and Murabaha and Wakala Transactions (which should be a source of liquidity IIG but apparently isn't) and land acquired from an affiliate.  That can't be particularly encouraging. 
2. Investments in Associates (KD47.3 million out of KD107.1 million in total assets) are carried on the equity method (original cost plus share of net income).  Over the past two fiscal years IIG has recognized income statement losses of some KD32.6 million - which like the original profits declared were "paper" entries only.  If there are more "profits" in these firms, there may be more "air" to let out of IIG's balloon. 
3. The Murabaha and Wakala transactions are secured by collateral.  In 2008 it was worth KD71.2 million.  As of FYE 2009, it's valued at KD44.2 million.  Presumably a decline in market value.  Another perhaps disturbing trend.  And since related and other parties who gave the collateral are no doubt suffering from liquidity problems of their own, it would seem to make sense for them to liquidate the collateral and pay off their dues to IIG leaving themselves roughly half or more of the KD44.2 million.   Since that's not happened, the value and liquidity of this collateral has to be questioned.
4. And finally there's the Egyptian real estate purchase (from a related party of course) for KD10.5 million in Other Assets and Real Estate.  I can't read all of Note 21.2 but it seems the total transaction was for KD13.4 million.  IIG got the Egyptian land  (KD10.1 million) and shares worth KD3.3 million in exchange for shares in an affiliate worth KD4 million and non cash debt "settlements" of some KD9.4 million.  No doubt some very fine assets changed hands here.
5. Most of and perhaps all of the above carried on a "cost less impairment basis".
6. Turning to liabilities, there are some KD83.6 million - no question about their value.  Equity is at KD23.4 million.  If the ultimate value of assets turns out to be lower by more than 22% then creditors won't get back 100% on the dollar. 

 Income Statement

1. A glance at IIG's income statement shows that most of the income (or losses) are paper items not cashflow.  Share in earnings (for the past two years losses) of affiliates.
2. For 2009 operating results were a loss of KD15 million versus KD6.6 million in 2008.  A major driver was increased (equity method) losses from affiliates which rose to KD21.2 million from KD11.4 million the year before.
3. Operating expenses were KD21.6 million, KD6.8 million over 2008 due largely to provisions of KD6 million.
4. Net loss was KD36.6 million versus KD21.5 million the year earlier.
5. Comprehensive Income was a KD41.2 million loss resulting from KD4.5 million in fair value changes not passing through the Income Statement.

Cashflow Statement

1. None included.  
2. Perhaps there was no cashflow for 2009?  More likely IIG forgot to include.

It's hard even for an optimistic fellow like AA to take too much comfort from these financials.  With all the related party transactions, one has to question the real value of assets.  And the very real prospect for an accelerated death spiral if there is an attempt to undo the daisy chain. On top of that is the general lack of liquidity in Kuwait.

Aabar: UAE Securities and Commodities Authority Orders AED1.95 Tender Price

The UAE SCA ordered IPIC to raise its tender price to AED1.95 per share based on the average of the past six months' trading.

It also set the Offer Period from 20 July through 5 August with payment to all tendering shareholders no later than 10 August 2010.

I must confess that I hadn't expected the SCA to upset the original price.  And for the small percentage I assigned to that event, certainly not as dramatic an increase in price as this.  The SCA may show only one eye in its logo, but it apparently has keen sight and a strong will - even when faced with "important" parties on the other end.   Hopefully, a trend that will continue.

International Investment Group: Defaults on Sukuk 2009 Financials Released

Today Deutsche Trustee Company, Delegate on the IIG Funding Limited Sukuk, announced on NasdaqDubai two further defaults on 10 July 2010:

1. First, IIG Funding did not pay the July 2010 Periodic Distribution Amount ("PDA" or "interest").   As you'll recall, the April PDA of US$3,353,062.50 was missed.   Since the Sukuk has a fixed interest rate (6.75% p.a.), the July PDA is the same amount meaning IIG has not paid a total of US$6,706,125.00 in PDAs.
2. Second, IIG (the parent and ultimate borrower) did not honour its Purchase Undertaking in the amount of US$152,467,782.23 representing principal of US$147,490,000 plus 100% of the unpaid PDA of US$4,977,782.22 on these amounts.  That is, 74.2274% thereof.

