And Now for Something Completely Different - The Financial Times

 

AA at His Rona Rig
Sufficiently Socially Distant so no Mask Required

If you’re one of the select (few) readers of this blog, what you usually find here are posts that focus on the negative. 

Misrepresentation of financial statements, questionable business strategies, other frauds and fakes, financial and economic fairy tales and the like.

That certainly is a “field” offering multiple opportunities to comment.

As the picture above indicates, today it is time for something completely different.

Some kudos to The Financial Times and the no doubt underpaid journalists who work there.

A bit of context.

Overall journalism ain’t what it used to be. 

And since it was never perfect, that’s quite a disappointing development.

Some basic “have to’s” are often missing. 

A breathless review of an exhibition that omits what in the past would have been basic facts: where, when, cost 

Other sloppiness that misses the "meat" of the story.

More seriously is the substitution of mindless partisanship for reporting. The intrusion of the editorial page into the news columns.

The FT is welcome respite from these two frequent lapses.

Some examples to make the case: NMC UAE, Wirecard, H20.

First, there is the uncovering of the basic story. 

Second the pursuit of the story despite pressure. 

Dan McCrum’s experience on the Wirecard story is instructive – working from a windowless office at FT central on an air-gapped PC. 

It is not the only case – NMC is another -- where external pressures were ignored.

Third rigorous smart in-depth analysis.

The report doesn’t stop at the surface of the story but goes into detail. 

It seems that often the chips are allowed to fall where they should. 

Did a “hero” in the Wirecard case have a less “heroic” role in related case in Mauritius? Dan McCrum and Olaf Storbeck report it.

Or BondHack and Cynthia O’Murchu digging through filings at EMCR and discovering that NMC had pledged assets (future credit card A/R). 

Something apparently unknown to folks who might be presumed to have a more serious interest in this disclosure.

“Folks” like equity investors or providers of funds -- other than ADCB.

Fourth, a global network that allows input from journalists around the globe to round out the story with local insights. 

Simeon Kerr weighing in on Wirecard from the UAE.

Is the FT perfect?

No, but it’s very good.

Disclosures:

1. No shareholding in companies related to FT.
2. No compensation for this article.

Adieu Caracalla

Ami, entends-tu le vol noir des corbeaux sur nos plaines?

Ami, entends-tu les cris sourds du pays qu'on enchaîne?

Ohé, partisans, ouvriers et paysans, c'est l'alarme.

Ce soir l'ennemi connaîtra le prix du sang et les larmes.

 

Creditor on Creditor Violence

Annual Leveraged Loan Investors Conference

Over the millennia our ancestors have passed down important life lessons to us in the forms of proverbs and other sayings.

Sometimes the author’s name is known. Most often not.

“Measure twice cut once”. Or in one country measure seven times before cutting.

“Don’t run with scissors” (ascribed, I believe, to Plato by Aristotle).

“Tie your camel first, then trust in God. (اعقلها وتوكّل)” ascribed to the Prophet Muhammad (SAWS) by Anas Ibn Malik via Al-Tirmidhi. (2517)

A recent article by Alicia McElhaney in Institutional Investor under the above title reminded me these and other similar sayings.

She describes how some members of leveraged loan syndicates are suing other syndicate members charging that when the obligor became distressed those lenders converted their “old” loans (those under the syndicate agreement) to “new” loans (outside the syndicate). 

In the process making the old loans subordinate to the new ones.

What those lenders did was take advantage of apparent deficiencies in the loan agreements.

AA finds it hard to have much sympathy for lenders stupid enough to sign syndicated loan agreements with inadequate protective covenants.

In the case at hand failing to insist that the loan agreement contain what were once standard covenants requiring:

1. 100% lender agreement to allow material changes to the loan conditions (rate, repayment, maturity, collateral)
2. pro-rata sharing of any repayments received by one or more syndicate member among all syndicate creditors 
3. limitations on market purchases of debt, along with a careful definition of what constitutes a “market purchase” etc.

While not the case here, this failure to “tie one’s camel” is similar to covenant lite loans that impose no real controls on the borrower. That is, no real triggers for creditors to call a default and accelerate the loan.

Both are “sins” in every kind of loan.

But more so for much riskier leveraged loans.

