Dana Gas 1Q18 Earnings - No Sign of Change in DG's Prospects

"Looks Like the Runway's Too Short Even with Jet Engines"

DG reported net income of USD 14 million equivalent for the First Quarter of 2018. 

On an annual basis, that’s an ROE of roughly 1.9% based on the very simple assumption that each following quarter will have the same NI of USD 14 million and that equity will increase by the same amount.  

However, as the Company’s directors noted in their report, 1Q18 income benefited from a USD 13 million reversal its share of accrued operating costs at Pearl Petroleum no longer needed because of the settlement with the KRG.  Thus, 1Q18 operations generated a pathetic USD 1 million in net income.  Annualizing that amount results in net income of USD 4 million for 2018 and a projected ROE of 0.15%.  

DG is likely to do better than either of these scenarios.  

But it’s hard to see it reaching an ROE commensurate with its risk profile or performance robust enough for thinking creditors.  

The settlement with creditors will result in interest expense for 2018 between USD 23.3 million and USD 25.7 million, depending on the take-up of Tranche A.  Calculated as (a) USD 700 million for the first 7 months of the year at 4% and (b) either USD 420 million (full take up of Tranche A) or USD 560 million (no take up of Tranche A) for the last 5 months of the year at 4%.  When compared to 2017’s USD 66 million, this is a “savings” of roughly USD 40 million to USD 43 million.     

The Company will also benefit from the reversal of two months of interest accrued in 2017 on USD 700 million or roughly USD 5.8 million.  This represents the difference between 9% and the negotiated 4% which is retroactively effective as of 1 November 2017 based on the draft restructuring terms.  

In my post on 2017 net income I made the case that if one deducted non-operating items DG’s reported net income of USD 83 million was actually a loss of USD 57 million.   

Let’s make projections for 2018 based on both 2017 net income as reported and net income as adjusted (by AA) for non-operating one time events.  

If we add an interest “benefit” of USD 50 million (a generous round-up) to 2017 reported net income, 2018’s projected net income is some USD 133 million.  Projected ROE is roughly 4.5% compared to 2.94% for 2017.  An improvement but still well below what I’d consider --and hope you would too--the required return for a company with DG’s risk profile.   

If we look at my calculation of an operating loss of USD 57 million for 2017, and are a bit more generous on the interest benefit (USD 57 million), then on an operating basis DG breaks even in 2018.    

Neither scenario should be comforting to equity holders.  

Creditors thinking of Tranche B may want to “think again” particularly as the restructuring and proposed dividends are likely to significantly reduce DG’s cash this year. 

Dana Gas Sukuk First Look at Restructuring Terms

Dr. Arqala Will See You Now

On 5 June Dana Gas reported progress in reaching an agreement with 93.69% of its sukukholders for a “consensual” restructuring.  Later this month DG will be seeking shareholder agreement to the deal which was outlined in a 13 May press release.  

AA has just resurfaced after an intensive several months of work (not every investment turns out well) so initially missed the 13 May press release. 

While fully detailed terms haven’t been released yet, let’s take a first look at what we know. 

The USD 700 million sukuk which matured in October 2017 will be restructured in two tranches.  

Tranche A – Early Exit Option 

Up to a maximum of 25% of the face amount of the existing USD 700 million sukuk (USD 175 million) will be offered for immediate payment at 90.5% of the face amount of the sukuk.  Those responding within 7 days of the formal offer (“early election”) will receive an additional 2.5% flat of the face amount or a total of 93%.   No interest will be paid.  

Assuming a 31 July conclusion of the deal (roughly DG’s target date) and full take-up of the USD 175 million Tranche A, some USD 13.1 million in interest will be due-- 6 months at 9% and 9 months at 4% (the new “profit” rate) because DG’s last interest payment appears to have been made in April 2017.    

Including the “to-be-lost” interest in the calculation results in an effective discount of the total amount owed to holders of 15.8% or, if the early election is made, 13.5%. 

Tranche B – 3 Year Sukuk Maturing 31 October 2020  

The sukuk will have a three-year tenor starting from 31 October 2017 – the maturity of the existing sukuk.  It will be structured as a “wakala” with underlying “ijara” / “deferred sale” obligations.  

The new “profit rate” will be 4% per annum. 

Holders who make an early election to enter the deal will receive a similar 2.5% flat fee of the face amount of their tendered sukuks. 

DG will make an upfront payment of 20% of the face value of the existing instrument allocated to Tranche B (75% of USD 700 = USD 525).  This will result in a new sukuk with a face amount of USD 420 million. 

