Executive Magazine

A waste of space

by Nicolas Photiades June 1, 2006

written by Nicolas Photiades

Since its independence, Lebanon has always been gold rich. In fact, during the prosperity years of the 1960s and early 1970s, the country was a net buyer of gold, increasing its gold reserves to a total of 9.22 million ounces today. Lebanon is considered to have the largest gold reserves among Arab countries and is ranked in the top ten countries and supra-nationals worldwide in terms of gold tonnage held. Indeed, with 286.8 tons of gold, Lebanon ranks 19th in the world behind countries such as the UK (with 311.3 tons, ranking 17th), Austria (307.5 tons, ranked 18th), Russia and India (14th and 15th respectively). The top countries in gold tonnage are the US in first place, Germany in second, the IMF in third, France in fourth, Italy in fifth and Switzerland in sixth.

A hefty sum indeed

At today’s prices (as at the 11th of May, 2006) of $707.2 per ounce, Lebanon’s gold reserves, which are held with the Federal Reserve in New York, the Banque du Liban (BDL) vaults, and in London (most probably at the Bank of England), are now worth a little bit more than $6.5 billion. A hefty sum indeed, when considering that Lebanon’s GDP is roughly $20 billion and national debt is almost $40 billion. In other words, today’s gold reserves account for 32.5% of GDP and could theoretically repay 16.25% of the country’s debt and save an average of $650 million (or more, if you repay Lebanese pound debt, which carries an average interest rate much higher than 10%) a year in interest payment on the debt. Instead, Lebanon’s gold reserves are sitting idly in vaults, yielding absolutely no return and costing the government storage and safe keeping charges.

Lebanon’s gold reserves were built up by previous Lebanese governments as a store of value and a safe haven in times of crisis. Gold and other precious metals are unique assets in that they are tangible (i.e. real) and liquid (i.e. easily traded), unlike real estate which is tangible but not liquid, or company shares and bonds which are liquid but not tangible (i.e. a share certificate is just paper). It was also believed that in case certain events occurred, such as war or economic crisis, gold would have a positive influence on any investor interested in Lebanon, unlike any other forms of investments and assets.

In a way, the government was proved right, as some investors continued to invest in Lebanon during difficult periods, thinking safely that gold would be a serious backup if things turn sour. However, a law issued in the 1980s forbidding the sale of gold reserves or their use as collateral for borrowing or as a hedging tool canceled out the positive influence gold has on foreign investments. Indeed, what’s the use of gold if it cannot be liquidated or used as part of a structured financing? By being blocked, gold reserves do not have a positive influence on investments, as investors treat them as if they do not exist. Former Premier Salim Al-Hoss, in his address to Parliament in July 1999, clearly stated that “gold is the main pillar for having confidence in the Lebanese economy”. In normal circumstances, such statement is correct, but with the specific law forbidding the sale or use of gold, Al-Hoss’ statement does not hold. With a policy of uncontrollable indebtedness, such a law puts Lebanon in a maximum handicap situation.

With gold prices hitting 25-year highs and the country drowning in a quagmire of public indebtedness and opposition to structural reforms, it is only fitting that the law blocking the use of gold reserves be lifted and national gold be used as part of a solution to repay public debt. Gold price cycles are very long, and if the world’s political tensions smooth down, they will inevitably fall again. Moreover, if one of the large holders of gold reserves in the world decides to take advantage of the high prices to sell part of it reserves, then prices will be affected negatively as well. It is therefore clear that Lebanon must take advantage of the current price cycle by abrogating this obsolete law and selling part, if not all of its current reserves.

The only solution to the debt problem

The sale of gold is the only right solution to the debt problem, as the proceeds could be used to buy (for the same amount) more liquid, interest- or income-yielding assets, which would, in time, cumulate to equal and meet the current amount of debt. Using gold as collateral for cheap indebtedness or as part of a complex structure to repay debt would only sort out things temporarily, and result in the postponement of the problem. Although essential, privatization is not a solution for debt repayment. Even if the government privatizes everything it has got, the proceeds of privatization would be grossly insufficient to repay the public debt. The current high gold prices present the country with a unique opportunity to use an asset it had long forgotten. Let us hope that at least one influential character within the government or elsewhere realizes this opportunity.

June 1, 2006 0 comments

Business

The rise of LCB

by Executive Staff June 1, 2006

written by Executive Staff

Lebanese Canadian Bank’s (LCB) rise over the last ten years has been quite impressive. The bank was able to accomplish close to a miracle by moving from the 21st place in terms of assets and deposits in 1998 to join the elite of the ten largest Lebanese banks by 2006 and 8th in total assets and deposits by the end of the first quarter of that year. When you consider that this significant rise was accomplished over a relatively short period (six to seven years) and in the midst of a heavy dogfight for deposits among more than 50 Lebanese banks, then one can only conclude that LCB’s meteoric rise has been achieved through hard work and shrewdness on the part of the bank’s management.

An aggressive expansion strategy, which was based on an active expansion of the domestic branch network (almost 30 branches by the end of 2005) and the hiring of experienced management and personnel from other banking institutions at home and abroad, also helped the rise of LCB into the Alpha (top 10) Group of Lebanese banks. The growth of LCB is furthermore a reflection of the economic drive of the country since 1993, when the reconstruction program started to take off in the aftermath of the 1975-1990 civil war.

LCB was set up in 1988, when the current chairman, Georges Zard Abou Jaoude, with a group of Lebanese-Canadian investors, took over the Lebanese franchise of the departing Royal Bank of Canada. For years after the take over, LCB benefited from the infrastructure left behind by RBC as well as from the relations with the Canadian bank, which for a certain amount of time acted as LCB’s main correspondent and clearing agent in the international money centers. However, the bank never rested on its laurels and proceeded to modernize and increase its capital gradually throughout the years, in a massive effort to keep up with the local competition. In doing so, the bank’s capitalization moved from a relatively insignificant LBP5 million in 1988 to more than $180 million today.

