Markaz: Review of Kuwait Investment Sector

 Renovation of Yet Another Proven Business Model In Progress
(Or, Perhaps, A Half Built Mega Project)

Markaz has issued “Kuwaiti Investment Firm Sector Taking Stock Two Years After the Crisis”. The report is an update to one they issued in June 2009.

As usual, good analysis and commentary.

You can obtain a full copy of the report by sending an email to info@markaz.com referring to the title above.

In the interim, some key points from the report.

Let’s start with Markaz’s Conclusion:

“The investment sector in Kuwait has a long way to go on its path towards health especially in light of the Central Bank’s increased oversight on the sector, which may lead to reduced activity among some firms that need to clean house. Given how unpredictable and difficult the sector’s assets are to value, it is difficult to predict the future performance of the sector, especially given the wide variance in case-by-case health.

We are optimistic that 2010 will show a further narrowing in bottom line losses, though we remain skeptical of a return to profit. Not only will companies be looking to offload more of their investments, booking impairment losses in the process, but regional/global equity markets have shown lackluster performance for the year, which may have an adverse impact on both the firm’s quoted investments in addition to the AUMs (thereby reducing fee income), all of which will put downward pressure on the bottom line.”

Historical Performance

I’ll start by noting that the report does not cover all investment companies in Kuwait. It is based on a set of 34 listed companies of which only 28 have reported for 2009. The missing reports include The Investment Dar – which hasn’t issued a financial since 31 December 2008. Nonetheless as with many such studies, it gives a good macro picture.

Earnings in KD millions.

2005	2006	2007	2008	2009
945	281	846	(810)	(778)

1. The graph in Markaz’s report gives a good pictorial sense of the variance.
2. In lieu of a graph, let’s look at statistical measures. All of which are rounded to the nearest integer. The Mean Income over the five-year period is KD97 million. The Standard Deviation (Sample) is 852 and the Standard Deviation Population (762). The SD is between 8x and 9x the Mean. That gives an idea of the variability of income. 
3. During the first three heady years of hefty profits, no doubt equally hefty bonuses and dividends were paid based on reported income -- largely non cash capital appreciation. Many of these payments also no doubt financed by “wise” lenders - who are now left holding the proverbial bag.

Asset Classification

IFRS 7 requires that companies disclose the basis for the valuation of assets held for sale (similar to FASB 157).

1. Level 1: Based on quoted market prices in active markets for identical or similar securities. 
2. Level 2: Based on observable market data – either direct or derived. 
3. Level 3: Inputs into valuation models are not observable market data.

Markaz’s set of companies assets are distributed as follows. Amounts in KD millions.

	FVTPL		FVTE	TOTAL	% TOTAL
Level 1	264		535	799	34%
Level 2	213		365	578	25%
Level 3	236		708	944	41%
TOTAL	713		1,607	2,321	100%
% Total Investments	31%		69%	100%	----

As Markaz notes, the IASB allowed companies to “move” assets from the then inconvenient FVTPL (Fair Value Through Profit and Loss) classification to FVTE (Fair Value Through Equity) which neatly “solved” earnings problems in a time of decline in values.  And, no doubt, achieved its goal of fooling more than a few "wise" investors and lenders.

It would be interesting to see how many Kuwaiti firms availed themselves of this exception to manage their apparent earnings.

It’s not surprising that overall there is a concentration in Level 3 assets given business models. And one could point to firms in the “Developed West” with similar concentrations. But out of national chauvinism I won’t point but merely link.

Appendix 1 lists the ratio for some 32 firms. There’s wide variance.

1. Gulfinvest International and Al Qurain have 100% of their assets in Level 1.   Noor 85%.  Bayan 84%. Coast 72%. 
2. On the other hand, National International Holding has Level 3 assets at 87%, First Investment at 70%, Al Safat and Al Mal at 67% and Global at 55%.

The Kuwait Investment Firm Sector in the GCC

Markaz notes that the KIFS dominates the rest of the GCC. No one is bigger. No one fell with a larger thud except two Bahraini-based firms in 2009. Markaz provides some income statement data for Fiscal 2008 and 2009 plus 1H10. What would be even more illuminating would be sector balance sheet size.

Leverage

The new Central Bank of Kuwait regulations impose a maximum 2x leverage ratio on the sector. Even after the debacles in 2008 and 2009, the KIFS’ leverage ratio (Total Liabilities/Total Equity) is a “comfortable” 1.84. It’s only when one starts drilling down into the details that one sees the variance.

