Gulf Finance House to Seek US$500 Million in Additional Equity

SWI (Search for "Wise" Investors) Project 

The Large Array at Jabal Dukhan Bahrain

Asa Fitch over at The National reports that GFH has issued a press release in which it advises that it intends to call a shareholders' general meeting to approve:

1. A reduction in paid in capital (4 old shares for one new) in order to absorb accumulated losses in retained earnings.  Like other GCC states, Bahrain has a law that when a company's accumulated losses reach 75% of paid-in-capital, it must take action to eliminate those losses.  That can be done by raising new capital.  Or by reducing paid in capital and using reserves (if available) to offset the losses.  As a financial institution, GFH, has to maintain a minimum 12% CAR and so unless it could reduce assets (which it cannot without incurring more losses), the bank has to raise new capital.
2. The issuance of US$500 million in new equity.  This is up from the US$300 million originally mooted by GFH.  It's unclear why the increase.  It may have found that there is substantial demand for its new shares.  I find that hard to believe.  It seems to me that with its track record and current market conditions, raising even US$300 million would have been a very hard sell.  Hence the picture above.  Alternatively, it may be that the additional amount is designed to cover the US$137 million in 2Q10 provisions that GFH magically turned into an asset. 

At 30 June 2010, GFH's capital structure was composed of:

1. Paid in Capital US$626 million
2. Share Premium US$206 million
3. Treasury Shares (US$23 million)
4. Reserves US$88 million
5. Accumulated Losses (US$480 million)  Equal to 77% of PIC.
6. Total Equity of US$417 million.  
7. If the "magic" provision assets of US$137 million are factored in, Accumulated Losses are (US$617 million), resulting in Total Equity of US$280 million.

GFH are savvy enough to know that a failed rights offering would be an extremely unhelpful event.  So either this is an act of desperation (perhaps motivated by its auditors awakening to the US$137 million charade) or GFH has found some wise investors to carry the issue.   And that may become evident if the Board proposes that shareholders approve a structure under which any shares unsubscribed for in the Rights Offering be placed by the Board with "strategic" investors.

One tactic the Bank can use is to mitigate its deal failure risk is to obtain shareholder approval to issue up to US$500 million over a period (usually the maximum is two or three years I think but am not certain).  In this way it could issue multiple tranches so that the amount it brings to the market at any one time is more digestible. 

As to the motives behind the raising of new equity, I think these include more than just funding operating expenses:

1. Regulatory compliance.  GFH's CAR is "on the wire".
2. Market credibility.  New equity would be a demonstration of confidence in the future, though a failure will be a major setback.
3. Funding for upcoming debt repayments.
4. Funding for operating expenses.

 

The "Developed" West - A New Kind of Forthrightness

A quote from the Financial Times on JPMorgan Chase's 3Q10 earnings conference.

Switching between annoyance at one analyst’s use of a “squawk box” to terse replies on JPMorgan’s soaring reserves against litigation and passionate perorations about the bank’s role in society, Mr Dimon displayed his customary forthrightness even if he was not always forthcoming about some of the details.

This was just too good a quote to let pass without comment.  Positively brilliant. 

And, I'd note it sets a high standard for this blog's favorite investment bankers in Kuwait and Bahrain to aspire to.  (And, yes, each word in that sentence has been deliberately chosen).

New Addition to List of Interesting Blogs - Felix Arabia

Felix Arabia by Sultan Sooud Al Qassemi.

Hat Tip to David Roberts of The Gulf Blog.

The "Developed" West - Burger King Kids Banking

"First-Class Business in a First-Class Way"

It's got to be gratifying to work for a first-class firm that labels you a "Burger King kid".

Also on the subject of documentation, which is a frequent rant here, the rule should be very simple:  No note, no foreclosure.    

If making a mistake in drafting a contract is  rookie behavior, losing one's contract is below the level of incompetence.  The Burger King Kids, as the bright executive had it, may be in the executive suite.

The Capital Adequacy Ratio – How Accurate a Measure?

Hard to Tell the Time With Just One Hand

In a post on the Booz & Company study on Kuwaiti banks' stress tests, I said that The National Bank of Kuwait was the most creditworthy bank in Kuwait.

Advocatus, one of the frequent readers/commenters on this blog, challenged that statement noting that as of 31 December 2009, NBK had the lowest CAR 15.03% versus 15.9% for Gulf Bank, 17.23% for Ahli Bank of Kuwait and 18.22% for Commercial Bank of Kuwait.

I'd like to address his remarks in a bit more detail than is convenient in a comment reply. So I'm moving the discussion to the "main board".

