Banking

Money Matters by BLOMINVEST Bank

by Executive Staff
written by Executive Staff

Regional stock market indices

Regional currency rates

South Koreans awarded housing development contracts in Libya

Two South Korean contractors, Sungwon Corporation and Amco, won a $1 billion contract to construct housing units in Libya.  Sungwon Co. signed a $996 million deal with Libyan Investment and Development Company to construct 5,000 residential units, while Amco, a Hyundai motor Co. subsidiary, will build 2,000 domiciles and related infrastructure in the city of Qubbah, as part of a $420 million project developed for the Organization for Development of Administrative Centres. In a related development, following its meeting in Alexandria, the Mediterranean union launched a new regional $1.3 billion infrastructure fund with the aim of developing infrastructure across the region.

Kuwait KPI and China Sinopec to build oil plant

Kuwait Petroleum International (KPI) and the Chinese state refiner, Sinopec, announced the relocation of their $9 billion mega refinery and petrochemical project to Donghai Island near Zhanjiang, in China’s Guangdong province. The plant, which is set to be completed by the end of 2013, will have a crude oil refining capacity of 300,000 barrels per day and ethylene production capacity of 1 million tons per year. The proposed project would become one of the largest Sino-foreign joint ventures in China. It is part of Kuwait’s plans to build strong links with China, regarded as a key future market for oil and gas. Furthermore, it is expected to serve as a driving force for the Gulf state to achieve its China-bound crude oil export target of 500,000 bpd by 2015. KPI will supply 100 percent of the crude to be processed at the plant.

Egypt’s 2009 growth between 3.2% and 4.3%

The International Monetary Fund, Economist Intelligence Unit (EIU) and Moody’s Rating Agency Services have published their relevant economic data on Egypt indicating a 2009/10 growth ranging between 3.2 percent and 4.3 percent. The IMF pointed out that the gross domestic product will grow by 4% in 2009/2010, while inflation will decline to below 10 percent in June 2009. Moreover, the IMF said that despite the lower economic growth rates than previous years, Egypt has weathered the impact of the global financial crisis well. The EIU has made an upward revision to their GDP growth forecast to 4.4 percent in 2008/09, and 4 percent in 2009/10 following better than expected economic data. The EIU specified that the Egyptian government has taken several steps to weather the crisis, while the Central Bank of Egypt has made four interest rate cuts so far and is expected to implement further reductions in 2009 and 2010. Moody’s Ratings estimates real GDP growth exceeded expectations in the first quarter of 2009, at 4.3%, and the expected growth for the year is estimated at 3.2 percent to 4 percent, despite the agency’s downgrade from stable to negative in June 2008.

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Banking

For your information

by Executive Staff
written by Executive Staff

UAE restricts structured products

On August 2nd, the United Arab Emirates’ central bank issued a circular instructing Emirati banks to withdraw from selling structured products.

“Should a bank wish to sell a structured product to its customers, it will have to submit to the central bank a written request with the relevant details and the rationale for asking an exemption to this rule,” stated the notice.

Evidently, the UAE Central Bank made this move in order to avoid future defaults and severe problems. Many banks in the UAE had invested in structured products up through 2008. Once the global financial crisis took hold, banks across the UAE and the GCC faced major liquidity problems. Consequently, the UAE sovereign had to bail out the financial institutions in order for the economy to stay afloat. This recent circular by the UAE Central Bank should improve regulation of local banks, while avoiding any major fallouts that could derive from structured product investments.

Lebanon resilient, but public debt looms

Earlier this year, the International Monetary Fund reported that the Lebanese economy would grow by 4 percent in 2009. Now, the IMF has revised this projection and believes the economy could grow considerably faster than previously thought — even when most emerging economies are still profoundly affected by the global credit crunch.

The IMF was worried about Lebanon’s extreme vulnerability at the start of the global financial crisis in September 2008, as the economy had one of the highest government debt-to-GDP ratios in the world, a large and heavily dollarized banking system (with substantial exposure to the public debt), and its local currency pegged to the US dollar.

With Lebanon’s ongoing deposit inflows, high liquidity levels, strong and conservative banking sector, improved internal security conditions and a small export base, the IMF says these key factors are responsible for the country’s resilience. Yet, the national debt still remains a major issue.

According to Bank Audi, by the end of June 2009 the public deficit stood at $47.3 billion — 160 percent of GDP. This is down from $47.9 billion in May 2009, $48 billion in April and $48.2 billion in March 2009. “This continuous decline has diminished the year-to-date increase to a mere 0.6 percent in the first half of 2009, as compared to 5.8 percent in the same period in 2008.”

However, the IMF warns that Lebanon could still be at risk in the future,  thus, substantial reduction of the country’s debts should be the top priority.  The IMF says this will take many years of continued fiscal regulation and will necessitate solving the problems in the electricity sector.

Emirates’ liquidity up

Liquidity in the UAE banking sector is reportedly on its way to recovery. Published in August, a report by the Dubai Chamber Economist credited the Emirates Interbank Offered Rate (EIBOR) for encouraging liquidity inflows into the banks operating in the UAE. The EIBOR rate currently stands at a low of 3 percent, significantly down from its peak of 4.6 percent in November 2008.

“The significant easing reflects the improvement in market sentiment over the past few months and strong appetite of banks to start lending to each other,” the report said. “Some observers suggest this trend is likely to continue throughout the remainder of this year.”

