The veil of secrecy shrouding the scandal involving two financial titans — Saad Group and Ahmad Hamad Algosaibi & Brothers Company — has regional financiers fearing untold billions of dollars in further losses.
Both conglomerates are owned and run by two families once considered among the wealthiest and most well respected, not just in Saudi Arabia, but the entire Middle East. The sole surviving son of the founder of the Algosaibi group, Sulaiman Algosaibi, was ranked number 368 by Forbes in 2008 on its list of world billionaires. The owner of Saad Group, Maan al-Sanea — of Kuwaiti origin — is married to one of Algosaibi’s daughters. Both companies could borrow hundreds of millions and even billions of dollars based on reputation alone.
Currently, the details of cross-ownership between Algosaibi and Saad are unclear. So far, the only confirmed crossover that has emerged is the role of Money Exchange, a foreign remittance handling company owned by the Algosaibi conglomerate. Apparently, Algosaibi put Sanea in charge of Money Exchange, based in the United States. Now Algosaibi is suing Sanea in New York on charges of embezzling $10 billion through Money Exchange’s operations.
Media reports say that both Saad Group and Algosaibi Group owe billions of dollars in debt to regional and international firms. Estimates from various sources range from $9 billion to $22 billion, but the actual amount is unknown. Dow Jones reported that the two firms’ total syndicated debt amounts to $7.42 billion, spread over 88 international banks. Dow Jones also said that lenders outside the region hold $4.88 billion of this debt, meaning GCC banks and holding companies’ exposure is around $2.54 billion.
Standard Chartered Bank, however, said Saudi banks’ exposure alone is some $5 billion. The lack of transparent information has kicked the rumor mill into full swing, thus creating much uncertainty throughout the region’s financial sector.
Nassib Ghobril, head of the economic research and analysis department at Byblos Bank in Lebanon, said that because banks are not releasing enough data about how much exposure they have to these groups, lenders are taking a step back.
“Right now, this situation is creating a lot of uncertainty, making banks even more careful in terms of lending,” he said.
Mahin Dissanayake, associate director of the financial institutions group at Fitch Ratings in Dubai, said the lack of information is largely due to confidentiality agreements. Yet, the “basic information is still unclear. We do not know what the background of this dispute is.”
Clear as mud
The absence of transparency in the Middle East is a major obstacle to finding the root of the problem, especially due to the family-oriented nature of this issue. EFG-Hermes research pointed out that the “initial lack of public communication by [Saad Group and Algosaibi Group] led to a degree of panic.”
The firms’ troubles first emerged in May of this year when both companies apparently ran into severe liquidity problems amidst the global credit crunch. Unfortunately, four months later, the picture is not much clearer and is now more complicated than ever.
At the end of May, the Saudi Arabian Monetary Agency instructed banks in the kingdom to freeze all Saad Group accounts. Soon after, the central bank froze Sanea’s personal accounts. After Algosaibi filed a lawsuit against Sanea in New York’s Supreme Court for embezzlement, US authorities had his accounts in the Cayman Islands frozen, which were valued at some $9.2 billion.
“It’s still not clear even in the Gulf — that’s why there isn’t enough information,” Ghobril said. “This is creating a lot of uncertainty in the GCC, specifically in the banking sector.”
What is certain though is the impact the scandal has had on the regional banking system. Speaking on condition of anonymity due to the sensitivity of the subject, a senior banker with inside knowledge of the crisis said, “There isn’t a single bank that was not involved in lending to these guys, internally and internationally. In order for you to get a meeting with Maan al-Sanea, you basically have to lend him $60 to $100 million. If you want him to invest $1 million in something, he will ask you to lend him $9 million. And people did it, because he was making all of these banks a lot of money,” the banker said.
“The Algosaibi family was happy, because Sanea was paying them X-hundreds of millions in dividends every year,” the banker added. “They were happy with the way things were going, until whatever happened happened and now they are in trouble. There was a lot of smoke before the shit hit the fan.”
With the unfolding circumstances, transparency is taking a top spot on the region’s priority list. Due to the excessive lending based on reputation alone, accountability is under serious scrutiny. “Now,” said Ghobril, “there will be a decline in name-lending, leading to a systematic due diligence approach. These are two of the biggest groups in the Gulf, not only in Saudi Arabia. Now they’ve ended up with liquidity problems and in default. There will be more calls for transparency altogether.”
Credit rating agency Standard & Poor’s released a special survey at the end of July on the issue, highlighting the imperative need for transparency and accountability in GCC banking.
“Corporate transparency and public communication is, in general, limited,” the authors wrote. “Public communication following the discovery at the Saad and Algosaibi groups has been minimal, including from the regulators.”
The private ownership structure of the conglomerates makes it even more difficult to discover the truth.
