Islamic Finance - What Does That Term Mean? "Whither Islamic Finance?"

Islamic Finance - a topic much debated these days.

What does it mean?

Is is a real alternative to conventional finance?  Or just an Abu Yusuf trick?

Here's a link to a post by practicing Islamic banker from the GCC with his take on this topic.  "Whither Islamic Finance?"

Well worth a read.

International Investment Group - Sets the Record Straight - It's Business as Usual

Apparently some easily excitable rookie investors panicked when they read IIG's earlier announcement that it was unable to pay some US$152.5 million on its US$200 million sukuk.

So today IIG set the record straight with announcements on the KSE, BSE, and Dubai markets.

"Notwithstanding this announcement IIG wishes to confirm that it and its businesses are continuing to trade normally."

AA certainly hopes that investors will come to their senses and recognize IIG for what it is.  And as well to place the comments in context: apparently "trading normally" up North has a different meaning than in some other markets.  

After all when you claim to follow Shari'ah principles and have the highest ethical standards, who on Earth would doubt your word?  Certainly, not AA.

Suq Al Mal Passes CEBS Stress Tests

In response to what I understand is some baseless concern in the market about Suq Al Mal's condition, particularly in light of the PIGS crisis in Europe, I'm very pleased to announce that SAM has passed the CEBS "Stress" Tests and will not require any additional capital to continue as a going concern even under the rather dire scenarios used.

Pictured below is the actual testing session which I can tell you was quite stressful.  As far as I recall this  experience, filling up the test form was the major stress.  In case you're wondering, I'm on the right.  Sadly, my buddy, KfW, was absent that day.  I'm hoping they'll hold a "make-up" test for him. 

In any case, I did pass, though my test paper and answers are "top secret".

Most everyone who showed up, passed.  No bank left behind as they are reported to say. Well maybe 7.  But over a 92% success rate is highly impressive.

AlGosaibi v Maan AlSanea - Fortis Bank v ADIB - Fortis Drops "Structured" Bombshell

 

 Warning:  Ethics Depicted in Picture May be Smaller Than They Appear

In  my earlier post analyzing the Awal Bank L/C I spent a bit of time speculating on the transaction as a disguised money on money loan and the potential role of Bunge in the second leg, the purchase on a spot basis of the commodity back from from AlGosaibi/Awal Bank.  The necessary step to get funds to AlGosaibi for the loan.

As they say (and they are right), reading is fundamental.   I could have saved a bit of time by looking a bit closer at two documents I had printed out.  

Today having posted on the BNPP lawsuit against ADIB, I decided to finish off the ADIB topic by commenting on the two latest submissions by ADIB and Fortis' counsel in the Fortis Case (NY Supreme Court Reference #601948/2009) - Documents #78 and #79.   Documents I had printed out on 9 July!

Right there on the first page of the 9 June 2010 letter from George O. Richardson, III, Esq.  of Sullivan & Worcester, Fortis' counsel, was the revelation that Bunge had informed ADIB of the precise nature of the transaction via an email prior dated 7 April 2008 - that is, prior to the date  ADIB agreed to confirm Awal Bank's letter of credit.  ADIB's SWIFT confirmation to Fortis was sent 16 June 2008  as per Document #24 Exhibit #2.  Some two or so months later.   By the way, that document (not the Bunge 7 April email but the copy of  SWIFT confirmation of the LC) was submitted by ADIB as part of Nuhad Saliba's Declaration.  Ms. Saliba is Head of the New Countries and Global Wholesale Banking Department at ADIB.

The Bunge email was sent by Rachel Wong of Bunge SA Geneva to Naeem Ishaque, Manager Financial Institutions at ADIB.  There are a variety of copy parties but their affiliations are not clear from the message.  The email is Exhibit #1 to Exhibit A in the Richardson Letter (Document #79).

So what did the Bunge email say?