Speaking to Emirates Business 24/7, Sanjoy Sen, consumer bank head of Middle East at Citibank, noted the recent increased levels of liquidity into the UAE market. “Yes, we see a lot of liquidity entering the market. A lot of investment that was going into the property market is now coming into the bank as deposits.”

“In the past few months we have witnessed funds, which were earlier held abroad, being moved back to the UAE. This is a very healthy trend for this market and consumer confidence has been further boosted by the UAE government’s deposit guarantee scheme that covers all local and foreign banks.”

UAE Central Bank data illustrates the improved conditions. Figures say that banks raised $15.3 billion in cash deposits in just the first six months of 2009, while only lending $3.6 billion during the same period. The loan-to-deposit ratio gap has significantly decreased since the beginning of the year; at the end of January the gap stood at $24.5 billion, while by the end of June this figure had dropped to $12.9 billion.

“This clearly suggests that the gap is narrowing considerably in a short space of time. Overall, the banking sector’s finances are starting to look healthier,” the Dubai Chamber Economist report said.

Lebanese banks solid

August, Bank Audi published a report on the resilience of the Lebanese banking sector, entitled “A Successful Story of Resilience Unscathed by Global Turmoil.”

Based on data from 2008 and the first half of 2009, the report says “Lebanon’s banking sector has witnessed in fact over the past year one of its best performances ever, unscathed by the global financial turmoil.”

From December 2007 to December 2008, domestic banks’ assets grew by 13 percent to $13 billion. Asset growth was mostly driven by customer deposits, which made up $11 billion over those 12 months.

This trend “was extended even further over the first half of 2009, as per preliminary Central Bank statistics,” the report said. “Capital inflows towards Lebanon amounted to above $16 billion in 2008, up by 48 percent relative to the previous year, leaving a large balance of payments surplus of $3.5 billion, a record high for Lebanon.”

Despite all the good news, Bank Audi cautions that in order for domestic banks to remain resilient in the long-term, structural reforms must take place, “to ensure a soft-landing scenario for Lebanon’s public finance conditions that remain worrisome and where the main vulnerability lies.”

Results of BSE listed banks for the first six months of 2009

The results of the first half of the year for the five banks listed on the Beirut Stock Exchange (BSE) are out, proving that the Lebanese banking sector has remained resilient throughout the global crisis.

Combined net profits of Bank Audi, BLOM Bank, Byblos Bank, Banque BEMO and Bank of Beirut increased by 3 percent to $368.1 million in the first half of 2009, up from $357.3 million in the first half of 2008. The banks’ average aggregate net profit growth reached 1.54 percent in the first half of the year.

BLOM recorded the highest growth in net profits with a 5.8 percent increase in the first half of 2009, totaling $138.3 million.

In the first six months of 2009, the average net assets of these banks increased 10 percent from the end of 2008. BEMO witnessed the largest asset growth from the end of 2008 with a 15.6 percent jump.

The listed banks’ deposits rose by 10.9 percent from the end of last year and 17.8 percent from the end of June 2008, reaching $50 billion. BLOM recorded the lowest loan-to-deposit ratio at 21.7 percent for the first six months of the year, compared to 22.7 percent at the end of June 2008. Byblos Bank came in second place for lowest loan-to-deposit ratio of 30.9 percent, versus 32.9 percent it posted at the end of the first half of 2008. Next came Bank of Beirut with a ratio of 31.3 percent for the first half of 2009, versus 35 percent in June of last year.

Bank Audi, Lebanon’s largest bank by total assets, witnessed a 32.4 percent loan-to-deposit ratio in the first half of 2009, versus 35.8 percent at the end of June 2008. Banque BEMO saw the highest loan-to-deposit ratio amongst the listed banks, with a 47.8 percent ratio versus 48.5 percent at the end of June last year.

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Editorial

Time to boycott failure

by Yasser Akkaoui
written by Yasser Akkaoui

It is a measure of how far Lebanon has come in recent years that a new roof is being placed on the synagogue in the Beirut Central District. It is also a reflection of Lebanon’s unique multi-faith make-up and the country’s tolerance for all religions.

But tolerance alone does not make a strong state.

It is no secret that today Israeli companies are outsmarting the Arab boycott, a concept so archaic and so self-defeating it stopped having any real meaning decades ago. Israeli manufacturers are re-branding and re-labeling their products to compete in the new and vibrant Arab markets.

Furthermore, Israel has set itself up as a shop front for global manufacturing, attracting some of the world’s biggest brands to their industrial parks. The upshot is that, while the Arab world tears itself apart, Intel — to take just one example — churns out Israeli-made processors destined for a global market.

And yet while Arab regimes would deny us the right to buy those same processors, they are also denying us the chance to move forward and compete in the name of a strategic ideal they call the Arab boycott.

The real Arab boycott should be one that stops us from denying ourselves the right to take our place in the community of nations that make up the new globalized economy. It should involve us making an effort to produce and compete on an equal level.

Contrary to popular belief, the strategic goal of the Zionist state is to place an emphasis on economic dominance. It is as much economic as military or political leverage that drives Arab-Israeli negotiations. After all, the victor is the nation that can achieve economic sustainability.

The Arab world, and the countries of the Levant in particular, need to understand the essential connection between the state, the public sector and the welfare of the people. Without this economic angle, a state can never succeed; indeed it can never be a state.

Lebanon is a case in point. The private sector has the talent and it has the will. The state now needs to hitch this potential to its creaking wagon so that it can start competing with Israel at its own game. Lebanon needs to start empowering, competing and attracting foreign investment.