“The family ownership of certain GCC banks and corporate groups creates, at least in theory, specific risks that may be difficult to assess, including succession risk, key man risk, related party exposure and contagion risk,” the survey said. “Overall, we believe that these family ownership structures are a negative credit factor. Corporate governance and transparency in the Gulf is, in general, relatively poor and needs to be enhanced.”
The trouble for Algosaibi group first materialized in Bahrain, where the company’s wholly owned bank, The International Bank Corporation (TIBC), defaulted on its loans. These loans amounted to $2.2 billion, according to EFG-Hermes. After TIBC’s defaults came to light, it was downgraded by numerous credit rating agencies, “before ratings were withdrawn altogether,” noted EFG-Hermes. At the beginning of June, it became clear that another Bahrain-based institution, Awal Bank — fully owned by Saad Group — had neglected creditors and was also in need of restructuring its obligations.
EFG-Hermes said that, “Both banks are likely to have faced erosion in the value of their assets, although Algosaibi Group has also hinted at financial irregularities at TIBC. While there is no formal relationship between the two groups, the shareholders are closely related.”
In July, Bahrain’s central bank took control of both Awal and TIBC. The central bank appointed law firms to administer operations for both financial institutions. Trowers and Hamlins will be in charge of TIBC while Charles Russell LLP will take care of Awal Bank.
In an attempt to soften the blow, on August 6, the governor of Bahrain’s central bank, Rasheed al-Maraj, insisted to Al Arabiya television that the exposure of TIBC and Awal Bank would not affect the country’s banking sector as a whole. “I want to make clear… that the damages from these two banks are very limited and there is no systemic risk to the banking sector in Bahrain,” he said.
However, EFG-Hermes reported that the “spill-over to the banking sector has been swift, setting off a wave of lenders seeking reassurance from the groups about their outstanding obligations.”
HSBC estimated that Saudi banks’ lending exposure to both Algosaibi and Saad Group could be anywhere between $4 billion and $7 billion. On August 26, Standard Chartered Bank said Saudi banks’ combined exposure to both groups amounts to some $5 billion. Victor Lohle, credit analyst at Standard Chartered, noted that no Saudi bank has ever failed, as the sovereign has always been there to save the day — especially since numerous government agencies have stakes in several Saudi banks.
But EFG-Hermes reported that, “None of the banks in Saudi Arabia have disclosed their exposure to the two business groups. Given that both groups were considered top quality credit in the country, we tend to believe that almost all the banks would have exposure to both or one of the two groups. However, given the lack of disclosure by the banks, it is difficult to determine which banks have the highest exposure. Emirates Business 24/7 reported that Samba Financial Group has syndicated exposure of $300 million (1.2 percent of total loans) to Saad Group. However, the bank has not verified this.”
Like Saudi Arabia, Kuwaiti banks and the central bank have yet to release any statements or disclosures regarding exposure to the Saudi groups. At the beginning of June, Kuwaiti press reported that the central bank requested that banks freeze all accounts of Algosaibi and Saad Group. Later on, however, Saad Group contested such reports. EFG-Hermes said that various Kuwaiti newspapers estimate that total local bank exposure to the groups ranges between $750 million and $1.14 billion.
United Arab Emirates
The UAE’s central bank governor, Sultan bin Nasser al-Suwaidi, suggested that UAE banks have rather “significant” exposure to both groups. Quoting unnamed sources, Emirates Business 24/7 reported that syndicated and bilateral exposures of UAE banks is around $3 billion. According to EFG-Hermes, “The principle exposures listed are [Abu Dhabi Commercial Bank] ($435 million), Mashreqbank ($210 million), [First Gulf Bank] ($55 million), [National Bank of Abu Dhabi] ($7 million).” The research hub is also concerned that Abu Dhabi Islamic Bank has yet to release the details of its exposure.
A Dubai-based financial analyst, who spoke on condition of anonymity due to confidentiality agreements, said that the UAE government told banks with exposure to Algosaibi or Saad Group that they “must provide up to 50 percent for Algosaibi and 75 percent for Saad Group exposure.”
In July and August, the UAE Central Bank arranged meetings with its domestic banks regarding the Algosaibi and Saad crisis. During both gatherings, banks were advised to freeze credit lines to the Saudi groups, and cover all exposure to the firms. A third meeting at the end of August drew more than 100 bankers, creditors, lawyers and accountants together in Dubai to discuss the latest developments. Unfortunately, the talks reached a stalemate.
A lawyer who attended the meeting told Reuters that the crisis “may take years to solve.”
Mashreqbank, the fourth largest bank in the UAE by current market capital, was the first to announce its exposure. In July, the bank filed a lawsuit in the New York Supreme Court against Algosaibi, claiming $225 million in defaulted loans. Algosaibi then filed a counter-claim against Mashreqbank accusing it of helping and abetting fraud executed by Saad Group. In response, Mashreqbank claims the allegations are “completely without merit.”