In 2002 and 2003, the bank realized that it had grown too quickly in terms of assets and deposits in relation to its capital base. It therefore proceeded to tap the local capital markets by becoming one of the first banks in Lebanon to issue preferred shares in both 2002 and 2003 for amounts of $15 million each. Preferred shares are generally regarded as tier 1 capital but don’t give their holders a share of the capital or voting rights. These preferred share issues positioned the bank firmly among the big local players and transmitted a clear message to the market regarding its capacity to manage rapid growth and develop an efficient financing strategy.

Management

Looking at LCB’s financial figures and growth in the last few years, management has been able to build a strong track record, creating a much improved financial structure and a growing market share. The quality of management has been reflected not only by significant growth in deposits, but also by diversification of funding, conservative allocation of funds in light of a constraining operating environment, containment of non-performing loans, strengthening of both regulatory and economic capital, and rising profitability. Today, LCB can safely claim to have transformed a small local banking franchise into one of the largest and most profitable banks.

The current strategy is to diversify banking products and revenues, while improving the quality of service to existing and new customers. The branch network is to continue growing so as to cover strategic geographical areas, while risk management is to be enhanced in preparation for the implementation of Basel II capital regulations, which are due to start being imposed in Lebanon in 2008. Retail banking is particularly pinpointed as an area of growth by management, which sees in retail lending a way of reducing exposure to a rising number of non-performing corporate loans. Retail is also believed to have a significant potential in Lebanon as well as in other regional countries, where the bank plans to establish branches or subsidiaries.

On geographical expansion, there are plans to establish a presence in countries of the Levant and the Gulf, as well as in any other country where the Lebanese diaspora is important. For instance, the bank has already established a representative office in Canada (Montreal), where more than 300,000 Lebanese immigrants live. The bank’s management considers geographical expansion to be key for revenue and asset diversification, which have become essential ingredients for success. The Lebanese market has become limited in nature and is over-crowded in the sense that there are too many banks fighting for the same customers. Outside Lebanon, LCB’s management is taking a close look at countries such as Syria, Algeria and Sudan (where it already has a presence through a small stake in a local bank), as these markets are regarded as representing a significant potential.

A merger with or an acquisition of a local peer would not be carried out haphazardly, as LCB’s management would only consider candidates who bring some level of added value. A local merger or acquisition would only be carried out if synergies are strong, and if the candidate has some kind of interesting overseas franchise. The interest in the latter reflects the bank’s strong desire to diversify its franchise away from a constrained local market.

The first phase of the bank’s long-term strategy, which consisted of enlarging the size of the balance sheet, increasing deposits and boosting revenues, has so far been accomplished with success. The second phase of the strategy is now more geared towards an optimization of the balance sheet size, a diversification of assets and revenues, and the exploration of untapped markets, which represent significant potential.

Shareholders and support

At present, LCB is principally owned by holding companies, namely Perpetual Holding (35%), the Hamdoun family (24%), George Zard Abou Jaoude (15.5%), NJO Holding (10%), Amwal al-Khaleej (4.95%) and the Nasrallah family (4.5%). Individual shareholders make up the remainder.

The shareholders have shown a significant interest in their banking investments by supporting management’s plans for growth and injecting capital when necessary. The shareholders have been instrumental in the rise of the bank into the top ten bracket of Lebanese banks and are currently active in improving corporate governance, which is still an issue amongst Lebanese banks. By supporting the bank financially and making clear efforts to spread decision making among many individuals within management, the shareholders have instilled a certain degree of trust among customers. In addition, the implicit support of the central bank (BDL) for the Lebanese banking sector as a whole is a further indication of stability and implicit support.

Profitability and performance

The bank’s profitability has been impressive for the last five years. Net profits have risen from $7.4 million in 2002 to reach $26 million by the end of 2005. At the end of 2005, the bank’s return on assets (which is calculated as net profits divided by average total assets) was one of the highest among the ten largest Lebanese banks at 1% (1.1% in 2004). The bank has been quite efficient in its treasury and capital markets activities during the last three years, but made the bulk of its profitability from traditional lending activities and from high yielding government securities.

The bank is clearly aiming at building a more diversified and constant income stream, as it realizes that the Lebanese market offers limited opportunities. However, LCB has improved the cost efficiency of its funding base, and has started to place its funding more efficiently. Increasing non-interest income remains a priority and the bank has been active in developing its treasury and fee income generating capabilities. The rise in profitability of the last few years was instrumental in allowing the bank to improve its capital adequacy and to strengthen its loan loss reserve as a way to cover existing and potential bad loans.

With a cost to income ratio below the 50% mark, the bank has also established itself as one of the most efficient banks in its peer group. Operating costs are being controlled, while expansion plans have yielded more revenues than they have generated costs.

Asset quality

The bank is below the industry average in terms of non-performing loans to gross loans (loans given before reserves but net of unearned interest) with a ratio of around 12% in 2005 compared to an industry average of more than 20% (2004 figures). This was due to a massive restructuring effort on the loan portfolio and an improvement in the bank’s risk assessment capabilities. The bank’s loan loss reserves, which were increased in the last few years thanks to a better profitability, covered almost 70% of non-performing loans. This figure reflects the bank’s loan optimization effort of the last few years, as well as a prudent and conservative approach towards lending.

Recoveries of delinquent loans were improved since 2003, as the bank stepped up its efforts and improved the classification system for loans. This new and more efficient loan classification methodology has allowed the bank’s credit officers to better assess credit risk and avoid potentially bad loans.