My intent is to reply with two posts. The first theoretical. The second specific to NBK and a few other Kuwaiti banks.

In this post I will discuss some shortcomings in the CAR which make it an inaccurate as well as incomplete measure of financial strength.

To start off a bit of introduction.

What is the CAR?

It is a ratio which measures equity capital against risk weighted assets ("RWA"). Neither the numerator nor the denominator in this ratio are the same numbers that appear in the financial statements. Rather both are constructed according to certain rules set forth in Pillar 1 of the Basel II Framework. A document of some 192 page. As that suggests, the rules are complex. Rather than delve into too much detail, I'll give a broad overview.

Regulatory Capital

The first step in determining regulatory capital is the allocation of a bank's accounting capital into one of three tiers. Tier 1 is considered the most solid. The others progressively less so. For example, common equity is Tier 1. Subordinated debt Tier 2. The amounts of Tier 2 and Tier 3 capital that a bank can use in calculating its regulatory capital for the CAR are limited. Tier 2 may be no more than 100% of Tier 1. Medium term subordinated debt may not exceed 50% of Tier 2 capital. However, to be counted even at the 50% level it must have an original maturity of five-years. If the maturity is shorter, it does not count. If the subordinated loan is a bullet loan, each year it must be reduced by 20% for CAR purposes. Tier 3 capital consisting of short term subordinated debt can be only used to support market risks and only to the tune of 72.5% of such risks. Any amount over these limits for Tier 2 and Tier 3 capital is not counted as part of regulatory capital for the CAR.

Once these have been determined there are a series of further adjustments. Goodwill is deducted from regulatory capital as are significant minority investments (which are deducted 50% from Tier 1 and 50% from Tier 2) and excesses over the 15% single obligor (Group) credit exposure limit. The full amount of equity in insurance firms may be required to be deducted from regulatory capital at the discretion of the national regulator. There are also a variety of haircuts on revaluation reserves for both property and securities.

Risk Weighted Assets

Basel II classifies risks (for the CAR) as either credit, market or operational.

The Basel Framework allows banks three options for determining Credit Risk. 

1. A Standardized Approach (the bank is given formulas to apply to the face value of its exposure). 
2. An Internal Ratings Based Foundation Approach ( the bank determines the Probability of Default for customers but uses the Loss Given Default, Exposure at Default, and Maturity as mandated in Basel II). 
3. An IRB Advanced Approach (here the banks determines all these factors). 

For Market Risk there are two basic approaches.

1. The Standardized Approach (banks use the set of factors given in the Basel II Framework to determine risk weighted "assets" for market risk)
2. A Model Approach (generally VaR). 

 For Operational Risk there are three approaches: 

1. The Basic Indicator Approach
2. The Standardized Approach and 
3. The Advanced Measurement Approach

Most banks in the MENA region use the Standardized Approach for credit, either the Standardized or a Model for Market Risk and the BIA or Standardized Approach for Operational Risks. As a general rule, Central Banks in the area prohibit use of the more advanced models: the two IRB approaches for Credit Risk and the Advanced Measurement Approach for Operational Risk.

One way to get a quick sense of how this system works is to look at the Basel II Pillar 3 disclosures of Kuwaiti banks. For 2009, you'll find NBK here (starting on Page 33), CBK here, and Gulf Bank here (from page 17).

What's the purpose of the CAR?

Regulators are charged with preventing problems at a single bank or group of banks from having a systemic impact on their economies. Accordingly, Basel II is designed not only to measure risks (to give early signs to the regulator of impending problems) but by the  very act of measurement itself (expressed in the CAR) to dissuade banks from certain types of activities which are felt to be risky. This is achieved by raising the risk weights for these activities.

It's important to understand this function. It is not merely a measure of creditworthiness. It is also a control device. And since the stakes are high, the controls are generally set with large safety margins.

What are the major issues with the CAR?

Capital

From the above discussion it should be clear that regulatory capital does not consider all the equity support a bank may have. One simple example: If subordinated debt at Bank A is twice its Tier 1 capital, half of that subordinated debt is not factored into the CAR. Yet, if Bank A encounters problems, that "excess" is still subordinated to other creditors providing an element of protection.

More importantly, one critical aspect of capital the quality of retained earning is not considered. And often is not considered on a consistent basis.

One example are changes in the fair value of financial instruments. If a bank takes these changes to income (Fair Value Through Profit and Loss – FVTPL), they are considered a part of Tier 1 capital dinar for dinar. If the same financial institution were to take the changes in fair value to equity (Fair Value to Equity), this income would be considered part of Tier 2 capital and would be haircut 55%. Calling these earnings FVTPL or FVTE does not change their fundamental economic characteristics. Yet for calculation of the ratio it does. 

