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Monday, 18 January 2010

Kuwait's NBK plans to raise capital by 10 pct

National Bank of Kuwait (NBK) (NBKK.KW: Quote, Profile, Research), the country's biggest lender, said it planned to raise its capital by 10 percent through a rights issue by the end of the year to fund expansion.

"NBK's move is intended to support the bank's strategic expansion plans which succeeded lately in acquiring 40 percent of Boubyan Bank," the lender said in statement released on Monday.

The bank said it would hold a rights issue, at a price of 500 fils per share including premium. There are 1,000 fils to the dinar.

Govt to revive plans to sell 30% stake in Omantel?: CommsUpdate : TeleGeography Research

The government of Oman may revive its plan to sell a 30% stake in the country’s incumbent telecoms operator Oman Telecommunications Company (Omantel) this year, Reuters reports, citing the minister of national economy. ‘We are waiting for the global market to recover so we can start looking for a strategic investor again for Omantel,’ economy minister Ahmed Mekki revealed, adding, ‘It may happen this year provided it is favourable to us.’ According to TeleGeography’s GlobalComms Database, Omantel is 70%-owned by the state, with the remaining 30% held by private investors. In July 2008 the government announced plans to sell a 25% stake in Omantel, aimed at boosting the firm's competitive position. The Ministry of Finance (MoF) invited expressions of interest from strategic investors, and was advised on the process by Citigroup Global Markets and National Bank of Oman. In mid-October 2008 it was confirmed that eight parties had been selected to participate in the second phase of the sale process, with Saudi Telecom Company (STC), Kuwaiti giant Zain, Indian operator Bharti Airtel and UAE's Etisalat all reported as potential bidders. However, in late December 2008 the government cancelled the sale, blaming 'unprecedented market volatility and economic conditions.'

Dubai World Likely to Offer ‘Sweeteners’ to Creditors, UBS Says

Dubai World, the state-owned company seeking to renegotiate about $22 billion of debt, is more likely to offer improved terms to creditors than risk the possibility of legal claims, UBS AG said.

“There is a higher probability of Dubai World offering sweeteners to creditors, perhaps higher interest rates or equity swap options, for a terming-out of obligations in lieu of creditors waiving legal claims to key Dubai World assets including DP World,” UBS AG analysts said in a report today.

Dubai World, one of Dubai’s three main state-owned business groups, said on Nov. 25 that it would seek to delay repaying debt for at least six months, roiling markets in the Middle East and around the world. The company plans to meet with creditor banks this week to complete a standstill agreement, a banker participating in the talks said on Jan. 14.

Dubai ring-fences construction funding

Dubai Municipality said on Monday it has earmarked 2.5 billion dirhams ($681 million) from its 2010 budget for the completion of construction projects amid growing concern over the emirate’s finances.

The municipality said the ring-fenced funding “reiterates Dubai Government's support for the completion of infrastructure projects”.

The municipality said it has approved a budget of 4.39 billion dirhams for the current year and expects to post a surplus of up to 472 million dirhams.

Dubai Index Ends Losing Streak as Shares Reach Five-Week Low

Dubai’s index ended the longest losing streak since March as investors stepped in to buy shares after six days of losses left stocks at a five-week low.

Emaar Properties PJSC, the United Arab Emirates’ biggest developer, gained the most in more than two weeks. Arabtec Holding Co., the U.A.E.’s biggest construction company, jumped the most in more than a week. The DFM General Index advanced 1.5 percent to 1,698.86 at 12:50 p.m. in Dubai. Qatar’s DSM 20 Index rose 0.8 percent.

“We are seeing some bargain-hunters picking up certain names,” said Julian Bruce, director of equity sales at EFG- Hermes Holding SAE, the biggest publicly traded Arab investment bank. Gains may be short-lived, he said, as “everybody is still cautious ahead of full-year numbers, so it’s unreasonable to expect a stampede of buyers at this stage.”

Dubai's $10B Bailout From Abu Dhabi Shrinks

The $10 billion pledged to Dubai by Abu Dhabi last month included $5 billion perviously pumped into the debt-laden emirate by Al Hilal Bank and National Bank of Abu Dhabi (NBAD.AD), a spokeswoman for Dubai government said.

The new breakdown of funding contradicts previous statements issued by Dubai government, which is struggling to deal with more than $80 billion of total debts, on the terms of the financial support from oil-rich neighbor Abu Dhabi.