Liquidity and funding

By enlarging its branch network and stepping up its marketing efforts abroad, the bank was able to expand its customer deposit base substantially. The bank’s customer deposits have risen from a level of around $959 million in 2002 to over $2.3 billion by end of 2005, and are regarded to be stable and recurrent in nature. Customer deposits are the bank’s main funding source, while other forms of funding include principally inter-bank deposits, which remain minimal as compared to customer deposits (average inter-bank deposits account for less than 10% of the bank’s total funding).

The bank’s total liquid assets, which exclude government debt securities, were made up of cash reserves at the BDL, and covered more than 45% of customer deposits in 2005, while these were a little bit more than 40% covered by government debt securities. The latter accounted for more than 40% of total assets in 2005, but have become increasingly liquid in a developing secondary market (boosted by the sudden interest of Gulf investors in the Lebanese capital markets).

The bank still has maturity mismatches, as it funds its medium-term assets with short-term deposits, but has almost no currency mismatches. The maturity mismatch is found throughout the entire Lebanese banking sector, although the recurrent and stable nature of customer deposits mitigates this deficiency significantly. LCB’s customer deposits are highly diversified and there are virtually no concentration of deposits amongst a small number of depositors.

The bank’s capital adequacy has improved for the last few years, as reflected by a rising capital adequacy ratio from 15% in 2001 to over 22% in 2005. The consecutive issues of preferred shares in 2002 and 2003, and the planned capital increase and preferred share issue in 2006 should allow the bank’s capital to catch up with asset growth. Rising profitability has also added the flexibility of organic capital growth.

Pole position

LCB has grown significantly in the past few years, as the bank’s management and shareholders expanded the branch network, the product base, and customer deposits. Profitability was also enhanced, allowing capital to increase organically. Today, the bank is in a position where it is trying to optimize its size and exposure to Lebanon, while seeking to expand geographically in order to diversify revenues and reduce the risk level of assets. By expanding activities in markets with significant potential, the bank will inevitably reach a new level of sophistication, which will see assets and revenues diversify, and capital grow significantly over time.

June 1, 2006 0 comments

Business

Unlucky Luciano

by Michael Young June 1, 2006

written by Michael Young

With a major Italian football scandal ushering in the World Cup in Germany, which begins in just over a week’s time, it is often difficult to remember there is more to the sport than money; there is also that old and somewhat ruffled phantom, the beauty of the game.

Aficionados have long been uncomfortable with commerce barging into the world of football. The aesthetics of the game have rarely been tolerant of the baser motives behind the sport. Many a team, from Barcelona to Inter Milan to Manchester United, to name only a few, has at one time or another been forced to nourish supporters’ refusal to see their teams depicted merely as business enterprises. Barcelona refuses advertisement on its shirts; Inter Milan’s tifosi stick to a myth that the team is politically on the left, unlike the supposed right-wing image of cross-town rival AC Milan. And United backers took none too kindly to the team’s purchase by an American magnate, seen as informed about finances but not football.

But business and football have always walked hand in hand, particularly in the past three decades, feeding off each other relentlessly, indeed inconceivable without each other: football needs money to supply the teams’ and supporters’ growing habit (a fact purists only cagily admit to), while investors are drawn to the magnificent cash cow that is football.

So what is one to make of the terrible scandal that has shaken Italian football, and which threatens to engulf the national team, the Squadra Azzura, as it makes a bid for a fourth World Cup title? In May, as the Turin team Juventus was preparing to win its 29th league title, prosecutors alleged that its general manager, Luciano Moggi, had conspired with senior officials in Italian football to pick referees for matches in which the Turin team was playing, to ensure victory. Moggi is also suspected of having pressured players into joining his son’s representation agency, and is said to have influenced the national coach, Marcelo Lippi, in his selection of capped players (Lippi denied it.) But the truly serious charge was that Moggi stood atop a pyramid of individuals – team owners, league officials, and politicians – that manipulated Italian football for personal gain. Several other teams seem to have also profited from illicit deals.

Has commerce tarnished football?

The scandal will revive complaints that damned commerce has tarnished Italian football, perhaps irredeemably. Certainly, Italy has always been corrupt on that front, with even a former star, Paolo Rossi, the high scorer in the 1982 World Cup, having been banned from the sport for a time because of match-fixing. Certainly, too, where there is as much money as in international football, there is bound to be much abuse. But the real question is whether commerce merits the blame.

One would have to go into arguments pertaining to culture to accurately answer that question. Perhaps some cultures are more comfortable with vice than others. Italy surely needs tighter control mechanisms in the naming of referees to matches, and greater oversight in the financial dealings of teams, which have been poorly managed, pushing leading clubs into bankruptcy. In that foul climate, cheating is natural.

However, the market can also be pitiless in its revenge. As news of the scandal broke, Juventus shares fell by 50 percent of their value, forcing the Agnelli family that owns the team to appoint a new chief executive. The family had earlier demanded that the entire Juventus board, including Moggi, resign. If the team is relegated to Serie B, a distinct possibility, millions of dollars of sponsorship and television money would be lost, not to mention the opportunity cost provoked by the backlash from disgusted supporters. Worse, the scandal will doubtless extend to affect the shares of other major teams being traded, amid a general sense in Italy that corruption tends to embrace everyone. Italian football may have to melt down before being recast as something more lawful and respectable.

Not commerce, but its misuse

This would be traumatic, but a clean break is not a bad thing. Italian football was shattered not by commerce, but by its misuse – through illicit market manipulations ensuring the competition was tilted in favor of the wealthy teams. These teams generate the most money, but also fall the hardest. Commerce may have made Italy’s latest sporting disgrace more likely, but only by strengthening commercial regulations that ensure decisions are more transparent and officials more accountable, will the country’s football be reborn stronger.