One might also argue that changes in fair value are not the same as cash earnings. If these changes are deliberately inflated or markets are in a period of irrational exuberance which reverses, equity can vanish with astounding rapidity. 

Classifications of bond holdings as "banking book" versus "trading book" can result in different income and fair value treatments for exactly the same securities. Again the economic substance is the same, yet the CAR will differ. Same asset. Same economic reality. Different income and equity treatments.

Assets

Credit Risk
 
As indicated above, the mere act of classification of an asset can have an impact on its value. The same with its risk weighting. Securities held in the trading book generally have lower risk weights than those held in the banking book.

But the key issue for banks is the Standardized Approach for RWA for loans, the major earning assets of most commercial banks.

Under the Basel II Standardized Method for Credit Risk, risk weights are assigned to loans to private sector companies based on their credit grades (if any). 

1. AAA to AA- receive a 20% risk weight
2. A+ to A- a 50% weight
3. BBB+ to BB- a 100% weight 
4. Below BB- a 150% weight
5. If the loan is unrated, a 100% weight. 

You can well imagine that weaker credits avoid ratings like the plague because if one is objectively a B credit but not rated, one gets the same risk weighting as a BBB- to BB+. Again the presence or absence of a rating (but not the underlying economic reality) drives the CAR.

More importantly, the following are not considered in determining the risk weight of a loan: the final maturity, the pattern of principal repayments, and the pattern of interest payments. Thus, a five year loan to Company XYZ has the same risk weight as a one year loan. A five-year bullet loan with quarterly interest payments is the same as a five-year zero coupon loan and is the same as a loan with quarterly principal and interest payments. The purpose of loans is not considered. A loan for real estate speculation is treated the same as a loan for a factory. Many forms of collateral are not recognized for CAR risk mitigation purposes, e.g., real estate, except the latter gives a partial mitigation for residential mortgages. Yet, the bank does have recourse to that collateral in the event of a borrower default and is more protected than one that has no collateral. Yet, the CAR does not reflect this.

Operational Risk
 
For Operational Risk, banks are generally limited to the Basic Indicator Approach or Standardized Approach. Under the BIA Operational Risk is 15% of the average of past three years' revenues (adjusted for certain banking book securities income and other items). If a bank has had zero adjusted revenue for those three years, it has no Operational Risk - at least for the CAR. Under the Standardized Approach a similar formulaic approach is used against revenues for eight defined lines of business with specific assigned LOB risk weight to each of the 8  ranging from 12% to 18%. 

As you might expect, banks generally determine which method will give the lowest Operational Risk charge and select that method as being the most "accurate". Again the mere selection of the measurement method affects risk – at least for the CAR, though not I'd add in the real world.

Market Risk

Market risk calculations are more complicated so I'm just going to wave my hands here with an unsupported assertion.

Sometimes VaR will give a lower market risk number than the Standardized Approach.   Sometimes not.  Depending on the choice of the measurement method, the same portfolio can have quite different risk weights.   No difference in economic reality.  But a difference in CAR.

Examples

Let's take two imaginary banks: Bank A and Bank B. For simplicity sake we'll ignore market and operational risk.

Bank A is a conservative bank that lends only for productive activities (no speculation) and structures its loans to require semi-annual payment of interest and principal. It also diversifies its risk among many customers, has a wide variety of tenors on its loans,  and makes a practice of taking real estate as collateral with borrowing base of 50% of collateral. Its KD100 loan portfolio is all to unrated clients so its RWA are KD100. After adjustments it has KD13 in capital giving it a CAR of 13%.

Bank B is less conservative. It also has a KD100 loan portfolio. Its underwriting standards are much lower than Bank A's. If a borrower can find his way to a Bank B Branch, he can get a loan. As part of its customer friendly approach, Bank B does not take real estate or other collateral. All the loans it makes are for five-year tenors with interest and principal due at maturity. It also is less diversified than Bank A and has numerous customers with loans equal to 14% of its regulatory capital (just under the 15% threshold). After adjustments it has KD 15 in capital.

Bank B's CAR is 15%. Bank A's CAR is 13%.

Based solely on CAR, one might think that Bank B was a stronger more creditworthy bank than A. It is not.

What credit factors are not considered in CAR?

