Gulf Investment House - KFH Finalizing Restructuring

Quoting informed sources at KFH (a 30.72% shareholder), Issa Abdul Salaam at AlQabas reports that KFH is on the verge of concluding the restructuring of GIH's debts.  The Company has reportedly had success in negotiations following a repayment of part of its past due obligations and is expected to convert short term loans to long term.

BP and the GCC: In the Right Place? Yes. The Right Time? No.

You've probably seen press reports that GCC states - among other "wise" investors - are considering riding to BP's rescue with capital.

At The National Frank Kane muses today whether "the Gulf is in the right place to back up BP".   One cannot question his argument that the Gulf is in the "right place".  Long historical relationships.  Some  historically stormy.  Paging Kermit Roosevelt.   Strong familiarity with the industry.  Lots of money in the pocket.

But before ADIA or another SWF steps forth with a capital infusion a la CitiGroup, it's probably appropriate to ask whether this is the right time.

Promises of a 300% return presume the continued existence of BP.  And unlike Citi BP is not too big to fail. 

Instead the really smart money should be looking to pick off prime assets from a sale now.  Or waiting to join the vultures later when it's time to strip the carcass.  

The total cost related to the Gulf spill (that's Gulf of Mexico) is far from clear.   The relatively simple  part (if one can use the word "simple") is the cost of capping the well and the "clean-up".  More importantly will be the claims for damages.   Much more complex.  There's a strong likelihood that the "tab" will be much more than the US$35 billion that Citi estimated.  Profound and lasting (perhaps permanent) damages.  From the residual oil and the impact of the over usage of dispersant chemicals.  Destruction of wetlands.  Loss of livelihoods - fishing, tourism.  The spectre of a chemical tsunami churned up by a hurricane making large swathes of the coast unlivable. Not just in the Gulf but as well along the East Coast of the United States.   Damages the extent of which may not be apparent for decades. 

In an environment where it is highly unlikely that US citizens or Congress will allow BP to skate away with a slap on the wrist.  Even if that slap is a rather smarting US$35 billion.

What's the way out?

Confronted with mounting and perhaps indeterminable liabilities, BP is likely to perform corporate seppuku - though it's hard to see any honour being redeemed in the act.  A filing for bankruptcy ( a "Pre-Pack") that will neatly inter the Gulf Coast liabilities along with BP's remains.    

 
Not a particularly smart move to become a shareholder now.  All that one is likely to get is  a front row seat when Last Post is played and the BP flag taken down.  A rather expensive ticket to a rather dismal event. 

Walid Shihabi Rejoins Shuaa Securities as CEO

As per an announcement on the DFM.

In this regard Mr. Shihabi was quoted as saying:

“It is with great excitement that I look ahead towards taking responsibility for one of the truly outstanding brands in the region’s securities trading market. I believe there remain tremendous avenues for growth  available to the company, and I am truly privileged to be in this position to help guide the company to further success, after having participated in building it into one of the largest and most respected investment banks in our region.”

Personally I would have hoped that the new CEO would have shown a bit more enthusiasm for his new role and a bit more faith in his new employer.

Gulf Finance House - Finally Issues Official Statement to Stock Exchange on US$100 Million Rescheduling

When the interests of investors are at stake, you can always count on GFH to take the same prompt action it always does to make sure they are fully informed.  In this case even working over the 4 July holiday!

You'll recall that on 30 June Ted Pretty was quoted in the press that GFH had agreed a rescheduling with the West LB syndicate and that it was in the final stages of documentation.

Today a formal announcement appeared on the Bahrain Stock Exchange.  I didn't see announcements on the DFM or the KSE, but then again the 4 July holidays in those jurisdictions may be responsible.

GFH's 1 July reply to the Bahrain Stock Exchange's letter of 30 June apparently was not sufficiently comprehensive and so this additional message apparently was required.

As Ted Pretty has stated previously, there are serious responsibilities for an institution like GFH.  Responsibilities matched by GFH's commitment. 

"GFH is a flagship institution in Bahrain and the Islamic financial sector and we are committed to working hard to set a better example as a model participant."

And for those who may still be prone to misinterpret this sequence of events, I'll requote the remarks of GFH's Chairman upon the issuance of 1Q10 financials which should set the record straight.

"The Board has taken a very prudent approach in declaring this result and is committed to continuing transparency in the way we do business."

Comforting words indeed.  The flag flies high.  Despite the fact that Arabic has no capital letters, that is I believe how one spells  شفافية  with a capital  ش .

Another remarkable though ultimately saddening disclosure was the implicit confirmation that GFH has been forced to abandon its "proven business model" for another.  As the press release notes, the new maturity on the West LB syndicate will give GFH time to "double its current efforts to transform to a new business model".   

Unspoken by GFH was the reason for need for that change.  

Here at Suq Al Mal we're not shy about confronting issues and speaking truth to power.  And so we'd note that as per the analysis of many experienced market experts (GFH, TID, GIH, a wise Southern Shaykh to name just a handful), it was the global financial crisis.  And, as always, we take this most appropriate occasion to point out that this expression is most properly in lower case lest it be confused with any specific institution.

AlGosaibi v Maan AlSanea – AlGosaibi’s Strategy with Creditors

In light of my recent post speculating that AlGosaibi was being pressured to accept Grant Thornton's "peace proposal" for a commercial settlement, this is probably an opportune time to take a close look at AlGosaibi's legal strategy. From a document concerned with the recent lawsuit by Trowers and Hamlins that I've seen, it's possible to reconstruct that strategy in more detail and to use AlGosaibi's "voice" in doing so.  Or at least it voice as channeled by US counsel.

Before we do that, a caveat.

What I'm about to present is AlGosaibi's side of the story. As you'd expect AlGosaibi's account is highly favorable to themselves as are statements made by their counsel – who they have hired to represent them.