"This sends mixed signals about how much the government knows," said Anshuman Jaswal, analyst with Celent, a Boston-based consultancy firm owned by Oliver Wyman. "This isn't a healthy situation, to have uncertainty at this point. Investors won't see the situation in a positive light. If you have invested funds in Dubai you'd be slightly worried that the government doesn't have a plan."

Dubai said in November that Al Hilal Bank and National Bank of Abu Dhabi would subscribe to a $5 billion bond from Dubai's government, easing concerns that the emirate may default.

This was followed on Dec. 14 by a statement from Dubai government, which said the "Government of Abu Dhabi has agreed to fund $10 billion to the Dubai Financial Support Fund that will be used to satisfy a series of upcoming obligations on Dubai World."

The Dec. 14 statement went on to say that $4.1 billion would be used immediately to pay sukuk, or Islamic bond, obligations and that the remaining funds would be used to provide Dubai World with "interest expenses and company working capital through April 30, 2010."

On Dec. 16, U.A.E. Foreign Minister Abdullah bin Zayed al-Nahyan told Jordan's news agency Petra on the sidelines of a Gulf Cooperation Council summit that Dubai would have to pay back the money supplied to it by Abu Dhabi.

The Dubai spokeswoman, who declined to be identified because of government policy, told Zawya Dow Jones Monday that $4.9 billion of the total Abu Dhabi funding announced in December remained in place.

Dubai World is trying to agree a standstill on $22 billion of debt with creditors including HSBC Holding PLC (HBC), Royal Bank of Scotland Group PLC (RBS.LN) and Lloyds Banking Group PLC (LLOY.LN).

Philippe Dauba-Pantanacce, senior economist at Standard Chartered PLC said the "consensus of analysts was that the total amount of Abu Dhabi's 2009 Dubai bailout was $25 billion, not $20 billion."

In February last year, Dubai announced a $20 billion bond program. The country's central bank subscribed to half of the package. The funds were used to support the government's direct debt obligations, including fully and partly-owned government companies.

"The lesson from the crisis is that there's a margin of progression when Dubai government clears up a message or presents a plan," said Dauba-Pantanacce.END

Chinese hunt for bargains in Dubai

Chinese investors, who have trawled the world for distressed car brands and cheap commodity assets since the beginning of the global financial crisis, will now take a shopping trip to Dubai to look for property bargains.

Investors from Wenzhou, known for their global bargain-hunting for distressed property assets, have been lured to Dubai by prices that look cheap by comparison with the rapidly rising Chinese property market.

A trip to the UK in the second half of the year may also be on the cards for the merchants of Wenzhou, famed as a city of millionaire entrepreneurs.

‘VIP investor’ sues Damac

A German investor is suing Damac Properties for alleged breach of contract in what could be the largest lawsuit taken by an individual against a Dubai developer.

Lothar Hardt has filed his case against one of the region’s biggest developers and four of its executives at the Dubai International Financial Centre Courts.

Mr Hardt claims to have invested US$9.7 million (Dh35.6m) across five of Damac’s developments in Dubai, including one building on land he says is owned by the UN.

Banks’ role in $10bn funds made clear

The US$10 billion (Dh36.73bn) in financial assistance to Dubai announced last month by Abu Dhabi includes $5bn committed in November by two Abu Dhabi-controlled banks, Dubai said yesterday.

Dubai announced in mid-December that Abu Dhabi would lend it $10bn to help prevent cash-strapped companies controlled by the Dubai Government, notably Dubai World, stay afloat after the financial crisis impacted their ability to keep up with debts accumulated during the property boom.

Until now, it had been unclear as to whether the $10bn, which Abu Dhabi will use to buy Dubai bonds, represented an entirely new commitment or whether it included $5bn in bond purchases announced on November 25 by two banks controlled by Abu Dhabi – Al Hilal Bank and the National Bank of Abu Dhabi (NBAD). They have already disbursed as much as $1bn of those funds.

Barwa’s Banking Unit Acquires The First Investor

Barwa Real Estate Co., Qatar’s second-largest property developer by market value, made its second acquisition this year as its banking unit gained control of The First Investor.

Barwa Bank bought the local investment firm after getting approval from the Qatar Central Bank, the company said in an e- mailed statement today. “The transaction will proceed through Barwa Bank acquiring the share capital of TFI in exchange for shares in Barwa Bank,” it said. “Both companies are currently in the process of finalizing all necessary filings in order for TFI shareholders to be issued shares in Barwa Bank.”