This asset class is supposedly where sophisticated investors—those able to analyze and bear the risks--”play”.

One might forgive a retail investor on the Robin Hood platform a “wise” investment in Tesla as a rookie mistake.

But “sophisticated” institutional investors with access to high-priced “elite strike force” legal teams?

I think not.

This is yet another cautionary tale--like that of Golden Belt Sukuk, Bernie Madoff, Abraaj, Wirecard, etc--for those who cling to unfounded myths about the innate wisdom of markets.

Kamkars - Rubayyat // کامکاران // رباعيات عمر الخيام

 

GFH Bahrain - Less to 3Q2020 Reported Income than Meets the Eye

For the first nine months of 2020, GFH reported net income of roughly USD 30.3 million down roughly 50% from the comparable period last year.

That’s not surprising. COVID-19 is casting a pall over many firms’ financial results.

But, neither is the full story.

That’s why one has to read the entire financial report and not just the Income Statement.

By my calculation the true economic performance of GFH over the period was a loss of roughly USD 66 million.PPA “swing” of some USD 96 million from the reported number!

Where does AA’s performance number come from?

The Consolidated Statement of Changes in Owners’ Equity page 4 in GFH’s Third Quarter 2020 interim financials.

The Retained Earnings column is the appropriate locus of focus for our attention.

Why?

Because it’s where economic gains and losses that are not required to be included in the Income Statement appear.

Despite their being excluded from the Income Statement, they are as real a loss as the charges that appear in the Income Statement. And, at times, gains are recorded here that are not included in the Income Statement.

To be very clear there is nothing inherently wrong with these entries.

Equally at times company management may use the discretion allowed under accounting principles to shift a “loss” from the Income Statement to the Statement of Changes in Shareholders’ Equity in order to present a “better” picture of performance.

Motives might be the desire to pay dividends, particularly for a regulated firm like a bank. Management bonus. Share price.

That’s why looking a comprehensive income or loss over a period is a better measure of the firm’s performance. 

Let’s review the pertinent charges to Retained Earnings.

There are three significant “losses” disclosed here.

First up is a USD 59.9 million charge arising from GFH’s underwriting of the entire BD 72 million (equivalent to USD 191 million) AT1 capital increase at Khaleeji Commercial bank. Note 1 on page 9 contains a detailed explanation if you’re interested.  GFH's carrying value of equity in KHCB is based on its share in the net assets of KHCB.  Not the purchase price.     

Next USD 13.9 million arising from “modification of terms” of financiing GFH has provided. That is, an easement of repayment terms on the debtor which decreases the amount GFH will ultimately receive (assuming the debtor pays) and thus the value of the related asset. Think of this as the recognition of a likely loss on the related financing.

Following that USD 22 million which represents the difference between the cost of Treasury Shares GFH sold (USD 108.7 million) and the amount it received (USD 86.7 million).

I’ve heard of “buy low sell high”, but not the opposite. Perhaps, an alternative investment strategy?

These transactions result from what GFH calls “market making” and AA calls a failed attempt to prop up its share price.

Not much evidence of a positive prop for the price of GFH’s shares. They began the year at USD 0.23 per share and were at USD 16.0 as of end of 3Q. As of 16 November trading at USD 14.9.

Of course, COVID has depressed markets.

But a look at previous posts analyzing this activity over several years suggest that GFH shareholders receive scant benefit from these “market making” activities.  

You'll find these using the search tool on the right hand side of the page and the words "treasury shares".

As noted above, if we adjust GFH’s reported Net Income for these three items, GFH had an economic loss for the period of some USD 66 million.

Happy 16th! (Throwback Thursday -- A Couple of Days Late)

 

Only 133 miles from the "world capital" of honeymoons, according to the "sunna" of of my elders.  Oder nur meiner Eltern?

And then onwards East.

Vor 16 Jahren eine h. B. 

Heute Mutter von drei Kindern. 

Vier, wenn Du deine Ehemann zählst. 

Und immer noch eine sehr h. B.

ذكرى ناظم الغزالي

Amália e Ana - Fado

"  دواء الدهر الصبر عليه "

 

The Even More Curious Case of Bahrain Middle East Bank - Who Owns the Bank?

Another curiosity regarding BMB.