The terms call for a prepayment of 20% of the face amount of the existing sukuk (USD 105 million) within the first two years, i.e. no later than 31 October 2019.  That will reduce the sukuk to USD 315 million.  If DG does not make the prepayment within the specified time, the profit rate will increase to 6% per annum.  

DG will be allowed to pay dividends up to 5.5% of the paid in capital of DG (USD 1.9 billion equivalent) or roughly USD 105 million per year, subject to a minimum liquidity requirement of USD 100 million.  The dividend allowance is not tied to actual cashflow. 

All net free cash proceeds from the results of the NIOC arbitration and sale, if any, of Egyptian assets for repayment of the Sukuk.  There are also provisions relating to the buyback of the new sukuk under certain circumstances.  Not particularly clear, but then this is a summary.  

DG’s May 2018 Corporate Presentation appears to provide some additional information on this latter topic. Comments on page 5 state that, if Tranche A is not fully taken up, DG will use the remaining amounts allocated to Tranche A to buyback new sukuk at the market price within 9 months of closing of the restructuring.  If there is insufficient offer, then DG will prepay sukukholders pro-rata at par.   From the wording it seems that when the May report was issued, no deal had been struck with sukukholders. So these terms may not have been modified.   

Danagaz WLL has apparently been removed from the security package, perhaps compensated with the above. 

Comments 

Better Structure: Shorter tenor, more periodic amortization, additional “collateral”. 

You’ll recall, and if you don’t AA will remind you, that very early on AA wrote that the sukukholders needed to shorten the tenor (from five years), obtain interim principal repayments (no bullet structure) and secure more collateral.  To an extent that seems to have occurred.  To be very clear, AA is not claiming any credit for this outcome.  The sukukholders’ advisors don’t need AA to tell them the obvious.  

Reaching agreement is like some telephone calls with President Macron.  One doesn’t know all the details or what the course of negotiations was.  Like sausage one just has to eat it.  No doubt the case here.    

But as an outside commentator, AA will exercise his right to highlight things that might be better without the responsibility to make them so. 

Prepayment Failure: Doesn’t trigger acceleration of maturity.  

Failure to make the interim prepayment does not appear to constitute an event of default that allows acceleration of the sukuk.  Ideally it should be particularly given this issuer. Rather the penalty seems to be only an increase in the interest rate.  Realistically, if the Company can’t pay, a higher interest rate won’t be much deterrence.  

Dividend Payments:  Risks of cash leakage controlled?   

According to the transaction summary, approximately, USD 105 million in dividends can be paid each year—subject to maintenance of the USD 100 million minimum liquidity requirement—because  the dividend “allowance” is based on USD 1.9 billion in paid-in-capital at a 5.5% rate.  It is not tied to DG’s cash generation which would be preferable from a creditor standpoint, i.e., dividends tied to new cash generation.  

We don’t have sufficient details about the minimum liquidity requirement to know if it protects against leakage of cash needed to repay principal via dividends.    

The key issues are that DG's ability to generate cashflow from operations has been volatile, there are operating issues in Egypt and the UAE, much of its USD 636 million in cash as of 1Q18 will be expended on the restructuring, and the dividend allowance on its face appears overly generous.   

Over the past five years DG’s cashflow (defined as the net change in cash on the Statement of Cashflows adjusted to remove non-operating cash receipts–the sale of 5% of Pearl to RWE, the RWE dividend, the KRG/Pearl settlement, new borrowings, etc.) has been very volatile, averaging approximately USD 46 million per year.  While future cashflow (2018 forward) will benefit from an approximate USD 50 million a year reduction in interest expense, there seems to be little margin for error, absent asset sales or settlement with NIOC., the timing of which appear uncertain, if they will occur at all.  That’s particularly the case if sizeable dividends are paid.   

At closing of the restructuring, DG will have expended some USD 300 million of its USD 636 million in 1Q18 cash and banks (an amount which excludes USD 140 million earmarked for development of Pearl).  The prepayment on Tranche B will use another USD 105 million, reducing the remaining 1Q18 cash balance to USD 230 million and the sukuk principal to USD 305 million.  

Compounding risks, the final principal payment may be due shortly after the prepayment.  If it’s made on the last day (31 October 2019), only 12 months will remain until final maturity.  

Tranches A and B:  Sukukholders’ interests aligned?

The early exit option and ongoing market buybacks represent a potential preference to some creditors over others.  It will be interesting to learn, if possible, if those institutions that elect early exit were key in negotiating the restructuring.   There is a fundamental conflict of interest between those who are whole dollar creditors and those who acquired their stakes at a discount.  

Which option would you choose? 

So having raised that point, what would AA do if he had been unwise enough to purchase the sukuk?  