1. The quality of the Board and senior management. Are they seasoned and prudent bankers? Do they have a good business and strategic sense? Or do they chase the latest fad? As long as the music is playing, are they dancing? 
2. Corporate culture and ethics.  Loose standards lead to problems.
3. The quality of credit underwriting and structuring.  Most problems in the portfolio are caused by easy credit standards, weak or sloppy loan terms, etc. 
4. The quality of loan monitoring and administration.  The earlier a bank finds a problem the earlier it can try to fix it.
5. The quality and liquidity of assets. If the bank needs to raise cash, can it do so quickly? What sort of discount, if any, will be required on its assets? 
6. The quality of earnings. Equivalent to cash or accruals of  imaginary promises? 
7. The structure of liabilities. Diversified across lenders, instruments, and markets? Are maturities  appropriate for the bank's business? Or is the bank dependent on a very limited source of  funding? Most or all of which is short term?

These are critical factors that can impact the ability of a bank to weather a storm. They are an essential element of its financial health.  The CAR does not consider them at all.

For these reasons, one cannot rely on the CAR alone as the single measure of a bank's financial health and strength. A wider view is required.   One that evaluates a range of factors, such as the CAMEL approach used by US regulators.  To its credit the Basel Committee on Banking Supervision has recognized this - which is why it instituted the Pillar 3 disclosures - a first step to giving lenders and investors a look under the "hood" of a bank.

The above also explains why some banks (Bank B in our case above) should be required by the regulator to hold more than 12% capital.  Economic capital is the buffer than absorbs unexpected risks.  The riskier the bank the more capital it should hold.

Shocking Developments in Chile Mine Rescue: 34th Man Emerges. 35th Man Left Behind.

Surprise 34th man emerges from San Jose rescue shaft.

Today the World witnessed the remarkable rescue of 33 brave men trapped roughly 700 meters below the ground in the San Jose mine in Chile since August.  Bienvenidos, hombres!

After the last miner had been lifted to safety, crowds were amazed at the emergence of the President of Iran from the rescue tunnel as shown in the above exclusive Al Ahram photograph.  

As with events of this sort, amid the joy there was some profound sorrow.  An Egyptian citizen, one  Mr. Mohammed H. Mubarak, who was scheduled to be the first to come to the surface, has been left behind alone in the mine as the rescue shaft was too narrow to accommodate him.  Apparently, the physical description contained in his official Egyptian Government biography - which was used in designing the tunnel - understated his weight and girth.  Informed sources  have confirmed that he has been provided a chisel and hammer and is slowly working his way to the surface.  Suq Al Mal has been told by its sources in Egypt in yet another Suq Al Mal exclusive that Al Ahram expects to publish a picture tomorrow showing him emerging first from the tunnel.

What Does Fitch's Study on CDS Spreads as Predictors of Default Tell Us About Modern Finance Theory?

Fitch released a report "CDS Spreads and Default Risk Interpreting the Signals" which has received a good deal of coverage in the press. One example from the Financial Times.

Analyzing five property-sensitive sectors in USA market in the wake the recent housing crisis, Fitch found that all five of these sectors had wild swings in their derived default risk. For example, USA REITs went from a CDS-derived probability of default ("PD") of 0.7% at June 2007, to 10.1% in October 2008, to 18.0% in March 2009, and then to 4.4% in August 2010. Details on the other four sectors are in the Table on Page 3. Despite these highly elevated PD's, actual defaults did not increase as predicted. The derived PDs were inaccurate. Fitch cites the volatility of CDS markets and the tendency for directional momentum (that is, an imbalance of demand and supply) as the cause of these false positives.

There are two key conclusions.  

1. CDS-derived PDs can give potentially erroneous and costly portfolio management signals. 
2. More importantly, as shown in the Table on Page 9, if the derived PDs are used in Basel II IRB models, financial institutions would be forced to dramatically and needlessly increase provisions at precisely the wrong time in a crisis. A pro-cyclical move which would depress the probability and strength of a recovery.

Fitch's study confirms what various analysts (including yours truly) have been saying about CDS spreads. The market is too thin to give reliable information. These are at best directional indications of PD. Fitch's detailed empirical analysis on this topic is therefore highly welcome and useful.

But there's more here.  Fitch's report raises fundamental questions about current finance theory:  both the construction of models and the use of market data – whether direct or derived –  as inputs to those models during periods of crisis. And so challenges some of the fundamental assumptions of corporate finance orthodoxy about market prices – both at the macroeconomic and microeconomic levels.

The simple empirical fact is that during periods of stress or exuberance, markets are dysfunctional. Prices no longer reflect, if they ever did, intrinsic values. During a crisis, there is a dramatic increase in liquidity preference motivated usually by fear. We see this most clearly in the breakdown of "normal" correlations among markets and asset classes. During a boom, a dramatic decrease in liquidity preference motivated by greed and irrational exuberance. 