"Section 15. Structure  This is a structured transaction whereby Discounting Bank [AA:  Fortis though at this point Fortis name is not mentioned, perhaps because Bunge was still shopping the second confirmation] is required to discount or fund the Instrument in favor of the Beneficiary once the documents are deemed in compliance at its counter, Applicant [AA:  AlGosaibi Trading] will on-sell the Goods to another Bunge affiliated company ("Bunge Buyer").  Once Beneficiary receives the discounted proceeds under the Instrument, Bunge Buyer will effect sight payment to the Applicant immediately.  Applicant will enjoy the cash financing during the Tenor [AA:  the 360 days from acceptance of documents until payment] before repaying the Issuing Bank [AA:  Awal Bank] on maturity of the Instrument."

This effectively demolishes ADIB's argument that it thought this was a trade transaction and that somehow it was tricked and so inadvertently and innocently defrauded.   ADIB is clearly an active and knowing participant in the transaction which equally clearly is a "money on money" loan.  Some might say that transactions like this are  a fraud against the Shari'ah. (With respect to AA's position please see the last sentence).

It also raises a very fundamental question about ADIB's earlier legal arguments in which it and its counsel claim that the bank did not see this was a structured transaction and had no inkling that it was participating in a money on money financing.   

ADIB's learned counsel at Dewey & LeBoeuf have set a high standard of knowledge in their previous pleadings.  They asserted that because Fortis Singapore advised a L/C for the same goods and in fact the same documents, Fortis Netherlands - half way across the world - was deemed to know this with respect to the Awal LC  it confirmed. 

Therefore, it seems highly appropriate and fair to apply D&LB's standard to ADIB with even more rigor because ADIB operates from a single country.  Thus with the greater proximity one would no doubt expect that the knowledge at ADIB permeated every level of that firm, including the chap who makes the tea.

Some might also be tempted to remark that there is a repetitive pattern here with "Islamic" banks of much less than كلام شريف  in their legal pleadings as in the case of TID v BLOM.

Heeding the admonition of Imam AlGhazali, AA will remain silent on all these points.

AlGosaibi v Maan AlSanea - BNPP versus Abu Dhabi Islamic Bank in re TIBC L/Cs

In discussing the Fortis lawsuit against ADIB, I mentioned that ADIB was also a defendant in a lawsuit brought by BNP Paribas' "Full Commercial" Branch in the Kingdom of Bahrain.

The relevant documents can be found at the NY Supreme Court Website http://iapps.courts.state.ny.us/webcivil/FCASMain  under Case # 603365/2009.   Or more precisely one document as all that is posted so far is the complaint by BNPP - missing what I'll bet ares some very interesting attachments.  Unclear why this is.  Especially since the submission in question dates from November 2009.

Here are the facts from the material posted on the NY Supreme Court's website:

1. In March 2009, ADIB issued six irrevocable reimbursement undertakings ("IRU's") in favor of BNPP to induce it to confirm 6 "commercial" letters of credit issued by The International Banking Corporation in favor of Dawnay Day and Co for the Account of AlGosaibi Trading Company.
2. BNPP confirmed TIBC's letters of credit and then upon presentation of the documents accepted the documents and the time drafts presented.  
3. On an unspecified date, BNPP claimed reimbursement of some US$44,875,000 from ADIB.  Presumably, the maturity date of the accepted time drafts.
4. ADIB refused to pay.
5. In September 2009 (after acceptance of the drafts by BNPP) ADIB obtained a judgment in Bahrain Court enjoining ADIB from making any payment.  
6. BNPP is seeking to have the Court issue a temporary restraining order preventing ADIB from moving assets (presumably balances in its correspondent accounts in NY) from the USA.
7. Its claim is for the principal of the payment (US$44,875,000) plus interest, attorney's fees and costs.

Now to some comments.

