Executive Magazine

Deal or no deal

by Nabil Makari April 6, 2021

written by Nabil Makari

The Beirut port explosion on August 4, 2020 resulted in the loss of more than 200 lives, countless wounded, and also massive insured losses now estimated to range between $1 billion and $1.5 billion by the website ReinsuranceNe.ws. While some of the damages have been repaid, according to the specifics of insurance policies, others have not, awaiting for an official report pertaining to the causes of the Beirut port explosion.

The damages to insured properties, in principle, would be subject to reimbursement by private insurance companies, in accordance with the insurance policies signed between property owners and the said companies. Though from legal and contractual aspects, this would appear to be a straightforward matter, the reality is far from being so, in part due to the unclear reasons behind the blast and the economic situation in Lebanon which has resulted in policies having to be readjusted to take into account the difference between “real” dollars and dollars held in banks and subject to capital controls.

Lollars and dollars

The first issue that has been at the forefront of the reimbursement of policies has been that of the payment of the insurance policy in local dollars or “real” dollars. As the Lebanese dollar (dollars held in bank accounts before the beginning of the financial crisis and capital controls) has lost in value in comparison to real dollars (the current discount as of February 24, 2020, being 30 percent for real dollars to 100 “lollars”) due to informal capital controls and a lack of liquidity, the underlying asset being insured could no longer be paid in local dollars, should the insured party be paid in full in the occurrence of damages. A good valued at $20,000 pre-crisis, should it need to be replaced, would require either the same amount in cash or a cheque with a higher value in lollars to be discounted for cash. This has resulted, over the past year, in insurance policies being readjusted for their fair value. In addition, the Lebanese Association of Actuaries in a report dated February 16, 2021, recommended “a review of the Pricing approach, including matching the premium with the allocation of costs by currency,” and the introduction of an Inflation Index to properly reflect the value of assets and costs of claims.

According to Elie Hanna, former president of the Lebanese Insurance Brokers Syndicate, if the insured have readjusted the insured sums in their insurance policies to account for the real value of the underlying asset, and if the policy covers the cause of the damage, then they are repaid, in full, by the insurance company. According to Hanna, this follows law and logic, “but since it is the first time that we had different exchange rates, judges may rule otherwise.” This payment can occur in cheques taking into account the discount of dollars to lollars. In addition, according to Elie Torbey, president of the Association of Insurance Companies of Lebanon (ACAL) in a TV interview dated February 12^th 2021, insurance companies have sent experts on the ground, in the aftermath of the blast, to evaluate the damages. According to him, 50 percent of reported damages have resulted in experts being set to investigate, and insurance evaluation will be conducted in real dollars in order to account for reconstruction fees.

In conclusion, the value of underlying assets has had to be readjusted to account for the presence in Lebanon of a non-transferable currency being sold on the black market at a discount for real dollars. Insurance companies have managed to readjust these policies for many of their clients. For clients who did not choose to renegotiate their policies and accept paying elevated premiums, payments are to be made in local dollars. The difficulty with regards to many non-adjustments is due to the higher cost of living: with a depreciation of more than 85 percent of the Lebanese pound to the dollar since the beginning of the crisis, many Lebanese simply cannot afford to readjust their insurance policies. In addition to the need to adjust for the massively depreciated lira, the cost environment of insurance has internationally been hardening, which translates into upward pressure on insurance premiums in most markets.

Vehicle damages and other property damages are covered under different policy terms. Most insured car damages have been paid back, according to Hanna. “Others have paid on a compromise basis,” he says, when adjustments of the sums insured have not taken place, and when the policies do not cover all causes (especially war and terrorism) taking into account the difficulties in renegotiating policies in a time of scarcity. With property insurance, on the other hand, settlements have occurred in small amounts but not large ones, as insurance and reinsurance companies are still waiting for an official report.

Reinsurance and official reports

A thorny issue that is blamed for holding up the settling of larger property insurance claims from the port explosion is that of dealing with international reinsurance companies. According to Torbey, in the same TV interview, most insurance companies are reinsured with regards to the Beirut damages, with international reinsurance companies, and with reinsurance companies covering over 95 percent of the insured damages. The main concern with regards to reinsurance companies is the need for an official report as to the causes of the Beirut port explosion, as the report would then clarify whether or not such cause is included in the reinsurance policy or not, and therefore would result in repayments by said reinsurance companies to the local insurance companies.