Below my calculations based on FYE 2009 financials as in Appendix 2.

FIRM	LEVERAGE (TL/TE)
Kuwait Finance and Investment	8.32x
Aayan Leasing and Investment	5.96x
The International Investor	5.88x
Global Investment House	4.12x
International Investment Group	3.57x
IFA	3.29x
Aref Investment Group	2.78x

Note: I have not adjusted the above for minority interests – so these are not strictly speaking Central Bank leverage ratios as will become apparent later when we review Markaz’s calculations, though the number of firms with significant minority interests is limited.

When Aayan’s substantial minority interests of KD42 million are eliminated from the calculation the Leverage Ratio jumps to an eye popping 14x (using the financials reported on the KSE).

Asset/Liability Mismatch

Details are on page 7 of the report. Briefly, conventional firms are more balanced than “Islamic” ones. The former with S/T debt of 40% versus S/T assets of 49%. The latter with S/T debt at 79% versus S/T assets at 36%. But this is largely due to the greater progress made in restructuring conventional firms. (Also note this data excludes The Investment Dar).

Review of the Top Five

Markaz then reviews the top five firms: Global, Aref, IFA, TID (using 2008 data) and Aayan.

Here in tabular form are the results of Markaz’s review of these firms’ compliance with the newly imposed Central Bank of Kuwait regulations.

FIRM	LEVERAGE RATIO	"QUICK" RATIO
Global Investment House	4.11x	17%
Aref Investment Group	2.78x	16%
IFA	3.28x	9%
The Investment Dar*	4.97x	2%
Aayan Leasing and Investment	13.90x	7%
CBK Regulations	2.00x	10%

*TID calculated using 2008 financials.

Markaz then discusses these five firms’ financial position.  If you want a quick insight into them and the investment firm sector in general, this report is a must read.

HSBC: Restrictions on Global under its Restructuring

The Short Fuse on Global's Restructuring

Al Qabas has a summary of a recent HSBC report on Global's restructuring.

The main point and the reason for the picture above is the repayment schedule:  10% of the principal in Year 1, 20% in Year 2 and a crushing 70% in Year 3.  The result of the unrealistic short three tenor. 

I've commented on this before, but that won't stop me from saying it again.  It's highly unlikely that Global is going to be able to meet the repayment schedule even with one or two small miracles coming its way.   With the short fuse and the extensive trip wires (by way of covenants below), the spectre of a second default has to be haunting Global's management and shareholders.   It will probably also give pause to clients being solicited by the firm for new business.  

The banks should be worried as well.  One can argue that a short leash increases their protection.  But too short a leash is not good either  - particularly when you want the dog to hunt.  A bit more breathing room - say two more years - and their potential headaches may be much much less.

Restrictions include the customary limits on distributions (dividends), taking new loans, making capital expenditures as well as a requirement that at a minimum the value of assets must be 0.75 times the amount of the loan.  Global is required as well to maintain capital adequacy at 5% until June 2011 at which point the ratio increases to 7%.

Just rounding out the article.  As has been mentioned earlier, the lenders got a 1% flat restructuring fee.  And a 0.25% extension fee from the date of default to the date of the agreement.  Both fees capitalized into the existing pre restructuring loan amounts.  The lenders also have the right to convert their debt to equity if Global doesn't repay 40% of the debt in the next two years.    That last condition coupled with a restriction on dividends seems to me to pretty much make the raising of any new capital a moot point.  Unless of course they're irrationally exuberant investors.

Commercial Bank of Kuwait Terminates S&P Ratings

On 23 September, S&P announced it was withdrawing from rating CBK at the bank's request.  In line with standard operating procedure for rating agencies, S&P gave a final rating.

S&P affirmed its 'BBB/A-2' long- and short-term counterparty credit ratings on Commercial Bank of Kuwait

(CBK) with a stable outlook. 

The rating agency said it had bumped up CBK's rating by one notch to reflect that it was a systemically important bank and that the likelihood of government support was high. 

Then it went on to say that it estimated CBK's distressed loans at 20% of the total loan portfolio.  And that provisioning needs are likely to weigh heavily on the bank in the next two years.  

It's clear from that language that CBK is not providing current data.  Either the deterioration in the loan portfolio is sudden or S&P just got an inkling.  In any case, not a sign of the sort of candor one would expect between issuer and rating agency.

I suspect the ongoing problems in the loan portfolio and S&P's likely future focus on them were the reason for the bank's "excusing" the agency from further rating duties.