What is interesting is that Certificateholders did not dissolve the Trust for the April non payment under Article 13.  Rather they chose to use the Put Option under Article 6.5.   See Offering Circular here.   

What that means is that IIG was only obligated to Purchase the interests of those investors who exercised the Put Option (which had a one time exercise date of 10 July 2010).  Only 74.2274%. voted to exerecise the Option.  Technically, the remaining 25.773% of principal is not past due.  Those Certificateholders are in effect in a subordinate state.  Not a particularly wise position to be in. 

Presumably, the Certificateholders will vote again on a Dissolution - thus accelerating the entire principal and ensuring they are all on the same legal footing.  A failure by IIG to honour its Purchase Undertaking is another Article 13 Event of Dissolution. 

Anyone out there who has an explanation for this approach - that is, not voting straight away for Dissolution and accelerating all the Certificates - please post.  This seems a very perplexing approach.  The prudent passenger does not stay below deck on the Titanic after it has collided with the iceberg.

IIG has advised that it is unable to make the payment and referred to its engagement of KPMG to help it devise a restructuring plan. 

I'll post separately about IIG's 2009 financials.  As you might expect, they are not "pretty".

Abdullahs Roll in Recovery for Damas

This is the actual headline in The National, though I suppose at some point the editor will change it to "role".  But the original headline is forever immortalized above.

Some quotes from the article which are just too good to pass up.

The three Abdullah brothers, whose family founded Damas jewellers and were held responsible for unauthorised transactions including about 50 property deals and two tonnes of gold borrowed from the company, are back at the firm – in charge of recovering money owed to the company.

Someone is definitely getting "rolled" here.  I suspect it's the hapless shareholders once again.

Though in light of this explanation from Damas' new CEO, shareholders will probably have a better understanding of the Abdullah Brothers' transactions.

“Not everything was well documented, which was very normal in the jewellery business. Most of the business was done on the basis of a handshake and based on the personal relationship between the management and the business partners … One of the three brothers was in charge of that file. Without his assistance, any progress on the recoveries front would have been impossible.”

An interesting explanation for what might charitably (and AA is always charitable) be described as theft.  It's always very important to be sure the documentation is properly prepared when you take someone else's assets.

In any case it's pretty clear from the above quote that the new CEO has an apparent keen understanding of  the intricacies of corporate governance.  There isn't the slightest doubt in my mind that he will be looking out carefully for their interests.  And making sure any related documentation is in tip top shape.

Bahrain: Saudi Driver Crashes - Lost or Never Had Control of His Car?

The Gulf Daily News carried one of the typical GCC traffic accident stories.  As is common, we're told that at some point the driver "lost control" of his car.

Whenever I read one of these accounts, my natural reaction is to wonder if he ever had control.

If you know this road, you've got to have a pretty powerful faculty to imagine an innocent loss of control resulting in a dip in the drink.   (Yes, that last word was deliberately chosen as I'm sure some drink of one kind or another was involved).  This chap was probably practicing for the F-1.  And as everyone in Bahrain knows, the nearest venue for that is the King Faysal Highway.

The Investment Dar - No Decision from Central Bank

It's been roughly four months since TID received the preliminary approval of the Special FSL Court to begin the process for the Company to seek protection under the FSL.  Under the law, the Central Bank of Kuwait has four months to review a proposed  restructuring plan, the financial condition of an applicant and make a determination as to whether it believes there is a reasonable chance that the a company will be able to meet its restructured obligations.  Earlier post on details of FSL here.

At this point the Central Bank of Kuwait has not issued its final conclusive decision.  

Mohammed Al Itribi at AlQabas reports TID held a consultative meeting yesterday (14 July)  with the Creditors Co-Ordinating Committee to advise them of the lack of a decision by the CBK. 

The article notes that this can mean that (a) the CBK is about to issue a negative decision or  (b) as allowed under Article 19 of the FSL ask for additional time no to exceed another four months.   The FSL allows only a single four month extension.

I still think it's unlikely the CBK is going to reject TID's restructuring given the negative fallout on Kuwait.  Perhaps, they're looking to find a way to approve.  And that ties into the E&Y report.   