There are two basic types of reinsurance arrangements: facultative reinsurance and treaty reinsurance. Facultative reinsurance is designed to cover single risks or defined packages of risks, whereas treaty reinsurance covers a ceding company’s entire book of business, for example a primary insurer’s homeowners’ insurance book. Facultative reinsurance is typically used for high-value or hazardous risks because the policies can be tailored to specific circumstances.

With regards to repayments, according to Hanna, it would all depend on the insurance policies, terms and conditions, and modes of payment: some reinsurance companies have negotiated with local insurance companies a certain amount of reimbursements, others are still waiting for an official report, while some have partly repaid according to premiums and on a compromise basis. In addition, self-imposed capital controls by banks since the end of 2019 have resulted in local insurance companies not being able to transfer money to their reinsurers. For those companies who already made those transfers to their reinsurers, the latter have proposed to deduct these amounts from their repayments due to their local clients instead of cancelling the reimbursement policies, taking into account their long-term relationships with the local counterparties.

An official report is still to be published, to allow for reimbursement from international reinsurers. It is still undetermined whether the Beirut port explosion resulted from an act of war, terrorism, negligence on the part of port and/or governmental authorities, or a combination of these factors. Some insurance policies mention these specific acts as causes for reimbursement, whereas other policies exclude them. The responsible reinsurance companies would therefore ask for an official report that would follow a judicial investigation to determine the causes of the blast. To date, no official reason was given with regards to the causes of the Beirut port explosion, therefore, many reinsurance payments are still in limbo.

Business interruption

Another side of the damages is that of business interruption, which is typical in case of large hotels or other businesses relying on a steady supply of clients. Distinct from property insurance, business interruption would include coverage over a certain amount of time not for the damage caused to the property per se but for the loss of clients resulting from the damage. In the case of a hotel, for example, such insurance would cover part of the losses stemming from the lack of clients who would have otherwise spent time at the hotel.

Again, in this case the devil is in the details: each insurance policy would have to be examined. Unlike property damages that require official reports, business interruption insurance is more straightforward and therefore most businesses that have signed up for such an insurance will manage to be repaid. The amounts will depend on whether they have readjusted their policy for the depreciation of the Lebanese dollar, and whether they can in some cases negotiate the amounts due to some reinsurance companies not having repaid full amounts due in case of a lack of transfer from their Lebanese clients.

According to the latest report of the Lebanese Insurance Control Commission, the amount of outstanding claims regarding the Beirut port explosion reaches 1.5 trillion Lebanese pounds, with estimated insurance losses at 1.6 trillion Lebanese pounds. Overall, the damages of the blast have resulted in partial payments of 74 billion Lebanese pounds, with some reinsurance companies still waiting for the official cause of the blast in order to assess whether or not the policies would cover the cause of the explosion. Nevertheless, should this occur, most of the damages will not result in payments, as Lebanon does not mandate insurance on housing, unlike other countries. According to Torbey, most houses are not insured, and only companies and owners having taken property loans have been fully insured, while property owners are mostly not insured. Therefore, should repayments occur fully, the Beirut port blast will most likely result in most Beirut homeowners having to pay for the damages themselves.

In conclusion, insurance after the blast will be different. International reinsurance companies will become wary, deeming that Lebanese insurance companies should have been aware of the risks, and therefore reinsurance premiums will probably rise and, in turn, impact the price of insurance premiums in Lebanon. Insurance companies in Lebanon are regulated financial companies and therefore cannot exchange money on the black market and are forced to function within the banking sector for transfers; they are therefore heavily impacted with regards to paying reinsurance premiums abroad (they are not allowed to discount cheques in Lebanese dollars for real transferable dollars). Insurance, after the blast, might become a luxury when it is in fact and first of all a necessity.

April 6, 2021 0 comments

Leaders

Inflection anniversaries

by Executive Editors April 3, 2021

written by Executive Editors

One has to assume that there are many reasons why somewhat articulate people tend to intellectualize social and economic moments of despair or change. Distancing ourselves in various ways from the direct emotions of shocks and despair, some talk of inflection points, some of tipping or turning points, and some perhaps of nadirs. All these terms differ in nuanced meanings – nadirs for example technically are points directly below the observer whereas an inflection point might denote a curve’s transition from convex to concave – but all these terms carry common connotations of danger, need for change and, in the case of climate tipping points, even irreversibility.

Looking back at the first three months of 2020 after a year of continual struggles and crises, it is justified to speak of three and more inflection points which back then changed the Lebanese trajectory: the discovery of the coronavirus SARS-CoV2 in January and classification of the Covid-19 disease as a pandemic in March comprising the first, the assumption of government by a politically one-sided and overall ill-fated Council of Ministers in January and its February 2020 ministerial statement that was as pretentious as it was portentous constituting the second, and the country’s hasty and disorderly first-ever default on an external financial obligation, namely the Eurobonds default of March 9, 2020, representing the third extreme and consequential shock.