Some thoughts:

1. CBK is not alone in its aggressive business posture.  This suggests that other banks may be experiencing increases in their distressed loans.  CBK as the proverbial canary in the coal mine.  The banking system had just under 10% at FYE 2009 - already a distressed scenario.  
   
2. This a rather short-sighted though common reaction.  Shoot the messenger for delivering bad news.  Pretend that everything is OK. The problem is that CBK's loan portfolio will not recover miraculously.  Future earnings statements will reflect the provisions.  And the fiscal year end report will reflect the percentage of distressed loans.  Frankly, this just looks bush league.  
3. In addition,  Fitch and Capital Intelligence rate CBK as well - and both have downgraded the bank earlier.   If distress continues, they are likely to do so again. And this leaves CBK then in the distinguished company of Dubai Inc.  Perhaps, not exactly the sort they should be palling around with at present.

US Congress to Investigate Middle East "Money Laundering"

For A Cleaner Clean

Frank Kane at The National reports that the US Congress will hold a hearing tomorrow on US$1 billion of money transfers from the Middle East through the USA over the past six years in connection with claims of money laundering.  

 

As you'll note from the article, a central part of the claims seems to relate to the dispute between AHAB and Mr. Al Sanea.  

 

The Al Gosaibis continue to accuse him of wrongdoing and he just as steadfastly denies any impropriety.

It will be interesting to follow the testimony to see what emerges.

Those who follow other blogs may recall the February 2009 reports of the discovery of US$ 5 million  in a Dubai laundromat.  If anyone out there has an update, I'd be interested in hearing.

Deloitte Survey on Islamic Banking

You may have seen press reports on a recently released Deloitte survey on Islamic banking.  In at least a couple of cases press reports implied that Deloitte was issuing calls for certain actions to be taken. What I think is the more appropriate characterization was that it was reporting the views of participants in its poll.

The poll itself appears to be a fairly standard exercise  - highly familiar to those of a certain rank in the business world who have email.  One receives a questionnaire and is asked to fill it out. I'm guessing the response rate is not high.  And in many cases the responses are crafted by someone junior to the "business leader".

Deloitte surveyed 40 IFIs and Islamic finance executives across the Middle East.  Well, actually with a focus on Saudi Arabia, Bahrain, UAE, Qatar and Lebanon (page 6).  Surprisingly, Kuwait - the home to KFH and other IFIs - is not included.  

It seems highly unlikely that the results of Deloitte's poll like others of this sort are statistically significant, though they do provide an impressionistic insight into issues.

Let's go to the survey.   

First Deloitte's summary.

Several key themes emerged in the results of this survey.  The first is a fair consensus on the need for an effective regulatory framework and good governance. The survey findings emphasize the importance of introducing new or revised regulatory measures–chief among them being Islamic accounting standards and risk management.  A second theme is the importance of adopting best practices and transparency in financial reporting. A great deal of the present industry shortcomings and performance shocks can be attributed to a lack of practice consistency and regulatory compliance. The necessity of adjusting investment strategies through diversification is a third theme of this report. A final theme is the need for investment in human capital and talent development to cope with the growth and industry challenges.

Now some details.

A.  Areas Requiring New Regulatory Action to Ensure Compliance and Best Practice

1. Islamic Accounting Standards - 61%
2. Risk Management - 61%
3. Corporate Governance - 58%
4. Shari'a Standards and Compliance - 55%
5. Bank credit exposures -45%
6. Conduct of Business and Professional Excellence - 42%

(AA:  It seems to me that the last point can be viewed as responsible for many of the shortcomings embodied in the above.  The smart ethical fellow doesn't need a rulebook to know what to do and to do it).
 
B.  Adequacy of Regulation of Islamic Finance

1. Over regulated - 3% 
2. Appropriately regulated -31%
3. Under regulated - 66%

(AA:  And Deloitte apparently didn't survey Kuwaiti entities!!)

C.  Best Form of Shari'a Regulation

1. Firm specific Shari'a boards - 43%
2. A single regional Shari'a board -57%

(AA:  The single regional board model is used further East - Malaysia, Pakistan - as well as in the Sudan).

D.  Extent of Risk Management for Islamic Financial Products

1. Exists in our organisation - 50%
2. No specific Islamic risk management - 50%

Responses to this question further ranked risks in order of importance:  credit risk (66%), operational risk (60%) and market risk (53%).