In an attempt to kick-start a formal solution process, Algosaibi held a meeting with lenders in the UAE at the end of August. Attended by bankers and creditors, Algosaibi reportedly proposed a unilateral scheme to resolve the crisis. The conglomerate said it would only honor debts that originated from “genuine borrowings” supported by “genuine” documentation and procedures, implying it would not take responsibility for the loans taken without the proper paperwork and solely based on the name-lending trend.
Algosaibi also notified the UAE bankers that other kinds of borrowing on its books with inauthentic signatures had occurred, and thus they claim they are not accountable for repayment. More precisely, the group said they are “not willing to settle” these debts. Bankers told Emirates Business 24/7 that a solution would be found only once an agreement is reached between Algosaibi and Saad. They also informed the news agency that Saudi authorities “are planning to set up a committee” that is specifically designed to resolve the issue.
The unnamed senior banker placed the blame on the chairman of Saad Group, Sanea, not Algosaibi. “In all fairness, the Algosaibi family did not do anything wrong. Their biggest mistake was giving a free hand to Maan al-Sanea to run their affairs [with Money Exchange]. He basically brought this whole thing down,” the banker said.
“Maan Al-Sanea and others know how to talk to the international market and these international banks and get them on their side. They understand the inclination and greed for profit of these European banks, and they use it — that’s how any intelligent businessman would do it,” the banker said.
Oman and Qatar
Oman and Qatar have been surprisingly transparent relative to their GCC brethren; only they have released detailed exposure to date.
Qatar Nation Bank and Qatar Islamic Bank both reported no material exposure to either Algosaibi or Saad Group. Commercial Bank of Qatar, however, has “declined to disclose any information, although this may change following [second quarter 2009] results,” said EFG-Hermes.
Oman has responded surprisingly quickly to the issue, with the central bank directing all Omani banks to report their exposures immediately. “Bank Muscat, which has the biggest exposure to the two groups among Omani banks, announced that it has direct exposure of $130 million and a $45 million [exposure] through its Bahrain-based subsidiary, Bank Muscat International. National Bank of Oman announced that it had inter-bank exposure of approximately $17 million to the Bahrain-based TIBC and Awal Bank.” EFG-Hermes also said that the rest of Omani banks reported no exposure to either group.
The only clear thing about the Algosaibi and Saad Group mess is the uncertainty of it all. How both companies got into so much trouble together is not so black and white; they are related through family ties, but operationally Saad Group claims to have no ties to Algosaibi whatsoever. It seems the problems between the two companies may have started from an internal family dispute, but this is not confirmed.
Recently, Saad Group admitted it was going through a liquidity squeeze, while suggesting that rumors regarding the group were derived from “a private family issue,” which they said they were working towards solving. At this point it’s become an issue that is clearly not as simple as a little family spat.
Unfortunately, the road to recovery for investor sentiment in the Middle East has now taken a back seat. EFG-Hermes said that “investor sentiment for banks in the region is likely to remain weak owing to the lack of disclosures by banks relating to their exposures to the two business groups, as well as the lack of details on the possible restructuring of the loans.”
With so many banks not disclosing information of their exposure to the groups and regional governments downplaying and keeping quiet on the situation, every lead only results in a dead-end. Transparency has now become the linchpin of this problem, with bankers, analysts, lawyers and investors across the region calling for the implementation of transparency reforms.
Ghobril said the “lack of disclosure and communication about this is a major problem, because it affects investor confidence, investor sentiment, banks and their future lending.”
What’s worse is that the governments around the region are likely to remain hushed about their domestic banks’ exposures. EFG-Hermes said, “A further difficulty for estimating the impact on banks is that it is highly likely that the central banks will exercise significant discretion in determining any losses and reporting of those losses.”
The name lending practice and lack of transparency cannot remain, said the senior banker.
“It has to change,” he said. “The pain is not only being felt in the Saudi and Middle Eastern private sectors, but also the sovereign. The sovereigns have had to fork out billions of dollars in order for them to get their act together. From here onwards, the rules of the game will have to change, but it will take a lot of time.”
“It’s not going to work [on name lending] anymore. The Algosaibi family will get out of this, but they will get out owing the Saudi government a hell of a lot and being very scrutinized by the system and their peers,” the banker said.
Dissanayake said this problem will continue well into 2010, especially for banks around the region. “Our initial reaction was that the dispute would be resolved between the two parties. I think the market expected that as well. That was essentially the best-case scenario, but things have changed now. At the moment, we’re looking at a long, drawn out legal battle with more creditors likely to take legal action.”
The banking insider familiar with the Algosaibi and Saad Group turmoil believes that the “unwinding of this whole mess will take many, many, many years.”