Overlapping – but not logically underlying – these expectable but nonetheless traumatizing shocks are the longstanding deficiency of the Lebanese political system and social contract and the presence of that powerful disruptive “elephant in the Lebanese room,” Hezbollah. As factor of enormous weight that Lebanese politically correct assemblies would rarely discuss in all its magnitude and impacts, this pachyderm entity is brimming on one hand with military capacity and cultural identity which cannot be denied. But it also is a force that throughout its history has been capable of negative disruptions of the national integrity of Lebanon, and which has exerted such impacts never more so than in the past 12 months of the Lebanese system’s exploding dysfunctionality.

Shocks and disruptions are scary in their short-term and long-term impacts. Undigested shocks often result in depression and even harm bodily well-being, whether of an individual or, as the recent experience of the Lebanese people suggests, of small collective and larger societal levels.

Over the past 18 months, the people and opinion makers of Lebanon have talked about little but shocks and their escalating sufferings. If done right, that is with honesty and resolve, discussion of traumatic processes is therapeutic. It should be the first step on a long road of regaining mental health and restoring a pre-trauma state.

If done the wrong way, however, with no other concern than one’s own complaints and with no regard for the bigger picture or the suffering of others, the drawn-out circular discussion of bad experiences and traumatic moments apparently can take forms where own failures are ignored and blame is deliberately deflected from the self to the convenient villain, the usual suspects, the ominous or concrete other. This one-dimensional blame-pushing, one fears, can be counterproductive to the point of losing sight of rescue opportunities and getting stuck in dead-end thinking and vicious loops.

The rage and silence of the land

Lebanon has been trapped for months now in economic down-sliding and dead-end thinking. Solutions are theorized but not implemented, certainly not on the plane of political reforms or steps that are germane to democratic systems. Non-solutions are in oversupply and spreading in the fashion of ever-mutating viruses of destructive political verbiage. The absurdity of the present situation is of Alpine or even Himalayan proportions. A well-educated population with an abundance of university-trained talents and historically unprecedented access to – supposedly enlightening and empowering – knowledge resources, has become information-wise encased in fake news, occupationally trapped in unemployment, economy-wise faced with destruction of currency, and is in daily life increasingly threatened by persistent hyperinflation. On the level of basic necessities, the Lebanese people are beleaguered by losses of electricity, gasoline, water, money, food security, and, crucially, emotional self-esteem and mental security.

As result, popular rage is constantly mounting against over political self-interest and lack of humanity presented by a few in the political class – and by all agents of the status quo of self-interested political-militaristic cults. The images of despair and protests are becoming our only diet and understandably so – but nonetheless these images are tormenting us. At the same time, the country has spent too many days and weeks in lockdowns, turning a territory once overflowing with outgoing and very socially interactive people into a place that evokes the depressed silence of a mass burial site.

Besides witnessing more or less organized and so far impotent outcries against perceived political evils, the country for 12 months has thus been governed through lockdowns which as their only undisputable outcomes produced forced quiet and economic inactivity. The social climate reeks of depressed minds, only erupting in occasional shouting matches over nothing or interrupted by those who vent their mental pressures by racing their cars down narrow urban streets with no respect for either the feeble legal order or the other humans on the street. Lebanon at the gates of spring and on the ides or March 2021 has become at the same time the land of historic rage and a land of eerie silences.

Evaluating the inflection points in the first quarter of 2020 from a year’s worth of hindsight, the undeniable lesson in Executive’s view is that hasty decisions at the one, financial, moment have been as detrimental as indecision at many other, monetary policy-setting, moments and that absence of true interactive leadership in an acute crisis is the worst absence of all. The ill-prepared decision of the financial default is milk that has been spilled and still waits to be mopped up with the implementation of smart reforms and negotiations, whereas solutions in terms of monetary policy come with zero guarantees but nonetheless have to be tried and proven right or wrong (see story on currency boards).

Political activism in tackling the Covid-19 crisis has been a preoccupation of our political cadres, second only to the trumpeting of fluff analyses and vain declarations. But as in developed economies of Europe and North America, the battle against the coronavirus has been impeded by viral knowledge deficiencies, contrasting biases, and irrational human behaviors. To conquer the medical challenge of the pandemic, it may be time and vaccines that we have to trust in. In overcoming the virus’s societal challenge, however, the construction of sustainable social insurances and safety for Lebanese society, and societies everywhere, may require solutions that are more integrative of private, public, corporate, and expatriate good will than anything that existed in previous social practices (see ESSN story).