E.  Do IFIs Lag Conventional Banks in Risk Management?

1. Yes -    63.4%.
2. Same -  20.0%
3. No -      16.7%

F.  Corporate Restructuring and Capital Adequacy

1. More than 50% of IFIs said they need more capital.
2. 57% said that it was likely they would restructure a current Islamic debt over the next 12 months.

(AA:  Unfortunately, Deloitte did not provide more detail on the response to the second question.  This seems very very high.  I guess that it's either a problem with the sample or with the definition of "restructure".  Perhaps, this includes some non distressed rollovers or refinancings??)

G.  Change in Business Models

1. 66% said that they expected a change in business models in the near future.

(AA:  Not surprising given the problems with previously "proven" business models).
 
H.  Most Relevant Business Models for Islamic Finance

1. Retail - 45%
2. Wholesale - 24%
3. Domestic - 14%
4. Cross Border - 10%
5. Corporate - 7%

(AA:  A couple of interesting points here.  First, no mention of Islamic investment banking.  Second, a very low number for corporate banking.  Again I wonder if this is a problem with the sample or the construction of the question / set of options).

I.  Real Estate Exposure

1. 66.7% of IFIs have REE up to 20%.
2. 18.5% between 21% to 40%. 
3. 7.4% between 41% to 60%.
4. 3.7% between 61% to 80%
5. 3.7% between 81% and 100%.

The survey covers additional sub topics on those listed above as well as a few other topics.

Central Bank of Kuwait Denies Noor and Gulf Investment House Extension on Treasury Share Purchase

I don't remember seeing this sort of refusal before. But I may have missed it.

In any case today, the Central Bank of Kuwait announced that it had refused to extend its earlier approval to both GIH and Noor to purchase or sell up to 10% of their own stock.   Announcements below.

Also anyone out there who can help with tafsir on the legal references please do.  I don't understand the reference to the Commercial Companies Law.  Article 115 has to do with the issuance of "redeemed shares".  Could this be a reference to Article 114?  Nor am I familiar with Ministerial Order (sometimes Ministerial Resolution) #10 of 1987 nor that of #11 of 1988 which amended it, nor #273 of 1999. 

In any case, it would seem a prudent regulatory move to restrain investment companies from buying treasury shares until their financial conditions had shown robust improvement.  Certainly, at this time companies have better uses for their limited liquidity than punting in their own shares.  You'll note in both cases the two firms asked permission to buy their own shares.

GIH

[9:13:26]  ِ.عدم موافقة المركزي لبيت الاستثمار الخليجي بشراء مالايتجاوز 10% من اسهمها
يعلن سوق الكويت للاوراق المالية بأن بنك الكويت المركزي افاد بعدم الموافقة
على طلب تجديد سريان الموافقة لشركة بيت الاستثمار الخليجي (الخليجي) بشراء ‏
ما لا يتجاوز 10% من اسهمها المصدرة ويمكن للشركة فقط القيام بالبيع من رصيد
الاسهم المشتراة المتوافرة لديها وذلك لمدة ستة اشهر تنتهي في 17-3-2011.‏
حيث ان ذلك الامر يتطلب ضرورة الالتزام بما وضعه البنك المركزي من ضوابط
وشروط في شأن تملك الشركة المساهمة لاسهمها اضافة الى ضرورة الالتزام ‏
بأحكام المادة 115 مكرر من قانون الشركات التجارية واحكام القرار الوزاري
رقم 10 لسنة 1987 وتعديلاته بموجب القرارين الوزاريين رقم 11 لسنة 1988‏
ورقم 273 لسنة 1999.‏

Noor

[8:50:52]  ِ.عدم موافقة المركزي لنور للاستثمار (نور) بشراء مالايتجاوز 10% من اسهمها
يعلن سوق الكويت للاوراق المالية بأن بنك الكويت المركزي افاد بعدم الموافقة
على طلب تجديد سريان الموافقة لشركة نور للاستثمار (نور) بشراء ما لا
يتجاوز 10% من اسهمها المصدرة ويمكن للشركة فقط القيام بالبيع من رصيد
الاسهم المشتراة المتوافرة لديها وذلك لمدة ستة اشهر تنتهي في 28-3-2011.‏
حيث ان ذلك الامر يتطلب ضرورة الالتزام بما وضعه البنك المركزي من ضوابط
وشروط في شأن تملك الشركة المساهمة لاسهمها اضافة الى ضرورة الالتزام ‏
بأحكام المادة 115 مكرر من قانون الشركات التجارية واحكام القرار الوزاري
رقم 10 لسنة 1987 وتعديلاته بموجب القرارين الوزاريين رقم 11 لسنة 1988‏
ورقم 273 لسنة 1999.‏
 

Gulf Finance House - Ted Pretty Sees Pretty Good Times Coming

Al Watan has an interview with GFH"s Group CEO Ted Pretty.  They noted that he was a bit more optimistic with them than with the Western media he had met with.  Perhaps, things have improved.  Perhaps, it's a bit of market segmentation.