Qatari companies are consolidating through acquisitions and mergers after the country’s economy slowed and real-estate prices dropped last year amid the credit crisis. Other companies that may combine include Qatar Navigation, a marine freight transport company, and Qatar Shipping Co.

Capital allocation? What are you talking about, I'm here for my IPO wealth redistribution! Get out of my way!

In my previous post I wrote about the difficulties involved in for Dubai selling equity in its businesses in order to raise funds to pay down its’ debts. I have discussed already are the psychology of Dubai and the reality that the level of indebtedness may exceed the amount of money that can be raised in equity. I would still argue that the strategic sale of equity is the best way for Dubai to manage the unwind of its’ debts. In this article I will address the most serious obstacle: the structure of the Emirati capital markets.

In order to explain the equity capital raising process it might be best to give an example of how it works in America. For that, I’d like to take the reader back to 1995 and the Netscape IPO. If you are too young to remember the early days of the internet Netscape was the first commercially available web browser. By August of 1995 virtually Netscape 80% of people using the internet were using Netscape to do so, so it had the best name recognition of any internet company. At the time people did not understand the commercial implications of the internet other than to know they were huge and so a lot of money poured into the field, initially from venture capitalists. The Netscape IPO was one of the first chances for the public at large to invest in the internet. Boy, did they ever.

The way that IPOs work in the US is that the company hires an investment banking advisor who does an initial valuation and gives a range. Then the company and their advisor go on a roadshow to pitch the company to potential investors and gauge their interest. Then a book building process is held which is kind of like a slow motion auction in which the investment bank collects orders from investors for the companies’ shares. When all the bids are in and the final price is decided the bankers go through and using their discretion to allocate the shares among the various investors. Usually they try to choose investors that are not likely to sell right away and occasionally “friends of the firm.”

What made the Netscape IPO so amazing was the investor demand for the shares. Netscape gave its product away and so it had little in the way of revenues as a result it was hard to value. Investors however gave the company the benefit of the doubt and bid the shares to the moon. Netscape offered to sell up to 5 million shares or about 10% of the company at a range of between $12-$14 dollars. During the roadshow it became clear that the demand was much greater so they upped the offer price to $28 dollars valuing the company at over a billion dollars. Even at this price there were over 100 million shares bid for meaning that the offer was oversubscribed 20 times with investors bidding for $2.8 billion. On the day the company went public the shares traded as high as $75 before closing at $58 and change. A home run for anyone lucky enough to get an allocation. Because of the massive oversubscription, many investors received no allocation and all those that did receive one got only a few thousand shares. MSAM the asset management wing of the lead bookrunner got only 6,000. Tom Brokaw got 28,000. Yep, people were mad about that. This massive initial valuation for an IPO touched off the internet boom in the United States that ultimately came to grief in 2000.

Just as Netscape kicked off my career the Dana Gas IPO kicked off my Middle Eastern career. Dana Gas, a start up gas company conducted an IPO in October of 2005 in order to fund a massive expansion. The company solicited 300 “founders” (the equivalent of venture backers) who purchased 65% of the equity in the company. The remaining 35% was offered to the public. The IPO was ultimately 140 times oversubscribed in Dubai with investors submitting 288 billion AED ($78 billion) in bids. The IPO price was 1AED and the stock opened at 5.48 AED a huge increase though like the internet boom Dana Gas has also come to grief with the shares closing at .98 AED today in Dubai.

So here we have two stories of two IPOs massively oversubscribed and massively successful on their first day of trading. Both were start ups, venture backed and were the tocsins of their eras. But what is important about them are not their similarities but their differences.

The first, and most obvious, difference is scale. The Netscape IPO doubled on its debut, Dana Gas more than quintupled. The oversubscriptions are very different, Netscape 20 times and Dana Gas 140 times. To say that one was 20 time and the other 140 times doesn’t go far enough to describe the difference. Not only was the Dana Gas oversubscription massive relative to the size of the offer, it was massive relative to the size of Dubai’s entire economy. In 2005 the total GDP of Dubai was 140 billion AED, so the amount bid for the Dana Gas IPO was greater than the value of all the goods and services produced in Dubai over the course of a year!!! How can that be!?! Imagine an IPO in the US generating $25 trillion in interest!! You might be thinking, surely you’re joking. No, I’m totally serious. Clearly this merits a closer examination.