As Lebanon has been faced with new, and even more dangerous political and economic inflection points in the first three months of 2021 than in the first quarter of 2020, there is another lesson to be drawn, a lesson of conventional foresight that does not rely on political prophecies of any sort. If Lebanon is to sustain itself, it cannot allow itself any further procrastination, indecision, political favoritism, or partisan bias. The polity has to insist on immediate but well considered economic and monetary decisions. Even the most longsuffering people will not wait for another quarter for the state to take remedial action to halt the lira destruction and the economic meltdown and social suffering across the entire country.

Such action cannot be piecemeal or try to fix some symptoms of the existential crisis with legalistic shenanigans or political talk. With regard to the elephant in the room, the past 12 months were wasted on political games and silly dances with the pachyderm by those who could neither tame nor ride it in the past 15 years.

This must not continue. We have to tackle solutions, own up on our responsibility, confront our demons of self-interests, our ghosts of old identities, and deal with our elephants in the room. Elephants that we cannot slaughter, because such is neither morally nor practically possible, and which it would be a dangerous illusion to think we can tame and turn into pets, can perhaps still be harnessed and put to work in the national interest. To find out how to control the elephant and implement a method of harnessing it will be key to surviving the next 12 months.

April 3, 2021 0 comments

Real estate

Solidere rides the real estate wave

by Nabil Makari April 2, 2021

written by Nabil Makari

With Solidere having registered positive stock performance since the beginning of the economic crisis in Lebanon, and with Lebanese rushing to buy real estate in order to hedge against the depreciation of the Lebanese currency, Executive sat with Ziad Abou Jamra, Secretary of the Board of Directors at Solidere and Deputy General Manager, to talk about Solidere’s performance and the current state of real estate in Lebanon.

1. With regards to the August 4^th explosion, what is your assessment of the damages caused to Solidere properties? Have any of these been covered by insurance? How much of it is being repaired by Solidere?

The explosion that occurred on August 4, 2020, caused severe damages to our facilities. The insurance policies that we have cover all possible causes but they nevertheless need to pinpoint a cause before initiating reimbursement in our favor. We are not waiting for that to occur but have started the process out of pocket. Rebuilding will occur in phases. The momentum of the rebuilding effort will be directly correlated to the overall situation of Lebanon but will nevertheless occur in stable steps. We are mindful of the interest of both the shareholders as well as the merchants and residents of Downtown Beirut. As for the assessment of the damages, these have already been discussed in our board meetings but discussions are ongoing and the results will not be made public for the time being.

2. The share price of Solidere has gone up 140 percent between January 2017 and January 2021 (currently at USD 24 per A common share). What are for you the main drivers of this demand?

The following improved company fundamentals are the main drivers of demand for our stock:

Cash reserves in banks witnessed a substantial increase during the year 2020, enhancing the liquidity of the company and its ability to face its urgent and future challenges. Effectively speaking, and in case the dire economic situation persists for the long term, Solidere’s current liquidity can carry the company for the next four years if not more. This liquidity will be more than sufficient to cover salaries, taxes, maintenance expenses, and other potential unforeseen costs.

The company settled all outstanding bank loans and overdraft facilities during 2020, thereby bringing its interest expense down to zero. Moreover, the remaining non-interest bearing liabilities have dropped significantly.

A major cost cutting effort initiated in late 2018 successfully brought down the general and administrative expenses by almost 26 percent from around USD 30 million (income statement 2018) to around USD 22 million (income statement 2019).

Sales picked up dramatically in the years 2019 and 2020. This helped the company record a sizable profit in both years.

Devaluation of the national currency definitely gave a boost to sales, but a big chunk of the total sales were realized before the onset of the devaluation of the local currency and its aftermaths.

3. With regards to the current situation in Lebanon, should capital controls last, how would Solidere deal with this situation?

Capital controls have no effect on our operations, as they do not affect checks that are drawn locally or transfers that are conducted internally as such. Therefore the future of such controls, whether they become regulated or not, or whether stay in place or not, will have a minimal impact on Solidere.

4. How has Solidere readjusted to the current monetary paradigm in 2020? In what form and currencies have transactions been undertaken?

Our modus operandi has remained unchanged as we have sold plots before and after the crisis. All of these transactions occurred in local dollars. Now, as our situation has dramatically improved, we may opt to require a certain percentage of future transactions to be paid in fresh dollars but we have not yet reached a decision in this regard.