June 1, 2006 0 comments

Business

Georges Zard Abou Jaoude – Grand Plans Ahead

by Executive Staff June 1, 2006

written by Executive Staff

Executive talks to Georges Zard Abou Jaoudé, chairman and general manager of Lebanese Canadian Bank, about the bank’s IPO plans, foreign expansion, capital increases and everything else in between.

E Can you give us some background about when you started thinking about an IPO and how you prepared yourself and your team?

To accompany growth and go regional with the highest solvency in the sector, and moreover, to be compliant with Basel II, you need to increase equity. IPO is the healthiest way to increase equity.

An IPO means exposure to other parties, in other words, to the public. The consequences include total transparency and disclosing every single decision. This in turn introduces a new culture. I and all the executives at all levels are convinced that our officers need to embrace this culture in order to be well-prepared for the public. I think we are now, after two years of hard work and preparation, ready for an IPO.

E Was there a particular date when you made the concrete decision to go ahead?

We are actually in the process of preparing all the ingredients for a successful IPO, while not forgetting the mood of the market, especially the Middle Eastern one.

E The number of IPOs on Arab stock markets has been held partly responsible for slides in market values across the region. IPOs need liquidity. Would you list only in Beirut?

Liquidity is important in any stock market. I feel that it exists extensively in the region because of the money factor, especially the price of oil. Maybe there was an excess of IPOs simultaneously in the Gulf region. On the other hand, in Lebanon the night is still young and the bourse still needs further developments and listings.

Deposits are over 3.5 times the size of our GDR. In other words, liquidity is not a problem and more IPOs in Lebanon are healthy for the economy. We would list first in Lebanon and then potentially in London or Luxembourg.

E Not Dubai?

Perhaps at a later stage.

E What level of capital increase did you perform in Q1 2006?

We had two issues involving capital increase: one common share issue and one preferred share issue, which is in the process of being finalized. This would represent an increase of almost 50% in capital from about $140 million to $210 million. The idea is now to float 20% of the bank in GDRs. This is merely to increase the capital to reach our target of around $350 million by the end of 2006. This is very ambitious and I would be very happy with anything near that mark.

E What kind of Gulf share would you foresee in the IPO?

Difficult to say now, but we certainly would do road shows in the Gulf through the lead manager.

E And the lead manager is?

It will be one of three major banks. It is likely to be BNP Paribas, although nothing is signed yet.

E This increased equity also means increased responsibility, and in turn higher profits and greater activity. Would you agree that LCB is one of the most aggressive banks in the Lebanese market?

We may be the most aggressive bank, keeping in mind that we hold one of the highest solvencies and one of the highest liquidities. In other words, we are the most aggressive and at the same time very conservative. That is very unusual. For the last four years, we achieved the highest return on equity and the highest growth rate.

We are confident that as we were successful in planning the past five years and achieved our goals, we could do the same for the coming years. The only difference is that beyond a certain volume, this kind of incremental growth cannot be sustained organically. Instead we have to look at mergers or acquisitions – with a preference for the latter – with a view to consolidating by acquiring banks abroad.

E In this context, then, was it a blow that BLC was acquired by someone who bid just a little bit more than you?

Sometimes conservatism does not pay. In a bid, you have to look at all the aspects – even though our Saudi and Emirati partners agreed on $240 million, we bid only $211 million and ended up as the second highest bidder. I wish BLC had stayed under a Lebanese umbrella.

E Do you have a name at the top of your list?

We do have a name, but I am not even allowed to think it out loud.

E Have you been talking to them?

Extremely gently.

E Do you see market opportunities for LCB in Gulf countries?

Yes, especially in the Emirates and Qatar. It is not easy, but we hope to get through in one way or another. In the meantime we are serving our clients in the Gulf from Lebanon.

E Have you set your eyes on other markets?

We have been in Algeria and are in the process of finalizing the majority share in an Algerian bank. Now we have our sights set on other markets, which is another reason why we need the equity increase.

E So once you have taken care of the IPO, how quickly would you move into these markets in North Africa and elsewhere?

We might be known for being very aggressive in the Lebanese market, but we have to be more careful when we go abroad. We have to test the ground and respect the restrictions imposed there. I know that my colleagues have great momentum, energy and know-how, so I think we could go in quickly but cautiously.

E Do you see possible synergies with other Lebanese banks going into the same market?

I will be happy to see other Lebanese banks sharing the same market. The more they know about the market, the easier it would be to syndicate with them.

E Here in Lebanon you have been concentrating more on retail and retail lending for some time.

In fact, we deal with corporate middle market and retail and have one of the best services on the trade finance level. Our goal is to enhance the capital market and private banking services. We feel that Lebanon lacks investment banks and this is something we are interested in.

E You have talked about a joint venture with another bank. Would that target the Lebanese market in particular?

No, it will serve the Lebanese diaspora, Arab investors and western equity. The idea of serving the diaspora came out of a need for survival. Frankly speaking, I feel that the strength of Lebanon stems from its emigrants. If you look at the country’s financial statistics, you see that every year we have a commercial deficit of around $5 billion, whereas the balance of payments is positive. This comes chiefly from the repatriation of income, so despite a huge debt-to-GDP ratio, Lebanon still lives relatively well and we have some degree of growth.

Every year a huge amount of money pours into Lebanon from outside, so if I want to be different, and serve those who are serving Lebanon, then I should go after their business. This is why our motto is to serve the Lebanese diaspora. We see major potential here.

Another opportunity we see is to strengthen the ties between the diaspora and the country itself. We intend to launch a website called Roots, which will help to galvanize the connection between the two.

E In your opinion, where is the diaspora most active?