According to the information at the Bahrain Bourse, BMB has two major shareholders:

1. AN Investment WLL Bahrain (ANI) holding some 80.77%
2. Al Fawares Construction and Development Kuwait (ALF) holding some 14.48%

According to the online commercial register of Bahrain’s Ministry of Commerce, Industry and Tourism (www.sijilat.bh), BMB is owned 100% by a “group of shareholders” who are all Bahraini.

You can look this up at Sijilat using BMB’s CR 12266-1.

Even more curious, according to Sijilat, ANI (CR 86835-1) was struck from the Commercial Register with the notation “deleted by law” on 15 September 2019. That is, by AA’s reckoning over one year ago.  

So here is the conundrum. 

1. Assuming that the MOICT information is correct and that ALF has not acquired “Bahraini corporate citizenship” which Bahraini entity or Bahraini individuals own the shares previously owned by ALF?
2. Assuming that the Bahrain Bourse information is correct, how can AN Investments WLL be a shareholder in BMB, if it no longer has a valid commercial registry? If ANI is no longer the shareholder, then who or which Bahraini entity holds the 80.77% of BMB’s shares previously owned by it?
3. Given that over one year has passed since ANI’s forced de-registration, it would seem there would be sufficient time for the MOICT and Bahrain Bourse to agree and “conform” their data.
4. Beyond that, surely BMB itself has an obligation to advise the Central Bank of Bahrain and the Bahrain Bourse of changes in its shareholding.

Is this a failure of communication? 

Or something else?  For example, a change in ownership due to a legal proceeding?

Dana Gas - Mashreq Bank Rides to the Rescue Sukuk to be Repaid

 

An Essay on Criticism Seems a Valid Citation

Dana Gas announced on 15 October that it had secured a USD 90 million loan from the UAE's Mashreq Bank priced at Libor plus 3 percent. 

The loan matures in one year, but is extendable at DG's option for another four years.

As per the press release, the loan "will be repaid" when DG's Egyptian assets are sold.

Some thoughts.

First, the 3% margin is described as "initial".  That certainly sounds like it is subject to change.  AA for one would expect that as the loan is extended the margin is increased. 

Second, DG's Chairman asserted that this loan is a testament to DG's "financial and operational strength".  

That is a bit of a howler.

It reminds me of the repeated assertions of Damas' "proven business model" made some years back by the Abdullah Brothers.

DG is borrowing one year money at a 3% margin.

That is a rather large spread.

And more likely evidence of financial and operational weakness than strength.

In any case the long ordeal of the Sukuk holders is over.

Perhaps one man's gain will be another man's loss?

 

Karl Richter 15. Oktober 1926 - 15. Februar 1981

Meister - Dirigent, Chorleiter, Organist und Cembalist.

BMB Wins Judgment in BCDR: Financial Impact, if any, Likely to be Negligible

A First Step May be Important Even if It is Small

11 October BMB announced that the Bahrain Chamber for Dispute Resolution (BCDR) had ruled in its favor in a case the Bank brought against 3 of its former executive officers. English version of press release here. 

The BCDR ordered the three unnamed defendants to pay BMB USD 13,198,309 plus BHD 100 for attorney’s fees.

As per the October press release, BMB initially brought the case in 2014 but suspended it while Bahraini authorities pursued a criminal case which resulted in a November 2018 judgment of prison terms of 3 years for the defendants.

From the original date of the case, we know this case related to the 2013 scandal previously discussed here.

Recall that BMB has another BCDR case relating to its 2018-2019 scandal discussed here (suit) and here (scandal). Interestingly, in this latter case the Bank indirectly confirmed the defendants’ names by confirming the accuracy of an AlAyyam press report.

As to this case (2013 scandal), we don’t have the names of the defendants However, in early discussion of the 2013 scandal, the Bank said that it had fired the then CEO, CFO, and other senior officers. 

From a July press release dated 20 July but published on the Bahrain Bourse 21 July we know that the Bank originally filed suit at the BCDR against seven individuals including some of its former officers. The fate of the remaining four is unknown.

How do we know this? Or think that we do?

Because the October press release cited above references a 20 July 2020 disclosure.

Note that BMB also issued a press release dated 20 July published that day regarding BCDR case related to the 2018-2019 scandal.

