Two weeks ago news circulated that banks were reducing their exposure to Kuwait’s Investment Dar (TID) by selling syndicated loans at distressed levels, at 33 cents on the dollar of a $25 million piece of TID’s loan. Following an earlier trade that was picked up by some traders in the low 20s around three months ago.

While both trades are only a small piece of TID’s $3.55 billion in liabilities, it still buys way for activist investors into the creditor negotiations. Do debt traders see real value in Investment Dar? Probably yes.

Today, TID and the newly appointment coordinating committee of its creditors agreed to a revised plan to restructure the company’s $3.55 billion debt. Under the plan TID will pay KD 405 million of debt in three to four years with an 11 percent profit rate a year, according to the statement. Of that 11 percent, five percent will be paid in cash and the rest ‘‘payment in kind.’’ The remaining KD 600 million will be paid between years four to eight, the statement said.  

The plan converts part of the creditors’ debt claims on the company into equity in Investment Dar, the statement said. Investment Dar ‘‘shareholders can reclaim part of this equity if debt repayments are honored in full,” it said. Under the plan, 10 percent of the company’s shares “will be passed to the banks and investors as part of the restructuring package.

Recently some news has surfaced regarding the Securities House and their will to sell any of their assets at the right price. There was news also that the company wanted to sell its Abraaj Water plant, but the buyer and seller did not agree on a price. Yesterday, it was reported that the Securities House was negotiating selling Al Aman Investment.

There is a question that raises itself, why would a company sell their assets in such a time, when prices are repressed and multiples are low? They can wait a few years when the economy further recovers and the market’s appetite for mergers and acquisitions grows; leading to higher multiples, and a higher price. The only logical explanation for Securities House’s actions is that they are in desperate need for cash.

 A look at the company’s financial statements tells us that they need KD 15 million annually for their Murabaha expense (interest expense). Their debt levels as of the end of 2008 are close to KD 190 million (65% of which is short-term). This amount declined by only KD 10 million in the first 9 months of 2009. So approximately KD 120 million needs to be refinanced every year. Such a sum might prove to be difficult to raise this year as financial institutions are still unwilling to lend.

The company has a cash balance of only KD 17 million as of Sept. 2009, and only 4% of their KD 250 million investments are liquid (quoted stocks, etc.). Their investments declined to KD 228 million as of Sept. 2009. Their treasury stock is only worth KD 10 million. In 2008, most of their cash was generated from the selling of their investment assets.

My question is: are we seeing another Investment Dar or Global scenario? Or are these indicators only false alarms and the company’s timing is just unfortunate? Time will tell.

By: SAL

In a recent report by Goldman Sachs covering its 2010 economic outlook for the region and specifically Kuwait, Goldman drew a very pessimistic picture of what it perceives the future holds for Kuwait. According to the report Dubai and Kuwait will lag behind Saudi Arabia, Qatar, and Abu Dhabi in any recovery in the near future. It estimated that Qatar would grow the most between 7-7.5% and Saudi Arabia will grow at 4.5%. While both the economies of UAE and Kuwait contracted by around 2.5% this year, UAE is expected to grow at 2% in 2010 driven by Abu Dhabi. After much deliberation, I simply don’t agree with Goldman’s estimates. Why would Kuwait lag?

FACTS:

1.    Goldman Sachs forecasts oil at $90 in 2010 and $110 in 2011. According to a report by Reuters, Kuwait’s GDP is forecasted to grow by 17% in 2010 driven by the rally in oil prices and investment in infrastructure projects. With the surge in oil prices from the December 2008 lows of $32, and oil being a main source of revenue for the country, Kuwait’s GDP is expected to grow the most, by 16.9%, followed by Qatar, Saudi Arabia, and UAE at 8.3%, 7%, and 5% respectively.  To note, the estimates were based on a conservative oil price projection of $50/ barrel throughout the budgetary period. With the expected surge in oil prices for 2010 and the OPEC consensus of no change in oil production quotas, crude oil for January delivery trading at $73.38 a barrel, I believe that Goldman undermined the effect of the projected “$90” on the country’s GDP.

2.    The political victory and vote of support that led to the survival of both Kuwait’s Prime Minister and Interior Minister from a non-cooperation vote in the parliament has been praised as a victory of democracy and turning point in the political field that is expected to bring with it’s a transition in the political system and passage of key economic policy changes and developmental projects. Kuwait is at REST. No ouster, no dissolution of parliament, and hopefully no standoffs between the government and MP’s anytime soon.

3.    Global Investment House reaching formal agreements with all of its financiers to restructure $1.7 billion in debt has brought a close to uncertainty and boosted investor confidence and expectations of reaching a similar agreement on Wednesday when the Investment Dar sits down with its creditors.  That, coupled with the  $1.1 billion or 37% profit the KIA made from its successful investment in Citigroup.

Political rest, surging oil prices, and investor confidence finally kicking-in with the noticeable increase in trading volumes in the stock market will help lead the Kuwait SE to break barriers Goldman set for it.

National Bank of Kuwait (NBK) finally found middle ground and struck a deal with Commercial Bank of Kuwait (CBK) to buy 19.1% of Boubyan Bank (Islamic). The total consideration is around KD 120M; valuing Boubyan Bank shares at 550 fils/share . CBK made KD 27M in the deal. NBK has an authorization until June 21 from the Central Bank to buy up to 40% of Boubyan Bank’s shares.

Investment Dar used to own the Boubyan Bank stake which it used as collateral for loans from CBK. The financial tsunami (god how much I hate this word!) caused highly leveraged Investment Dar to default on various loans. Consequently, they lost their buyback option on the Boubyan Bank stake and the title transferred to CBK.

According to Bloomberg.com, Investment Dar said in a statement today that it has filed three lawsuits with the Kuwaiti judiciary against Commercial Bank of Kuwait. The first accuses CBK of “fraud and dishonesty,” the second is to prevent CBK dealing with the shares and the third lawsuit demands the return of the shares to Investment Dar.“Investment Dar warns the National Bank of Kuwait, or any other party, against getting involved in this dispute so as not to subject its reputation and the interests of its clients and shareholders to risk,” Investment Dar said in the statement.

Enough with Investment Dar’s whining! With the conclusion of this deal, NBK officially grew a little but potentially prolific beard. I believe that NBK will not only add to their never-ending stream of winning products, but also transform the Kuwaiti Islamic market into a more competitive field. It is no hidden secret that Kuwait Financial House (KFH) has dominated the Islamic area for a very long time and I am glad they now have substantial competition because this will definitely enhance product quality/prices.

There is always a first. Usually being a pioneer is flattering, but not always. Ask Kuwait’s Investment Dar how they feel about being tagged the first Shariah compliant company to default on its Sukuk (Islamic bond). Its official. According to a statement by the company, they failed to pay a “periodic distribution” due on April 27 to holders of its Sukuks Islamic bonds maturing in 2010. Bloomberg data suggest Investment Dar had $3.73B of total debt ountstanding as of 9/2008.

Analysts, including me, believe that this default will have significant implications because it set a precedent. Investors across the muslim world believed Shariah-compliant companies are immune from the crisis, are simply blessed, and can never default on their Sukuks. Guess what? They did and this has been nothing more than a myth ready to bust.