Gulf Banks: Some Wilt and Some are Apparently Ruder (At Least Healthwise)

A couple of interesting articles in the Financial Times over the past two days.

In one the remarkable recovery of Gulf Bank Kuwait is diagnosed.   Indeed quite a dramatic recuperation.  Its health much "ruder" than before.

Though with a third of its loan portfolio distressed, a need to provision just about all its earnings (except a cosmetic profit) to cover its currently recognized bad loans, and an ongoing fire sale of the ubiquitous but apparently solid "non core" assets to fund its core assets (the loan portfolio?), Gulf Bank is not yet out of the intensive care ward.

One does have to wonder how a bank achieves both a meltdown in loans and derivatives in the same time period.  Success in achieving just about every commercial banker's dream?  Building an investment banking business to rival its commercial business. 

Hopefully, Michel will be able to turn around the bank.  With a chronic case like this one, careful clinicians will want to ensure that (temporary) remission  is not confused with a (permanent) cure.  The surgical removal of the old Board  and elements of management by the KIA no doubt a necessary but not sufficient part of the treatment.  As to core competencies in commercial banking, - another element in the  cure - I'm assuming Michel is speaking prospectively and not retrospectively. 

Now to the next article:   a "blistering" analysis of defects in business models at the Gulf's so-called "investment banks".   You'll have to look rather closely in the picture immediately below to glimpse the wilted remains of some former investment banking titans of the GCC.  But I assure you they are there.

Sahara Desert

 Copyright fr:Utilisateur:Jgremillot 

  GNU Free Documentation License,

There has been a lot of soul searching at GCC investment firms to determine what went wrong.  

As I've pointed out before, many experienced and serious thinkers have come to the conclusion after no doubt very careful study that it was someone else's fault.  When the going gets tough, the tough find a scapegoat.  And an excuse.  The global financial crisis is generally identified as the villainous culprit.  As a matter of good form, I will again note that as a matter of definition that term is all lower case. 

In his article Robin Wigglesworth adds:

"The financial crisis has highlighted severe shortcomings in risk management, over-exposure to real estate and a reliance on paper gains on proprietary investments rather than recurring fee-based revenue, with disastrous results for some houses."

Some firms.  Indeed!  But not all.

While a generalized macro economic shock will lower all boats, it is usually the weakest links that get hurt the most. 

What then explains how the uneven effects on firms?

A study which considers "sharp" business practices and the state of ethics as causative factors might be quite enlightening.  A potentially "tricky" topic for discussion with financial firms that profess to follow the teachings of a noble religion, I suppose.

It would also have been informative to hear from some of the regional investment banks who emerged as "going concerns" after the crisis.   But then reporters cannot compel interviews.  With the summer months no doubt many have fled for more temperate climes.  Others may feel that discretion at this time is advised.

The Elixir of Privatization for Infrastructure

 Blueridge Parkway Tunnel Construction 1935 (In the Public Domain)

Along with the nostrum of austerity in the midst of severe recession, the pedlars of financial patent medicines are offering the magical elixir of privatization as the cure for infrastructure needs around the globe. Today's Financial Times carried a lengthy article focused on America's needs, including advice from one famed investment banker who as noted saved New York City some years ago. And just now happens to be working for a firm "which has a big infrastructure business" and, perhaps, stands to make a shipload of money from successfully closing such deals. A bit of signaling from the FT in those six words?

Not only are the sums required great -- an estimated US$2 trillion. But there is a deeper problem.

"We are almost broke wherever you turn," Mr. Rohatyn said.

 How can we solve this conundrum?

Private investors, including kindly foreigners, stand ready to step up to bail out beleaguered and bankrupt local US governments if only small minded impediments can be removed. If achieved, local governments will be able to sell existing assets and get cash now. To apply the teaching of the famous commercial "It is my money" and "I want it now". And as well turn over costly new projects for private development.  An apparently free lunch, economically speaking.

Imagine the economies and efficiencies of having private industry in charge, not wasteful, spendthrift governments. Or the enhanced sharply focused management of assets and resources. One only has to look at the track record of the private sector in the financial sector, the oil and gas sector (perhaps with a focus on offshore drilling), mineral extraction (coal mining springs to mind) to see how well the profit motive can sometimes be married with careful stewardship.

The price for all this is rather modest. All that's required is the agreement to pay a fair return on the capital provided, a rate set by the "market". What could be fairer than that? Well, maybe just a few extra "bits" to top off things: some tax breaks and perhaps rights to develop adjacent or adjoining real estate. A small price indeed when one considers all the benefits promised to accrue.

Like the chimera of the efficacy of self-regulation, however, the reality is a bit less rosy than promised. Private capital generally is looking for returns in excess of 12%. On top of that one will have to compensate the diligent managers of that capital with management fees and carried interest for their time, hard work, and value creation. Anything less would be unfair. Anyways it will be a "market" rate. Then, of course, some one will have to bear the cost of the services of famed and not so famed investment bankers who help put the deals together. But no doubt (well at least among its advocates) still cheaper than wasteful government spending on a purely public project which is done as we all know on "non market" terms.