As noted by the Bank, none of the 2013 scandal defendants currently lives in Bahrain and that uncertainly relating to enforcement of this judgment by a foreign court means the Bank is unable to estimate the ultimate financial effect.

Three comments.

First, given the “hole” that BMB is in, 100% collection is not going to materially change the Bank’s dire position. Nor would 100% of the other case. Together both total roughly 10% of BMB’s negative equity. 

But the directors are to be commended for pursuing this action. Rather then let it languish as the earlier board appears to have because every dollar does count and fraud cases need to be pursued with vigour. 

One--well at least AA--might wonder if there were reasons why some directors would have preferred to let sleeping dogs lie. 

Second, the defendants have had ample time to arrange their financial affairs to limit the Bank’s ability to collect even if a foreign court enforces the BCDR judgment.

Third, also unless the defendants were guests of the Bahrain state during the criminal proceeding with “time served” counted against their three year sentences, it’s likely they did not serve any time.

Remembrance of Rama IX - 4 Years Later It Appears that Much Has Sadly Been Forgotten

15 October 2016 / 15 ตุลาคม พ.ศ. 2559  

Crowds gather at the Royal Palace to sign the condolences book for รัชกาลที่ 9.

5 November 2016 /  5 พฤศจิกายน 2559  Silom Avenue Bangkok

An important message on the sign:  "ทำดีเพื่อพ่อ" 

"Do Good for Father" in the sense of do good things to honor father.  

Rama IX was called "father" for all he did for Thais and Thailand.

13 October 2020 / 13 ตุลาคม 2563

In four short years it appears that many Thais have forgotten over 70 and one half years of his service to the people and country of Thailand.

Some still remember พระบาทสมเด็จพระบรมชนกาธิเบศร มหาภูมิพลอดุลยเดชมหาราช บรมนาถบพิตร

Pictures and text from AA's elder and wiser brother, expert in many things Asian.   

محمد رضا شجريان

 

 روز و شب خوابم نمیآید به چشم غم  پرست

Dana Gas - Restructuring of Nile Delta Sukuk on the Horizon

DG's Board - Ready to Continue the Show

Full repayment of DG’s sukuk is contractually due on 31 October.

As outlined below, barring a miracle, another rescheduling is “on the cards”, continuing the second longest running "play" without a real plot.

According to DG’s 1H2020 financials (note 16), DG has reduced the principal of the sukuk USD 70.7 million to USD 309 million via buybacks that took place after 30 June. 

Its reported cash balance as of 30 June 2020 was some USD 366 million.

However, USD 58 million of that amount represents DG’s 35% share of Pearl Petroleum’s cash, meaning that amount is (a) in PPL’s account not DG’s and thus (b) not immediately available to DG. (Note 13). The “miracle” of consolidated financial statements.

On that basis DG’s 1H2020 cash is really USD 308 million. Of which it used an amount to fund the Sukuk buybacks.

How much?

On page 5 of its 1H2020 Investor Presentation (IP), DG says that the buybacks will result in “overall cost savings in profit and repayments at maturity of USD 10 million.” 

The “profit” rate on the Sukuk is 4% per annum paid quarterly (January, April, July, and October).

Let’s assume half a year of interest on USD 70 million or some USD 0.7 million.

That would mean that most of the remaining savings was discount on principal.

So very roughly a 14% discount on principal USD 70 million “retired” at the cost of USD 60 million.

Investors in the Sukuk probably rightly considered the discount a small price to pay to exit given the likelihood of another restructuring and the company’s continuing weak financial position and performance.

That likely leaves DG with a cash balance accounts lower than the principal balance of the Sukuk. If it has been lucky with cash inflows cash outflows, perhaps the amount is equal to the Sukuk.

In any case the amounts are so on the edge that it is unlikely—barring a miracle—that DG will have sufficient cash to both repay the Sukuk and maintain a minimum operating balance.

Other than the sale of its Egyptian Assets—whose value DG was trashing not so long ago—DG doesn’t seems to have have a lot of options to a rescheduling.

Perhaps the remaining Sukuk investors will take comfort in this statement from DG’s IP:

“Any proceeds from Egypt will go to paying this down. In case we don’t sell Egypt, we are considering various options”

AA will leave it to you to contemplate whether the options will be religious or financial. Or perhaps some combination of both. 