1. It's not clear to me why there isn't more precision in documents sent to the Court with exact dates when events took place, additional details of the individual transactions -  currency, goods, tenor, etc.  Perhaps time was of the essence and BNPP's lawyers wanted to file quickly to block the potential movement of assets outside of the USA. 
2. Dawnay Day was a very large "financial firm" with a commodities trading wing which ran into some "financial difficulties" as a result, I believe, of the global financial crisis (small "g" as always).  It was also an active participant in structured "Islamic" trade transactions as described in my post about Fortis.  It had at least one subsidiary Condor Trading which it uses so that the "purchaser" and "seller" of the goods are not the same party.  
3. It appears (but the documentary record here is very slim so this is an educated guess) to be a mirror of the Fortis transaction.  The TIBC L/Cs are one half of the "Islamic" structure:  the purchase on deferred terms.  For TIBC/AlGosaibi to actually get the funds a spot sale on a cash basis is required.  That could have been with Condor with TIBC Bank acting as the "arranger" of the transaction.   That is probably the most likely scenario and the one that I think happened - but again note this is an educated (or uneducated) guess.
4. Since discovery in other legal cases has resulted in the publication of  some details of at least the US - domiciled US dollar accounts of Awal Bank and TIBC, clever boots might be looking through that material for incoming credits around the time of the negotiation/acceptance (but not the payment date) of the first leg letters of credit. That is in the Fortis case the Awal Bank LC confirmed by Fortis under ADIB's IRU.  And in the BNPP case, the letters of credit issued by TIBC and confirmed by BNPP against ADIB's IRUs.  If these are indeed disguised clean money on money loans, the second leg (the spot sale) should have occurred around the same time.  The amounts would not necessarily be the same as interest on the loan might be built into the price on the first leg (the deferred payment).
5. But one key additional bit of information.  If we look at the Fortis Case (NY Supreme Court Reference 601948/2009 Exhibit #2 Document #34 Amended Declaration of Qays Zubi, we note two things.  First, TIBC LC's seem to have been denominated in Euros not US.  Second, a restraining order has only been obtained for four L/Cs not six as mentioned in BNPP's complaint.  The total of the L/C's mentioned in the Qays Zubi Declaration are some Euros 18,243,975.  Clearly, that does not equal US$44,875,000.  Two L/Cs are "missing".  Does that give Fortis a legal "wedge"?
6. We also learn that the payment dates on the TIBC L/Cs were between 22 June and 24 June.  You'll also notice that the certified translation has an error in that it shows the last LC as due March 23,2009.  The Arabic clearly states (in "Western" numbers not Arabic!!!) 23 June. 
7. The central point of BNPP's claim (like that of Fortis) is that under a documentary (aka commercial) letter of credit the bank's obligation to pay is independent of the commercial contract.  Its obligation is set by the terms of the letter of credit.  Compliance with the documentary requirements of the letter of credit establishes the obligation.  
8. To overcome the rather substantial amount of case law and precedents in favor of BNPP's legal position, I believe ADIB has to prove two things. (a)  Fraud in the inception.    (b) Involvement of BNPP in that fraud.  That is a a tough row to hoe as the saying goes.  

Transparency: The Missing US$400 Billion in Derivatives

As we in the "developed" (make that "highly developed") West like to do, it's time to preach the virtues of transparency and care in preparing data to those less enlightened and skilled out there.

In that vein, here's a quote from the BIS Publication "Provisional International Banking Statistics First Quarter 2010"  Footnote #5  Page3:

In previous reports, some US reporting banks have failed to fully account for the risk transfers associated with protection bought using credit derivatives. This has been corrected for Q1 2010 only. Therefore, the current data for Q4-2009 and Q1-2010 suggest a much larger increase in US banks' cross-border ultimate risk claims and inward risk transfers than will be shown when the Q4-2009 data have also been revised. The amount of this additional reporting is estimated to be close to $400 billion in the Q1 data.

Apparently, the BIS noticed this when reconciling reports on a country by country basis - there were US$400 billion more of transactions reported with the USA than its own institutions reported. 

The culprits have been identified as the non banks that transformed themselves into bank holding companies in the wake of the global financial crisis (all lower case, especially the first word), e.g., Goldman, Morgan Stanley, etc.

Presumably the result of a failure to understand how to fill up the forms.

AlGosaibi v Maan AlSanea - Legal Case Summary and Status

Citi, the Delegate on Saad's Golden Belt Sukuk 1, has posted a notice on the BSE listing the legal cases  it is aware of involving Mr. Al Sanea and his companies as well as their current status.

Besides conveying useful information, the Delegate is putting Golden Belt Certificateholders on notice that other creditors of Mr. AlSanea and his companies are pursuing legal claims.  As long as Golden Belt Certificateholders are not, they are effectively in a junior position.