Take the early exit for three key reasons.  

First, if one doesn’t trust a potential business partner or issuer, one simply doesn’t do business with him.  No need for any further analysis.  

Second, if basic legal protections are lacking in a market, you can’t rely on the law to compel your counterparty to comply with the contract or the local courts to execute the judgments of foreign courts.  You are on the high wire without a safety net.  Usually, this is another deal breaker, unless your business puts the burden of risk preponderantly on the counterparty.  For example, you are a seller of investments rather than a buyer.  But is it worth the risk and bother?  

When the Ruler of Dubai created the DIFC, he sent a very clear message about the state of the law and courts in the UAE.  If you weren’t paying attention then, the recent decisions of the Sharjah Court hopefully caught your attention.  

Third, at the issuer level, DG exhibits high operating and credit risks.  Weak performance and a contration in squirrelly markets (that’s a technical term in case you don’t know).  DG has a “rich” history here (but not in the financial sense).  Future prospects do not appear bright. 

 

More Nonsense from Gulf News About the Qatar Crisis

Here’s another gem from the Gulf News re the Qatar crisis under the headline:  “Qatar’s defence of Iran drives further wedge with neighbours”  with the subheading “Comments by defence minister prove Qatar’s arrogant position when it comes to solving year-long crisis”.  

Just what did Qatar’s Defense Minister ("QDM") say to prompt such criticism?  

Let’s read GN's charges.  Words in quotes are verbatim from the GN article cited above. 

First, the Qatari Defense Minister “defended the Iranian nuclear deal despite criticisms from Arab states that the deal has empowered Tehran to wreak havoc in the region.”   

As AA reads the GN’s charge, it’s clear that the QDM did not defend Iran but defended the JCPOA, a position shared with the former President of the United States, Australia, Canada, China, the EU, France, Germany, Ireland, Japan, the Netherlands, Norway, Russia, Sweden, and the UK – all no doubt as arrogant and intransigent as Qatar at least in the eyes of the GN.  Citations here and here.  

Interestingly, neither Kuwait nor Oman have adopted the “Quartet”'s position. 

Also Tehran’s influence/actions in the region pre-date the 2015 JCPOA, e.g., the Huthis seized Sana in 2014, Tehran has been supporting the Syrian Government since before  the JCPOA, and its influence in Iraq also predates the JCPOA.  While JPCOA's negotiations concluded in 2015,  the agreement came into effect in January 2016 (“Implementation Day”). I suppose one, perhaps the GN, would argue that actions before 2015 or 2016 did not consist in wreaking havoc.

Second, the QDM said that “Qatar would not ‘go and fuel a war’ in the region and called for engaging in talks with Iran” and that a war with Iran would be “very dangerous”.  

That seems an eminently sensible position on general terms.   

But for a region that has seen the sad consequences of wars in Iraq, Libya, and Syria a bit more caution on war would seem to be in order.  

Finally there is the lesson of 1967.  If you’re bogged down in a war in Yemen, best to keep your head down with regard to further military adventures, particularly if the potential new adversary’s power is a multiple of the current adversary in Yemen.  

GN had another article earlier "Lack of Wisdom Prolonging Qatar Crisis".  The article referred to above is perhaps an exemplar of the headline.  

Expect more to come as I clear out from under a rather busy past three months.

Dana Gas "Swings" to Profit in 2017

DG Ready for Takeoff The Sky is the Limit

DG announced its FY 2017 results on 15 March.  Net profit was USD 83 million equivalent up from a USD 88 million equivalent loss in 2016. 

Does this mean that DG has turned the proverbial corner and that future results are likely to show similar and perhaps even improved results? 

You might think so reading DG’s earnings press release.   

“The turnaround was led by higher realised liquid prices, higher production in Egypt and tight management of operational expenses. Higher profit was also supported by the successful settlement agreement ('Settlement') with the Kurdistan Regional Government ('KRG'). However, Q4 net profit was impacted by an impairment charge of $34 million (AED 125m) against the UAE Zora asset following the year-end reserve report.”

While admittedly it's too early to state conclusively, as the picture above indicates, AA is not convinced that DG has a smooth flight path to a rosier future. There are some fundamental problems at DG.  It's hard to see these being corrected.  Another cautionary message to the unfortunate existing creditors of DG and to any potential ones.