Nothing surprising here.  This is the (adversarial) nature of the US legal system.  Long ago, AA was called for jury duty in a personal injury case. After the jury had been selected, the judge took us aside. He said that while each counsel had claimed that his sole purpose and desire was to obtain justice, this was not the case.  Each counsel was working for its client's interests, not for justice. And that, recognizing this fact, we should be duly skeptical of any statements made. Such is also the case here. It applies to all parties to the case: AlGosaibi, AlSanea, T&H, TIBC, Awal Bank and their respective management and officers as well as the counsel they have hired to represent them.

Now to AlGosaibi's strategy and rationale.

First, AlGosaibi's central thesis is that TIBC was "throughout its active life a criminal instrumentality operated apparently for the principal purpose of defrauding our client and third parties, incurring massive fraudulent debt in our clients' name and siphoning the proceeds to Maan AlSanea and his Saad Group of companies". In this regard they assert that TIBC was formed without AHAB's knowledge or authorization and that the pledge of shares which is listed as the source of equity for TIBC is not "legitimate." And that they do not "accept any debt owed to TIBC or the validity of any claims whatsoever asserted by TIBC" against AHAB. As part of this thesis, it's important to recall that AHAB also claim that the Money Exchange (through which the proceeds of alleged fraudulent commercial loans were passed) was also under the control of Mr. AlSanea and his confederates.  This thesis - that AlGosaibi itself was the victim of fraud along with the creditors - would also the basis for a less than 100% payback of the loans as I've noted before.  At least by AlGosaibi.

This is also the appropriate place to note that Mr. AlSanea and various other parties accused directly and indirectly by AHAB vigorously deny any wrongdoing.

Second, as a consequence of this (alleged) fraud, the proper response of T&H (and any creditor) is to join with AlGosaibi in pursuing the culprits and not the innocent victim - AlGosaibi.

Why?

"Litigating intercompany positions (e.g., TIBC and AHAB) will take years, if not decades and that such litigation only depletes resources that will be needed to effect a workable commercial settlement". Co-operation on the other hand "avoids wasteful and ineffectual expenditures and offers a potential for TIBC and its creditors to benefit from AHAB's recoveries and its potential commercial resolutions of claims with third parties." 

AHAB's counsel notes that even though AHAB rejects any TIBC claims against itself, it nonetheless has proposed that TIBC's creditors be included alongside its own in any settlement by a "substantive consolidation of all the creditor positions and the creation of a single fund". And that AHAB is creating a "fighting fund" of some US$150 million to use to pursue legal cases against Mr. AlSanea – which would relieve a burden on TIBC's creditors who no doubt would be reluctant to provide substantial funding for such an effort.

As well, it comments that commencement of legal action by T&H against AHAB could jeopardize its good will. And that a further danger to TIBC creditors is that any such legal action will require the presentation of original documents, which AHAB counsel asserts could be difficult to produce. And if produced, AHAB and its counsel are confident that the signatures thereon could be successfully challenged as forgeries.

Counsel also notes that it intends to raise these points with counsel for TIBC creditors, Clifford Chance Dubai.

The fact that T&H launched its suit roughly three weeks after this correspondence was sent indicates that it was not persuaded.

There are a couple of other points in the document - worthy of note and comment:

1. AHAB asserts that Saudi British Bank has refused to turn over to AHAB certain records pertaining to AHAB - which it asserts Mr;. AlSanea has removed from the Company and taken under his personal control and which include those relating to  the underlying pledge of shares which serve as the basis for the equity in TIBC. This is particularly perplexing. Why would SBB not provide duplicates of records to its client of record?  Or in other words, what would be the basis why SBB would refuse to turn over to its client duplicates of certain records pertaining to that client's business with it?
2. That AHAB counsel had proposed an information exchange protocol (apparently in March) under which AHAB and T&H would share information but with the stipulation that neither party would use the information so obtained in legal action against the other. It's perfectly understandable that T&H would not accept this. As the Central Bank appointed Administrator, it has a fiduciary duty to pursue claims against all debtors registered in TIBC's books. And certainly wouldn't want to expose itself to a TIBC creditor later suing it for failure to pursue one of the debtors because it unilaterally decided not to. The better path is to raise the claim.  Then let a Court determine whether the debtor has a defense against payment. This was, I am told, the tactic used in the liquidation of Petra Bank Jordan في الوقت المدثور . 

Stay tuned.  In a day or so, I'll post AlGosaibi's reaction to T&H's apparent rejection of its proposal for co-operation by looking at AHAB's 15 June submission to the NY Bankruptcy Court.

The Investment Dar - Ernst and Young Delivers "Final" Report on Restructuring Plan

AlQabas reports that E&Y has delivered its "final fateful" report on TID to the Central Bank of Kuwait.  The report includes a valuation of the Company's assets which is the basis for E&Y's judgment as to whether TID is capable of continuing as a "going concern" and meeting it repayment obligations under the restructuring.

As well, that the Company held a meeting with E&Y to discuss its analysis.  And that according to sources close to the Head of the Creditors Committee, the CCC held a meeting with Credit Suisse, Morgan Stanley and the Company to discuss the latest developments.

And finally that there are members of the CCC who are ready to propose alternatives should the CBK take an adverse decision on the restructuring plan.

I'd be rather surprised if the CBK did not approve the plan.  Rather if it has serious concerns, it might seek to amend the plan in one or more areas, though again I don't expect this. 

Presumably, the development of alternatives is a further demonstration of AA's Law of the Conservation of Due Diligence.  If you fail to do proper due diligence in the underwriting stage, you "catch up" in the restructuring stage.  And then of course the amount of work reflects the impact of time value (present value).  Much more is done.

As you know, the CBK's approval is required for entry by TID into the safe harbour of the FSL which will protect it - at least in Kuwait and probably in other jurisdictions - from dissident creditors' legal actions.  And recall that the FSL does give the CBK the right to amend the restructuring plan if it feels that such is needed to ensure its implementation.