As an indication of where things are likely to be headed, DG has engaged the good folks at Houlihan Lokey to provide financial advice on the Sukuk.

If you don’t know, HL has quite a reputation in debt restructurings. Less so in “miracles”.

Turning to financial performance or perhaps more accurately financial “results”, DG had a loss of USD 19 million for the first six months of 2020 versus a USD 140 million profit for the corresponding period last year. 

As allowed by the Sukuk, DG paid a cash dividend of some USD 104 million in April. Money that might come in handy right about now.

In addition to their firm religious convictions, DG’s board is known for its financial prudence and acumen.

Despite those negative comments, DG apparently actually had a good half year as per their Chairman. 

The Company has demonstrated a strong and resilient financial and operational performance in the first half of 2020.We generated an operational net profit (before impairments) of $18m, which demonstrates our ability to operate successfully in low-cost environments.

I’m sure you agree that Elon Musk couldn’t have put it any better. Sadly, DG has no tax credits to sell to “manufacture” a positive bottom line.

As to the ever promising (but not necessarily delivering) future, things are apparently equally rosy.

We remain focused on strengthening our balance sheet to better position the Company for the future and we plan to press ahead with certain strategic actions regarding our asset and Sukuk which will benefit all our stakeholders alike.

DG’s shares are down some 25% over the past 12 months.

This could be the opportunity of a lifetime, but it probably isn’t.

QiXi Festival for My One and Only

 

AA's elder and wiser brother, expert in many things Asian, has advised that tomorrow 25 August is Double 7.

And so the fondest wishes for my own Zhinu.

Für die sogenannte "Cecily"     ....   "Ernst"

HK CHATS USD, RMB, and Euro RTGS Funds Transfer Activity

 As a general rule, a country has a clearing system (payment system) or systems for its national currency only. That’s because payments are generally settled through accounts at the central bank or equivalent for each currency. 

In most countries there usually are separate systems dedicated to specific purposes—large value payments, small repetitive payments (whose delivery may not be as time-sensitive), check clearing, etc. 

As an example, the USA has FedWire for large domestic payments, CHIPS primarily for cross-border payments, ACH for small repetitive payments, and one Fed and one private check clearing system.

If you’re interested in a country’s payment systems, you can refer to the BIS CPMI’s Redbook which has details on the payment and settlement systems, e.g., securities of its 27 member countries. 

It also publishes data on volume and value of transactions in its member countries available through BIS Statistics. But note this information comes with a 1 year lag. Preliminary data for Year X is released in December Year X+1 with final figures released generally during 1Q Year X+2.

HK has four such system under CHATS (Clearing House Automated Transfer System):  

1. HKD (launched 1996)
2. USD (launched August 2000)
3. Euro (April 2003) and 
4. RMB (June 2007).

The rationale for the USD and Euro systems was to enable banks in HK and Asia to settle transactions among themselves during their (local) business hours.

The RMB service was set up to facilitate the volume of transactions between the HKSAR and Mainland China and later to facilitate cross-border RMB payments because the Mainland’s national payment system (CNAPS) (AKA “HVPS” in the BIS CPMI reports) only accepts Chinese characters. That makes it difficult for foreign banks' payments to be processed because they must first be translated into Chinese.

Each of HK’s four RTGS systems have a settlement institution (SI):

1. HKD – Hong Kong Monetary Authority
2. USD - Hong Kong Shanghai Bank HK
3. Euro - Standard Chartered Bank HK 
4. RMB – Bank of China HK

Each of three banks listed is a HK incorporated subsidiary of their parent. They also act as the issuers of HKD currency notes.

Similar to other systems—CHIPS or CIPS—there are two classes of participants/members for CHATS HKD, USD, and Euros. RMB is handled differently as will be discussed.

1. Direct Participants (DP) that hold accounts with the SI and are the only institutions that can input payment orders directly into the system and that receive credits from the system. 
2. Indirect Participants (IDPs) work through a DP with whom they have a correspondent account which the DP debits or credits. They do not have accounts with the SIs.

Hong Kong Interbank Clearing Limited (HKICL) runs the computer infrastructure for each system. It does not make payments. It performs the processing of information on payments and sends that information to the SI’s who then debit or credit the DP’s accounts on their books.