1. DG’s 2017 Gross Profit was USD 118 million equivalent compared to 2016’s USD 103.  That’s a USD 15 million turnabout or just under 9% of the USD 171 net change between the two years.  So this led the “turnaround” only in the sense of occurring first in the income statement.  Note: Gross Profit = Gross Revenues –Royalties – Operating Costs and Depletion.   The Gross Operating Margin (GOM) in 2017 was some 26.22% versus a slightly higher percentage in 2016.  GOM = Gross Revenues/Gross Profit. 
2. The real “turnaround” occurred in other expenses and income which were a net credit of USD 3 million versus a net debit of USD 58 million in 2016. 

Has DG discovered a magic solution to controlling expenses?  Has its business fundamentally changed, leading to new ongoing "other revenue" stream?  Or has it benefited from one-off events?

If you guessed the latter, you’ve guessed right.  References to notes below are to those in the 2017 FY Audited Financials available here. 

1. DG had USD 26 million in other income (note 7).  Under the agreement with RWE regarding its investment in Pearl Petroleum Ltd, RWE owes DG additional payments when PPL pays a dividend.   PPL paid a dividend as a result of the settlement with the KRG.  Future PPL dividends are likely to be contingent on settlements with Iran’s NIOC.  Probably a low probability event. 
2. DG benefited from a USD 114 million reversal of Surplus over Entitlement (note 29) again resulting from the settlement with the KRG. 
3. These two items aggregate some USD 140 million in credits that are unlikely to recur.  Adjusting for these, 2017 results would be a net loss of some USD 57 million.  Income tax expense (note 9) appears related solely to DG’s Egyptian operations and so would not change based on these adjustments. 
4. One interesting side note – DG appears to have accrued interest on the sukuk at contractual rates for the full year – some USD 67 million.  Though as the Statement of Cash Flows shows the Company only paid total interest of USD 32 million out of the USD 71 million accrued. 

On that basis, DG has not turned the corner. 

1. With the recorded USD 83 million in 2017 net income, DG earned a whopping 2.9% on equity. More cellar than stellar. 
2. Assuming 10% is the minimum appropriate rate for the risk of this company (Disclosure: AA thinks it should be higher but doesn’t want to pile on DG) and that other expenses are roughly USD 100 million a year, DG has to earn net operating revenues of USD 382 million. If ongoing other revenue streams of this magnitude are not likely, then DG has to increase its net operating profit.
3. Assuming the 26% GOM would hold (and it probably wouldn’t given higher production), DG would have earn gross revenues of roughly USD 1.469 billion or 3.3x 2017 gross revenues. 
4. Alternatively, without a change in gross revenue, DG’s GOM would have to be roughly 85% which is almost certain not to happen.  If gross revenues were doubled, the GOM would have to reach 42% - another level that seems less than attainable.

Other Information in DG’s Financials

What else did we learn from DG’s FY 2017 annual report? 

1. Of the USD 1 billion KRG settlement, DG received USD 350 million of which USD 140 million is restricted for investments to increase production in the KRI. DG is able to utilize that amount for other purposes if it can raise financing.  Imprudent or uninformed is the financial institution that would lend to this discredited (that’s a partial pun) borrower for a venture in what might charitably be described as a squirrelly market.
2. Some (a) USD 695 million in be-whiskered KRG trade receivables and (b) interest due on them which had been deducted from Surplus over Entitlement have been “discharged”.  The KRG no longer is legally obliged to unconditionally pay these amounts.  Rather they have been transformed into additions to “petroleum cost” carried under “property, plant, and equipment”.  Under its concession agreement with the KRG, PPL has the right to recover certain costs of investment in the KRG from future production. If there is insufficient future production or none at all, the amount is lost.  If recovery of these costs requires an extended period, then the present value of the amounts recovered will be less than the amounts booked.  And it appears that unlike the trade receivables, PPL and thus DG have no right to interest on the unpaid amount.  In short, as part of the settlement PPL has transformed a sum certain debt payment into a contingent payment the amount and timing of which is uncertain with no protection by way of interest accrual.  On the other hand, as a practical matter this may have been the only way to “collect” this debt. 
3. The woes at Zora continue.  2017 production is 39% down from 2016.  The Company also assesses that “At present it is unlikely that further well interventions can be economically justified …” Financials page 5. 

Quibbles

As usual with AA, he just can’t resist a technical quibble.  Or two. 

1. In its FYE 2017 Financials, DG observes that its 2017 net income of USD 83 million represents a 194% turnaround from the 2016 loss of USD 88 million.  That’s an interesting calculation.  If, for example, DG earned USD 1 million in 2016 and USD 83 million in 2017, then the net change would have been an impressive 82 times or 8200%.  But going from a loss of USD 88 million in 2016 to USD 83 million in 2017 is only 194%!  Trust this is an outlier error in DG's financial calculations.
2. In commenting on DG’s 2017 results AA’s favorite GCC financial newspaper apparently misread the quote above from DG’s press release causing GN to say that “Revenues of the company went up to $450 million in 2017, from $392 million a year earlier due to higher oil prices, increase in production in Egypt and tight management of operational expenses, the company said on Thursday.”   DG’s quote referred to net income not gross revenues which are before any expenses.