More Signs of Real Estate Woes in the UAE

According to Bradley Hope at The National, Sorouh Real Estate has introduced a "rent-to-buy" scheme for commercial tenants at its Sky Tower on Reem Island.  The plan is apparently designed to "fill out" the remaining 20,000 square meters of commercial space.  Previously, Sorouh had offered a below market rate of 4.99% to first time buyers at its Sky and Sun Towers in the Shams Gate project on Reem.

This follows the announcement earlier this week that Dubai had given Nakheel's Board control over Limitless.    I suspect this is the first step towards combining the two companies as a way of reducing costs as well as adjusting capacity to realistic prospects for demand.

As you'll notice from this article also from The National, Limitless' problems were caused by the "global" (financial) crisis.   On a personal note, I was gratified to see that TN did not use the term "Global Financial crisis" using the SAM stylebook with all lower case letters.  There are some sensitive folks up North as AA knows only too well.

Original Prague Syncopated Orchestra

Equal time for Praha.  And here's the link to their website.

Bratislava Hot Serenaders

Nothing to do with finance or the GCC but brilliant.  Mit "Henry de Winter" und Bobby.  

Here's the link to BHS website.

Riffa Views Bahrain: GP Zacharides Walks

Because if it’s not remarkable it will become invisible.

The Gulf Daily News reports that GP Zacharides, one of the main contractors at RV, had terminated its contract due to non payment of some BD4 million due since February.  

"We have been left with no option following numerous attempts to come to a mutually-beneficial agreement with the client to right the debts outstanding since March and provide comfort that future dues would be paid when due," he said.

"Unfortunately, it is reported that the client could not provide this due to their current and longer-term financial outlook."

GPZ's was contracted to build 300 villas in the Lagoons section of the project.   It claims to be owed BD4 million since last February.  With demobilization and other termination costs, its claim may more than double to BD10 million.

The project has been struggling since 2008 (when it was hit with dramatic cost increases in building materials due to the real estate irrational exuberance - a particular cause was the Dubai delusion).  Then later the collapse in real estate prices slowed sales, reportedly caused some buyers to walk from their commitments.  Tight financing terms didn't help either.

Arcapita brought the project to market in December 2004 for some US$260 million.   It's a measure of its own financial condition that it is not bailing out the project to finish it.

Moody's Downgrades DHCOG

Asa Fitch at The National has an article on Moody's recent downgrade of DHCOG.

"The credit ratings agency downgraded Dubai Holding Commercial Operations Group (DHCOG) by one notch on its rating scale to “B2” from “B1”and kept it on review for another drop. DHCOG, which has large holdings in the hospitality, business parks and property sectors, was unavailable for comment. The group was downgraded to “B1” last December, a rating already considered below investment grade."

You'll recall that last January, Dubai Holding had excoriated S&P for its:

1. manifest "lack of understanding of DHCOG's business, its operations and relationship with the Government of Dubai." 
2. "inaccurate statements coupled with factual errors that are misleading."  

While it may be unclear to some if Moody's is suffering from the same affliction or if S&P was indeed right after all, there's no confusion here at Suq Al Mal.

AlGosaibi v Maan AlSanea - Grant Thornton to Broker "Peace" Deal? Authorities Supporing?

Frank Kane over at The National reports that Grant Thornton is trying to broker a settlement between AHAB and Mr. AlSanea.  Under what is described as the proposed deal, the parties would cease litigation against one another and pool assets to repay outstanding debt.  The stated goal is to maximize creditor recovery.  First, by eliminating the costs of litigation which no doubt would be considerable.  Second, and perhaps, more importantly, shortening the time frame until ultimate payment. 

Acceptance of the proposed plan would also achieve at least four other highly convenient goals:

1. It probably closes the book on allegations of financial crimes - which would no doubt be a comfort to any party who may have committed a crime.   In this regard, it should be noted that not a single party to the dispute has admitted to any wrongdoing.  And all aver they are as pure as newly fallen snow.  Perhaps, the proverbial pristine white snows of Saudi Arabia. 
2. It could relieve jurisdictions of the need to engage in complicated, messy and uncertain criminal prosecutions.
3. It will reduce (but not eliminate) the current intense scrutiny and reputation bashing of regulators and their countries - an unwelcome event fed largely by continuing press reports of the feud.
4. It would settle the dispute between two very important Saudi parties via a compromise .  Peace among the tribes rather than a victory for one side over the other.  Well consonant with Saudi tradition.

As the Cayman Islands' Court appointed liquidator for Mr. Al Sanea's Cayman companies,  GT's sense of fiduciary duty is clearly the motive for devising the settlement plan.   

As outlined above the plan would benefit other parties.  And they might well be expected to promote its acceptance.

Since the beginning of the crisis, Mr. AlSanea has suffered  heavy personal opprobrium in the press despite his repeated denial of any wrongdoing.  He and his firms have borne the brunt of legal actions filed.  And thus he may be well incentivized to deal.  

AHAB has until recently had a kinder fate.  And may therefore need a bit of prodding.   As well, they are perhaps the key to acceptance given the nature and vehemence of their accusations against Mr. AlSanea.  If they will sign the deal, then it may be easier for Mr. AlSanea to agree-  particularly if as expected the deal will involve a removal of accusations.

That's why I wonder about the recent spate of litigation directed against AHAB.  

Could it be that certain authorities are attempting to put pressure on AHAB with the view of securing its acceptance?

You'll recall that in announcing its US$720 million lawsuit against TIBC on 16 June Trowers and Hamlins said it took the action "following referral of the claim by the Council of Ministers." Clearly a reference to the Saudi CoM.  No doubt, any proposed legal actions were vetted as well by Trowers and Hamlins with its employer, the Central Bank of Bahrain.   In both cases an official "green light" to proceed.