Why?

As I read the Delegate's last announcement, while a sufficient number of Certificateholders (more than 25%) have voted for Dissolution of the Trust, they have not indemnified the Delegate to its satisfaction.   That is, agreed to reimburse Citi for expenses.  Until that happens, the Delegate is not obligated to take the legal steps to dissolve the Trust, claim on the Repurchase Obligation of Saad Trading and Contracting, and in the event of non payment by STC pursue STC in Court.   Thus, the Certificateholders are effectively in a subordinate position against STC - they have an uncalled guarantee.  

The Delegate is doing this to cover its legal posterior.  In the event that the Certificateholders' recovery is adversely affected by failure to take action, the Delegate will have a legal defense that it has done all it  was obligated to do to protect their rights.

The thorny issue for Certificateholders is whether they agree to repay Citi for legal expenses involved in taking such actions.  Will the net recovery after the expenses be more than if they did not take action?

And this is I suppose as good a place as any to note that Mr. AlSanea still denies any improper or illegal behavior.

The Investment Dar - Central Bank to Impose Conditions to Enter FSL

Muhammad Sha'baan at AlQabas quotes informed sources that the delay in the Central Bank's approval of TID's entry under the protection of the FSL reflects some fundamental concerns and that as a result the CBK is likely to impose conditions and constraints as the price for TID's entry - which they will secure prior to any approval.

The steps will protect the interests of creditors as well as support the rehabilitation of TID.  And this "workshop" (or perhaps worklist) of effective and swift measures will immediately follow entry under the FSL. 

The article notes that TID's "file" is complicated (and presumably this is the reason for the CBK's caution):

1. A significant amount of creditors want nothing to do with the restructuring and are determined to continue legal action.  The concern is that a foreign judgments will be immune from the FSL and thus will disturb the Company and upset the legal protection given.   AA:  There is no real way that the CBK or Kuwaiti authorities can get 100% a priori assurance this will not happen.  The hope is that a foreign jurisdiction will recognize the FSL as being analogous to USA Chapter 11 and stay legal actions in their countries.  This is something the Kuwaiti authorities have to make a leap of faith on once they've decided the larger issue - whether it is better to liquidate or rehabilitate TID.  The USA (State of New York to be precise) has recognized the Administration of TIBC in Bahrain as a fair and reasonable process and has stayed legal actions. One would hope Kuwait could get similar treatment.
2. The Company has yet to issue any financial reports from 2009 or 2010. The article describes several legal/regulatory issues -- the holding of annual shareholders' meetings, restoration of trading on the KSE --  as well as the determination of the Company's financial situation.  AA:  The regulatory issues are immaterial to the issue of ability to repay creditors.  The major issue is whether it makes sense to liquidate the Company or run it as a going concern (which will have a higher expense level).  Which course provides the highest net payout?   Which course does the least damage to Kuwait? The longer the file is left undecided the more value that will be lost. 
3. Complete and detailed information and explanation from the Company is lacking.  The Creditors Co-Ordinating Committee failed in obtaining information on some issues - where the answers are still "floating" according to creditors.  AA:  The CBK, CCC and creditors need to determine if the Company is being forthright.  If it is not, then it's time to remove the Board and management and go forward with the restructuring.  Or put the Company in Administration.  If the situation is unclear because of external factors and the Company cannot respond with precision, then the creditors will have to learn to live with ambiguity.  One would have hoped that by now the creditors would have made a decision on this score or decided to accept less than forthright answers.
4. Some points remain open.  It appears the chief one is shareholder support.  AA:  It seems a mite optimistic to expect shareholders to put more money into TID at this point (as it does for Global) until shareholders seem the direction of the restructuring.  Presumably, any money put in will wind up immediately in the creditors' pockets.  A rather hard sell to shareholders who have probably lost most if not all of their past equity.  Invest money not to build for the future but to pay off loans. Even putting money in to build the business requires a bit of optimism - perhaps irrational - at this stage.
5. Another major unresolved issue is expense reduction/control including grants, bonuses etc for management.  AA:  Unless this is the typical bankers' myopic focus on pennies in a restructuring, this is a rather disturbing bit of news.  If repayment of TID's mountain of debt depends on reducing relative hillocks of expenses, it may be time to consider Administration.  Unless of course the intent of the plan is a disguised liquidation.  Or there is no alternative to current management and controls are required to avoid dissipation of assets.   
6. Ernst and Young (who the CBK hired to evaluate TID's financial condition) ran a series of stress tests (to use a term common in the press).  Apparently under some of these TID was unable to repay principal and/or service debt.  That led E&Y to comment on the Company's debt burden and  reliance on two sources of revenue.  The CBK is said to be looking for 100% assurance that TID will be able to service its debt according to the plan.  AA:  Perhaps this is just a flight of rhetoric.  But if the CBK is looking for 100% assurance, it needs "tae think again".   The only thing the CBK can be sure of with that level of precision is that banks under its supervision are likely to make manifestly stupid loans again and get themselves into a serious deteriorated situation.  It cannot be sure that TID will sail through.  What it needs is a reasonable assurance - tempered by a keen understanding of what a bankruptcy this size will mean for Kuwait.   The US Court didn't have 100% assurance when it let General Motors through the gates of reorganisation.  