5. Overall, is it correct to say that Solidere’s share price has been a result of transactions in Lollars? How do you describe the share price in comparison to January 2019?

I have covered a part of this question in answers provided above. Suffice it to say that while the local dollar has aided the share price it was by no means the only factor in the significant improvement witnessed over the recent period.

6. Solidere is a company involved in high-end real estate. Would factors such as the currency depreciation that we have been seeing result in Solidere or other developers being interested in investing in high-end real estate?

Uncertainty about the future has driven ultra-high net worth investors with significant deposits in Lebanese banks to migrate losses by buying prime real estate. As Solidere has the best of the crop in this regard, it has stood to benefit the most from this demand.

7. With regards to properties being sold by Solidere, can you tell us more what kind of real estate has seen the greatest demand in the past year? Offices? Apartments? Other?

We estimate that more than 90 percent of the value of the transactions were land-related, with Solidere having the lion’s share of total real estate transactions in the Beirut City Center.

8. What trends are you expecting for real estate? Will there be local or foreign buyers?

As long as the political situation remains dire, demand will predominantly remain local. Actually, demand may increase as the fear factor increases. Eventually, should a regional political settlement be reached, hopefully a long-lasting one, foreign buyers will return to Lebanon, consequently improving the inflow of fresh dollars and the value of real estate.

9. How much of the increase in overall real estate transactions do you attribute to transactions in the Beirut Central District? How do you explain the attractiveness of these areas despite the damages caused there due to the Beirut blast, protests and the economic downturn?

All the recent purchases can be described as long-term in nature. These are not investors looking to flip their newly acquired assets for a quick profit. Rather, these are investors whose primary aim is to park their funds in an asset class that will most probably provide the best alternative to protect the value of their money. They possibly aim to hold on to their real estate for at least five years until the situation witnesses a significant improvement, at which point they could possibly sell for fresh dollars. These investors are looking beyond the Beirut explosion, which, no matter how atrocious that was, remains a one-off event, the repercussions of which on the real estate market will dissipate over time. They are also looking beyond the protests. That is the main reason I believe that they are focusing on Beirut as it is the area most likely to recover first and fastest.

10. Overall, it is my impression that 2020 has been a good year for Solidere in terms of repairing your balance sheet and gaining traction for your stocks. Do you see this trend continuing in the near future? Taking into account Lebanon’s situation.

The positive trend should continue in the coming few years as our stock is still undervalued relative to its net asset value (NAV). In addition, should the situation at the macro and political level improve, Solidere would be one of the first companies that would directly benefit as life returns to normal to the downtown area. Ironically however, should the situation continue to deteriorate, this would translate into a rise in both the value of Solidere’s stake in Solidere International (assets outside Lebanon) as well as a rise in the value of its real estate portfolio as a whole as local dollars would rapidly lose their worth.

As can be seen from above, Solidere has positioned itself through recent actions on its part to benefit no matter what future developments may lay in store for Lebanon.

April 2, 2021 0 comments

Events Executive news Executive Roundtables

Roundtable 5 Technology And Knowledge Enterprises

by Executive Editors March 31, 2021

written by Executive Editors

Part 5 in a series of 5 roundtable discussions on the future of Lebanese industries organized by Executive Magazine in partnership with the United States Agency for International Development under the Lebanon Enterprise Development (LED) project. The roundtable dealt with enhancing core strengths and specializations in the digitized knowledge economy landscape Date: March 31, 2021 – 6:00 PM – 8:00 PM

March 31, 2021 0 comments

Events Executive news

Roundtable 4 food & beverage and hospitality

by Executive Editors March 31, 2021

written by Executive Editors

Part 4 in a series of 5 roundtable discussions on the future of Lebanese industries organized by Executive Magazine in partnership with the United States Agency for International Development under the Lebanon Enterprise Development (LED) project. The roundtable dealt with aiming to export successful F&B concepts and develop job-creating quality hospitality ventures Date: March 31, 2021 – 3:00 PM – 5:00 PM

March 31, 2021 0 comments

Events Executive news

Roundtable 3 Media Publishing And Content Creation

by Executive Editors March 31, 2021

written by Executive Editors

Part 3 in a series of 5 roundtable discussions on the future of Lebanese industries organized by Executive Magazine in partnership with the United States Agency for International Development under the Lebanon Enterprise Development (LED) project. The roundtable dealt with taking media creativity ,integrity and professionalism to new heights of regional prominence Date: March 31, 2021 – 11:00 AM – 1:00 PM