Then again this all may be coincidence, though I don't think so.  The affair has dragged on to long.  Each day it persists is highly inconvenient for important parties who no doubt feel that it's time to close the book and move on.

Bahrain Court Rules in Favor of Central Bank of Bahrain's Decision to Place Awal Bank in Administration

The CBB issued a press release noting that a Bahrain Court had issued a ruling supporting its decision to place Awal Bank in "administration".  The former Chairman (Mr. Al Sanea) had raised a court case challenging the CBB's action.

It's not clear from the press release or news items (which seem to be a mere transcription of the press release) whether this is the Court of First Instance (which I suspect) or a higher level.  If it is the Court of First Instance, Mr. AlSanea would of course have the right to an appeal. As well, if it is the Appeals Court.  Like American baseball, the Bahraini system gives each litigant three goes at bat - with the Cassation Court (Supreme Court) being the final one.  

I'm guessing that Mr. AlSanea may take another swing in the courts.  And here it's appropriate to remark that Mr. AlSanea still continues to deny any wrongdoing in the conduct of his business affairs.

The importance of the ruling to CBB is evident from the inclusion of quotes from three senior executives.  Their common focus on the CBB's actions to maintain the strength and reputation of the Bahrain banking sector no doubt reflects some concern over the market's perceptions of both. 

Dubai Properties to Countersue Hopkins

Quoting an item in Reuters, Business Maktoob says that DP has indicated it will countersue Hopkins Architects for damages it suffered when HA stopped work on Central O8 towers.

Maybe, DP is reading SAM?  Realistically, probably not.

Gulf Finance House - In Final Stages of Restructuring US$100mm West LB Syndicate

There are press reports (Gulf Daily News and Reuters) quoting Ted Pretty, CEO, of GFH that they are in the final stages of refinancing the "stub" US$100mm from the earlier US$300 mm West LB led-syndicate.  As you recall, they repaid US$200 mm of the loan on maturity in February and then rescheduled the remaining US$100 mm for payment this August.

Whether this reflected the lenders' desire to keep GFH on a very short leash, irrational exuberance on the part of GFH's management regarding the potential for sale of its highly marketable and valuable "non core" assets, or some other serious delusion on the part of GFH or its creditors wasn't clear at the time.  And is still not clear.

What was clear at the time is that barring a miracle, GFH was not going to be able to make the payment.

This time a more sensible two to three year rescheduling is apparently being contemplated.  According to the GDN article, GFH and its creditors are in documentation.  If this is correct, then the deal terms are set.

What will be interesting to see is the impact on pricing.  The six month extension resulted in a five-fold or so increase in pricing.

Also what is clear from all of this is that GFH's rather low stock of credibility has been depleted even more.  

The Company really doesn't do itself any favors by making unrealistic pronouncements (US$420 mm in asset sales) or reversing course as with the on again off again sale of its interests in Khaleej Commercial Bank.  

Adding to its problems, if S&P holds true to its earlier position, GFH is in line for a downgrade.  A particularly unwelcome development as it seeks to rebuild its market position.  Particularly with clients.

On a positive note, this more sensible rescheduling does offer substantial relief to demands on its cash flow.  As well as a third chance to move forward. And also looking forward probably no American baseball rules here.

It also  will also give the folks at GFH another opportunity to use their demonstrated talents for writing press releases.  I can see how this successful rescheduling might just demonstrate yet again (as if another demonstration were needed) the confidence of GFH's lenders and the market in its proven business model, leading position as the premier GCC Islamic Investment Bank, as well as its promising future. Smaller minds may just see it as lenders accepting the inevitable if they want to maximize their recovery.  But then these are minds without the "vision thing".

I'll also be looking tomorrow morning for the announcements on the BSE, KSE, and other exchanges regarding this material development.

Markaz Kuwait: Massive Losses in Kuwait Investment Firm Sector

The fine folks at Markaz have issued a report on the Central Bank of Kuwait's proposed new regulations for the Kuwaiti "Investment" Firm Sector.

Markaz is generally supportive of the CBK's actions.

The "headline" story here (and sadly not a surprising one) can be summed up in this quote:

The sector lost over USD 2 bn in 2009 following a monstrous loss of upwards of USD 3 bn in 2008, and continues to post an aggregate loss of over USD 100 mn in 1Q10 (an annual run rate of USD 400 mn). The losses are tied to impaired assets which companies have been writing-off in an attempt to restore some health to their balance sheets. Liquidity and over-leverage have also been an issue for the sector, whose assets are often comprised of difficult to value and illiquid investments which are then pledged as collateral against further borrowings. These issues were not bothersome during the boom periods; however, when the global financial crisis hit, it exposed the sector’s vulnerabilities resulting in a massive destruction of wealth.

The report has three main parts:

1. A discussion of the ratios.  This is well worth a close read.
2. The CBK's analysis of compliance. (Discussed below)
3. Markaz's own analysis from a sample of 32 companies.

I'll let you read Markaz's discussion of the ratios - not much for me to add.

As to the CBK's analysis,  of the 100 firms in the sector:

1. 94 meet at least one of the new criteria.
2. 82 at least two of the new criteria.
3. 49 all three of the criteria.

Markaz has done a bit of data gathering and number crunching to come up with a ratio compliance test for 32 firms in the sector for the first two new ratios:  total leverage and liquidity (the latter what Markaz calls the "Acid Ratio").  It's not possible to calculate the third ratio (foreign debt exposure) given the woefully inadequate disclosure of foreign borrowings.

The detailed results of Markaz's analysis are in Appendix 2.  On an aggregate basis, of the 32 firms in their sample.

1. 75% met the Leverage Ratio.
2. 44% the Acid Test (Liquidity Ratio)
3. 34% both ratios.

One point I would like to highlight is their focus on fair value reserves.