It is that simple.

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Executive Insights

Front-office self-assessment is good for the firm

by Tommy Weir
written by Tommy Weir

Look in the mirror and take a long look to see how well you are doing as a leader. This can be very scary, as a mirror reveals reality and all of the blemishes that we try so hard to hide. It has probably been a long time since you took a real look at the quality of your leadership and you will be anxious from the results.

Guess what? You are probably not doing as effective a job as you may have thought, at least according to your followers. For this past year the average difference, globally, between how effective managers say they are and how effective the non-managers say the managers are is a startling 12 percent, according to the Kenexa Research Institute’s Employee Confidence Index. This is a significant gap that organizations must address.

It is no surprise that leaders think they are better than non-managers say they are, as they seldom take the time to look in the mirror. Isn’t it strange that in organizational life, leaders try to cover-up, hide and masquerade their leadership quality when every employee sees the real story and knows the truth?

In this region, the typical manager’s reaction is to argue about the results, blame others and make excuses for the difference. Because of pride and prestige, they find this research a very hard truth to swallow. Immediately upon learning that they are not as effective as they think they are, managers start making excuses and blaming everyone possible. Here is a list of common reactions:

They blame the organization, saying it did not give them the support needed.
They blame the human resourses deparment, saying they hired these people who are questioning the effectiveness of their leadership.
They blame the global recession.
They blame the employees saying they do not know what quality leadership is.
And, they conclude that the employees are just wrong.
They blame everyone, except for the real source of the leadership deficit, which is themselves. Instead of blaming and making excuses for their lack of effectiveness, the managers need to take responsibility, recognizing that they are not performing as well as they think. Then, and only then, will they be in a position to do something about it and to get better.

Business, political parties and governments are at great risk if they do not pay attention to what the research says. It may be revealing that the level of employee engagement is off, employees are loyal to themselves and not the organization, and the organization is not receiving top performance from the non-managers. The employees are stating a painful reality that organizations need to address in order to mitigate the risk associated.

So what should an organization do to improve reality to the level of perceived leadership effectiveness?

First, an organization needs to discover the truth through a global standard leadership effectiveness survey.

Then, leaders need to see and accept the reality of what the non-managers say about the effectiveness of their leading. No more blaming, hiding or masquerading. They need to accept the results and be accountable for them. 

Finally, organizations need to invest in developing the effectiveness of their leaders. This should happen through organizational systems, processes and approaches that provide accountability and through leadership development.

In this region, only 50 percent of organizations invest in developing their leaders. And for the majority of the ones who do invest, the development is limited to aspiring leaders — not the ones who already occupy the managerial posts. The result is less than optimum effectiveness in leadership, as most managers do not continue to improve their capability once they attain the aspired managerial position. 

If an organization wants to mitigate its risk exposure, it must get serious about its leadership reality/effectiveness and do something about it.

This 12-point difference reminds me of the monkey who climbs all the way to the top of the tree. Once he reaches the top he looks back and sees a crowd of people staring up at him. As he looks at this crowd he sees them pointing and smiling. Success! Right? But what is it that the people are seeing when they look up from the ground to the monkey in the tree? They are laughing as the monkey is exposing his backside.

Are you at the top of the tree? What do you see? What do the non-managers see of you?

Tommy Weir is managing director of leadership solutions at Kenexa

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Finance

Food security – Harvesting another’s crop

by Mona Alami
written by Mona Alami

Last year’s soaring food prices caused a global crisis that triggered a shopping spree on farm land around the world. Rich countries that normally import food have now bought up large tracts of land in poor food-exporting countries.

Arab countries have gotten in on the act, as a result of losing confidence in normal food supply chains. To ensure their food security, many have bought millions of hectares of farmland in Africa and Asia, creating offshore food sources in countries like Indonesia and Ethiopia.

“It seems that it has become an important concern for countries in the Arab region which want to meet the growing demands of their populations,” says Devlin Kuyek, a researcher at GRAIN, an international non-profit organization that supports small farmers.

Last year, Egypt signed a contract with Sudanese President Omar al-Bashir to produce 2 million tons of wheat per year in the north of Sudan for export to Egypt, according to GRAIN, which includes Egypt in a report on “land grabbing” countries. Egypt has also leased 840,000 hectares from the Ugandan government, which represents about 2.2 percent of Uganda’s total area.

Countries such as Saudi Arabia, Bahrain, Kuwait, Libya, Jordan, Qatar and the United Arab Emirates have also been featured in GRAIN’s land grabbers report. In September 2008, the governments of Qatar and Vietnam announced plans for a $1 billion joint investment fund, of which some $900 million was invested by Qatar’s sovereign wealth fund, the Qatar Investment Authority.

“In August 2008, Ethiopia’s prime minister told the Financial Times that he was eager to give Saudi investors access to ‘hundreds of thousands’ of hectares of farmland for investment and development,” notes GRAIN’s report.

“It is however very difficult to estimate the total value of land grabbed today as most deals remain in the negotiations phase and are, for the most [part], very obscure,” says Kuyek.

But the United Nations’ Olivier de Schutter, the UN’s special rapporteur on the right to food, quotes an estimate from International Food Policy Research Institute (IFPRI) that between 15 and 20 million hectares of farmland in developing countries have been subject to transactions or negotiations involving foreign investors since 2006.