The mystery behind this is that the IPO process in the UAE is very different from the process in the US. The most obvious way in which they differ is in the allocation process. As I have mentioned in America the IPO allocations are done in a discretionary process by the bankers. In the UAE the allocations are done formulaically and in two tranches. There is a retail tranche which is open to UAE or GCC nationals only. For the Dana retail tranche 700 million shares were set aside and divided evenly among all those who applied. For Dana that was about 400,000 people so each person got 1750 shares, thus each person made about 8000 AED on day one. Because of this allocation methodology the retail tranche can’t really be oversubscribed. What really happened was that the institutional tranche was 222 times oversubscribed, more than ten times Nestscape. That’s where the magic was.

While the retail tranche allocation is divided by the number of subscribers, the institutional tranche is divided by the value of each investors bid. If I bid for $1 million worth, and you bid for $10 million worth you get ten times as much as I do. This is novel and you could argue that it makes more sense than the American way of doing it where a handful of guys decide who gets what. In the UAE if you want more, you bid for more, you get more.

The banks add an interesting wrinkle to this: they’ll lend you the money to gross up your bid. HSBC was to lever some of their clients up to 5 times. So now, you put up one million, they lend you five million, now you’re in there bidding for $6 million and you’ll get a much bigger allocation. Many clients got significantly better leverage than five to one. I think the legal limit was 12 to one and some clients got even more than that. So why would the banks do this?

Well another difference in the UAE is that you have to actually put up the money at the time you subscribe for the IPO. As you don’t find out your allocation and get your refund for 30 days you have to pay interest on your loan for those 30 days. That’s how the bank makes money. It seems like a minimal risk to the bank, they’re lending you money to buy shares which have yet to be issued. If they lever you 10 to one and the issue is 20 to one oversubscribed they never even have to take a pledge of your shares because they get all their money back and you even get back some of your deposit. In the interim, your pledged money plus their loan to you go to the company which turns around and deposits it in the receiving bank until it’s refunded after the 30 days, so the money never actually leaves the bank.

Wait a minute, did you say the money goes to the company? Yes, the company gets to earn interest for 30 days on the amount of money bid for the IPO. So in the case of Dana Gas they got to earn interest on the GDP for Dubai for 30 days. I think the total proceeds to them were something like 1 billion AED, almost as much as they raised in the IPO itself. I’m not making this up. You’re probably thinking to yourself that something is missing here. What is the weak link in the whole argument? Well, there’s a big one.

This entire system is predicated two assumptions: 1.) there will be a massive increase in the shares on day one, and thus 2.) the issue will be massively oversubscribed. Imagine for a moment that the banks levered the subscribers 5 to 1 but the issue was only covered, not oversubscribed. Now the banks have essentially made margin loans to all their clients on a 5 to one basis at the IPO price. Unless the shares trade up a lot the bank is going to have to issue margin calls the instant that trading begins. If the shares decline then the bank is in very serious trouble indeed. Despite these risks banks and investors were willing to risk the entire GDP of the country on the fact that the Dana Gas IPO would be significantly underpriced and thus significantly oversubscribed. With a risk that big you would have to assume that it was a sure thing. So is it a sure thing that the IPOs in the UAE are systematically underpriced? Yes it is.

As I mentioned earlier in this article in the US the IPO price is determined by a process called book building where investors submit bids at varying levels beginning with an indication given by the bankers. This is done to try to arrive at a level which does not leave too much on the table for the sellers and at the same time leaves upside for the buyers. Who decides what the IPO prices should be in the Emirates? The government.

What happens is that the issuer and the advisors submit a request to ESCA, the Emirati Securities and Commodities Authority and ESCA has to approve the valuation. The ESCA valuations are always on the conservative side. There are several reasons for this. One is that ESCA, like the SEC has a mandate for investor protection. If you told the SEC to decide the value of all IPOs in the US it would probably make them cheap as well. Two, a failed IPO would look bad and the UAE will spend billions to not look bad. Most importantly is a philosophical reason and that is that the authorities look at the IPO process as a form of wealth redistribution. I have had government officials throughout the Gulf tell me this in person. The theory is that if you are running a successful commercial enterprise in the Gulf you probably had significant help from the state (not an unreasonable theory.) Therefore might it not be reasonable to expect the owners to take a hit on their IPO and share their good fortune with the regular folk by low balling the IPO price? ESCA thinks so and that's what matters.