The problem arises in the valuation method used in this segment which can be vague at best and completely misrepresentative of “actual” value in the worst case. By misrepresenting the fair value of Assets Available for Sale, a company can inflate its Fair Value Reserve (and therefore Equity figure) by booking Unrealized Gains, which would produce a lower leverage ratio." 

Earlier post on this topic here.

Jones Lang LaSalle: "Dubai Real Estate Slowdown to Continue"

You've probably seen reports quoting Jones Lang LaSalle's prediction that half of Dubai's commercial office space will be vacant in 2011 and that the residential property market will also be under stress until then as well.

Well, here's the original JLL report that is the basis for those news items.  Besides containing more information, the JLL report also provides some nuances.

Commercial Office Real Estate

1. While there is a substantial vacancy rate in commercial office space currently at 38%,  only 12% of single ownership stock in the Central Business District ("CBD") is vacant.
2. JLL sees very little demand for "strata titled" space.
3. There is in some respects a shortage of good quality supply (location, specification, legal title) as evidenced by the lower vacancy rate in the CBD.

Residential Space

1. Rents for  higher end apartments (Burj Khalifa) continue to decrease significantly.
2. Higher end villas are hit even harder.

Retail Market Space

1. Estimated Rental Values down 39% from 2Q09 to 2Q10.
2. Retail sales growth expected to come from department stores and mid market value chains rather than luxury goods.
3. No significant new supply until 2013 (Mall of Arabia in Dubailand).

Hotels

1. Beach hotels have higher Average Daily Rates than business hotels - AED1,386 versus AED660.
2. New hotels are expected to intensify competition and lead to a decline in ADRs not a decline in occupancy percentages.

There's a lot more in the report and you can "mine" it according to your own interests.

Central Bank of UAE Preparing Provisioning Guidelines for UAE Banks for Dubai World Exposure

Quoting Reuters, Emirates Business 24-7 says that the CBUAE has advised banks not to take specific provisions against their Dubai World exposure pending the CB's release of guidelines on provisioning.

As discussed in February, the CBUAE is in the process of revising its general guidelines for loan classification and provisioning.   

No doubt they will want to do a bit of "fine tuning" regarding guidance for Dubai World.

British Architectural Firm Sues Dubai Properties for AED27 Million (US$7.3 Million)

Bradley Hope over at The National reports that Hopkins Architects, a major UK architectural and engineering company, is suing Dubai Properties in the DIFC Court  (Court Case CFI 034/2009) for AED27 million (US$7.3 million) for what it claims are unpaid fees and costs it has incurred in connection with Central Park 08, a set of twin 50 storey towers next to the DIFC.

As per the DIFC Courts website, Dubai Properties has until 12 July 2010 to present its defense.

This amount is rather small beer in financial terms.  And failure to pay reflects either a very serious commercial dispute.  Or a rather severe cash crunch at Dubai Properties.

The article leaves the impression that HA stopped work because of non payment and then DP sought to cancel the contract.  Assuming this is correct, it would seem then that DP would owe HA for work to date less any deductions for any damages it can claim against HA.  From the article it sounds as though DP is not raising any counterclaim against HA, though it may still be early in the legal game.

In any case, I am taking comfort as I suppose we all should by the recent words of a high placed guy in the Emirate who should know the score.  While this quote refers to Dubai World, I'm sure that it probably equally applies to Dubai Holdings.

"I'm not worried about the company, the company has got the wealth. So they have something, and they will come back very very quickly."

Though I'll confess I'm not so confident about HA collecting its receivable.

AlGosaibi Offers Creditors 20% on the Dollar Plus Proceeds of Lawsuits Against Maan AlSanea

Quoting informed sources, Frank Kane at The National reports that AHAB has offered creditors a cash payment of US$1.8 billion on US$9 billion of liabilities plus up to US$4 billion hoped to result from AHAB lawsuits against Mr. AlSanea.   

As Mr. Kane notes and as I have as well before, Mr. AlSanea continues to deny AHAB's allegations against him.

The al Gosaibi family of Saudi Arabia is prepared to sell much of its 70-year-old business empire to help pay its creditors, informed sources say.

The proposed net payment is a minimum of 20% (US$1.8 billion) with a maximum of 64.4% (US$5.8 billion).

As the article points out, the net value of Mr. AlSanea's assets is not known. 

Assuming for a moment that AHAB would be successful in its lawsuits, I believe it would become another of Mr. AlSanea's unsecured creditors.   And would therefore be entitled to a proportionate share of the "estate".  As well, the resolution of the lawsuits is probably something that will require a very long time to settle.  In objecting to a potential suit against itself by Trowers and Hamlins,  AHAB is reported to have said that "litigating the intercompany positions will take years if not decades and that such litigation only depletes resources that will be needed to effect a workable commercial settlement".   One may perhaps safely presume that the same would apply to AHAB lawsuits against Mr. AlSanea.  

Putting aside the depleted resources argument, one might argue that the present value of the proposed settlement is therefore less, much less, than 64% or 20% for that matter (which will depend on sales of AHAB assets). 

DIC Cashes Out of Merlin (Madame Tussaud's)

Asa Fitch over at The National reports that DIC has sold its remaining 6% stake in Merlin to CVC.  No doubt an element of cash need drove the sale, though DIC received the lion's share of its return in 2007 when it received GBP 1 billion in cash plus 17% of Merlin.  This is compared to the purchase price of GBP800 million in 2005.  

The additional amount for the sale to CVC is icing on the cake.

According to CVC's press release on the sale, the ownership of the Company is now KIRKBI 36%,  Blackstone 34%, CVC 28%, management 2%.

With no single investor holding majority control, managing the Company will be a bit trickier than if there were a dominant shareholder.   

On the other hand, a distinct benefit is that cash calls for new equity (if any is required) will not fall disproportionately on any one shareholder.  