Not always a fair deal
“States would be acting in violation of the human right to food if, by leasing or selling land to investors, whether domestic or foreign, they deprived the local population from access to productive resources indispensable to their livelihoods,” he said. “They would also be violating the right to food if they negotiated agreements that might lead to a situation of food insecurity, a dependency on foreign aid or on increasingly volatile international markets.”

The land purchased by countries is usually fertile farm land with relatively easy access to water.

Some say the purchases can have adverse repercussions on indigenous people and pastoral populations who are evicted from the land they have used for generations for cultivation and irrigation.

“Land grabs are becoming institutionalized as clear strategies that are developed by governments, which also rely on the private sector and international organizations,” insists Kuyek.

For example, the Saudi Eastern Province Chamber of Commerce has sent a circular to all businessmen in the eastern region, directing them to invest in agriculture projects overseas, following a government directive that the private business sector should undertake agricultural production ventures abroad, according to the Saudi Gazette.

“The objective is to achieve long-term food security for Saudi Arabia and secure a continuous supply of food to the kingdom at low and fair prices,” Adnan al-Naeim, secretary general of the Asharqia Chamber in the Eastern Province, told the Gazette.

The buyers
Governments, often through sovereign wealth funds, are negotiating acquisition or lease of farming land.

“The Bin Laden Group signed an agreement to invest about $4.3 billion, on behalf of a consortium of 15 Saudi investors [know as] the Middle East Foodstuff Consortium, to develop 500,000 hectares of rice land in Indonesia,” the GRAIN report said.

In August 2008, three Gulf firms — Abu Dhabi Investment House (ADIH), Ithmaar Bank and Gulf Finance House — announced the creation of AgriCapital, a new $1 billion Islamic investment fund which purchases land overseas to produce food for the region, as well as fund biotechnology research.

The report also quoted Abraaj Capital, a private equity firm, saying it had acquired, together with the UAE government, about 324,000 hectares of farmland in Pakistan for rice and wheat production.

“Gulf countries are also operating through the Islamic Development Bank,” adds Kuyek.
A spokesperson at Abraaj, speaking on condition of anonymity, told Executive, “This is the first time I have heard of such a thing.” ADIH and the Binladen group did not reply to requests for comment.

Beyond food security concerns, it appears that land purchases are increasingly being perceived as a powerful investment tool for global firms. A flurry of investment companies and private funds have been acquiring farmland around the globe, banking on increasing food prices in the future and cheap fertile land. Among the companies named by the GRAIN report are Goldman Sachs, Deutsche Bank, Black Rock and the International Finance Corporation.

“In August 2008, Goldman Sachs invested $300 million to acquire full control over more than 10 poultry farms in Hunan and Fujian provinces in China,” says the report.

In spite of the power and influence these countries and international companies exert, more and more opposition groups are fighting the deals.

“In the Philippines and Madagascar, opposition groups are challenging such deals and taking them to the government,” says Kuyek.

But many countries around the world remain unaware of the possible dangers lurking in the near future. According to the Saudi Gazette, Saudi Arabia launched a major food security initiative, in cooperation with the International Fund for Agricultural Development, identifying Mauritania, Yemen, Algeria, Senegal, Sudan, Morocco, Bosnia and Lebanon as countries where land may be purchased to guarantee food security. 

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Finance

IPO Watch – A Saudi solo

by Executive Staff
written by Executive Staff

Optimism about a year-end pickup in initial public offerings (IPOs) cannot conceal that August was yet another bone-dry month, which continued the plunge of all IPO measures in the MENA region in 2009.

Only one company, the Saudi medical services firm Al Mouwasat, undertook a subscription in the Gulf Cooperation Council last month. Al Mouwasat offered 7.5 million shares in a bid to raise $88 million; it did not announce any over-subscription after its IPO closed on August 21.

Another company undertook an IPO on the floundering Damascus Securities Exchange (DSE): Qatar National Bank-Syria. The company said its offering of 3.4 million shares for $37 million met with substantial demand, resulting in an over-subscription of almost 2.5 times. The IPO closed on August 10.

While the lowdown in regional IPO activity in August has been attributed to a mixture of uninspiring first-half results, the summer vacation season and the beginning of Ramadan, it keeps local and global investment professionals waiting another month in limbo for the potential of Arab IPO markets to regain speed.

Slim pickings
So far this year only 12 companies have approached public markets, compared to 50 during the same period in 2008. The total amount of capital raised so far this year has dropped 85 percent from $13.12 billion to $1.98 billion, half of which came from the IPO of Qatar’s Vodafone.

Average oversubscription levels have come down considerably from 15.71x in the first 8 months of 2008 to 3.69x over the same period in 2009.

Although the drop in oversubscription levels may be reflective of the prevailing risk-averseness among investors, some see it as a positive development.

“We stand at a much healthier level of oversubscription because investors are being allotted a larger number of shares, so they do not lose interest anymore,” an associate vice president at a major Saudi investment bank told Regional Press Network on condition of anonymity because he was not authorized to speak with the media.

The executive attributed the slowdown in the number of IPOs in the kingdom to regulatory and administrative red tape, adding that “the IPO market in Saudi Arabia is not suffering, and the Capital Market Authority is in fact studying many applications.”

Indeed, after being propelled to the global leadership list of public offerings in 2008, Saudi Arabia again flexed its muscles in 2009 with the number of issues reaching eight and raising almost $1 billion.

Companies were able to raise 10 times more in 13 offerings during the same period in 2008, but the lower 2009 number of Saudi IPOs contrasts positively with that of neighboring United Arab Emirates, where IPO activity has stalled. Activity in the UAE fell by eight IPOs and $1.3 billion raised over the same period last year.