So what are the implications for this? The most important one is that if you have a valuable business you would have to have a hole in your head to sell your business this way. Sure you might recoup some of the ESCA discount through the float on the oversubscriptions but the amount of that will be correlated to the size of the discount, the ease of subscription and the level of interest rates not the value of your business. As a result most of the businesses that have done IPOs were start-ups like Dana, government companies like the DFM or companies owned and managed by people who were subject to political pressure from the powers that be in the Emirates like Arabtec. It’s hard to see this by looking the the list of shares on the DFM, you have to look instead at the fact that the most successful businesses in Dubai would never ever consider doing an IPO.

To bring this back to my original point about the equitization of the debts of Dubai something it desperately needs to do. Local IPOs pose significant risks for Dubai. ESCA is a federal regulator in the UAE and therefore is controlled by Abu Dhabi. For Dubai to begin listing its crown jewels it would be subject to Abu Dhabi for valuations which would almost certainly be lower than it would get if a true auction were held. Gosh if only there were someplace that Dubai could sell equity where it would not be subject to the ESCA approval process and instead could do a book built IPO, wouldn’t that be a great idea. Well there is such a place it’s called the DIFC and it will be the subject of my next post.END

New York court rules in favour of TIBC in Chapter 15 filing

Trowers & Hamlins, the international law firm appointed as external Administrator of The International Banking Corporation B.S.C.(c) (TIBC) by the Central Bank of Bahrain (CBB), yesterday welcomed a US Bankruptcy Court ruling in favour of TIBC that recognises the Administration of the Bahrain-based bank as a "foreign main proceeding" and grants relief in aid of the Administration under Chapter 15 of the US Bankruptcy Code . The ruling affirms an interim order for provisional relief passed by the court on December 16th 2009 and allows external Administrator Trowers & Hamlins, who are working with leading independent restructuring firm Zolfo Cooper, to proceed with its asset realisation program whilst protected from further litigation in the US.

Abdullah Mutawi, the Partner at Trowers & Hamlins who filed the motion through the external Administrator's US Counsel Holland & Knight LLP, said of the ruling, “This is extremely good news. It recognises the Bahrain based Administration and protects TIBC from further claims in the United States thereby saving the unnecessary costs of defending any further litigation. This is another positive step in our efforts to realise assets in various jurisdictions and, with the support of the creditors and the Central Bank of Bahrain, we will continue to implement our asset recovery strategy for the benefit of the creditors of TIBC.

TIBC was placed in administration by the CBB in July 2009 after defaulting on some of their obligations. The CBB then appointed Trowers & Hamlins as external Administrator on 10 August, 2009 . The wholesale bank is majority-owned by Ahmad Hamad Algosaibi & Brothers (AHAB), the Saudi family at the centre of a wider dispute with another Saudi based group of companies, Saad Group.

Bahrain opens bank under Grameen model

Family Bank, a microfinance bank licensed by the central bank of Bahrain, opened in Bahrain on Thursday, said a statement of Yunus Centre.

Nobel Laureate Prof Muhammad Yunus and Chairman of the Board of Trustees of the Royal Charities Organisation Prince Shaikh Nasser bin Hamad Al Khalifa inaugurated the bank at a ceremony at the Gulf Hotel Convention Hall in Bahrain.

The ceremony was held under the patronage of King Hamad bin Isa Al Khalifa. Minister for Social Development Dr Fatima Al Balooshi was also present.

Bahrain to launch new oil company

A Bahrain-UAE-US oil development company will be opened on Wednesday.

His Royal Highness Prince Salman bin Hamad Al Khalifa, Crown Prince and Economic Development Board chairman, will inaugurate the firm at the site of Bahrain's historic first oil well at Jebel Dukhan.

The new firm, Tatweer Development Company (Tatweer Petroleum), is a joint venture between Bahrain, UAE and US firms.

Creditors seek Dubai World loans sale

Bank creditors to Dubai World that are owed billions of dollars are trying to reduce their exposure to the debt-laden conglomerate by offering their loans for sale ahead of an expected restructuring of the company's $22bn of debt.

Last week, debt traders told potential investors that there was a seller seeking to offload about $100m of loans.

This would be the first large trade in the $5.5bn loan facility at Dubai World's parent, of which $2.1bn falls due for repayment in June, according to Bloomberg data.