The Company needs cash to fund its "ambitious growth programme" as the CVC press release states.  And there is the unfortunate bunching of loan maturities - the extension of which is being negotiated currently.  Both potential cash demands.

Additional debt financing is unlikely.

The CVC press release also states that "Merlin does not intend to increase its financial leverage."   I suspect that the decision reflects more than sober financial self-discipline. Bankers are now less willing to lever up the company than they were during the  "Bonny" days when Charterhouse owned Madame Tussaud's.  Then loans were abundant.  And with easy terms - long dated bullet loans.    

That leaves additional equity.

Last October, the Financial Times reported that Merlin would IPO in 2Q10 with the transaction mooted at some GBP2 billion.  The sale to CVC suggests that the IPO route is not as likely as there is little reason for Blackstone to reduce its position in a trade sale if an attractive IPO is imminent. 

The remaining source is private equity - and perhaps a rationale for several rather than one dominant shareholder.

The Investment Dar - No Agreement on Draft Budget Expenses

Citing informed sources, AlQabas reports that the meeting earlier this week between the Creditors Co-ordinating Committee and the Company did not resolve the differences over the level of operating expenses in the proposed five-year budget (which is required under the restructuring).

At the end of the meeting, the CCC came up with some modifications to the Company's budget which were devised by the Chief Restructuring Officer - who was appointed by both sides as a "neutral" party to review the proposed five year projected financials/budget.

The Company is expected to reply within the coming week.  If it agrees, then the revised budget will be submitted to the Central Bank for its review.  If not, the dispute will remain open (unresolved).

As noted in the previous article, the creditors' position is that expenses should be in harmony with the new situation the Company finds itself in.  Meaning probably fairly dramatic cuts in operating expenses.

The central question is just how deep the cuts are and whether they are really required.  Or if they are a bit of overkill by overzealous bankers.  Without details, there's no sound basis for judging one way or the other.

NY Court Compels Release of AlGosaibi Bank Account Details

As per the Gulf Daily News,  Trowers and Hamlins won an important legal victory in US Bankruptcy Court.  The Court ruled that AHAB's New York bankers must disclose details of a key AHAB account.   One to which reportedly a large amount of funds were transferred.  As the article notes, Trowers and Hamlins have been requesting information on this account since last August.  

Trowers & Hamlins partner Abdullah Mutawi, who is leading the asset realisation strategy, said it was a significant development.

"This is the first time AHAB has been compelled to reveal details of any of its bank accounts," he said.

"It is particularly significant because AHAB has repeatedly refused to hand over important information relating to the operation of the account.

"The account is important because a substantial portion of TIBC's funds were remitted to it and the information should help reveal the ultimate destination of those funds."

As I noted in yesterday's post about First Gulf Bank's lawsuit against AHAB,  there seems to have been a change in the dynamic of this story.  The focus is now on AHAB's behavior - both in terms of responsiveness to requests from creditors as well as its role in the collapse.

I suspect this is going to get increasingly messy.  At the end few reputations may be left undamaged.

Dubai: Self Made Challenge

HH Shaykh Mohammed Bin Rashid AlMaktoum set the record straight in an interview with CNN.  Or more precisely will do so next week when the interview airs.

Like Global Investment House in Kuwait, Gulf Finance House in Bahrain and several other careful students of the market, he's identified the sole cause of current problems - the global financial crisis.  As we always note here at Suq Al Mal out of an abundance of caution to prevent anyone from drawing the wrong conclusion, that's global with a lower case "g".

"The recession is a global phenomenon and I do not think that we in Dubai fear it, but instead we consider it a challenge."

It's often said that true progress and development comes by challenging oneself.  Sadly, other members of the GCC, like Qatar, apparently don't feel up to challenging themselves in quite the way that Dubai is challenging itself.

While in reference to Dubai World, he adds: "I'm not worried about the company, the company has got the wealth. So they have something, and they will come back very very quickly."

Some Kuwaiti Banks Overreaching in Collateral Demands

AlQabas quotes unnamed financial sources that some banks have been taking excessive collateral in restructuring debts for their subsidiaries and affiliates - reaching 400% coverage in some cases.  The issue is that such coverage levels effectively place other creditors - banks, investors in murabaha transactions, etc - in a much weaker position.

The financial sources expect that disadvantaged creditors will raise formal complaints with the Central Bank of Kuwait.  The article notes that the traditional collateral level is between 150% and 200%.

A final comment is that some restructurings are being delayed as creditors cannot agree - given some creditors' demands for a higher ratio of coverage or specific assets for themselves.

While nothing concrete was said, I wonder if this relates to "Islamic" banks.  

Perhaps one of my better informed readers will care to comment.

First Gulf Bank Sues AlGosaibi for AED58.7 Million

First Gulf Bank has launched a suit in the Abu Dhabi Court of First Instance against AlGosaibi's local company and AHAB itself.

Both parties are being quiet about the details of the case.

FGB reportedly has a US$55 million in exposure to both AlGosaibi and Saad.

From recent press announcements it appears that the legal tide has turned - and that the current focus is now on AlGosaibi.

AT Kearney: Reinventing Investment Banking in the GCC

An interesting report from ATK on the GCC investment banking sector.

The key issues that GCC investment banks face are:

1. Competition from more established firms - who are opening offices in the region.
2. Local investment firm's business models which focus heavily on private equity investments.  That in part reflects the state of local capital markets.
3. A debt capital shortage which constrains the ability to build asset intensive businesses.

To that I'd add:

1. A reluctance by clients to pay for advisory services unrelated to fund raising.
2. Relatively modest volumes.  This in part explains the focus on proprietary investments where the gross margins are higher than on capital markets and advisory business. 
3. Market deficiencies.  An absence of sophisticated institutional investors.  Local equity markets are largely driven by irrational exuberance and pessimism of retail investors.    Constrained free float on many major firms.
4. In general weaknesses in corporate governance and disclosure.   
5. Lack of skills and shortcomings in professionalism/ethics.