March 31, 2021 0 comments

Events Executive news

Roundtable 2 Food Processing And Agro Industrial Production

by Executive Editors March 30, 2021

written by Executive Editors

Part 2 in a series of 5 roundtable discussions on the future of Lebanese industries organized by Executive Magazine in partnership with the United States Agency for International Development under the Lebanon Enterprise Development (LED) project. The roundtable dealt with helping the agro-food sector contribute to building a productive economic system Date: March 30, 2021 – 6:00 pm – 8:00 pm

March 30, 2021 0 comments

Events Executive news

Roundtable 1 Manufacturing

by Executive Editors March 30, 2021

written by Executive Editors

Part 1 in a series of 5 roundtable discussions on the future of Lebanese industries organized by Executive Magazine in partnership with the United States Agency for International Development under the Lebanon Enterprise Development (LED) project. The roundtable dealt with overcoming rising financial barriers by leveraging competitive skills and new labor cost advantages. Date: March 30, 2021 – 3:00pm – 5:00 pm

March 30, 2021 0 comments

Editorial

Do we dare?

by Yasser Akkaoui March 27, 2021

written by Yasser Akkaoui

Elephants are the epitome of power. These times of mystifying power tugs-of-war remind us that Lebanon’s economy has a fundamental right to security and stability. If you personally like the company of an elephant is thus secondary, as long as their power is wielded democratically.

The scary downside of this equation is that when out of control, an elephant in any room will be ruinously destructive. Without a harness, ours has been running loose for much too long. What is tricky is that we cannot mislabel, ostracize or kick it out, since years of indoctrination have engrained it in the identity of Lebanese individuals, families, and communities.

We understand that this elephant is part of our national mix of communities, we know its roots and doctrine, and we are well aware of the bloody path it has taken for forty years, rampaging both for and despite of Lebanon’s interests. But in all our awareness of this destructiveness and despite the track record that includes years of undermining the rule of law, flaunting the national sovereignty, amassing weapons and, lately, mastering cyber weapons and wielding them in cyberwars in support of Syrian and Iranian interests, we also recognize that harnessing the elephant will require a whisperer.

At this moment where we face a very real collapse of a nation, however, we cannot stand idly by the hijacking of Lebanese social causes or the continued destruction of our politics and future. Yes, the elephant is today more dangerously out of control than ever and has failed, along with the whole Lebanese establishment, to deliver on any promise to the people while doggedly warding off alternatives.

This ugly truth is unbearable, but it is time to face it. Look at our barren land, standstill mills, wasted youth and frightened eyes.

Elephants may arrogantly look down on roommates. But any would-be or real elephant in our room has to understand that Lebanon can no longer afford and will no more accept stampeding over its affairs and interests for the benefit of power-mad and bloodthirsty patrons.

March 27, 2021 0 comments

Entrepreneurship

Cedar Oxygen: a ventilator for Lebanese industrialists?

by Nabil Makari March 25, 2021

written by Nabil Makari

Established in early 2020 as a private initiative to address the pressing social and economic difficulties of the Lebanese industrial sector, Cedar Oxygen was later approached by the Lebanese central bank (BDL) which invested $175 million of financing in order to address the need of local industries. In light of the financial crisis in Lebanon and the depreciation of the Lira, which is making it more difficult for the Lebanese to import foreign goods, including raw materials, Executive sat down with Alexandre Harkous, Chairman and Managing Partner of Cedar Oxygen.

Could you please start by introducing yourself and telling us about your background?

I left Lebanon in 1985 and moved to France. I am an engineer, technology oriented, specialized in Finance. All my background is with banks, asset management and capital markets. Then I ventured into startups. I founded my first one, SIP, in 1996, and sold it in 1998 to a very big company in the UK, Mysis UK. For the following three years I was head of wealth and asset management at Deloitte, then my second startup was established in 2000, BI-SAM Technologies, which became a worldwide leader in wealth and asset management systems. Today, more than USD 15 trillion of assets under management use this system. This company was then sold in 2017 to FactSet [and relocated from the UK to Lebanon]. Why Lebanon? I am Lebanese […] I wanted to give back to Lebanon, and even wanted to come back and live in Lebanon. I had prepared everything in Beirut, then we started facing the problems we know. My objective was to help Lebanon and help the Lebanese youth in creating startups.

Could you expand on the genesis of Cedar Oxygen? How was it created? Were institutions such as the Lebanese central bank or expat organizations involved in the design?