Here are the main points. My comments are in italics and contained within parentheses.

1. GFH faces difficulties but will regain health at the beginning of 2011.
2. In the past we bit off more than we could chew.
3. The current strategy is to focus on existing investments and projects, complete these and realize value. (AA:  More on strategy later this is not the complete picture).
4. GFH took action early and is starting to see the benefits.  Our 1H10 loss is smaller than 2009's.  Because of its wise actions, the bank is well positioned for profitability and growth in 2011.
5. GFH's 2010 priorities are:  restoring its operating model, reestablishing sources of income, cost control and rescheduling debt.
6. Going forward business activities will comprise as well raising financing, providing consulting services, managing assets, and the development of private capital (private equity), particularly in forming Islamic financial institutions.  He then noted that GFH had raised some US$2.5 billion in capital for a variety of firms:  First Energy Bank, Khaleej Commercial Bank, Bank Q Invest, First Leasing Bank, Asian Finance House, Arab Finance House and others.
7. He said that new capital is not required for and  will not be used to repay debts.   There's no need because the WestLB syndicate and LMC syndicate have been rescheduled.  (AA:  No doubt wishing to reassure investors.  The proceeds of the 2009 new capital were used to repay debt).

He also commented that fear was depressing economic and market activity.  However, he noted that several countries had proven that they were able to restart their economies without being dependent on recovery of the US economy.  And called for SWFs to do more to support and develop economic activity in the region noting that the average investor had a predilection to invest in Europe or the USA.

If you believe his pitch, this would be an excellent time to buy GFH shares.  They're selling below par.  Way below par.  US$0.125 on the BSE versus a par value of US$0.33.  The upside potential is unlimited as they say.

And since GFH has yet to publish its Basel II Pillar 3 disclosures as of 30 June 2010 as mandated by the Central Bank of Bahrain, many of you may be forgiven for assuming this means the bank has no risks to report - which, if true, could be a very positive "buy" signal.

MEED MENA Real Estate Report

حقل الأحلام الكويت

If you build it, he may not come after all.

 

AlQabas has a summary of a recent Middle East Economic Digest ("MEED") report.

Pretty much the report can be summarized in the table below.

CITY	Median Office Rent Per Square Meter	Average Commercial Vacancy	Median Residential Monthly Rent
Abu Dhabi	$51	3%	$3,500
Amman	$16	10%	$   800
Cairo	$39	0%	$   800
Doha	$50	20%	$3,000
Dubai	$38	38%	$1,900
Jeddah	$25	10%	$1,000
Kuwait	$42	40%	$2,000
Manama	$24	10%	$2,000
Muscat	$23	5%	$1,110
Riyadh	$33	20%	$1,500

 

As mentioned in the article, it's important to remember that these are median rates for a city. There may be more than one market in a city. So, for example, Shaykh Zayed Road may be booming in Dubai with strong occupancy and rental rates, while other areas are really depressed.

On that latter score, I'd invite my Arabic reading audience to comment if I've translated the terms معدل and متوسط correctly. I'm reading these to be Arabic for the statistical terms "mean" and "median" respectively.

And finally anyone who'd care to comment about the rental rates.

HSBC: “No Provision Relief for Kuwaiti Banks Until 2012”

AlQabas published a summary of a recent HSBC research report in its Sunday issue.

Here's a quick summary of the main points:

1. HSBC notes the dramatic growth in distressed loans at Kuwaiti banks – from 5.3% in 2008 to 9.7% in 2009. 
2. And predicts that the banks will continue to make substantial provisions this year and next only reaching a normal level of provisions in 2012. 
3. That being said, there should be a recovery in ROE for 2010.
4. Banks in Abu Dhabi and Kuwait were the worst affected among GCC banks. However, Kuwait has average provisions equal to 10% of total loans while Abu Dhabi only 4%. 
5. A concentration on loans to real estate, construction, and investment companies is responsible for the decline in the value of Kuwaiti bank assets. 
6. Real estate exposure:  Given the absence of Kuwaiti government spending on infrastructure or development projects during the boom years (2005-2008) credit was to the private sector largely to individuals and unlisted companies. The focus was on commercial, residential and investment real estate. Listed real estate companies only account for 13% of the total of such loans. 
7. Investment firm exposure:  Loans to investment companies were KD2.8 billion with KD1.2 billion to conventional firms and KD1.5 billion to "Islamic" firms.  The loans granted were largely used to fund investments in real estate and regional stock markets (thus increasing the lenders' total exposure to these sectors). 85% of investment companies' assets are in the GCC as per the IMF. Since the crisis hit, banks have seen their loan security drop by at least 50% as per HSBC's estimates, though it does note that in the absence of transparency the true impact is not known. 
8. Consumer loans:  These extensions of credit are believed to be of better quality because  they are secured by rentals and salaries. HSBC notes that most Kuwaitis are employed by the Government, the implicit presumption being that their incomes are secure.
   

There were two interesting tables accompanying the article, which I've reproduced below.

First, Kuwaiti bank exposure to real estate as a percentage of shareholders' equity.

Amounts in KD millions.

Bank	Real Estate & Construction ("REE")	Shareholders Equity	REE % of Equity
NBK	1,450	1,871	78%
CBK	733	440	167%
Burgan	976	422	232%
KFH	1,591	1,537	194%
Gulf	1,495	391	382%

Second, Kuwaiti bank exposure to investment companies.

Amounts in KD millions.

Bank	Exposure	% of Total	Shareholders' Equity	Exposure as % of Equity
Gulf	486	18%	391	80%
Burgan	190	7%	422	45%
CBK	269	10%	440	61%
NBK	216	5%	1,871	12%
KFH	944	34%	1,537	61%
Others	658	26%	----	----
Total	2,763	100%	----	----

 

From the above one can draw some conclusions on relative business models and underwriting standards.  

Of course without knowing the details of the loans and in particular the security obtained, these can be only preliminary. 


As usual, the pattern seems to be repeating itself.  One bank is distinguished by its prudence.  And some of the same names seem to be pushing the envelope. 

2 -3

Arggh!   Or should I say "nutters"?

Presssure on Rent Levels in Bahrain -If You Build It, They Might Not Come

The Gulf Daily News reports that rentals have fallen across the board in the retail, residential, office and industrial sectors.

Martin Cooper of DTZ Middle East is quoted as saying:

"The region has woken up to the fact to only give the people what they can afford and not recklessly invest in projects they cannot afford or those which are of no use," he told the GDN.

Often one wakes from a nightmare only to fall back asleep again.

Nakheel: CDG Lawsuit Will Not Delay Deal with Trade Creditors

Nakheel has issued a press release (to Reuters) stating that CDG's lawsuit will not delay its reaching a settlement with trade creditors.  It also said that it expected to prevail against CDG noting that it disputed the entire claim and had counterclaims of its own against CDG.

Nakheel said it has approximately 85 percent of acceptances, by value, for its restructuring deal and is "well on target to achieve its 95 percent acceptance of all payables and claims within the near future," according to the statement sent to Reuters late Tuesday

Mashreqbank v AlGosaibi - Al Sanea's Forum Non Conveniens Motion Successful

Above Main Entrance to NY Supreme Court

Looks like Mr. Al Sanea is continuing his run of victories in the NY Courts.  

As you'll recall when Mashreqbank filed suit against AHAB in the NY Supreme Court, AHAB had Mr. Al Sanea added as a third party defendant.

July 29 Judge Lowe of the NY Supreme Court ruled in favor of Mr. Al Sanea's request that due to forum non conveniens he and Awal Bank be removed as third party defendants. 

While Mashreqbank is appealing, based on the pattern of judgments in the NY Supreme Court, their chances of obtaining a reversal of the ruling would appear to be somewhere between slim and none.   Wonder if AHAB will now find NY an inconvenient forum and file a motion.  There seems to be lots of precedents for this.

(As before, the email notification from the NY Supreme Court is a bit late in arriving.)

You can find earlier posts on this topic by using the label "Mashreqbank".

The NY Supreme Court Case Reference # is 601650/2009.

4-1

Some victories are particularly sweet.

Al Ahli Bank of Kuwait v AlSanea & Saad Trading - NY Case Dismissed Forum Non Conveniens

A Rather Inconvenient Place After All

Judge Richard Love III of the Supreme Court of the State of New York decided last July that New York was indeed a forum non conveniens and so dismissed ABK's suit against Mr. Al Sanea and Saad Trading, Contracting and Financial Services Company.