Central Bank Regulation - John Lipsky

John Lipsky, First Deputy Managing Director at the IMF, delivered a speech on deficiencies in central bank regulation prior to the recent crisis plus some prescriptions for correcting shortcomings in Moscow last Friday. "The Road Ahead for Central Banks: Meeting New Challenges to Financial Stability".

He identifies a central failing which might be described as simple minded credulity.

Prior to the crisis, for instance, supervisors relied excessively on financial firms’ own risk analysis and internal controls. In broad terms, they relied heavily on the self-disciplining qualities of markets. In other words, supervisors were insufficiently intrusive and skeptical.

What could possibly go wrong with allowing firms to police themselves?  Not just allowing them to judge when they had "broken" a prudential limit, but allowing them to measure whether they had broken it or not.  And, we hear yet again about the self disciplining qualities of markets - which is the regulators' equivalent of the implicit guarantee. 

In fact if you read the speech carefully, you'll see that this failing is the root cause of most of the other shortcomings he identifies. 

AlGosaibi v Maan AlSanea - Trowers and Hamlins Statement

One of my new and frequent commentators mused whether the fact that Trowers and Hamlins had launched a lawsuit against AHAB represented any sort of determination by T&H about the guilt or innocence of the parties involved in the case.

I had speculated that T&H was merely doing its job - going after the registered debtors of TIBC and pursuing collection of funds without making any such judgments.

That left us in a stand-off of opinions.

So, I posed a question to T&H through Hill and Knowlton.  Today I received the following response which I quote verbatim.

A Trowers and Hamlins spokesperson said: “Our investigations to date and other extrinsic evidence provided by third parties - which we are still considering - would suggest that there were irregularities in the manner in which the business of TIBC and other institutions connected with the AHAB / Saad situation was conducted.  However, investigation of fraud or other criminal activities and/or other material non-compliance by officers or other stakeholders of TIBC with the law or regulatory requirements essentially remains the remit of the public prosecutor and the CBB respectively and it is therefore not appropriate for us to comment or speculate further.”

As you'd expect a law firm to do, this statement is carefully crafted to avoid creating any unwanted legal problems for T&H.

There are several points I think are worthy of comment:

1. That at this point what T&H has seen suggests - though not conclusively - that there were "irregularities in the manner in which the business of TIBC and other institutions connected with AHAB / Saad situation was conducted".
2. That investigation of fraud, criminal activities or material non compliance with regulations is not T&H's responsibility but that of the "Relevant Authorities" in the Kingdom of Bahrain.
3. Accordingly, T&H will not comment on such matters.
   

Damas - Enforceable Undertaking Latest Developments

A rather enigmatic press release from Damas on Nasdaq Dubai this morning.

Three points of note:

1. Damas International Limited ("DIL") is negotiating a Cascade Agreement with Damas Investments Limited and Damas Real Estate Limited, the Abdullah Brothers who own both companies, and their respective creditors.  "The purpose of the Cascade Agreement will be to effect an orderly realisation of the assets of the Abdullah Brothers Group. DIL and its board will at all times continue to act in accordance with their legal duties."
2. "DIL notes that its undertaking to recover amounts owing from the Abdullah Brothers at paragraph 17.37 of the DIL Enforceable Undertaking is expressed to be subject to any stand-still, restructuring, security, cascade or similar agreement with the Abdullah Brothers Group and their creditors, including DIL. DIL further notes that in the enforceable undertaking given by the Abdullah Brothers dated 21 March 2010 (the "Abdullah Brothers Enforceable Undertaking") the obligation to repay the Drawings Amount (as defined therein) to DIL at paragraph 15.11 is expressed to be on terms and conditions either already agreed or to be agreed with DIL. Further, the obligations of the Abdullah Brothers to use the net proceeds of realisation of assets to repay the Drawings Amount at paragraph 15.12.1 of the Abdullah Brothers Enforceable Undertaking is expressed to be subject to the terms of any settlement, stand-still, restructuring, security, cascade or similar agreement with creditors (including DIL)."

It sounds as though Damas is in the process of revising the original repayment schedule agreed with the Abdullah Brothers.  No doubt legally required in terms of the rights of all creditors.  What it probably means for DIL is a longer payback period.  And depending on the assets, perhaps less than 100% payout.  From what I've read it seems likely that many of the investments may be problematic to sell at original cost.

The International Banking Corporation - Trowers and Hamlins Sues AlGosaibi

Not a good week for the AlGosaibis.

Trowers and Hamlins, the Central Bank of Bahrain Administrator for TIBC, announced through its public relations firm, Hill and Knowlton, that on 16 June, it had "filed a US$720 million foreign exchange claim against Ahmad Hamad Algosaibi & Brothers (AHAB) at the Saudi Arabian Monetary Agency (SAMA) Committee in the Kingdom of Saudi Arabia, following referral of the claim by the Council of Ministers."

There are a couple of telling points in the press release.  The first is the comment that the claim was filed "following referral of the claim by the Council of Ministers".

The second is a quote from Abdullah Mutawi, the T&H Partner handling this case:

“The claim we have launched with the SAMA’s Committee follows unsatisfactory responses from AHAB and their representatives to questions relating to the assets of TIBC that we have repeatedly asked them."  

You'll recall (and if you don't here's the link) that earlier there were complaints from some of the Kuwaiti banks that AHAB (as well as Saad) were not responding to requests for information or to hold meetings.   T&H notes in the press release that it has has "filed an application in the Courts of New York under Chapter 15 of the US Bankruptcy Code for an Order pursuant to Bankruptcy Rule 2004 authorising discovery.  The application seeks to obtain an Order from the Court compelling the disclosure of key financial information which the Administrator has been requesting from AHAB since August 2009 and which has not been forthcoming."  