Amman’s IPO activity also came to a halt in 2009 through August, after 13 offerings and a total offering size of $125 million during the same period in 2008. Similarly, no IPOs have been registered in Cairo, Casablanca, or Muscat so far in 2009, after strong showings in 2008.
“Why are the Saudis so dominant?” asked Jeff Singer, CEO of NASDAQ Dubai in a recent Ernst & Young report. “You have a lot of companies that really never went public… The stock exchange in the last few years has become a truly viable market. We’re seeing what looks like a pent-up demand for companies going public.”

Saudi IPOs have indeed become the torch bearers of the move to public ownership in the region. Most recently, shareholders of SABB Takaful, one of the Saudi’s largest insurance companies, voted to increase the company’s capital by issuing shares.

The pipeline for the kingdom also holds further promises. Three insurers — Buruj for Cooperative Insurance, Al Alamiya for Commerce and Services and Gulf General Cooperative Insurance Company are scheduled to open their IPOs in early October. These insurance companies have also received CMA approval to sell shares.

The success of IPO offerings in the kingdom is in fact surpassing the initial offering stage to reach the secondary market. Ace Arabia and AXA Cooperative Insurance, whose IPOs were 11.35x and 5.71x oversubscribed, marked their Saudi stock market debut with whopping 662 percent and 267 percent spikes on their first day of trading.

Similarly, Saudi Steel Pipe Company and National Petrochemical Company which were 3.44x and 2.11x oversubscribed, respectively, and ran up 34 percent and 30.5 percent respectively on their first day of trading in August.

NASDAQ Dubai’s Singer, in his interview with Ernst & Young, also expressed optimism that the successful Saudi trend will continue.
“We’ll continue to see more companies out of Saudi Arabia than anywhere else in the Gulf. And I don’t think it’s anywhere near the demand that would exist if the market conditions were better than are right now,” he added.

Despite the concentration of IPOs in the kingdom, Bahrain, Tunisia and Syria’s markets still saw a bit of IPO activity.

Outside the Saudi game
Bahrain’s Gulf Finance House said in August it had received central bank authorization for a capital increase and, pending shareholder approval, plans a $300 million rights issue to bolster its balance sheet and fund possible investments. In addition, Manama-based Takaful International Co, an Islamic insurer, announced a 20 percent rights issue for September that will increase its capital by $2.6 million to expand its business and underwriting capacity.

In Tunisia, cement company Les Ciments de Bizerte announced plans to raise $76.3 million to finance the expansion of the plant and increase the clinker production capacity.
In the Levant, Syria is expected to see several public offerings throughout the rest of 2009, as the DSE works to increase the number of its publicly-listed companies.

Besides Qatar National Bank-Syria, which closed its IPO with a 2.5x oversubscription, Audi Bank Syria and Banque Bemo Saudi Fransi successfully increased their capital through share issuances.
The list for the next several months includes additional financial firms, of which Albaraka Bank Syria’s IPO has been scheduled for the first week of October.

Lebanon’s only action came from privately-owned chocolatier, Patchi, which said that the group is preparing for a bourse listing on the London and Dubai stock exchanges to finance international expansion.
The region’s most disappointing market remains the UAE, where no equity capital has been raised so far in 2009. A thin ray of hope came from the deputy CEO of the Securities and Commodities Authority (SCA) Mariam Butti al-Suwaidi, who said that “markets are expected to witness one IPO from a local company,” adding that “the number of applications that the SCA received since the beginning of the current year is three.”

Nevertheless, the bittersweet reality is that the practical standstill of IPO markets in several MENA countries is a situation shared by many abroad, as a result of violent equity market fluctuations and fears of being publicly snubbed by investors.

Commenting on the global drop in share issues, Edward Law, co-head of Western Europe Equity Capital Markets at Deutsche Bank, said that “companies recognize that now is not an easy time to IPO. At the moment, they are looking for broader guidance on the direction of the economy — on when we are going to see some stability in the macro environment and also in underlying equity markets.”

NASDAQ Dubai’s Singer added that “valuations across all asset classes have declined significantly in the last 12 to 18 months, and the ability to achieve an attractive valuation is an important driver to encourage owners of potential IPO candidates to sell these assets through the public markets.”

Singer predicted that “the fourth quarter of 2009 is most likely the realistic time here for when the Middle East IPO markets will open up.”

Regional Press Network

 

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Real estate

UAE – Investors vs. developers

by Nada Nohra
written by Nada Nohra

Property disputes between real estate developers and investors in the United Arab Emirates have increased since the financial crisis crippled the country’s property market. Dubai’s property court has already recorded 833 dispute cases in the first six months of this year.

Analysts told Executive they believe numerous cases have not reached the courts yet, and with the continuing recession, the number is likely to increase in the coming months.

Little or no confidence 
The rise in the number of disputes stems mainly from Dubai’s property values decreasing and the sudden lack of credit and investors, which caused many projects to be put on hold or canceled. As a result, investors’ confidence in the market plunged and they started questioning if the projects would actually be delivered.

Jim Delkousis, partner and the head of mitigation and arbitration at the law firm DLA Piper, said these disputes are a catch 22: Investors claim that developments are not being built quickly enough and thus withhold further payments. On the other hand, developers say they will have to stop building due to investors’ payment defaults.

Nick Clayson, real estate partner at the international legal practice firm Norton Rose agrees, adding that there may be other parties involved who could slow the progress of construction and make the issue even more complicated.