I think that most of the first and second waves of emigrants have lost their Lebanese roots, but more recent departures, especially those in North and Central Africa, Arab countries, Canada and even Europe, still have close ties. They send a lot of money back to Lebanon. There are 250,000 in Canada, concentrated in Quebec where we have opened a representative office. There are probably at least 1-2 million in the Arab countries, and Lebanese continue to leave for the Gulf. Overall, there is a potential market of not less than 3-4 million people, which is almost equal to the resident domestic population.

E Back in Lebanon, are you relying on political stability? Would it be devastating if the proposed Beirut conference were postponed or cancelled?

Hopefully someone will inject some reason into our politicians. Fostering a healthy economy is the most important thing.

E Even if the private sector prepared a healthy economy, it still seems as if some kind of force is trying to destroy it.

This is why I am begging for some wisdom. There is a lot of available money, a surplus of petrodollars, and most of it is flying straight over our heads in Lebanon. It won’t last forever. If we could catch some while we can, it would help stabilize the debt situation enormously. We have lost many opportunities in the past. Let’s hope not to miss this one.

E On another level, you are active in non-financial areas. You give speeches on the importance of banking standards and participate in conferences, and LCB allocates time and resources to other events. How does this fit into your strategy? Is it a way to raise visibility?

We are trying to give back society what it offers us. We discovered that the more you give to society and the more you help, the more it gives back in return. It is a kind of virtuous circle. We recently launched solar energy loans, for instance, which allow people to install solar energy equipment and repay it in installments. Through this we give visibility to the bank, make money and also manage to reduce our clients’ cost at the same time.

We are saying that the environment is Lebanon’s most important equity. If we can reach the same level of solar panel usage as in Cyprus or Israel, then we can lower the national energy bill and improve the balance of payments. This is what I mean about being aggressive and conservative at the same time.

E Will your new headquarters be ready soon?

Not very soon. It is a long process as you need at least a year to get a construction permit in downtown, which is a pity. Having said that, we have almost finalized the design and from a short list of ten international architects, have chosen a German architect from Berlin who works hand in hand with “Batimat”, a highly reputable design house. The building will be one of a kind in the region.

E Last but not least, you have also applied for an Islamic Banking license. Any update on this?

We have already invested in Islamic banks in Bahrain and Sudan. In fact we have done an extensive study on Islamic banking in Lebanon and we feel we should start working in this area shortly.

We have also invested extensively in human capital to be able to sustain everything that is happening at the same time. We are tackling six or seven countries, arranging our GDRs, issuing capital increases, launching a private bank and an investment bank and applying for a financial company in Lebanon.

On top of all that, we sill have to try to remain vigilant and conservative.

June 1, 2006 0 comments

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Georges Frem

by Faysal Badran June 1, 2006

written by Faysal Badran

George Frem, who passed away in May after a valiant battle with illness, will be remembered as an astute businessman, a pioneering Lebanese industrialist, a philanthropist, and a political idealist. Many have written about the business empire he created, but few have talked about the man behind it. It is very difficult for me to write this piece with any degree of detachment as his family are dear friends.

What was striking about George Frem was the personal involvement and passion he put into everything he did. He put people first, not only in his business ventures, but also in his family life, where he always kept a firm focus on solidifying the unity of the family and its business interests. Another laudable trait of this most generous and low-profile man was his modesty and sense of identity. He was a genuine patriot and when he was appointed Minister of Industry, I went to his Paris hotel to congratulate him. Right away, my traditional cynicism about Lebanon was humbled. The man radiated hope and belief in the country and its youth. He always reminded me that the future of Lebanon rests “on you, the next generation, free from sectarianism and working for your country.” I found his idealism refreshing, but worried that his ethics and sense of good governance would run up against the ugly realities of Lebanese political life.

Yet he always felt that in business, his 6,000 or so employees were the ones doing it all and that the most important thing was to keep Lebanon alive. He acknowledged that the system had broken but that the rebuilding was in our hands. How I wish his vision was shared by more people, for George Frem, through his ventures in Saudi Arabia, where he began his professional life, and later in the US and South America, raised the profile of Lebanon, always driven by an inner force of love and respect for his country and friends.

Starting out small

It wasn’t always easy. George Frem started his career working in Saudi Arabia, at a time when air conditioning was a far-off luxury, and well before the name Frem meant so much in the paper and packaging business. Yet the group he built managed to position itself among the most well run and financially strong groups in the region, with revenues of well over $1 billion.

While the group was built almost entirely in an organic manner, he did resort to joint ventures and outright buyouts in some of the global enterprises. His most visible brand in Lebanon, Sanita, has been a genuine success story, challenging world leaders in both quality and market share, while the Indevco group of companies is run along international standards the world over. So, in many respects, Mr. Frem was running a large family business which grew into an impressive global concern. Many of the key executives were sent to blue chip executive programs in order to help the transition from a pure family business into a small multinational

On the many occasions when I corresponded with him, having lost hope in the country, he would have a contagious, upbeat attitude and spirit possessing an almost limitless optimism for the potential of the Lebanese people. We have lost another great man, and it is up to us to make sure that the country he loved so much remains a viable state, a melting pot of cultures, and an incubator for successful business ideas and the virtue of hard work. And while I hope his businesses will continue to flourish, it is his human and humane qualities that will surely be missed most.

George Frem (1943-2006)

June 1, 2006 0 comments

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It hurts

by Yasser Akkaoui June 1, 2006

written by Yasser Akkaoui

It hurts to see our politicians ignorant of the history and evolution of this great country that they are supposed to lead. It hurts that because of this ignorance we have lost opportunities.

It hurts to remember that in 1973, the first oil boom was about to explode just as Lebanon was beginning its slide into civil war. We would have been the natural beneficiary of this sudden wealth, but instead the money, potential and human capital went elsewhere.