There are a couple of other points of note in the article:

1. Legal experts say that the CBK is not bound by the Special FSL Court's request.  That as the Central Bank it has certain powers beyond and above the FSL.  
2. The Company is described as being in the position of "one standing on shifting sand" given the decline in asset prices and the problem of coming up with asset values given different and moving prices.
3. Some local banks (Kuwaiti) have provisioned between 50% to 100%.  In any case by the end of the year according to CBK requirements, provisions will have to be at 100% as for other troubled investment companies.  AA:  Presumably at that point, having taken the pain, banks don't need to accommodate a plan because they have nothing to lose.  The bankers' rule that a recovery on a fully provisioned loan is found (new) money as opposed to recoveries of old lost money.

Additional conditions and safeguards - while no doubt justified - are unlikely to provide 100% assurance of TID's success.  At some point the CBK will have to make a decision - formed largely by the intersection of approximations of fact and the realities of policy - what is best for Kuwait.   And then prepare itself for criticism that its decision was flawed.  With no doubt a major part of that criticism coming from the "wise and learned" members of the Majlis al Umma.

Dubai World - Lenders Will Be Worse Off If They Reject Current Deal

Reuters reports in an exclusive that it has seen a document that DW has circulated to its creditors warning of the dire results if creditors reject the current deal.

1. No government guarantee
2. Loss of pari passu with the Dubai Fund.
3. Withdrawal of the generous offer to use previously ring fenced assets from Isthimar World and Infinity (MGM Grand in Las Vegas) to fund repayments.
4. Longer tenors.
5. Significant reduction in ultimate recovery.

As Reuters notes and quotes:

The document made clear that creditors would suffer in a liquidation scenario and that Dubai's own coffers would be protected.

"Recoveries for all creditors except DFSF in a liquidation scenario would be significantly below those expected under the proposal," the debt plan said.

Of course this announcement is completely unrelated to the fact that DW is trying to get creditor approval for its current plan which it "improved" once already because of creditor pressure.

Having been involved in similar such exercises,  AA can vouch that borrowers and/or bank steering committees never ever ever use dire threats to try and persuade other creditors to accept a plan.  No fear mongering.  No threats. You know stuff like:  This is the best deal you'll ever get.  Take it or leave it.  The alternative is destruction of value in a messy bankruptcy.  I'll hold my breath until my face turns blue.

And AA should know as he has been both a threatenee and a threatenor - though in an institutional and not a personal capacity.

Realistically at this point, DW is close enough to the magic number necessary to cram down creditors that it needs just a few more.  

You do remember how out of a solicitude for a fair and just process Shaykh Mohammed issued a special decree that DW's debt restructuring would be handled according to the DIFC regime.  And some said the Shaykh didn't have The Vision Thing.  As far as AA can see, he saw this coming all along.

And finally a virtual tip of AA's enormous tarboush to Aidan and DW.  It seems DW will sell "strategic assets" to fund repayments at least at some stage.  Note the use of the term "strategic" as opposed to "non core".