This happens not only in illiquid markets like those for CDS but in the most liquid markets. In the period after 9/11, the NYSE plunged dramatically. While the attack was horrific, our way of life was not under serious threat. Our economy was not in danger of being destroyed, particularly by a relatively small band of cave dwellers in Afghanistan and Pakistan. For that task it would need and subsequently got some timely domestic help.

In such circumstances as in booms, the usual assumption about what market equilibrium means has to be thrown out the window. When markets are not rational, in no sense do their prices reflect intrinsic or fair values. Using the values they give – potential inputs into our "sophisticated" models – makes little sense. Market equilibria are much more unstable than during more "normal" times.

But, even if we assume that markets continue to function in such periods, we are misled by another myth: the imaginary no profit equilibrium derived from microeconomics. As this theory goes, intense competition leads sellers to lower their price until goods are sold at cost. Now, I recognize this is the one sacred doctrine on which all or nearly all the various economic cults agree. They may dispute vociferously with one another over which is the sole efficacious economic sacrament – the gold standard, the quantity theory of money, deficit spending, tongue of Newt, tax cuts etc  But on this issue there is by and large doctrinal unanimity. 

However, back in the real world, I don't know many businesses that price at cost. Or that stay in business if they do. Yet, we derive our financial models based on this illusion.   Often we use it to derive inputs for those models.  As you'll notice from Fitch's report, the standard equation for deriving PD from a CDS is to take the CDS spread in bps and divide it by the presumed loss on default (LGD) in percentage terms. The result is the PD expressed in percentage terms.  So a 100 bps CDS spread with a 50% LGD turns into a 2% PD. 

As you'll notice, this calculation assumes that the seller of risk protection is content to receive as his compensation exactly the amount of his expected loss. This is far removed from the standard microeconomic theory of equilibrium, which would have the seller's price result in an overall break even position. Here the seller does not recover his operating costs – salaries and other expenses which I believe it would be safe to say are not small in most investment banks. One might, I suppose, argue that in normal non crisis or non boom markets we can ignore these costs because they are spread over large volumes of business. Perhaps.

But in a crisis or in a boom where there is excess demand for a product, I'd expect any rational business man or trader to take advantage of supply/demand dynamics and increase his profit margin. which as I've argued above was not at "zero" from "normal" times.  More importantly, in a crisis where an institution and a trader are assuming an ongoing risk (like a CDS), I'd expect there to be a strong incentive - both  for the trader and his firm - to price up to cover that risk taking. The personal and institutional consequences of a wrong bet can be rather serious – just ask AIG.  So we should rationally assume that during a crisis CDS spreads include  not just the protection seller's  objective best estimate of the PD and LGD but also a fear/caution based adjustment of those factors plus a rather hefty profit margin.  It's not hard to imagine a seller demanding profit margin well in excess of 50%.   As before, in line with best doctrinal thinking, we're ignoring costs. Clearly, the profit margin and the additional fear induced safety margin in pricing are going to be a major component of the pricing.  All of which of course explain why often CDS spread-derived PDs are greater than 100%. And why using them in models makes scant sense because the resulting PDs are inflated.  Probably by significant factors. Not percentages that would be considered "normal" tolerances.

We like to think that we are more advanced than our predecessors. We have elegantly constructed apparently "sophisticated" and "scientific" models. Finance theories are expressed with imaginary mathematical precision. 

Yet at the very heart of these models are assumptions that would make a medieval scholastic blush. 

Assume a market with perfect information and no transaction costs and you will discover, perhaps - but hopefully not - to your surprise, that it turns out to be an efficient market. Something I believe has to do more with logic than economics: the principle of tautology.    

Assume that the market price reflects intrinsic value and you are highly likely to input the silliest numbers as variables into your model. 

What's needed at the core of this discipline like any other is a healthy does of skepticism, a constant challenging of revealed assumptions and a cold hard eye on results. 

Norton Rose Survey on Middle East Lending

You may have seen some references to this survey in press articles.

The Middle East survey, which really seems to be focused primarily on the UAE and the GCC, is part of a larger NR global survey "Global Financial Recovery:  A Matter of Perspective".  The ME Section is pages 58 through 64.

As with all exercises of this sort, it's utility is a function of the selection of the group asked to participate and then those who actually did.

Dubai Courts: Potential Conflict of Jurisdiction Between Onshore and DIFC Court

Bradley Hope over at The National reports on the case between Taleem versus Deyaar and National Bonds.  In September the DIFC ruled that the case could be heard in its system.  Earlier National Bonds had sued Taleem in Dubai Civil Courts. 