The  KD64,000 question is precisely what it said.   Did it support the restructuring plan?

If not or if the CBK is uneasy,  then a possible alternative would be to change terms of the plan - extend the tenor or re-profile payments to push any perceived problem out far enough so that the possibility of repayment is increased.  The promise of CBK approval for changes in the Plan could be a powerful incentive for banks to go along and agree - as this will provide some closure to the TID file.   Even if it's only a temporary pushing of the problem to the future.

The article also notes that some alternatives were discussed if the CBK's decision is negative.

The central issue with alternatives is ways to prevent dissident creditors' lawsuits from threatening the viability of the restructuring plan.   One would expect that dissident creditors would seek Court orders  forbidding the disposal of assets by TID during the course of their legal action.   That cuts off cash flow for repayments under the restructuring.  If the dissident creditor wins, assets could be lost - though no more than the creditor's claim (including legal interest, costs, etc).  

One strategy is to just tough it out delaying court decisions as much as possible. Seeking court permission to sell assets and place the  amount at dispute (but not the entire proceeds) in escrow pending the court's decision - allowing the remainder of the proceeds to make payments under the restructuring. 

Or trying to substitute less desirable assets.  Here take my shares in TIDBank and let me have the Bahrain Islamic Bank shares. 

Following the tough it out strategy requires  the co-operation of the  agreeing creditors to go forward.  And strong discipline in their ranks.  It also depends in the final analysis on the amount of the dissident creditors' exposure and their ability to bring suit in various jurisdictions.     

You Said What?: Sue Myrick "The Iranians are Coming"

Well the thing that concerns me, and you mentioned this briefly, Iran is working with Venezuela. And they're transiting through Venezuela, taking Spanish for maybe six months. They're getting the false documents that they need, coming up through Mexico and if they're stopped, they just say well I'm Spanish. And it, oh I mean Mexican, and it only takes a smart border agent who knows the difference in the accents. He can tell, but if he doesn't have that, there's no way to know.

And the other thing that we're seeing, and we're seeing it in your state in particular in the prisons is Farsi tattoos. Farsi is basically a Persian language, which Iran is, and we know we've seen Arabic tattoos in our prisons for a long time, but we haven't seen Farsi tattoos in a long time. That's a pretty good indication that these people coming across our border are not just coming from Mexico and other countries that are looking for work. And that's what scares me. Being on Intelligence, we know there are people who are are here who do want to do us harm who are already in the country and it's not a matter of will they get in anymore, it's a matter of they're already here because of our lax border laws.

Well, as I'm sure you'll agree, this is mighty disturbing.  Rather sophisticated Iranians - capable of learning Spanish in six months - are infiltrating our country.  The only thing that stands between "them" and "us" are the language skills of our border patrol.  If they can't tell a Mexican or Spanish accent from  a Farsi  one, we're in for big trouble.

Of course, if they have those "Farsi tatoos", I suppose that would be another way to catch them.  Though I have to admit it's unclear why they would have these tattoos.  Wouldn't that undermine their clever disguises?

And if they're in jail, haven't we already caught them? Or is this a diabolical plan to take over our prisons?  And what greater threat to our nation?  For what more symbolizes a nation than its prisons? 

Perhaps, convenience stores?  And there's another threat lurking there.  And it isn't Apu.

After all this AA is pretty scared but not more than by two chilling facts:

1. Representative Myrick has represented the 9th Congressional District in North Carolina since 1995 .
2. She has a seat on the House Intelligence Committee.

I'm hoping the name signifies the Committee works to raise the intelligence level of its members.  No Representative left behind, no matter how far back he or she starts out.

AlGosaibi v Maan AlSanea - Saudi Court Rejects AHAB Suit Against AlSanea

AlQabas reports that the Saudi Administrative Court for the Eastern Province rejected a lawsuit raised by Ahmad Hamad AlGosaibi and Brothers Company ("AHAB") against Mr. Maan Al Sanea citing lack of jurisdiction and competence to hear the case.

In the case AHAB was seeking 43 million shares of SAMBA plus earnings thereon of some SAR1 billion (US$266.6 million) which it claims are in Mr. AlSanea's possession but which it asserts belong to it.