Kuwait: "The Age of Taxes is Coming"

Kuwaiti Citizens Demonstrate Near Sheraton Hotel Kuwait City

So screams the headline from the 23 July issue of AlWatan.  A most scary development.

According to the article, the Ministry of Finance is preparing a public awareness campaign under the slogan "Tax the Permanent Source of Development" as well as that the Ministry had sent some of its staff to Egypt to learn methods for fighting tax evasion as part of a plan to introduce a comprehensive tax plan including an income tax.

Can it be too much longer before  حزب حفلات الشي   eclipses the salafist bloc in the Majlis al Umma? 

Can the local versions of   سارا بالين  and   جلن باك  be far behind?

Though knowing Kuwait, this may turn out to be like electricity.   At the end of the day citizens will delay paying their taxes until the government bails them out.

Aayan Leasing and Investment - MOCI Shareholders' Meeting 10 August

Aayan (no doubt with a bit of encouragement from the MOCI) announced on the KSE this morning that its ordinary and extraordinary general shareholders' meeting will be held on 10 August at the MOCI premises at 11 AM.   I expect this will be an "interesting" meeting as the centerpiece will be the MOCI's presentation of its report on the Company's financial condition as well as certain violations it believes have occurred.

The KSE also noted that it had not yet finished its review of ALI's  2009 financials and would publish them once it completed the review.

[11:43:59]  ِ.اجتماع الجمعيه العمومية لشركة اعيان للاجارة والاستثمار ( اعيان )‏
يعلن سوق الكويت للاوراق المالية بأن شركة اعيان للاجارة والاستثمار (اعيان)‏
شركة موقوفه عن التداول لعدم تزويد ادارة السوق ببيانات 31-12-2009 وبيانات ‏
ِ31-3-2010 وقد افادتنا بانه قد حدد موعد لاجتماع الجمعيه العمومية العادية
والغير عادية يوم الثلاثاء الموافق 10-8-2010 في تمام الساعة الحادية عشر
صباحا في وزارة التجارة والصناعة .علما بأن ادارة سوق الكويت للاوراق ‏
المالية لم تنتهي من دراسة البيانات المالية السنوية عن السنه المالية ‏
المنتهية في 31-12-2009 والتى تم تقديمها لادارة السوق بتاريخ ‏
ِ18-7-2010 وسيتم خلال اجتماع الجمعيه العمومية العادية والغير عادية ‏
مناقشة جدول الاعمال المرسل للمساهمين ‏
وسوف تقوم ادارة سوق الكويت للاوراق المالية بنشر بيانات 31-12-2009 ‏
لشركة اعيان الموقوفه حاليا عن التداول فور الانتهاء من دراسة البيانات ‏
المالية للشركة ‏

Damas Extends Standstill To September - Business Model Apparently Validated Yet Again

From Nasdaq Dubai 22 July:

Damas International Limited (the Company) announces today that the Company has signed an extension to the standstill agreement signed with a majority of its bank lenders. 

 

The standstill agreement has been extended until 30 September 2010 in accordance with its terms in order to allow the Company to finalize its restructuring plan and having regard to the Ramadan period. The Company has agreed a term sheet with the steering committee of its bank lenders and which has now been sent to the entire lender group for approval.  

The Company is pleased to announce that a majority of its bank lenders have approved the extension which proves once again the confidence of the Company's bank lenders in the strength of the underlying business model of Damas, a Company spokesman stated.

With respect to latter comment, I was surprised that Damas neglected to mention their lenders' confidence in Damas proven corporate governance model.  So I will mention it here.

Some commentators might remark that the lenders are making the best of a bad situation in the hopes of securing their recovery.  But those with Vision (like AA) know this can't possibly be right.  Can it?

What Were They Thinking?: Bharti Airtel US$7.5 Million Loan - "Sour" Skim

You'll recall that Bharti Airtel secured a US$7.5 billion loan last March to fund its purchase of African assets from Zain Kuwait.  Original pricing on this 4.7 average year life loan was 195 basis points with a 20 basis point up front fee.