If the DPs are acting on behalf of IDPs, they in turn debit or credit the correspondent accounts they hold for the IDPs for transactions in CHATS.

All communications between the DPs, HKICL, and the SIs are transmitted via SWIFT as is currently the case with CIPS.

Banks outside of HK participate in CHATS HKD, USD, and Euro systems but as IDPs, subject to approval of the relevant SI and HKMA, except of course for HKD where the HKMA is the SI.

Banks outside of HK may participate directly in CHATS RMB by opening an account with the SI, BoC HK, subject to approval by the SI and the HKMA. Note that difference.

You can find a list of participants for each system here.

Or a master list here for all four currencies sorted by membership status and country. This is quite useful as it shows the status of an individual bank’s participation in each of the four currency CHATS as well as breaking out banks by country.

There are also other lists for HKICL's cross border services with the Mainland here.

Now to the volume statistics.

I’ve prepared two charts.

1. One for the USD and RMB.
2. And a second for Euros. 

The second chart is necessary because the Euro volume is a fraction of the other two currencies.

Note the charts start in 2007 the year CHATS RMB began service.

OECD Statistics were used for conversion of RMB and Euro clearing into USD equivalents. 

Source of the actual clearing data is the HKMA's Table T031201 from its Monthly Statistical Bulletin. 

If you’re interested in value of transactions from the year “dot”, you can refer to T031201.

One further word of introduction.  Well OK, more than one word.  But that's what you'd expect from AA.

Typically, there are two types of payments reflected in such statistics:

1. Interbank Transactions – Settlement of FX and deposit placement transactions
2. Customer Transactions – Commercial and personal payments

Generally interbank transactions are the much larger amount. 

That’s almost certainly the case here.

Why?

CLS International Bank which is the primary global service for netting FX transactions do not currently handle transactions denominated in RMB. As per the HK CHATS participants list, CLSIB only appears to for HKD CHATS. It does not appear as a member of the other CHATS currency clearing arrangements.

If you’re wondering why netting FX transactions and thus netting FX settlement risk is a “big deal”, take a look at this article on Herrstatt Bank which brought this risk to the fore with a “crash”.

As is clear from the above, RMB payments dwarf those in the USD.

For the first four years after RMB CHATS was founded its volumes compared to USD CHATS were small.  So small they don't show up in the chart above.

The USD equivalent of RMB payments was USD 5 billion, USD 22 billion, USD 14 billion, and USD 138 billion respectively during those years.

In 2012 and 2015 RMB CHATS service extended its operating hours and cutoff times to accommodate those Clearing Members not in Hong Kong.

Of note is the fact that of the 209 RMB Clearing Members 65 are banks outside of HK, mostly--but not all--branches of PRC banks.

RMB CHATS also handles RMB check clearing and some securities settlement services. 

As for USD CHATS, yearly volumes seemed to have reached a plateau at about USD 10 trillion. Compare that to the USD 1.5+ trillion processed by NY CHIPS each business day to get a sense of the relative HK CHATS position in global USD clearing.

Another important point to note: USD clearing transactions in HK take place on the books of HKSB Hong Kong. A USD CHATS participant can use those funds to make a payment in USD CHATS. 

However, if it wants to use its USD funds for a payment to a bank in Europe or the USA, it’s very likely that that payment would transmit NYC via CHIPS.

One other interesting factoid is that USD denominated credit card transactions for (China) Union Pay International transit USD CHATS.

As mentioned above, Euro CHATS are not included in the above chart because the volumes are relatively small and really wouldn’t show up.  

So here's a separate chart.

In 2007 the USD equivalent of Euro clearing was some USD 383 billion. Since then volumes have decreased to around USD 100 billion. 

Part of the explanation is the number of participants as the chart below shows. 

HK CHATS PARTICIPANTS
	HKD	USD	RMB	EUROS
DIRECT	161	111	209	37
INDIRECT	NA	86	NA	17
TOTAL	161	197	209	54

There just doesn’t seem to be much interest in Euros among HK and other Asian banks.

Clearly, there is strong interest from around the world in CHATS RMB clearing with 209 Clearing Members (DPs), 65 of which are banks outside of HK. That strong interest is reflected in the annual clearing volumes of RMB through HK which currently dwarf those handled by CIPS. 

Earlier post on CIPS here..