The third is that AHAB is the "single biggest debtor owing US$3.2 billion."

In its press release T&H notes 

In addition the Administrator recently filed cases with the Negotiable Instruments Committee (NIC) in Saudi Arabia against Saad Trading (US$ 117 million), which is part of the Saad Group, as well as Abdulaziz Al Sanea (US$54 million) for defaults on loans advanced by TIBC.   Hearing dates have been set for early 2011 in relation to those cases and the administrators are currently working to expedite these hearings.

And that it will be pursuing other cases in an attempt to recover monies owed TIBC.

Finally, there is a quote from an unnamed representative of the Central Bank of Bahrain

“We are pleased that litigation has been launched less than 12 months after the CBB placed TIBC into Administration. This is a positive step forward in what is clearly a very complex case and reflects the CBB’s commitment to maintaining a well regulated and stable investment environment in Bahrain.”

Frank Kane over at The National has some additional information.

Two quotes. 

The first.

“Trowers and Hamlins’ rhetoric simply ignores [the Al Gosaibi group’s] multiple offers to enter into a co-operative information sharing agreement …”said Jim Courtovich, the spokesman for Al Gosaibi, said in a statement to The National.

The second.

In a letter to Mr Mutawi dated May 26 obtained by The National, a lawyer for Al Gosaibi said the group was advised not to hand over documents to Trowers and Hamlins because the firm was planning to use them as evidence in cases against Al Gosaibi.
“We could not responsibly advise our clients to proceed in this manner,” the letter, from Eric Lewis at the firm of Baach Robinson and Lewis, said.

In the letter, Mr Lewis also advised Trowers to join Al Gosaibi in the fight against Mr al Sanea, asserting that filing lawsuits against the group would be unproductive for creditors to TIBC.

As always, it's a good way to end a post on this topic to note that Mr. AlSanea vigorously denies the AlGosaibi allegations against him.

KFIC - Annual General Shareholder Meeting Approves Capital Reorganization and RIghts Offering

KFIC published the results of its shareholders OGM held 16 May.

1. Agreement not to distribute dividends for Fiscal 2009.
2. Recapitalization by extinguishing 2009 losses of KD25,314,775 by utilizing General Reserves of KD6,371,986, Legal Reserves of KD8,948,771, and Capital in Excess of Par KD2,210,849.  The difference will be made up by reducing Paid in Capital from KD41,930,970 to 34,147,801.
3. An increase in capital of KD20,000,000 by issuing 200,000.000 shares at KD0.100 per share by way of a priority rights issue.   This allows existing shareholders the absolute right to buy enough shares in the Rights Offering to maintain their respective percentage ownership of the Company.
4. Election of a new board for a three year term.

The board is composed of: 

1. Saleh Yacoub Yousef Al-Humaidi
2. Riham Fuad Mohammad Al-Ghanim
3. Mahmoud Fouad Mohammad Al-Ghanim
4. Tariq Mishari AlBahar
5. Mahmoud Emam Yaseen Owais
6. Abdulmohsen Yagoub Yousef Al-Humaidi
7. Fadwa Yacoub Yousef Al-Humaidi

This is pretty much the old Board except that Tariq appears to have replaced Wael Jassim Al-Sagar.

للشركة الكويتية للتمويل والاستثمار ( كفيك) قد انعقدت يوم الاربعاء ‏
الموافق 16-6-2010 واقرت الجمعيه العمومية بما يلي :‏
ِ1- عدم توزيع ارباح عن السنه المالية المنتهية في 31-12-2009 ‏
ِ2- الموافقة علي اطفاء الخسائر المرحله للعام 2009 بمبلغ 25.314.775 د.ك ‏
وذلك باطفاء رصيد الاحتياطي العام بمبلغ 6.371.986 د.ك والاحتياطي القانوني
بمبلغ 8.948.771 د.ك وعلاوة الاصدار بمبلغ 2.210.849 د. ك وتخفيض راس
المال من 41.930.970 د.ك الي 34.147.801 د.ك بمقدار الخسائر المتراكمة بعد
اطفائها من الاحتياطيات وعلاوة الاصدار والبالغه مبلغ وقدره 7.783.169 د.ك ‏
ِ3- الموافقة علي زيادة رأ س  مال الشركة من 34.147.801 د.ك الي ‏
ِ54.147.801 د.ك وذلك عن طريق طرح عدد 200.000.000 سهم للاكتتاب بقيمة
اسميه قدرها 100 فلس كويتى نقدا ودفعه واحدة وذلك للمساهمين المقيدين بسجلات
الشركة في نهاية اليوم السابق لبدء الاكتتاب في زيادة رأس المال ويكون لكل ‏
مساهم الاولويه بالاكتتاب بحصة من الاسهم الجديدة ومتناسبة مع عدد اسمهه .‏
ِ4- كما تم انتخاب اعضاء مجلس ادارة جدد للثلاث سنوات القادمة كما يلي :‏
السيد - صالح يعقوب يوسف الحميضي ‏
السيدة - رهام قؤاد محمد الغانم
السيد - محمود فؤاد محمد الغانم
السيد - طارق مشاري البحر
السيد - محمود امام ياسين عويس
السيد - عبد المحسن يعقوب يوسف الحميضي ‏
السيدة - فدوي يعقوب يوسف الحميضي ‏
وعليه سيتم تداول سهم الشركة بعد تخفيض رأس المال اعتبارا من اليوم الخميس ‏
الموافق 17-6-2010 ‏

The Investment Dar - TID and Creditors Debate Expense Controls

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

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

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

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

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

Etisalat AED37 Million Bonuses Flap

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

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

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

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

Gulf Finance House - Badr Al Subaiee Resigns from Board

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

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

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

Hashem al-Dabal Released After Repayment of AED130 Million

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

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

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

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

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