(In case you're wondering why the delayed posting, while the judgment was electronically filed 11 August, I didn't get an email until today).

I suspect the new venue will turn out to be much much more convenient for Mr. Al Sanea.  Under AA's law of the conversation of legal energy, that may make it much much less convenient for ABK.  Such is life.

You can find the judgment as Document #28 at the NY Supreme Court's website under Case # 602487/2009.

If you use the tag "Al Ahli Bank of Kuwait" you will find earlier posts on this topic.

Al Safat Investment Kuwait - More Detail on 1H10 KD1.1 Million Loss

Additional detail on ASIK's 1H10 financial performance via an article in Al Watan quoting ASIK's Vice Chairman Mohammad Ali Al Naqi.

While the Company did indeed have KD4 million in profit on the sale by one of its subsidiaries of an investment (in the PRC), this was overwhelmed by mark to markets on Kuwaiti shares.  The VC noted the significant decline on the KSE in 2Q10 as well as KD2.48 million of precautionary provisions on   أرصدة مدينة  .

I'm translating these as "debit balances" and presume they relate to receivables of some sort as opposed to investments.   And I'd certainly welcome any comments from readers who either would like to confirm or amend that translation.

Earlier post on ASIK's 2010 performance here.

月餅

When the moon is full, mankind is one.

It's that time of year again.  Though for some of us it seems more like mid Summer than mid Autumn.

Note to the authorities:  AA's mooncakes have no hidden messages.

The Investment Dar - Dubai Creditor Meeting

TID held a creditors' meeting in Dubai 21 September.  Both Al Watan and Al Qabas have accounts.

The Al Watan (Taamir Hamaad) article is fairly bland - no fireworks.  Adnan Al Musallam  is quoted as reiterating TID's firm desire to repay its debts, adding that the reality of the financial crisis made it incumbent  on everyone the obligation to work together to reach the restructuring.   

He also proposed the formation of a holding company capitalized at between KD300 million to KD400 million - to be administered by the banks and investors - as the vehicle to settle TID's debts.  The rationale appears to be to ensure compliance with the Central Bank of Kuwait's new rules on investment companies.  Apparently to shift the debts off TID's balance sheet along with the assets - thus  improving TID's performance under the CBK's  three ratio tests.  He said that he had requested the executive and legal management of the Company to study this matter.

On the other hand Al Qabas (Mohammad Sha'baan) has a more fiery story (not unexpected) of creditor "anger".  In the Al Qabas version, some creditors are on the verge of a confrontation with TID and its Board over the following:

1. A belief that parties outside the formal management/Board structure of TID are really making the decisions
2. That the Company is deliberately stalling progress
3. That the creditors have been overly patient during the past two years but have gotten nothing from the Company
4. Board Members are deliberately missing meetings with creditors and provoking confrontations in order to evade responding to creditor requests.  A central point is the creditors' demand that they be kept fully in the picture as to what is going on at TID, including efforts to comply with the Central Bank's new regulations for investment companies
5. That some creditors are prepared to bring legal action against all parties - including against the Creditors' Coordinating Committee,  if there is an attempt to impose the restructuring plan without 100% creditor acceptance or acceptance by an absolute majority of creditors.   AA:  This is a puzzling statement.  It's pretty clear by now that all creditors are not going to accept the plan.  And equally that the whole point of recourse to the FSL is to cram down dissident creditors.  Al Qabas' informed sources may be less informed than they claim.
6. That TID has apparently stopped its program of salary reduction for senior management and that the salary scale has reverted to what it was in the boom years.  AA:  This is similar to the earlier theme about creditor anger over a raise and bonus for a member of senior management.  A neat way of attempting to finesse this is to eliminate a reduction and say that technically the fellow is not getting a raise but rather his salary is being restored to what it was prior to the reduction.  Unclear if this is what is going on. 
7. That some Board Members through related companies they control, companies which are partners with TID in certain assets, are gaming the realization of assets.  AA:  This is the fundamental creditor fear - that asset disposals will be gamed to reduce the banks' realization proceeds.  Not an unreasonable fear in the land of egregious related party transactions.

Two quite different accounts, though it should be noted that Al Qabas is speaking about creditor discontent which might manifest itself in the future not battles raging at present.

There's a creditors meeting today in Kuwait for those creditors who missed Dubai.  Hopefully, more detail will be forthcoming.

It's no surprise that creditors' patience is wearing thin.  It's been over two years.  The Central Bank is still reviewing whether to allow TID to use the FSL as cover for its rescheduling.  TID has yet to release any 2009 financials - either quarterly or fiscal year 2009.