It hurts to know that if we had been clever then, no Lebanese today would be starving and Lebanon would be a jewel, not just in the Middle East, but in the world.

It hurts to see that instead we are a bankrupt nation, living on our past and paying our way as the cut-price fleshpot of the Middle East.

It hurts that we should rely on, and fawn over, tourists rather than develop our ailing industries.

It hurts that we didn’t learn from our first mistake and that in 2005 our politicians, intoxicated by the heady fumes of megalomania, were duped into dragging the country into political deadlock, ensuring we missed out on the second oil boom.

It hurts that Gulf States are increasing their quota of Lebanese workers while we let in more maids. It hurts to know that had we been smart, we could have kept our valuable human resources and in all likelihood wooed back other Lebanese, lost to foreign job markets.

It hurts to know that the Hariri vision for economic prosperity – the vision that its detractors like to blame for the current crisis – was predicated on the inevitability of at least one, possibly two booms: peace and oil. The latter came but we had already been raped at gunpoint.

It hurts today to see the return of sectarianism, flag-waving mediocrity and the politics of segregation and self-interest.

It hurts to see our economic reform plan sabotaged for political gains, scaring away Beirut I donors and making Prime Minister Seniora politically impotent. It hurts that Lebanon is weak when it should be strong; it hurts that we are destructive when we should be creators and it hurts that we are ignorant when we should have foresight.

It just hurts.

June 1, 2006 0 comments

Real Estate

What’s the difference anyway

by Safa Jafari June 1, 2006

written by Safa Jafari

Lebanon has been going through ups and downs, cycles of joys and woes, repeated phases of history. It waddles along both victorious and defeated. How do its people feel about this? Are they aware of the issues at hand? Do they have an opinion or a preference? Absolutely. Are they hopeful? Unlikely. The result is a numbing state of indifference.

This article is based on information gleaned from informal interviews with Lebanese citizens – although the word ‘citizen’ does take on an ironic twist, assuming, as it does, a sense of ownership, stake-holding and awareness of their rights and duties vis-à-vis their country. Of course, citizenship also implies the presence of a functional state. The aim was to see if today’s Lebanese are politically indifferent. If so, why and what does it mean?

What is indifference?

The dictionary definitions of indifference include: privation of passion, emotion, or excitement; a state of indolence or apathy, and being incapable of being ruffled or roused to active interest. Etymologically, the word means “no difference,” an unnatural state in which the lines blur between light and darkness, good and bad. Indifference is often an outcome of a crippling set of excuses. Sometimes it is based on ignorance but often comes despite knowing that things are not going well. Finally, it is choosing to ignore that kind of knowledge and waiting for things to become better, allowing the problem to continue. As indifference by definition is being passive and inactive, it also implies no change towards the better and a definite lack of planning. It is the loss of hope and the bottling up of intense feelings that may cause sudden societal rage or lead to indoctrination by extremist groups, such as we have seen in France and the UK among disaffected Muslims. Indifference, far from being stagnant, can be very dangerous indeed.

Arab political indifference

In his article “What on earth is it with the Arabs” Robert Fisk speaks of Arab apathy. Invasions, interferences, injustices and occupation come frequently and are challenged rarely. The fact is that the West objects more than the Middle East. Whether it is violence in Sudan or the removal of Saddam Hussein and the occupation of Iraq, the Arab people simply move on. The Palestinians have been feeling Arab indifference for decades; the Lebanese felt it throughout the civil war and now the Iraqis are also feeling it.

Internally, the heavy hand of the oppressive state has been historically responsible for the apathy which grips Arab societies. They can speak of injustices in other countries but not within their own borders for that is going against the law. As Adnan El Amin says, it is as if the law is to “stay sedentary, within a circle of nonchalance and disgust.”

The sorry state of Arab societal organizations is equally to blame. The Oxford-based academic, Nadim Shehadeh, recently told Al Ahram that “too much has been expected from the man on the Arab street… The people are more cynical and just want to get on with normal life rather than pursue high ideals and become revolted and frustrated.” The public is also feeling deep distrust of their representatives who, as Talal Salman told The Weekly, have started buying their survival from the United States by discreetly agreeing to American plans, while publicly denouncing the US and suppressing all forms of public resentment. The Arab public sees this, loses faith in the regimes, realizes it can neither change the regime nor the way it functions and just gets on with life.

The Lebanese Scenario

The situation in Lebanon is different. The Lebanese allow politics into every part of their daily lives. Compared to other Arab nationals, the Lebanese have more space to express their political opinions while their political energy is more consumed by internal affairs than issues in other Arab countries.

But this does not mean they are not indifferent. If indifference is defined as lack of interest or caring, then the Lebanese are not indifferent. If, however, indifference is taken to mean a lack of hope, then, yes, they are. Elie Wiesel wrote about ‘The Perils of Indifference’ in 1999, he defined indifference as the blurring between good and bad. In the Lebanese case, the people do see the difference. It is just that they are currently in a state of feeling no differently whether they experience the good or the bad – as, you see, the good cannot be so good, the good might just as well be bad. The Lebanese spoken to in these interviews realize what it is like to have a functional, developed Lebanon. But due to a state of hopelessness, they do not see this coming any time soon.

Politics politics everywhere – show me change and not despair

Politics plays a major role in daily life in Lebanon. Jokes, cartoons, comedies and even songs revolve around political reality. “It is the bread we eat,” commented one young Lebanese. One hears political discussions everywhere: coffee shops, the living room, even the gym where small TV sets airing heated political debates grab the attention of those working out.