[BDL] was talking to different fund managers and counterparties, including the Association of Lebanese Industrialists. The Governor [Riad Salameh] called me in January 2020 and we met. We discussed in length the problems that the industrialists were facing, their increasing need for liquidity as well as the foreign reserves situation and the subsidies issue. He asked me for my opinion. We import between 11 and 14 percent of GDP per year for the industrial sector. We import raw materials for USD 3 billion. We should have a way for industrialists to finance themselves which should be a closed circle.

The other idea was related to the FX, because industrialists selling to the domestic market will collect their money in LBP, and therefore we should have a solution to inject money in the fund in USD. He mentioned that he was talking to different parties. So we started the process in the end of January and early February. After a long procurement process and 11 different meetings, due diligence and compliance processes, our proposed solution (Fund and Digital Fintech Platform) was approved by the Governor and voted by the Central Council members

I had called different partners, from Moscow, Paris, and Beirut, and we worked hard during six weeks and presented this program in March. It has two legs: a fund (a pool of money), and a platform for peer-to-peer FX.

Were there any Lebanese expatriates involved in the process?

All the founding team members are expatriates. We hired a team of seven in Lebanon after we created the company. Today we have two structures, the back office in Paris and a front office team in Beirut.

Did any organization such as Lebanese International Financial Executives (LIFE) take part in this process?

The founding team seeded the initiative, then the BDL was the first anchor investor in the fund. Cedar Oxygen is a private initiative, founded by expatriates. I am a member of Life, and chairman of the technology pillar of LIFE today. Two other members of Cedar Oxygen are members of LIFE. This is how I contacted my partners. It is not a LIFE initiative but an initiative by LIFE members.

In the current situation, Lebanese enterprises are finding difficulties in accessing capital, in paying for imported materials (raw materials and machinery), and the need to activate exports. How will the Cedar Oxygen fund address these issues?

The journey ahead of us is long. We have a pool of capital and a FX platform. Now if you are an industrialist, you need to buy your raw materials let’s say from France or any other country, you can ask for a facility from Cedar Oxygen, you can import through the platform, which is digitalized, with a new way to treat the files. Given that we are in France, we will be talking to Coface and Euler Hermes to help structuring credit insurance for exports.

The process starts by collecting the data from applicants, studying the files, financial statements, and their financial situation. We have a credit team in the Beirut front office that collects and analyses the data, and creates a credit memo for an Investment Committee (IC). The IC is composed of five members; three of them are independent and two are not Lebanese. The idea was to avoid a conflict of interest. There is no decision made in Beirut with regard to how we allocate the funds. Any file we receive is treated in Beirut, a detailed memo is sent to the IC. Every week we have an IC, the vote has to be unanimous for the file to be approved. Then we deploy the money and pay directly to the sellers of raw materials. The materials are then sent to Beirut.

How would you describe Cedar Oxygen’s business model? Would you qualify it as a private debt fund?

Yes, but for the moment it is not debt for capital expenditures or working capital. It is for buying raw materials. However we are talking to different development finance institutions (DFIs), and we hope to help more by deploying money for capital expenditures and working capital, this will help the industrialists augment their production, especially the exporters. Our target is to improve the balance of payments.

Will this include export support or export activation programs? (For example, participation in trade fairs among others)

You are aware that we have signed a memorandum of understanding with the Association of Lebanese Industrialists (ALI). We are working now with different economic attaches, either Lebanese or non-Lebanese, in different Lebanese embassies, but also the French Chamber of Commerce and the ALI. We are preparing a virtual trade fair for Lebanon that will be held in Paris on April 29 to promote the Made in Lebanon label. It will be the first virtual trade fair where we will expose real Made in Lebanon brands in Europe, and it will be our first occasion to show that.

Is Cedar Oxygen banking on specific key sectors for exports (for example agribusiness and key industries with competitive edges)?

We are excluding jewelry, due to Know Your Customer (KYC) and Anti-Money Laundering (AML) problems. We were excluding oil because it is not raw materials. But we received a file today, a request for a company that is importing oil for industrial purposes and we will consider it. Other industries, agribusiness, of course, textiles, machinery, and other industries are all eligible.

You mentioned hoping to reach $400 million per fund. How are you segregating the funds?

When I met Fady Gemayel, the president of the ALI, we were looking at the needs of the Lebanese Industries, and we came to the conclusion that if we reached this number, and we could roll it out once or twice a year, this would be enough to cover the initial demand. This was in February 2020. Afterwards, the government announced their default on Eurobonds, then resigned, then unfortunately the explosion at the port and the COVID-19 lockdown occurred, so we are trying to readapt our strategy to be pragmatic, especially as our stakeholders, the DFIs have two problems today: they have concerns about the political issues, and the country risk. We are trying to reach this amount as a target.