Justice Chadwick of the DIFCC wisely did not issue an order to the DCC to stay their proceedings preferring sensibly to wait until he sees their ruling.  At that point if it is contrary to the DIFCC's then it will be time no doubt to seek the intervention of a higher power.  And hopefully this case will lead to a mechanism for co-ordination between the two courts on future such situations.

It seems this is all about a failure in precision to specify the governing law and judicial forum.  And so I'd mark this down to a lapse in one of the most routine matters of contract drafting.  As the episode of Shuaa's convertible securities, those of Citi Group, and those of  National Bank of Umm AlQaiwain show, it really does pay to pay attention.

And as with the examples cited above, the amount involved is no small beer -- AED236.6 million.  

Hard to understand this.  The parties to the examples mentioned above consider themselves sophisticated firms.  The amounts are substantial.  Yet they fall down on rookie mistakes?

Mayzoon the Magnificent

Kuwait sheep sold for KD25,000. Apparently gets KD200 per night for his "particularly good breeding ability."  Next stop Dubai?

This beats Sa'eed Al Huweiti's take on his falcon.  But not yet those tasty Kuwaiti pigeons!

International Investment Group - Explanatory Note on 2009 Financials

IIG Funding issued a brief explanatory note on IIG's 2009 financials on Nasdaq Dubai today.

Dubai Escrow Law: Exemptions Fueled Boom and Left Buyers High and Dry

 Credibility - Now You See It, Now You Don't

A very good piece of investigative reporting by Asa Fitch at The National.

In 2007 with great fanfare Dubai passed a law requiring that developers set up escrow accounts to ring fence buyers' funds so they would only be used for construction and related costs on the projects that the buyers invested in. 

Rather quietly and quickly the Dubai Land Department gutted the law by granting exemptions to certain master developers. Among this select group were Nakheel and Emaar as well as other Dubai World entities.  The latter two have recently (three years later!) disclosed this fact.  Apparently, neither they nor the DLD considered it material information an investor/buyer might be interested in knowing or have a right to know.

A couple of quotes:

The developers of multiple projects in Dubai that are stalled spent money in this way, and now homeowners find that their investments were spent but that the projects cannot continue without new funding.

But having to comply with escrow laws could be burdensome for developers such as Nakheel and Emaar because of their obligation to build expensive infrastructure in their master developments. Emaar said in its prospectus last week that if it had to comply with escrow laws, its "business model may be significantly impaired as it would only be able to finance the construction of projects with corresponding purchase price instalments once certain construction milestones are met".

Poof, there goes the last illusion of Dubai as a world class financial center.

And, no, it's not a matter of professionalism  as one "expert" has it.  It's much more basic.  It's a matter of running a fair, honest market.  When the games are rigged, one is well advised to go to another casino.  When one doesn't get a fair shake (or a fair Shaykh), it's time to look to another market.

To be very clear, the central issue here is not that an exemption was given.  It was that the granting of the exemption was not disclosed.  Neither by the Government or the companies.  There may have been what were considered at the time very good reasons to give an exemption.  The problem was that buyers had no way of knowing.  They should have.  

International Leasing and Investment Company - Attempt to Stack Board?

Al Qabas has a follow-up to their earlier report of the resignation of 3 directors at ILIC.  See earlier post on that topic here.

1. The Company has supposedly written to the MOCI requesting that it approve the replacement of Mr. Mohammed Al-Jasser with Mr. Basil Al Mutawa (a relative of Mr. Bassim Al Mutawa one of the major shareholders).  If this is approved then Abraj Holding/Boubyan Bank would not be represented on the Board despite AH's 32.3% share in the Company.  Boubyan has made a loan to Abraj and its representation on ILIC's Board was no doubt a way of looking after its interests in the collateral.
2. Also the Central Bank is said to have approved ILIC's 2008 financials which reportedly show a loss of US$120 million with the result that shareholders' equity was reduced to US$45 million.  Loans are said to remain at 2007's level:  US$600 million.  The CBK has, it is said, reservations on the financials.  And the auditors are refusing to give an opinion.
3. The two directors from the Islamic Development Bank are still tendering their resignations given their concern that the actions being taken are not in the interest of rescuing the Company.  Official bodies are reported to have rejected charges levied against the two directors as inventions and levied by parties who want to take control of the Company without involving other shareholders.
4. When the 2008 financials are released various infractions will be disclosed.  It's said that the auditors have concerns about the use to which loans were put.
5. The same parties behind the Board machinations are reported to be trying to block Mr. Faisal Al Zamil (Kuwait's representative on the IDB Board) from assuming a position in executive management  in the Company in order to enable them to put in someone who will look after their interests.
6. Finally creditors are said to be disgusted with the developments at the Company.