“Some of the reasons why the properties are not being finished are because of disputes between building contractors and developers,” he said.
Investor confidence is also lower when dealing with developers who are delivering their first project, as they have no track record and are more likely to fail.

“Now that times are more difficult, a number of purchasers and investors are asking themselves if the developers are capable of completing their developments as they have little or no history to back them,” said Delkousis. Still, to know who to blame, each case has to be considered separately.

Investor groups
As investors started to worry about the completion of projects, they formed investor groups, putting themselves in a stronger position against developers. Clayson said that even though they can take no legal action as a group, they can discuss the issue and agree on taking the same steps.

One example is the 100 investors who own more than 200 apartments in the Abu Dhabi Tameer Towers that formed an investor group because they were concerned about the progress of the $1.64 billion project.

“Three CEOs in 15 months, cancelation of contracts, sacking of over half of its staff and no progress on site initiated our concern,” said one of the Tameer investors who didn’t want to be named because of the legal proceedings. 

Since the group was formed, the 100 individuals stopped making payments, explains the investor. He adds that they do not wish to discredit Tameer in any way, but have put forward a series of questions that they would like to see answered.
“We put these questions through ‘The National’ (newspaper) but they never got answered — Tameer wishes to deal individually and not with a group,” he said.

Tameer was unavailable to comment about the issue. Frederico Tauber, the company’s president, told Arabian Business in May that he would be glad to talk with concerned investors, but the company will not be able to return the money invested. He also said that some investors thought the project was canceled, which he said was a “misunderstanding.” In July, Tauber also told Arabian Business they had approached investors trying to understand their concerns, but some were reluctant to come forward. The Tameer investor said the company did not promise the group anything.

“They did say that they would work with all individuals to solve their payment issues and concerns — [a] divide and conquer strategy we feel, [as] individuals have less power compared to a collective group,” the investor said.

He also added that work on the site at the Tameer Towers has been progressing since August, but not to the extent that was promised. 
“Our way forward — well we are still evaluating this as a group — we have some good leads through some of the group’s members which we are looking into,” the investor said.

Lack of transparency
The recession is the main reason behind these disputes, but certainly not the only one. Another important factor that is negatively effecting the market is the lack of transparency between investors and developers.
“The communication is not as good as it should be, investors do not always know what is happening and they are not being kept fully informed by the developers,” said Delkousis.
The blame does not fall only on developers, since some companies might be very transparent and have offered solutions, given the current market situation. Some investors might also be “closing their minds to discussing the issue of delays, payments and things like that with developers,” said Clayson. 

Property court
The Dubai Property Court started functioning in September 2008. Delkousis draws a paralell between the courts and the issue of transparency, saying that investors are not being able to derive any guidance for their own case because most of the cases are private, confidential and run in Arabic.

It is expected that the number of property disputes will increase further, since some investors and developers are waiting to see what the next step of the other party will be. On the other hand, some cases might not even reach court. Clayson says that it would be much better for everyone to negotiate rather than go through the demanding process. Some developers might not even continue pursuing end-users who surely have no money left.

“It can be very time consuming and costly. They might be happy enough to accept that they will not get their money… [and] walk away,” said Clayson.

What about the laws?
One of the most important laws that is supposed to back investors is the escrow law, which came into effect on June 28, 2007. It applies to developers selling units off-plan and stipulates that payments by investors should be put into a special escrow account, which will be used solely for the designated project.

Delkousis said that having an escrow account is better for the purchaser, but it doesn’t make disputes easier to solve. “Investors and developers are fighting to see who is entitled to the money in the escrow [which] will depend on many things, including which party breached the contract,” he said.

Clayson said that a problem with the escrow law is that developers have been able to use the payments to pay for the land, thus leaving no money for construction and for refund if the project is canceled.

“Going forward, the escrow law now does not allow land payments to be made, that is my understanding from having spoken to the land department,” said Clayson. He added that the law should be taken one step further, and not used until the project is completed. Therefore in the case of any dispute, investors will be able to take their money back.

Going forward
The more investors hear about projects not being delivered, the more they are nervous about their  money, and the more disputes arise. So far, the market has not begun to settle down.
“I think it is safe to say that the [number of] cases is still increasing,” said Delkousis.

Clayson said investors and developers should understand that they are entering into a long-term deal, so due-diligence is necessary to ensure both parties can deliver. From the regulatory point of view, he said that the way for the market to recover is first to have a consistent legal regime. 

“Investors should be able to make their investment decisions knowing that the law is certain and will be applied fairly and consistently. That’s what the aim should be so that the market will recover,” he said.

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Real estate

Lebanon – Home on a mountain

by Nada Nohra
written by Nada Nohra

In the next eight to 10 years the map of Lebanon will include a completely new village. BeitMisk, the new residential community located in the northern Metn region, is one of many newly-launched projects which affirm the country’s increasing attractiveness for real estate investment.

BeitMisk will cover 655,000 square meters and include apartment buildings, villas, penthouses, a country club, gardens, recreational areas and retail, offering its residents and visitors a home away from the cities’ pollution and traffic.

The $800 million project is unique in many aspects. The developers say the new village will use renewable energy and have environmentally friendly wastewater treatment facilities. Sustainable and green building materials will be used in construction, and some 70 percent of the development will be green space. BeitMisk will also blend historical and modern structures. Work is underway, construction has started and so have sales.