Suddenly, that "free lunch" appears a bit more costly than that in the public service diner. With privatization citizens will pay the price in terms of higher usage fees and/or less service. Or will give up value through the sale of "their" existing assets at prices low enough to give private capital its required market based rate of return. "Their assets"? Well, ultimately what are local governments except those citizens? Much as the shareholders of a private company are essentially the company itself.   I am for the sake of economy in my argument ignoring the many and repeated "agency problems" in the public sector.  A sad event which happily does not occur in the private sector.

So the choice is between paying taxes to the Government (an inherently bad thing as any good American can tell you) or paying fees to the private sector (an inherently patriotic and soundly economic thing to do). A remarkably easy choice it seems.

That the fees to the private sector may in the final analysis be higher (because of all the worthy mouths that need be to be properly compensated) is a rather small detail. The provenance of the small minded.  Another real benefit is that these schemes allow politicians to engage in the time honored and election savvy practice of inter temporal shifting. Provide a benefit today and shift the cost burden to the future when it will be someone else's election and problem. A fact which largely explains why investments in infrastructure have been deferred causing the current problem. 50 years or more of neglect. Until the water mains start popping like champagne corks, their condition is out of sight and out of mind. Instead money can be spent on more pressing universally recognized public goods like tax cuts.

Many will no doubt protest that such analysis smacks of dangerously leftist ideas. Indeed!

For such an analysis let's turn to the radicals at Blackstone Infrastructure Partners.

In a guest editorial for Infrastructure Investor magazine, Blackstone's Michael Dorrell, David Tolley and Trent Vichie point out that the Dow Jones Utilities Index could be used as a benchmark of performance for long-term, US-listed infrastructure returns. That index has delivered 9.5 percent compounded returns per year since 1970, and private infrastructure funds should take stock of this return:

"By simply levering the Index to customary infrastructure fund leverage levels, one would increase the return to 12 percent. That is, on a leverage-equivalent basis, private market funds must provide net returns of 12 percent simply to match the historical performance of the Dow Jones Utilities Index," Dorrell, Vichie and Tolley write in their editorial.

To provide a 12 percent net return, Dorrell, Vichie and Tolley point out that funds will likely need to provide internal rates of return in the range of mid-teens, taking into account several different fee structures.

	Carried Interest
Management Fee	10%	20%
1%	14.1%	15.2%
2%	15.2%	16.3%

 

"The analysis demonstrates clearly that a low double-digit return hurdle, which is somewhat common among private infrastructure funds, is too low to generate any meaningful outperformance against publicly-listed infrastructure, and provides investors no compensation for illiquidity," they conclude.

The simple answer is to raise the required return to attract the capital. Those with a belief in traditional economic theories of demand/supply equilibrium might be forgiven for assuming that raising a non trivial US$ 2 trillion might perhaps exert some "slight" upward pressure on the required rate of return.

Now AA is not advocating that private capital has no role in helping fund public infrastructure. It has but in the context of the proper understanding of what a public good is. And the value – both direct and indirect – of service franchises. Plus critically their importance in the wider context. One only has to think of the myriad of benefits and the knock-on effects that accrue to a locality from improved transport. So-called positive externalities. Sadly often overlooked by those selling public assets and public franchises. With the result that no examination is made of how higher private market pricing might in itself adversely impact those externalities to the detriment of aggregate wealth.  If I'm not mistaken, a famous Austrian political and economic thinker attributed such rent seeking behavior to "girly men" capitalists.  But then I suppose I could have the citation wrong.

Anthony Shorris, former head of The Port Authority of New York and New Jersey, discusses some of these issues along with others in this rather useful article. As above, this is a good juncture to note that as a former public employee, his agenda might reflect some personal interest just as that of famed and not so famous investment bankers might.

Finally, to complete the discussion, it might be worthwhile to muse on relative rankings of government expenditure. Some expenditures it seems are by common agreement and definition more worthy than others. More worthy of spending. More worthy of incurring debt to be paid by one's grandchildren.   And perhaps in some cases one's grandchildren's grandchildren's grandchildren.

Perhaps the simplest solution to the infrastructure crisis in the USA is to redefine the need as an integral part of national defense. From potentially futile attempts at nation building in inhospitable foreign climes to a bit of nation building "at home".  A new twist on "Homeland Security" if you will – a phrase that just might catch on.

WallSt WTF "Appreciation" of Damas Saga

Ken over at WallSt. WTF has an "appreciation" of the Damas saga.  Well worth a read if you haven't seen it.

Bank Stress Tests in the GCC?

Bank Run 1933  USA National Archives  (In the Public Domain)

Tom Arnold over at The National reports that "Gulf governments have been urged to follow the EU and introduce stress tests of regional banks’ capacity to withstand financial shocks."

With some not unexpected remarks about the need for "transparency and disclosure"

“Stress tests would be welcomed but critical to their success would be having correct systemic inputs to make sure the assumptions going into stress-testing were sensible,” said Raj Madha, a senior banking analyst at Rasmala Investment Bank.