Thoughts on "Thoughts and Prayers"

There has been significant adverse reaction from some quarters to politicians stating that their "thoughts and prayers" are with the people of Parkland, Florida.  They have been accused of dodging responsibility to do something to prevent events of this sort from happening by hiding behind pious words.

But what if instead of denigrating this approach, we were to react positively and apply it to other situations?

As an alternative to passing a tax cut and reducing spending on the average citizen, we could tell the affluent and big corporations that our "thoughts and prayers are with them" and do nothing more.  

Saudi Arabia: Value of AlSanea Group Debt Surges 67% to 200%

Beatrice and Benedict Discuss the Value Surge

1 February Thompson Reuters reported that following recent reported efforts by the KSA Government to “step up its efforts” to resolve the Ahmad Hamad Al Gosaibi/Maan al Sanea USD 22 billion or so debt dispute: 

“In a sign that some creditors are now more optimistic there will be a positive outcome to the debt dispute, Saad Group’s debt has been trading up at 3 to 5 cents on the dollar in recent weeks, compared to 1 to 3 cents previously, bankers say.”

In percentage terms that's quite a movement.  Not so much in absolute amounts.

AA would guess that these now more optimistic creditors are the same ones who made the original loans to AlAwal and TIBC.  Or would have if they had had the chance. 

For some of those earlier “great moments” in banking you can refer to the posts right here on SAM, e.g., AlAhli Bank Kuwait letters of credit, Mashreq Bank’s split value FX deals, and many more.  Here. Or here.  Name lending combined with what some might rightly consider unsound banking practices.  Talk about compounding errors!

Those less charitable than AA might also make a comment about the extent of the “step up” by the KSA Government of its efforts.  After all, it’s only been a scant 8 years 10 months. 

No surprise that when there’s good news, there’s always some naysayer like AA who refuses to acknowledge it or see the upside potential.  Saudi investment banking fee riches is yet another example. 

“But some investors remain skeptical. A hedge fund trader who had been considering buying Saudi debt described the attempts by Saad’s advisers to resolve the issue with creditors as a “dog and pony show” and said “very little” work had been done to reach a settlement since November." 

Note that the anonymous hedge fund trader quoted above would be purchasing the paper at a deep discount.  Unlike the original lenders who have been well and truly skinned, he could still make a profit even if final settlement were at a 8% recovery level.  Yet, he still doesn’t find it attractive. 

Why is that?

As AHAB/AlSanea and REDEC have well demonstrated, generally KSA prefers (in the technical legal sense of a preference) domestic over foreign lenders. SAMA take good care of their banks. Foreign banks not so much. 

If that weren’t enough, the Saudi courts and legal system generate “uncertain” outcomes (euphemism of this post).  Hapless foreign creditors are more likely to get “shaken down” than to get a “fair shake”.  Or is that shaykh?  To be fair KSA is not alone in the region.  One need  look no further than Dana Gas in the UAE.

2017 Middle East Investment Banking Fees -- Get out Your Microscopes

Researchers at Arqala University Help AA Find MENA IB Fees

AA had a moment of near total shock as I read the headline “Middle East investment banking fees total $912 billion in 2017” in the 10 January edition of AA’s newspaper of record the Gulf News.

Quite a change from 2016 or so it would seem. 

It only took the first paragraph to dash AA’s fervent hope for “investment bank fee riches” in MENA much less in Saudi Arabia to come crashing to the ground.   USD 912 billion quickly turned into USD 912 million. 

Thompson-Reuters estimate that global investment banking fees total some USD 104 billion in 2017.  MENA  fees  at USD 912 million are some 88 basis points of the total. 

AA’s point in writing this isn’t GN’s editing mistake, but rather to use it point out once again that in the grand scheme of matters financial MENA IB fees remain miniscule, more a rounding error that meaningful.  A hobby rather than a mainframe business.

السماء لا تمطر ذهباً ولا فضة One Gram

Personal preference: AA would remove the "l" above.  3:160

No, AA hasn’t branched out into pharmaceuticals. 

An article in Gulf News caught my eye “Buy Property in Dubai with Crypto-currency.” 

“OneGram will go live in June next. Investors in MAG properties will purchase OneGram to the value of the property and receive a 5 per cent discount on the property price as a result. The OneGram will then remit to MAG according to the payment plan, which is 35 per cent over six to nine months and 65 per cent on completion at the end of 2019”

At first blush this sounds like a great deal.