The BeitMisk project is owned by Renaissance Holding, of which the majority shareholder is Georges Zard Abou Jaoude — who is also the chairman of the Lebanese-Canadian Bank. It is 60 percent financed by Abou Jaoude himself and 40 percent by Banque Libano-Française (BLF). Emaar Lebanon, part of Emaar International Development — a subsidiary of the Dubai-based Emaar Properties — is the developer, while the Lebanese architectural company Erga Group did the architectural studies.

Building sustainability
BeitMisk is not as cutting edge as Abou Dhabi’s Masdar City, but it will include several green-building and sustainable initiatives.

“We will be very close to the LEED [Leadership in Energy and Environmental Design] standards,” says Nabil Zard Abou Jaoude, chairman of Renaissance holding and managing director of Emaar Lebanon, who spoke with Executive on behalf of Renaissance. He  explains that buildings will have double-insulated walls, excellent insulation for the roofs, and will use solar energy to decrease electricity consumption.

“It is not a marketing tool, but when you go into high specs, you are automatically very close to LEED,” says Nabil Abou Jaoude.
Anthony Sfeir, BeitMisk’s project coordinator at Erga Group, explains that the plumbing system, for example, will be separated into grey and black water, of which the grey will be recycled and used for irrigation. The project will also have a sewage treatment plant, where all the wastewater will be recycled and reused. “We will not be dumping waste effluent; we are treating everything,” he says.

Construction and sales break ground
So far, the only building constructed at BeitMisk has been the sales office, which will later be turned into a country club. In mid-July, sales began for the first phase of the project, which will see the construction of nine buildings with 72 apartments. Four of the buildings have traditional designs and five are modern, according to Nabil Abou Jaoude. He says that so far, some 32 percent of the units have been sold.

“It is better than expected,” he says, adding that he expects 80 percent of the units will be sold by year’s end. “I thought that just for the first two to three days, we will have some people interested and then only two to three clients per day… but we have a lot of potential clients.”

According to Georges Abou Jaoude, apartments start selling at $1,650 per square-meter, while townhouses start at $2,100. The prices of villas have not been determined yet since they need to be specifically designed before pricing. Apartments offered range between 177 and 330 square-meters, according to the sales office.

“These prices are launching prices; I expect them to go a little bit higher later on,” says Georges Abou Jaoude, adding that the target buyers are basically Lebanese. He expects only around 8 percent of the project will be sold to foreigners.

Construction of the first phase is expected to start at the end of the year, after all the permits have been obtained, irrespective of the units sold. Each phase is supposed to take up to two years.

“The first $100 million is already there, and the financing of the first and the second phases is already secured,” says Georges Abou Jaoude.

A sentimental value
Nabil Abou Jaoude say Renaissance is lucky to have found such beautiful land where they can develop a whole new town. The Northern Metn also holds sentimental value for the family since its roots come from that area.

Georges Abou Jaoude, formerly an architect before becoming a banker, also carries high hopes for this project.
“I want [Beit Misk to be] the most beautiful village in Lebanon, and maybe in the world.” 

Environmental concerns
But with many of Lebanon’s high mountains already spoiled by poorly planned development and half built concrete homes and apartment buildings, is the unspoiled upper Metn really a place to build a suburban neighborhood?

 
BeitMisk may be advertised as environmentally friendly, but the fact that construction will destroy a part of the forest did not render environmentalists very enthusiastic. Wael Hmaidan, executive director of IndyAct, a league of independent environmental, social and cultural activists, says that BeitMisk will destroy the natural habitat and the ecosystem of a big part of the mountain forest.

“There will be plantations rather than a forest ecosystem. You cannot compare it. The dynamics are different,” Hmaidan says. “A tree does more than give oxygen. It is a habitat, a house and an eco-system.” 

Garaved Kazanjian from Greenpeace agrees with Hmaidan. He says that the organization does not support these projects, but has no capacity to pursue every development that threatens what is left of the Lebanese natural wealth.

For the same reason, Hmaidan says that campaigning against any single development is a lost cause. What should be done is to reform planning policies in Lebanon so developments would not be allowed if they threaten the sustainability of Lebanese forests. “We can continue like this until we don’t have a single forest in Lebanon,” Hmaidan says. “Or we can create urban planning and a system to benefit all levels of society.”

Georges Abou Jaoude says the BeitMisk project will blend with the local area’s environment. “We will be planting 200,000 trees in the development and a little bit around it,” he says, adding that only some 25 percent of the project will be built-up area.
 
A small walk around
So far, only the master plan of the project has been designed. The construction will be divided into phases, each being a neighborhood, and each phase will have its own final design. Buildings, villas and townhouses will be surrounded by gardens and plantations, while biking and walking paths will also surround the whole project.

“People will be able to see many views as they are walking. At one point they are looking at Beirut, then the sea, then they will be looking at the mountain to their right as they are walking,” says Georges Abou Jaoude.

Most of the buildings will have three floors; only apartment buildings will have four floors. Villas will be provided with two to three parking spaces each, and two for every apartment building — even visitors will be provided with public parking spaces. Roads will also be designed to minimize cross-town traffic.

“The project has been designed by Erga, so there is a traffic engineer who worked on that,” says Nabil Abou Jaoude.
BeitMisk will also be divided into two parts. The upper part, which includes the villas and the townhouses, will become a closed community — although that decision is not final, says Nabil Abou Jaoude.