You mentioned before that you were hoping to reach a $2 billion a year financing. How are you segregating the funds?

We are allocating by sector. Our business strategy is to manage risks. We have to manage risks by sector, we will not concentrate our investment on a few sectors. We reallocate things differently, but we are still deploying. We cannot have more than 5 percent concentrated to a single borrower and no more than 30 percent concentration to a sector.

Industrialists have expressed interest. Are they mainly interested in the fund as potential borrowers or recipients? Or are there desires to be part of the financing?

There is interest in borrowing from the fund, but we have received interest by some of them to invest in the fund. You can use money in the fund, but you cannot obtain any priority to borrow from the fund in that case, or receive any information on your competitors. It’s a candid answer we need to give to those industrialists; it’s part of the communication.

When we created the IC, we were concerned to receive these calls from Beirut. I have one vote, even if I want to transfer money from the account I cannot sign alone. The signature is done not just by the chairman but also by two external managers that are partners in the corporate service agent that we work with who operate under Luxembourg jurisdiction. We are always under control by the IC for any money in and out.

Has potential funding interest been expressed by other sources?

Industrialists are interested. DFIs were all interested, but with all that happened last year we have had ups and downs. Since the US elections we are seeing more interest from the American side. In Europe it’s more wait and see, as they wanted us to form our government. Now they are accelerating, since it’s a private initiative and for the private sector. I cannot tell you which country, but I had a meeting with the ambassador from a European country, and he mentioned the need to accelerate. We are accelerating with these DFIs without waiting for the government and waiting time.

In light of the political instability in Lebanon, do you believe Lebanese industries can thrive even if economic instability seems to have become the norm?

We are looking into the private sector, and our contracts are under Luxembourg and UK laws, if they are under Lebanese law it’s for rare cases like mortgages and guarantees. All the investments are under the UK and Luxembourg laws.

Lebanon is unstable and has always been unstable. Unfortunately the good days of Lebanon are behind us for now, we should wait to get those good days again, and I am optimistic. But we can work without this, we should continue, otherwise we lose a lot of time.

We made studies about what happened in Italy, Germany, and France with regards to lockdowns for example, and we gave the Government the protocols applied there and told them not to lock down the industry, as it is a productive sector. We are trying to help. I don’t think we should be concerned about the government and the reforms; otherwise we lose a lot of time.

It’s an alternative system and an alternative fund; it’s even an alternative economy. It’s a private initiative. Investors have no leverage on us.

True, but Lebanon’s Ease of Doing Business rating is very low, industries are not hit by a lack of financing only, but also by issues related to infrastructure and regulatory issues (for example electricity outages and slow internet). Wouldn’t this be an impediment to the growth of the industrial sector?

Of course, but look, let’s be pragmatic, and let’s consider a moment that Cedar Oxygen was not established and that we are here to build something and come up with solutions. The banking sector won’t recover in the next 18 months, it will take years, and when we say years we say five years minimum. You don’t have a lot of financial solutions. If you wait for the government, who knows?

In my opinion, if we want to rebuild the country we need private initiative, direct to the consumer, direct to the industrialists, to people, to become productive. Cedar Oxygen is one initiative, but we can duplicate this. Even at Cedar Oxygen, we finance trade, but also what else can we do? We are considering Capital Expenditures. If we make our initiative successful, we can duplicate this to other sectors such as technology or agriculture.

You put a lot of emphasis on governance, principles; you have an investment committee with unanimous voting. Do you think you can help promote better governance standards?

That would be our aim. If you asked me this question two years ago I would have told you it’s difficult, due to the fact that Lebanese companies are family businesses, with strong connections. It’s a difficult mission to be honest. We are trying to talk to our industrialists but the road is long, they have to rebuild a lot of things. There are things we can’t address now like pollution or sanctions.

Today I am seeing people more open to equity investments, because they want to save their companies and jobs. I think that implementing new standards is an opportunity, and not just an economic one. It can promote best practices and gender equality, for example.

On our end, we have best practices implemented and corporate governance, including Environmental, Social and Governance (ESG) principles that we review with different experts and asset managers.

I feel I have to take on this mission, and fortunately I have a great team behind me. It was a learning curve. I was naïve when I came to Beirut, I learned a lot from that one year.

Note: We modified this text on March 26 and 27, 2021, based on clarifications from the interviewee, specifically in terms of Cedar Oxygen’s relationship with the Lebanese central bank, its internal structure, and its allocation of funds.

March 25, 2021 0 comments