As I mentioned earlier, IDB and Abraj Holding, control over 60% of ILIC and should be able to take control of the Board.  If the Central Bank can finalize ILIC's financials, then the MOIC can call for a shareholders' meeting and presumably the majority of shareholders can vote in their own candidates for the Board - at least a majority.

Gulf Finance House - Back in the Game with Tunis Financial Harbour

Today on the fringes of the IMF/World Bank meetings in Washington, GFH announced the addition of a Financial Harbour to its existing project in Tunis.

This takes me back to the heady days of 2005 and 2006.

Can the US$10 billion Suq Al Mal Financial Harbour Cafe & Blog be far behind?  Get in on the ground floor, while you still can!  The Turkish coffee and baklawa concession could be easily worth twice that.  But be sure to scotch-guard those carpets.

SICO Bahrain: Dubai Debt Problems Just Deferred Until 2014?

SICO Bahrain has issued a new report, "Dubai Debt Concerns Deferred to 2014".  SICO Research is only available to registered users so you'll have to sign up to read the report in detail.

Here are some highlights.  Themes that might already be familiar and some not.

1. Forgetfulness of investors in limelight.  Some history on the trends in CDS spread differentials between Dubai and Abu Dhabi (180 bps in October 2009 to 480 bps in early December and then again to similar levels around the Greek crisis).
2. Recent US$1.25 billion issue not sufficient to plug the 2010 deficit (estimated at US$1.6 billion).  Plans to slash subsidies and other transfers by 64%, though wages to increase by nearly 20% as the Government needs to make room for more nationals entering the workforce.
3. Repayment schedule remains a challenge.  SICO estimates very modest debt repayments in 2011 and 2012.  For the period 2013 - 2015 excluding bilateral, the estimates are US$1.7 billion in 2013,   US$19.23 billion in 2014 and US$0.5 billion in 2015.   So a definite debt hump in 2014 - and the reason for the title to SICO's article.
4. Economic recovery may not improve Government revenues.  Trade and tourism not expected to generate significant large government revenues.
5. Not many options to improve finances.  Taxes a possibility but pose competitive disadvantage vis-a-vis other GCC states.
6. Sale of assets a possibility.  SICO believes the Government may take the strategy of selling partial stakes to raise cash rather than relinquish control of strategic assets.
7. Dubai increasingly "leveraging" the UAE brand.  Apparently in the prospectus for the recent bond, a great deal was made of the fact that the UAE has a AA sovereign rating.  SICO sees this as a way of diverting attention from Dubai's 395 bps CDS roughly 296 bps higher than Abu Dhabi.  In my opinion it may also be a way of reminding investors of Abu Dhabi's deep pockets.
8. Despite the negatives, SICO does not believe a sovereign default is likely.  It seems to me that the major issue here is one of pricing of credit as well as lenders and investors being careful about the quantum they commit to the Emirate.

Boubyan Bank to Liquidate Shares Owned by Awal Bank to Partially (Very Partially) Collect Debt

Mohamed Sha'ban at Al Qabas reports that having received judicial authority, Boubyan will sell some 300,000 shares in International Finance Company on the KSE to partially settle a debt of SAR 111 million owed by Awal to it.  Furthermore it will sell some 61,000 Global GDRs listed on the LSE through the manager of the fund holding the  shares.

Since AlDawliah is trading at around KD0.250 per share the recovery is half of that pictured above.  A penny on a dollar of debt.

US Elections: Nur Ein Wenig Harmloser Spass (Just A Little Harmless Fun)

Spot the Republican candidate for the Reichstag, sorry, Congress from the 9th District in Ohio.  Rich Iott.

He's not on the far right but second from the right which I guess might make him a moderate of sorts when you consider the wider context.

He explained that he participated as a history buff and as a way for a father to bond with his son.  If I remember correctly, there is an old saying "The family that goose steps together"  though I forget the rest of it.  I suppose that's the important bit, though, isn't it?

While I'm probably confusing a historical event, I believe the candidate was also heard to say:

1. Ich erkenne mich nicht schuldig.
2. Befehl ist befehl. 
3. Die Fahne hoch!

In any case, those familiar with this repulsive ideology  know the central importance of the Viking in the "Aryan" myth along with the Celtic Cross and Runic symbols.  That's why of course the SS Unit adopted the name  in the first place.  And why other later adherents of the ideology did.  The Wiking-Jugend.  Several "Aryan" rock bands  with variants of Wiking in their names. 

Just a little harmless fun, so they tell us.