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Real estate

Lebanon – Sama Beirut

by Nada Nohra
written by Nada Nohra

Beirut will soon have a new tallest building. Called ‘Sama Beirut,’ developers have already broken ground on the 50-story luxury residential tower in the Sodeco area. Launched in mid-August by Sama developer Antonios Projects, it is expected to be completed by 2014. The tower will rise from a 5,000 square meter plot, of which the actual building will occupy 1,200 square meters, leaving the rest for a private garden.

Tower specifications
Sama Beirut will be 200 meters high, with six underground floors used for storage and parking for 560 cars. An underground floor will also have a gym with private access for the tower’s residences. Six shops will be divided between the ground and the first floor. Offices will be situated on the third and the eighth floors.

The tower will host 58 apartments of various sizes, ranging from 300 to 1,500 square meters, as well as duplexes and a penthouse. Apartments start at the 9th floor and have a private entrance from Elias Sarkis Avenue. Part of the land belonging to the development will also be used to enlarge the road, with the aim of decreasing traffic. It will also utilize green technology.

“We have a beautiful sun in Lebanon, and we will be using it as much as possible,” says Fady Antonios, chairman of Antonios Projects. He explains that the tower will use solar energy for water heating, thus saving a substantial amount of electricity. Antonios says the tower will be more than 250 meters above sea level, thus higher than the city smog.

“The tower will be taking the fresh air from the top and feeding the whole building,” explains Antonios.  Waste water will also be treated and reused for irrigating the large garden.

“We have other features like the insulation of the building which will be of very high standards, so it will need less heating and less cooling… We have all the electromechanical requirements of the LEED (Leadership in Energy and Environmental Design) certification.”

Antonios says that one of the reasons why he chose the Sodeco area is its strategic location.
“You are five minutes from Solidere and very close to the airport. You are close to the main access of Beirut,  [be it] towards the north, the south, or to the mountain. It is a very quiet area. It is very well located and the people love to be in Achrafieh.”

The other reason why Antonios chose the Sodeco area is rather sentimental. “I come from that area and I love it. I attended school there.”
But some weren’t so happy to see the new tower’s plans.

Beirut’s tallest tower in Ashrafieh?
The new skyscraper is exciting news to real estate investors and wealthy buyers, but it is not the case for heritage activists who think that Sama Beirut is one of the many misplaced developments that will ruin the historical cluster still present in the Sodeco area, like Monot and Abdel Wahab Al Englizi street.
 

“It is on the edge of one very important cluster,” says Mona Hallak, an architect and a member of the Association for Protecting Natural Sites and Old Buildings in Lebanon (APSAD).
Hallak adds that due to a lack of  proper urban planning to prohibit building towers in historic areas, Beirut will lose its historic neighborhoods in a few years.

“Now we have [a tower] at the edge of a heritage cluster. In two years we will have it in the middle of the cluster,” Hallak says.
Fady Antonios says that he had the possibility to build six identical small buildings which would be cheaper, but instead chose to use only 20 percent of the land and leave 80 percent for gardens and greenery.

“On the contrary, the tower leaving all this space will bring all the historical buildings into relief, since they will not be hidden by just concrete blocks.”

Wael Hmaidan, executive director of IndyAct, a league of independent environmental, social and cultural activists, agrees with Hallak saying, “we are definitely against it.”
“We need to understand the value of old architecture,” Hmaidan says, explaining that Lebanon’s comparative advantage to places like Dubai is its old architecture, moderate climate and social life — not high-rise towers.

Hallak says that high rise towers need to have more open space to breath. “This… is not a place for a tower. Nobody will notice how bad it will be until it is done and there will be no sun in that area,” she says.

Both Hallak and Hmaidan say that the only solution for keeping heritage clusters from being ruined is to have a proper urban plan. Currently, to get approval to build a tower, the permit has to be reviewed by the directorate general of urban planning for the purpose of stopping random urbanization. But so far, Hallak says, all proposed towers have been approved. “If you are approving all towers, why are you reviewing them in the first place?” she adds. 

There are also no public meetings to discuss the construction with the nearby businesses and property owners before the towers are approved.

A downbeat first reaction
Others had a similarly negative reaction to Sama Beirut. Massad Fares, whose company Prime Consult is managing Sama’s marketing and sales, said Minister of Interior Ziad Baroud was not very enthusiastic when he was first asked to sponsor the launching of the tower. He even mentioned so in the launching ceremony, where he said that he was shocked at first by the news and not very supportive, but then changed his mind when he saw the green surrounding Sama Beirut.

“We sat with him and showed him what we are doing and how we took from our land to enlarge the road and the green space that we kept — it increases the value of all its surroundings,” explains Fares. “Instead of building concrete, we are going to build a high, beautiful tower and put it in a nice environment.”

Sales have started
All the construction permits have been approved and sales have begun for apartments and offices in the building.

“We have a waiting list,” says Fares. Until now, Fares says that the interest came from only Lebanese people, either residing in Lebanon or abroad.

“It doesn’t mean that there will be no Gulf people, but so far, we only have Lebanese buyers.”
Apartment prices range from $5,000 per square-meter to $15,000. Offices are priced around $4,000 per square meters, while shops go for up to $11,000. Offices and shops are not only offered for sale, but also for rent.

“The good thing about this portfolio and this client for us is that he is financially sound and not pushing to sell,” says Fares.

 

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Banking

GCC – The Saad-Algosaibi disaster

by Executive Staff
written by Executive Staff

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.”

Bahrain
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.”

Saudi Arabia 
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.”

Kuwait
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.

Speculation
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.”

 

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