Assume you want to buy that corner unit in برج أوهام for AED 3 million.  Right off the bat you’ve saved AED 150,000.

But a closer look indicates that the deal may not be as sweet as the result of patience. 

Let’s look at the Shari’ah whitepaper prepared by OG’s advisor, AlMaali Training and Consultancy, specifically at the fee discussion on pages 16-17.

First, there is a 10% purchase fee equal to the amount of OG one wants to buy.  That’s 10% of AED 2,850,000 (95% of AED 3 million).  Or AED 285,000.   Oops, we now appear to be AED 135,000 in the red.  (AED 150,000 less AED 285,000)

But as they say “wait there’s more”.  There’s also a 1% transaction fee for another AED 28,500 for a grand total of AED 163,500. 

Thus, we’ll pay AED 3,163,500 for our AED 3,000,000 apartment. 

And as per the above quote, we’re required to pay 100% of the price to OG up front who will then carefully safeguard 65% of our funds until 2019 (roughly two years) when MAG is owed the money.  No interest paid I suppose since this is an “Islamic” financial instrument.  No need for any present value calculations even if based on "profit rates" as opposed to interest rates.

Despite all this, we can take comfort from using an innovative new Islamic financing tool and helping a deserving firm make a nice profit.  Can’t we? 

If you’re wondering, the 10% entry fee is used for the following purposes:

1. 5% (or 50% of the total fee) for long term business development. 
2. 1.5% (or 15% of the total fee) for marketing costs. 
3. 1.5% (or 15% of the total fee) for operations –gold transport, fee for offering spot price, storage, insurance. 
4. 2% (or 20% of the total fee) for salaries.

The 1% transaction fee is allocated as follows: 

1. 70% to buy additional gold to back each OG token.  What this means is that over time more than one gram of gold will back each token.  Of course, if you sell your OG, you don’t share in this benefit. The chap who buys from you does unless some how you can work that future benefit into the selling price you receive. On that basis, the business logic of this mechanism escapes AA.   If one uses OG as a medium of exchange, the benefit of this feature would appear to be small.  If one were getting OG tokens for free as a “miner” or perhaps in some other way (founder), this could be quite attractive. Having said that another Dubai-linked gold cryptocurrency Currensee has a similar mechanism, though 80% of the their 1% transaction fee will purchase additional gold.  Interestingly their maximum transaction fee appears capped at USD 10.  Currensee whitepaper page 9. 
2. 10% for operations and development.  The whitepaper has an error here and in the next two categories.  It states 2.5%, though from the numbers provided example it’s clearly 10%. 
3. 10% for charitable contributions. 
4. 10% for the “miner” reward with the caveat that under Shari’ah there can be no guaranteed returns.  It’s unclear what this is all about on two fronts.  First, the whitepaper describes the “miner” as the “investor”.    Second, if this is truly a transaction fee, it would seem that it would be perfectly halal.

There’s a different version on the allocation of the 1% transaction fee in the English “whitepaper” written by I.M. Khan in categories 2 to 4 above.  On page 6 the operations and development fee is 25% (Currensee takes 20%) and the charitable deduction and mining fee (here clarified as a fee for blockchain processing) are each 2.5%.  In IMK’s estimation the transaction fee is “minimal” compared to “traditional banking” (page 2). 

Analyst disclosure:  In all AA’s personal traditional banking relationships I pay no more than a flat USD 45 fee for a payment.  This is with both OECD and non OECD banks. The firm I work for has an even smaller cost. 

All OG’s fees—set on transaction amounts--look like a sweet deal for someone but perhaps not necessarily investors in OG.

By comparison Bitcoin’s transaction fees are a flat per transaction fee not a percentage of the amount.  Recently, there was a bit of a hue and cry over a temporary spike in Bitcoin’s transaction fee to USD 26.  At OG, you could move USD 2,600 equivalent for that fee!  If you wanted to move more, the OG fee would be higher.  

Bitcoin transaction fees vary by demands on the capacity of the (Bitcoin) Blockchain, resulting from what appears to be a rather small maximum size per “block”.  If one is not in a hurry to complete a transaction, one can simply offer a lower fee and wait until the higher fee offering transactions have cleared. As might be expected “miners” prioritize transactions based on the block processing fee they will earn.  

As to entry prices, Bitcoin has a typical trading bid/ask spread which fluctuates with market conditions and is not a fixed percentage cost. 

Second analyst disclosure, AA is not recommending Bitcoin as a superior investment but merely pointing out the difference in fee structure.