The space allowed for venting, however, if accompanied by the possibility for action (as in joining political parties, organizations, and demonstrations) is not accompanied by change. The act of political discussion has become an art of deliberation, as in a school debating society, if not a pastime. But what happens after one has spoken one’s mind? What happens beyond polling and opinion surveys? Democracy is only part expressing one’s opinion; the other part is being heard and taking action accordingly. The Lebanese citizen is aware of this incomplete picture. Loss of democracy then results in apathy, and apathy, in turn, results in further loss of democracy. And yet the curve of hope has waxed and waned, affected by incidents, speeches, alliances and shocks.

The shock

For 30 years, the main obstacle on the road to prosperity was considered by many to be the Syrian presence in Lebanon. This alone bred inertia, as a justifying excuse was present, obvious and persistent. There was an obvious stagnation in political feeling among the Lebanese public for many years (44.6% of interviewed Lebanese youth in 1997 stated no political preference). However, a revitalization of political energy occurred with the assassination of Former Prime Minister Rafic Hariri, and the return of both Samir Geagea and Michel Aoun to the political scene. Lebanon received international attention and support, and a happy ending was perceived when the Syrian forces pulled out of Lebanon. For once, the Lebanese felt they could take their destiny into their own hands. But more recently, the feeling that different leaders had failed to demonstrate genuine concern for the state, has left the people wondering about their loyalties and judgment.

Reasons for hopelessness

It is not lack of information that makes some of the Lebanese indifferent. Information can be incomplete and it can be incorrect. It is mainly the fact that there is no new information and too much of the same morale-defeating information that has led to this inertia.

Indifference can occur as a result of a lack of awareness and interest in current issues as well as a lack of a sense of belonging to one’s country. In Lebanon, several possible reasons for indifference have surfaced:

n A feeling that one cannot do anything about the status quo, coupled with a heavy dose of cynicism.

n A lack of faith in the state, the political system, the law, the institutions, and the politicians as well as a lack of confidence in the ability to organize and achieve institutional reform.

n A feeling that the same tribal and political leaders that have ruled the country for years will continue to do so.

n Voter apathy in the election process, law and candidates.

Indifference in Lebanon

Although the 2005 elections were the first free elections in 30 years, the voter turnout was still not high. The first round turnout was 28%. In the second, third and fourth round, the turnout was between 43% and 55%. Meanwhile, citizens’ rights remain unclaimed, be they the Sheba’a dispute and war crime compensations, while national files – the disappeared, the cellular phone dispute and the quarrying scandal – remain closed. But utilitarian theory dictates that, unless the people see benefit from a certain change, they will not put the effort to bring it about. If two scenarios are similar in weight, there would be indifference in the choices on offer.

People want a dignified daily life. They want to know that they are not being robbed by the VAT and phone and water and electricity bills. They want to know where their money goes. Is the debt being paid off?

Ironically, there is a separation between daily struggle for economic and social security on one hand, and politics on the other hand, which, although very linked to the reality of the people, is often perceived as an accessory or social activity. With a growing economic gap, there has been significant growth in dissatisfaction with present political parties, and this has led to a decline in political trust. People have been marginalized by the complication of ongoing politics. As Walter Lippman pointed out in 1913, ‘indifference prevails insofar as political paradigms propose differences that are irrelevant to the lives and actions of persons.’ But maybe it was Plato who summed it up best when he wrote that, “the price of apathy towards government is to be ruled by evil men.”

June 1, 2006 0 comments

Business

Greenhouse Revolutionary

by Michael Karam June 1, 2006

written by Michael Karam

According to Etienne Debbane, chairman and CEO of Exotica, the horticultural and contracting company, the key to success has been to exploit the synergy of opposites: war and peace, indoors and outdoors. A bit of flair, an emphasis on service, staying tightly competitive and a strong regional presence have also helped the corporate cause.

“When we started in 1978 and opened our 5,000m2 outlet in Zalka, the doubters all said, ‘these people are crazy. They have more money than sense and they will soon be bankrupt’,” he recalls.

Debbane is sitting in his office at Exotica’s 100,000m2 nursery and head office in Louaizeh in Zouk Mosbeh. “They were wrong. People were spending more time indoors because of the war and they needed something to make their living environment more agreeable. They needed plants. Till then it had been an alien concept. It was the same with the offices. We won contracts with banks, insurance companies and other major businesses to supply and maintain plants in the work environment.”

With peace, the Lebanese emerged, blinking into the sunlight. “The stress was on gardens. Again we were pioneers. Look at Fakra. It is arguably the greenest area in Lebanon. Why? Because the promoters of the development were crazy enough to go for our idea to plant around the hotel. Again we had our doubters. They said we were crazy putting plants in the snow. They will die, they said. But tell me, who builds a chalet in Fakra today and doesn’t plant a garden? Who today invites people to dinner and doesn’t put flowers on the table? We have created or at least contributed to this culture.”

A household name

Exotica’s origins are embedded in Societe Debbane Freres, the agricultural arm of the Debbane group. Etienne’s father was what he calls “a pioneer farmer” who began the importing and contracting of pesticide application in Lebanon and abroad. “I joined the group in 1971 and my father told me to bring new business ideas, so I implemented the greenhouse and plastic undercover business to Lebanon in 1971 and 1972 and then began producing ornamental plants in 1979. This is how we started the distribution company. We then moved to Kuwait and Saudi Arabia, and grew from there.”

Today, Exotica is a household name with annual revenues in the range of $10 million. With five points of sale and the mammoth Zouk nursery, it can sell you a dozen home grown roses, a 2,000 year old olive tree or ranks of fast-growing, Leylandi conifers to block out nosey neighbors. It will landscape, plant, irrigate, and maintain your garden, manicure your lawn, plant a golf course or lay a football pitch. Exotica produces 2 million plants a year and imports those it can’t grow locally or which are too expensive to grow locally. Today, the retail side accounts for 50% of business, landscaping 30% and plant production 20%.