Subsequent to granting of the loan, S&P reduced Bharti's credit rating from BBB- (investment grade) to BB+ (non investment grade).  It seems now that the lead arrangers have a bit of problem.  Their hoped for skim on the loan has gone sour.  Rather than being able to sell the loan at say 190 basis points margin, the lead arrangers are reportedly finding that the "market" is demanding around 250 basis points.  

I've seen comments that suggest the mark to market would be on the order of US$40 million to 42 million.  Without the exact amortization schedule, it's not practical to calculate.   BofA is reportedly going to mark.

Funny thing is, when the lead arrangers were pricing the deal, S&P put the Company on ratings watch for a possible downgrade.  One would have thought (at least this one) that perhaps the pricing would have been linked to the rating.  Apparently not.

The frenzy with which the loan was bid may be a leading indicator of the end of the banking recession and the return to "happy days".  Though the sour skim may be a contrary sign.

Lead Managers and their reported shares are:

1. Stan Chart US$1.3 billion
2. Barclays: US$0.9 billion
3. ANZ, BNP, BofA, Credit Agricole, DBS, Bank of Tokyo Mitsubishi, Sumitomo Mitsui:  US$0.8 billion.

(There's apparently a bit of rounding in the above numbers).

Another Insult to the United Kingdom: Frosty Chill Settles Over Anglo-American "Special" Relationship

US-UK "special" relationship apparently "on the rocks".

As pictured above, the Prime Minister and the US President exchanged  cases of beer at the conclusion of the Toronto G-20 summit to settle a bet over the winner of the USA/UK World Cup match.   As it was a tie, each drank the other's choice of a beer.  The Prime Minister Goose  Island 312.  The US President Hobgoblin Ale.

At that time incredulous reporters noted that the US President had refrigerated his drink.  As per contemporaneous and reliable press reports, the Prime Minister gently advised the US President that Hobgoblin is to be drunk at room temperature.

Based on intelligence gleaned from highly reliable sources (The Financial Times), Suq Al Mal can now report a further chilling deterioration in what has clearly become the former "special" Anglo-American relationship.    

During their Washington meetings this week, the US President drank another chilled Hobgoblin in the Prime Minister's presence.  A clear, deliberate and direct slap in the face to  English tradition, and thus, to Mr. Cameron, Parliament and the United Kingdom. As of yet, there have been no reports of the reaction of  a no doubt shocked Prime Minister.

Some commentators have linked the US President's behavior to his interpreting  the tie in the US-UK World Cup Match as evidence that the United Kingdom was now "punching below its weight".

What Were They Thinking?: Central Bank of Kuwait Approves Burgan Bank Share Buyback

When I read announcements like the one below (that the CBK has given permission to Burgan Bank to buy back or sell up to 10% of its shares) or the periodic announcements on the UAE exchanges reporting this or that bank's share buyback activity, I've got to wonder "what were they thinking"?  Or maybe "were they thinking at all?"  To be clear, here I'm not just questioning what the bank itself is thinking so much as what its apparently overly friendly or somnolent regulator is.

Those not suffering from banker's ADD will recall that Burgan Bank had a massive rights issue earlier this year -  April to be specific.  360 million shares.  Equivalent to a 34.57% increase in capital.  A Rights Offering that needed two stages because in the first Burgan managed to only place 85% of the amount.   If you have a banker's memory and don't remember, here's the link.

While one can never be certain, presumably Burgan raised this massive amount of capital because it needed it.   Perhaps, it was even encouraged by the Central Bank to do so.  To now partially decapitalize the bank seems not to make much sense though I suppose I could have missed the miraculous turnaround in the Kuwaiti economy in the last three months.  The boom in the KSE. The restoration of imagined ruddy health to the investment firm sector.  The disappearance of problem loans.

Looking southward,  one might also expect that the Central Bank of the UAE would stop or reduce sharebuybacks by local banks on the theory that in these difficult times banks need all the capital they can muster to provide a buffer against  problems. Though again I suppose difficult times may have ended. A dramatic recovery in the UAE.  The start of a new real estate boom.  The concomitant collapse of problem loans.  A new improved "Vision".  At least 20/5 this time!

It really does pay to pay attention as they say.