It should be noted that OG has ongoing operating costs regarding the storage, insurance, etc. of the physical gold that Bitcoin which is backed by air does not.  Whether its other costs are justified or not, الله أعلم 

OG’s fees may appear higher than market, but surely one can’t put a price on adherence to one’s faith.

Interestingly, OG also offers a Russian language copy of the whitepaper, but no Arabic version.  Apparently OG sees an opportunity to market to the legions of Muslim investors in the RF.   

What is the Qatari Banking Sector’s Foreign Currency Exposure? Part 4 – Consolidated Annual Financial Reports “Approach” Continued

AA Puts the Finishing Touches on His Analysis

Earlier posts here, here,  here, and here.

With all the caveats in the preceding post, let’s look at a series of charts which I’ve compiled from the FYE 2016 annual reports for 7 Qatari banks.  Recall there are 3 banks (AlAhli, AlKhaliji, and IBQ that don’t provide full geographical analysis of assets and liabilities) and one bank Development Bank of Qatar that has a relatively miniscule positive NFA position and so I’m not inclined to spend time analyzing it.

Before we begin, one important note.  I will be comparing consolidated data as of 31 December 2016 to QCB data as of that same date in what follows  Keep in mind that since 31 December 2016, QCB data shows a QAR 79 billion reduction in TFL (USD 21.7 billion), and a QAR 41 billion (USD 11 billion) reduction in NFA.  For a net decrease in the negative NFA position from USD 47.7 billion to USD 36.6 billion equivalent.

Qatar Banks NFA 31 Dec 16
Consolidated Financials  - QAR Billions
BANKS	TFA	TFL	NFA	NFA-USD
QNB	278	355	-77	-$21
QIB	25	37	-12	-$3
CBQ	43	53	-10	-$3
MAR	16	13	3	$1
DOHA	10	9	1	$0
BAR	11	5	6	$2
QIIB	2	6	-4	-$1
TOTAL	386	478	-92	-$25

1. MAR = Masraf al Rayan and BAR = Barwa Bank. 
2. As per the QCB’s statistics, the NFA position was a negative USD 47.7 billion equivalent at 31 December 2016.  Using consolidated financials, the NFA position was negative USD 25 billion at that same date.  While this is based on a sample instead of the population, it’s unlikely that the remaining banks have a negative net foreign position anywhere approaching USD 23 billion.  As per QCB data, the QDB has a miniscule though positive NFA exposure equivalent to some USD 84 million.  Because total liabilities (foreign and domestic) of the first three banks equal QAR 112 billion (some USD 31 billion). It’s highly unlikely that they have foreign liabilities equal to 74% of total liabilities.  And also if they have such FL, they probably have some amount of FA to offset them. 
3. On that basis and subject to the caveat about the free transfer of assets between overseas entities and Qatar, particularly for subsidiaries, it certainly looks like the Qatar banks aggregate position (onshore and offshore) is even more manageable. 
4. One can also look at other measures of this exposure. If we look only at banks with negative NFA, they owe some QAR 102 billion (USD 28 billion). 
5. If we look at a base worst case (because we lack data on three banks), consolidated financial derived TFL are QAR 478 billion (USD 131 billion) which is higher than QCB’s TFL of QAR 447 billion (USD 123 billion). 

But what is the exposure to Other GCC countries, which would include the GCC 3?

Qatar Banks NFA  31 Dec 16
With Other GCC States
Consolidated Financials - QAR Billions
BANKS	TFA	TFL	NFA	NFA-USD
QNB	32	24	8	$2
QIB	9	28	-19	-$5
CBQ	10	14	-4	-$1
MAR	3	7	-4	-$1
DOHA	10	9	1	$0
BAR	5	2	4	$1
QIIB	1	5	-4	-$1
TOTAL	71	89	-18	-$5