Lenders Selling Saad Group Loans

Remedial Lending Class

Asa Fitch at The National reports on some loan sales by Saad lenders.

This makes perfect sense. 

It's highly unlikely that Saad or AHAB, for that matter, are suddenly going to settle their debts.  It's likely that there will be considerable more time before a deal is struck.  And then repayment is likely to be painfully slow over a long period.

It makes perfect sense for lenders with modest sized tickets to exit now.  End the uncertainty.  Devote resources to other more productive efforts than negotiating a rescheduling and then tracking the performance of a weak credit.

The sad thing is that bankers have ADD so that any lessons learned are remembered for only a short period making the cost of tuition not effective.

DFSA Calls for Audit Improvements

Apparently heeding the comments of  The Rageful Cynic on this blog,  Paul Koster, CEO of the DFSA called for improvements in local auditing as reported by Tom Arnold at The National.

“Are auditors doing enough in that respect? I don’t think so,” said Mr Koster. “I think one of the key areas where auditors right now can gain momentum in the level of trust they provide to the financial market is to increase the level of scrutiny and scepticism in regard to the judgement of management in valuations.”

There's the usual commentary as well about the  need for auditors to get more training so they can understand complex financial instruments.

But the most telling quote of all is at the end of the article.

Auditors speaking to The National have previously accused Gulf companies of using similar accounting practices to mask bad assets and called for greater safeguards to avoid such methods.

Accounting in the GCC is based on IFRS which is a principles and not a rules based approach (the latter being the system in the USA).

Under a rules-based system, the accountant and auditor merely ticks the boxes.  If enough boxes are ticked, the transaction passes the test.  Form may over rule substance.

Under a principles-based accounting system, accountants and auditors are to look behind the form of a transaction to the substance.  The Lehman Repo 105 was a very clear scheme to get around the rules.

That local auditors are whining about violations and doing nothing to stop their clients is a very clear indication that the problem isn't training.  It isn't greater skepticism (or scepticism).  It isn't a lack of scrutiny.  

Very simply put, it's a lack of professional ethics.

Construction Delivery Group Files AED49 Million Suit Against Nakheel

Bradley Hope over at The National reports that CDG has filed an AED million suit against Nakheel at the special Dubai World Tribunal at the DIFC.

Here's an extract from the claim filed by CDG (Dubai World Special Tribunal Case DWT-0008-2010).

The DWT website is at www.dubaiworldtribunal.ae.

1.The Claimant claims against the First Defendant and/or the Second Defendant and/or the Third Defendant  damages, monies due, interest, legal fees, costs and expenses.

2.The Claimant's contractual and non-contractual claims arise out of and in connection with a contract (PJ-338) and/or contracts for the provision of Facilities Management Services (comprising Mobilisation Phase Services and Operational Phase Services in respect of 1,224 villas and 114 “Canal Cove homes” located on the Palm Jumeirah, Dubai) between approximately March 2007 and January 2009.

3.The Claimant Claims:

(i)  AED 24,514,464.49  Mobilisation Phase: unpaid fees to 31 January 2009
(ii) AED 2,608,347.75  Mobilisation Phase: loss of profit 01 February 2009 – 30 June 2010 
(iii) AED 6,001,899.58  Operational Phase: unpaid fees to 31 December 2008
(iv) AED 1,369,200.00 Operational Phase: loss of profit 01 January 2009 – 31May 2009
(v) AED 4,097,925.00 Operational Phase: Maintenance Services; fixed running costs for villas exceeding 400;  01 June 2008 - 31 December 2008
(vi) AED 982,534.00 Loss and damage: office, plant and equipment
(vii) AED 103,235.69 Loss and damage: emergency stores
(viii) AED 1,095,149.87 Loss of main office overhead contribution
(ix) AED 679,023.69 De-mobilisation costs on wrongful termination
(x) AED - To be advised  Loss of the use of the Claimant's Performance Security (AED 1,569,460.00) for the period 10 February 2009 – 07 October 2009

Interest pursuant to Articles 88 and 76 of Federal Law No. 18 of 1993: the Claimant claims compound interest on the above amounts at 12% per annum from the date such sums accrued to the date of payment, alternatively at such rate and for such period as the Tribunal deems fit.

As Bradley notes the process and outcome of the case will be closely watched to see how the Special Tribunal works.  As well, whether the ST gives smaller creditors a way around the rescheduling.  It would seem that CDG perhaps does not intend to contract with Nakheel again.