In cases like this where the decision seems contrary to good sense, it makes sense to look for additional motives.  As we all know, regulators are charged with looking out for the health of the banking sector and the economy as a whole - and not just that of this or that bank.

That suggests the Central Bank of Kuwait's decision is motivated by a higher  and more pressing need: raising Burgan's share price to a more appropriate level -- defined as one that makes its shares worth more in a collateral pledge and which increases the equity and perhaps income of its owners (FVTPL).  And goal so compelling and universal that a regulator "down South" might share a similar view, though of course for different banks.

As all good bankers know it is a cardinal rule of commercial banking to "have a second way out".  Even given the apparently generous pricing mooted on United Gulf Bank's purchase of 13% of Burgan is it really wise to rely solely on this "auction" to achieve this nationally important economic goal?  Apparently not!

And finally, yes, Burgan does hold Treasury Shares (some 29.6 million of them if I'm not mistaken) though I rather doubt they sought the CBK's approval because they want to sell them.  And of course, in such a case, the CBK could have limited its approval to a sale only.

[13:28:52]  ِ.موافقة بنك الكويت المركزي لبنك برقان بشراء ما لا يتجاوز 10% من اسهمها
يعلن سوق الكويت للاوراق المالية ان بنك الكويت المركزي وافق بتاريخ ‏
ِ21-7-2010 علي طلب بنك برقان بشراء او بيع مالا يتجاوز 10%‏
من اسهمه المصدرة لمدة سته اشهر اعتبارا من تاريخ انتهاء الموافقة ‏
الحالية في 5-8-2010 وذلك مع ضرورة الالتزام بما وضعه البنك المركزي
من ضوابط وشروط في شأن تملك البنوك لاسهمها اضافة الي ضرورة الالتزام
باحكام المداة ( 115 ) مكرر من قانون الشركات التجارية واحكام القرار ‏
الوزاري رقم (10) لسنة 1987 وتعديلاته بموجب القرارين الوزاريين رقم (11) ‏
لسنة 1988 ورقم ( 273) لسنة 1999

Aayan Leasing and Investment - MOCI to Press Forward with Shareholders' Meeting

Muhammad Sha'baan at AlQabas reports that the Ministry of Commerce and Industry is determined to push forward with the shareholders' general meeting it has called and which will take place in early August.  At that meeting the MOIC will deliver its report to shareholders on the Company's financial condition as well as violations of various laws and regulations committed by the Company - including the delay in releasing financial statements, holding the required shareholder's annual meeting along with other unspecified violations.

As per the article, the MOCI does not intend to tell the shareholders what to do but expects that they will in light of its report take action.  It will also refer certain violations to the Public Prosecutor for investigation.

The Company has apparently tried to get the MOCI to let it set the agenda for the meeting.  The MOIC has refused and has noted that the shareholders' meeting it has called will take place prior to any OGM that the Company may call. 

Apologists for the Company have reportedly argued that the Company was unable to secure the Central Bank of Kuwait's approval of its financials until just recently and so it shouldn't be held accountable for the delay in financials.  Further as financials are a condition precedent to an OGM, neither should it  be blamed for the failure to hold the OGM.   Critics have retorted that the Company delayed in providing certain information to the Central Bank and is therefore, after all, culpable.

Global Investment House v National Bank of Umm AlQaiwain: GIH Proposes Negotiations?

In what is billed as an exclusive interview with AlWatan, Amir Yusri writes that Badr AlSumait, GIH's CEO, said that Global's doors remain open to NBUQ to discuss an amicable solution outside of the court room.  One that would of course respect GIH"s right to the deposit.

As you'll recall from earlier posts on SAM, the Dubai Court of First Instance has ruled in GIH's favor ordering NBUQ to return the deposit with legal interest at 9%.

It's hard to know what is at play here.  

Is GIH concerned that NBUQ will launch an appeal and win?  Or that it will be able to tie up the funds for a prolonged period - a rather dangerous development for GIH given the unrealistically short repayment tenor on its restructuring?  

And thus by offering to accept a lower interest rate or a staged repayment to secure repayment?  And a relatively prompt repayment?

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.