1. NFA exposure to Other GCC is QAR 18 billion (USD 4.9 billion). But note that not all banks have negative NFA positions. 
2. As argued more than once in earlier posts, it’s more proper to look only at those banks with negative NFA positions.  In that case, the exposure is QAR 31 billion or USD 8.5 billion.  Still manageable. 
3. The total TFL to Other GCC (some QAR 89 billion equivalent to USD 24.5 billion) is only 19% of the QAR 478 billion in TFL. 
4. The GOQ shouldn’t have a problem providing either of these amounts and by some reports has already transferred this amount to Qatari banks. 
5. The above is based on a sample of 7 banks because the remaining banks—AlAhli, AlKhaliji, IBQ and DBQ—don’t provide the sufficient information to include them. While we are missing detailed data for four banks, it’s unlikely that their positions will dramatically change these amounts. 
6. AlKhaliji has disclosed subsidiaries with gross assets of QAR 8.9 billion (USD 2.4 billion) primarily AlKhaliji France (AKF) which appears to operate primarily through its branches in the UAE. On the asset side AlKhaliji reports some QAR 9.9 billion in assets with OGCC.  We don’t know the total FL to OGCC. AlKhaliji shows FX assets of some QAR 3.5 billion and FX liabilities of QAR 3.3 billion in its currency risk note. 
7. AlAhli and IBQ do not appear to have foreign branches or operating subsidiaries overseas. IBQ reports some QAR 1.4 billion in OGCC FA and a negative net FX position of QAR 4.4 billion in AED in the banking book so a quesstimate of their FL position vis-à-vis the OGCC is some QAR 5.8 billion.  That assumes no significant non AED funding from the OGCC. 
8. AlAhli reports some QAR 1.1 billion in FA with OGCC.  It does not report any significant FX position in AED.  Again assuming no significant non AED funding from OGCC a good guesstimate is that OGCC FL are QAR 1.4 billion.   
9. Qatar Development Bank, the missing fourth bank, doesn’t release financials but from the QCB data we can see that it is funded primarily with equity and has a positive NFA of some USD 84 million equivalent.
10. If we adjust the base worst case scenario for the above QAR 17.1 billion in estimated FL in the worst case increases by USD 4.7 billion equivalent to USD 29.2 billion.  Reasonable increases in the QAR 17.1 billion amount (say in the range of 2 -4) would still leave the base worst case at a comfortable level. 
11. Other GCC includes Kuwait and Oman. These states may be less “enthusiastic” about withdrawing their funding from Qatar.  That being said, Oman and Kuwait are unlikely to have as large positions with Qatar as the GCC 3. 
12. What this means is that for the GCC 3+1’s efforts to be successful they will need to persuade other foreign creditors and depositors to withdraw funds from Qatar.  That seems a difficult row to hoe. 

But there are some strains on the individual bank level.   For example, QIB has OGCC-related TFL (QAR 28 billion) greater than QNB (QAR 24 billion) a bank which is roughly 5 times its size. 

Qatar Banks NFA 31 Dec 16
Other GCC FA & FL to TFA & TFL
BANKS	GFA/TFA	GFL/TFL
QNB	12%	7%
QIB	38%	76%
CBQ	23%	27%
MAR	20%	52%
DOHA	94%	95%
BAR	49%	32%
QIIB	36%	71%
TOTAL	18%	18%

1. Looking solely at foreign assets and foreign funding, four banks have ratios that cause concern:  QIB, QIIB, MAR, and Doha, though on an absolute basis the GOQ could easily provide replacement funding.
2. Note the potential exposure of QIB, Doha, Barwa and QIIB to asset concentrations in Other GCC states.  If the boycott continues, this business may be “lost”.  If the GCC 3 takes steps to restrict these banks’ access to their assets in these countries, including the proceeds of the realization of those assets, by way of additional boycott steps, then much larger but still manageable GOQ support would be required. 
3. QNB on the other hand is relatively well positioned. 

But this chart measures OGCC FA and FL in terms of total FA and FL.  That tells us how important OGCC business is to their foreign activities.  But what about the importance to their total business both foreign and domestic?

Qatar Banks NFA Position 31 Dec 16
Other GCC FA and FL to TA & TL
BANKS	TA	TL	OGCC/TA	OGCC/TL
QNB	720	621	4%	4%
QIB	140	120	7%	24%
CBQ	130	130	8%	11%
MAR	92	79	4%	9%
DOHA	90	77	11%	11%
BAR	46	39	12%	4%
QIIB	43	36	2%	12%
TOTAL	1,260	1,102	6%	8%

1. QIB again “sticks” out.  Looking at details in their FYE 2016 annual report, their liability concentration in Other GCC is driven by customer deposits.  80% of QIB’s QAR 28 billion in Other GCC liabilities is from “equity of unrestricted account holders”.  There isn’t a breakdown by maturity of QIB’s TFL.  If we assume these track its other customer deposits of this nature, we can use the maturity note on page 39 of their FYE 2016 report.  According to that note, some 70% of EUAH mature within 3 months with an additional 14% between 3 and 6 months.  Assuming these maturity patterns have carried forward, then QIB could be facing some serious withdrawals. 

At this point I’ve thrown a lot of data at you.  It’s time to organize that data into key takeaways and to provide some scenario analysis of the exposure of Qatari banks to foreign liabilities and as well of the exposure of Qatar’s Central Bank to that exposure if the banks are incapable of dealing with it themselves.   That will be the topic of a future post.