Department of the Tragically Absurd: A New Structure for Arab Joint Action on the Table

It's Got to Hurt When Only a Few Recognize Your Completely Imaginary Genius

As Emirates 24/7 informs us:

Chairing the opening session, the Libyan President Colonel Muammar Al Gaddafi welcomed the Arab leaders and said that the summit would discuss a new structure for Arab joint action.

He added that a five-member committee under his chairmanship was formed during the last summit in Sirte to oversee implementation of the new structure.

Another decisive step forward.  A new structure.  Proven visionary leadership.  What could possibly go wrong?  (For one thing see picture above).  

Who could possibly object?

Amr Moussa voiced some skepticism and warned that steps should not be taken which would undermine the highly effective Arab League.

But as the report tells us several critical breakthroughs were made at the meeting:

HH Sheikh Mohammed Al Maktoum had several very important visits.

1. He visited Egyptian President Mohamed Husni Mubarak on Sunday for a session filled with Hope.
2. He met with Syrian President Bashar Al Asad also on Sunday.  While we're not told,, I believe this session was about Change. (Quite a busy day, it seems).
3. On Saturday the Bahraini Deputy Prime Minister and his entourage visited HH  and his entourage and conveyed the greetings of King Hamad of Bahrain!  That was, if I'm not mistaken. one of the major achievements of the conference.
4. Though there were no doubt many more,  perhaps more than could be recorded.  One of note,  that was, was a visit to a heritage market.

This event certainly lived up to its billing as the  extraordinary Arab summit.

Despite the many imaginary achievements of this remarkable event, I am left with one nagging doubt.  What sort of people make a habit of indulging a psychotic in his delusions?

Golden Belt Sukuk 1 Certificateholders Make Up Their Minds

Today via an announcement on the Bahrain Stock  Exchange Citibank, the Delegate on the Golden Belt Sukuk, advsied:

The Delegate refers to previous notices issued by the Delegate dated 24 August 2009, 7  October 2009, 17 November 2009, 23 November 2009, 2 February 2010, 16 March 2010, 28 April 2010 and 22 July 2010.

In these notices, the Delegate noted that, in accordance with the Terms and Conditions of the Certificates, prior to acting upon any instructions from Certificateholders it is entitled to be  indemnified to its satisfaction.

The Delegate confirms that on 27 September 2010, it entered into a deed of indemnity (the  Deed of Indemnity) with a number of Certificateholders (the Indemnifying  Certificateholders). The Indemnifying Certificateholders represent at least 25 per cent in  aggregate face amount of the Certificates outstanding.

Acting under instructions from the Indemnifying Certificateholders, the Delegate has served a  Notice of termination of the Sub-Lease and made a demand for all amounts due under the  under the Costs Undertaking.

The Investment Dar - Creditors Warn TID Central Bank Will Not Impose Restructuring Against Our Will

Nancy Reagan

White House Photo in the Public Domain

Al Qabas, as it often does, has a different take on the story about TID proposing a 50% haircut than Al Watan.

Here the story is that the creditors have said that if Dar's request for a 50% haircut proves true, then this will give the Central Bank of Kuwait full justification for turning down its application for the FSL.  (You may as I have been struck by this formulation.  Either a deficient translation on my part.  Or maybe the story of the 50% haircut was wrong).

They also remarked that the Central Bank will never force a restructuring on them without their consent as they are the owners of the money and should decide their fate.  So a consensual plan agreed by all parties will be required.

Finally they are quoted as saying that there is an indication that the entity charged with preparing the report on Dar's ability to remain a going concern and pay its debts shares Dar's opinion that it can comply with the financial ratio set in the new Central Bank of Kuwait regulations if it can deal with approximately KD500 million of burden which will strengthen shareholders' equity in addition to bringing it in compliance with the new principles.   I'm taking Al Qabas description of the "entity" to mean E&Y.  And am not sure why the circumlocution is necessary.

As I've indicated before, I really don't understand the fixation on the new CBK principles.  Dar is in a life or death situation with the rescheduling.  It seems eminently reasonable that if it can't meet the new regulations that should be a very minor consideration in the greater scheme of creditor repayment and the continued existence of the Company.  There are many ways this can be "handled" to preserve the regulation but give Dar some breathing room.  Would one really "put down" Dar because it couldn't meet a ratio if it could repay a substantial portion or all of its debt?

All this talk of the regulations makes about as much sense to me as arguing about the  poor  quality  of the band as it plays the final songs just before the Titanic sinks.

Maybe one of my regular readers can tell me precisely what I'm missing. 

It's also unclear if this story came before or after this one.

Ah, Kuwait land of mystery and intrigue.  And also family values.