“We need fuller disclosure for stress testing to be independently verifiable.”

As usual, let's take a closer look.

Before my usual joyous descent into the details, an uncharacteristic exploration of the relevant meta topic. Framed as a question.  Just what do serious minds out there think these tests are designed to do?  If the national banking system is insolvent and unsafe, do they really expect the national regulator to start a bank panic or crater the economy by publicly announcing this?  Exercises like this are designed to reassure markets not disrupt them.  Purpose - as they say - informs practice.

Now to the details.  

There are three key areas in stress tests:

1. The definition of stress
2. The test methodology
3. The interpretation of the results

First and foremost is the definition of the stress.  

As the Grey Lady reported regarding the US stress tests:

But analysts say the administration’s worst projections, which it describes as unlikely, are not much more dire than what many private forecasters already expect.

As the less than politically correct folks over at EurActiv put it about the EU tests:

"Some scenarios that should be included will not be included, at least in what will be publicly revealed, which will be sugar-coated to avoid market panic," according to an informed source close to policymakers.

Putting aside for the moment the goal of the exercise (reassurance), there is a very tricky "technical" problem here.  It is possible to define stress so that no bank passes or all pass.  With a very broad range of outcomes "in between".  

Just what is the right scenario - particularly when it will have policy implications (the need for banks to raise additional capital, for the authorities to "rescue" or shutter banks or some combination thereof) and market reactions (exuberance or panic).  There is no easy answer.  

No doubt regulators weigh carefully the potential implications of their choice of scenarios.  Use of a dire scenario may be taken by the market as the authorities' assessment that that outcome is likely.  And thus  become a self fulfilling prophecy.

Then there is the test process itself.

Given what might be described by some uncharitable souls (but definitely not AA) as "soft ball" downside scenarios, the banks are asked to grade themselves by coming up with projected loan and other losses.   Much better than an "open book" test.  

The banks could I suppose base their answers on the same internal models that served them so well prior to the subprime crisis.  Models whose worth has been tested and proven.  Well, if not exactly proven,  certainly tested!

A much surer method is to send in a team of flinty-eyed no nonsense examiners to each bank and do the work oneself.  An assurance of consistent methodology and standards as well as the opportunity to look closely at individual portfolios.  And strictly confidential.  This methodology is not applicable here as this is really not the purpose of the stress tests. 

Then there is the grading of results.

The "pioneer" of national stress tests after the Subprime or global Financial Crisis (Yes, it's still lower case "g") was of course the USA.   As the Washington Post reported:

"Some major banks managed to wrest concessions from the government in closed-door negotiations over their "stress tests" that helped them put the best face on their results, financial analysts, industry officials and sources said."

As the article notes, various mechanisms for remedying capital deficiencies were concurrent with the announcement.   Recognition of to-be-concluded sales, conversion of rescue "loans" to equity, and on and on.  All announced so that the impact of negative results would be muted.

Prodded by Spain, the EU will be releasing the results of its stress tests.  Unlike the US's tests, these will be "pass/fail"  (no quantification of capital shortfalls).  An innovative adaptation of one of the more remarkable advances in the theory of higher education. 

So, now that we're clear on the process, hopefully there's a bit more understanding of what stress tests for GCC banks would mean.  And more importantly what they would not.   

This takes us full circle back to the introductory calls for  شفافية  in any GCC stress tests.  An apparent sign of some concern about the integrity of the process in the GCC.   It's unclear if that is a relative or absolute judgment on the GCC as compared to the USA or the EU.   In any case, I'm fairly confident that the GCC will be able to match the "developed" world closely enough for it not to affect the purpose of the exercise.

Credibility will be another matter.  Short of declarations of financial Armageddon,  local regulators announcements are likely to be dismissed as less than  كلام  شريف .   Which in itself poses a rather fundamental problem.

And for those who haven't had their fill on this topic, a link to papers at a 2006 IMF Experts Forum on the topic of bank stress tests.

The Investment Dar - Good News? Aston Martin Planning a Stock Offering

If the report in AlQabas (which quotes the Internet financial site, City AM,) proves to be correct, there could be some very good news for TID and its eager creditors.

David Richards, Austin Martin's Chairman, is quoted as saying that AM is considering an IPO with valuations mooted in the GBP 1 billion range.  Or a tie up with another manufacturer.

And the news couldn't have come at a better time for TID as the Central Bank of Kuwait carefully considers E&Y's "fateful, final" report on TID's financial position and its ability to meet its obligations under the proposed restructuring as the basis for its decision on letting TID enter the "safe harbour" of the FSL.

Of course, there can be many a slip twixt cup and lip, particularly when one is only at the stage of considering an IPO.   

One might, I suppose, also wonder about the credibility of this source which believes that Austin Martin "is majority owned by the Kuwaiti sovereign wealth fund Investment Dar, which bought it for £503m from Ford in 2007." 

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.