Regional roles

Exotica has been a regional player from almost the very beginning. In 1981 it established one of the largest companies for landscaping in Saudi Arabia and for 22 years worked on palaces, universities, golf courses and sports pitches. Does this entity still exist? If not, what happened?

In 2004, the company embarked upon its second regional project and now divides its Middle East activities between two corporate entities. Exotica SAL today serves the Levant – Jordan, Syria and Iraq – and North Africa – Egypt and Algeria, while Exotica LLC, an Emirati company with local partners, conducts business in the UAE, Qatar, Bahrain and Kuwait. Both companies are looking to target regional markets with renewed vigor. “We have just built a 50,000m2 nursery in al-Rahba area of Abu Dhabi. It will be fully operational by September 2006 and is geared to outdoor plants,” explains Debbane.

In the last three years, Exotica has been more active in the region, a strategy born out of a gradual contraction in the Lebanese market. “We need to focus on countries where there is wealth and demand. Lebanon is getting poorer. You need a consumer to sell and today there is less money to spend. Big jobs have been delayed or even stopped.”

Still, the infrastructure was in place to serve regional demands, while the know-how built up over a quarter of a century of working in the region has, claims Debbane, given Exotica a genuine edge. “We are executing gardens by shipping straight from the source or Lebanese nursery,” he explains. “If you want to be a big player you have to be there as a legal entity and to have a nursery producing plants that others don’t have and to be price competitive with other local producers. And this is what we have done. Today 20% of our business is outside Lebanon but within five years, we expect this to climb to 50% with overall revenues hitting $30 million.” According to Debbane there are no plans to undertake an IPO. “There is no need. We have a very powerful partner in the Emirates and in Lebanon we are doing well.”

A unique selling point

Despite the regional push, Exotica’s main hub is still in Lebanon. The Zouk nursery is a source of immense pride for Debbane. “It is probably the largest in Lebanon with the widest selection of plants, around 3,000 items.” Debbane points out that due to Lebanon’s unique range of microclimates – tropical, sub-tropical, desert and alpine – the company finds itself in the unique position of being able to cater to all zones, including the Gulf countries. “We are probably the only company in the world that caters to all these climates.”

Self-production and slavish attention to the bottom line has also sharpened Exotica’s competitive edge. It is an area of the business of which Debbane is particularly proud. “When it comes to quality and price on the plants we produce, we are unbeatable. We are highly mechanized and professional. For instance here in Zouk we produce 1 million rose stems, using hydroponics, a soilless culture in an ultra-sophisticated computer-controlled greenhouse system. The investment has been extremely expensive but we sell what we produce and we make the best roses in the country. Whether it’s annuals, perennials, small plants, or shrubs, we are also unbeatable because we use mass, mechanized production. We handle the plant once, put it in its pot and when it is ready for sale, we unplug and sell it.”

Debbane is also keen to stress that while Exotica is a successful family business, it is run as a corporation. “We have rules. We are clearly regulated, well-organized and financially transparent. There are two ways of running a family business. There is the family way: low cost, no investment and where everyone in the family works haphazardly and then sells without calculation. We do it in reverse. We look at it as an industry. We say the end product is this. What should we do to get it at price of not more than this? How many should we produce and what are the means of producing?”

The result is a competitive pricing policy that is often at odds with the company’s glamorous image. “People are normally shocked by our the prices. They think we charge for our name. This is not true,” claims Debbane. “The name is the gravy. All our plants have prices and are fixed. This is security to the consumer. Customers can come here and book a tree and come back for it in two months.

Exotica grows 1.5 to 2 million plants each year. “Everything that we can grow that is cheaper than importing we grow and in the same vein everything that we can’t grow here or is cheaper to import we will. For example, we used to get Palm trees from the North but now it is cheaper to ship them in from Egypt. They may not be as good as ours and a few may be diseased but it is still worth it. The plants we grow here are plants that reach maturity in 1-4 years and which we can sell easily. There is no point in investing in long-term trees when the market is so uncertain and in the contracting game you have to keep overheads low all the time as a precaution against the lean periods.”

The Debbane Group

Precaution or not, Exotica’s fortunes have been firmly rooted in the solidity of the Debbane Group, without which Debbane says Exotica would probably not be around today. “We owe our success to the support of the Debbane group. We have had highs and lows.” The lows were…well, pretty low, especially a particularly lean spell at the end of the civil war. “When things went bad, no one would have come in. Who was going to pay $500,000 for 90% of Exotica when they see you are bankrupt, even though 50% of the company should be worth $4-5 million? The Debbane Group, with income from other sectors in other countries, has been the key to our success.”

Debbane is one of six family owners in the group which established Exotica and which has revenues of around $100 million. The core activities are spread over seven other companies: Societe Debbane Freres, importers and distributers of agricultural material; Sodap, Insulco and BCL, which make construction material, insulation and cement respectively, Pesco Telecom and Evert M which provide telecom and data transmission services, and Enoteca, the upmarket wine importers and retailers, a business that grew out of a hobby and which now serves both the on and off-trade. It is another area in which Debbane feels the group has contributed to new trends in modern Lebanese living. “People used to serve whisky and arak with a meal. Now it has to be wine.”

The CSR experiment

Exotica devotes 5% of its revenues to advertising, “the norm by western standards.” Given the company’s green – metaphorical and literal – profile, surely it must be heavily involved in corporate social responsibility, working among the community and leading the way to a greener Lebanon? Debbane sighs. “To be honest, most of our efforts to help the public sector have failed. We have planted roundabouts, medians and trees on pavements mostly without success because the day we hand them over to the municipality, they are not well looked-after. We have planted some areas as much as six times. If we had been allowed to do it properly they would be fantastic places by now. It kills you. I was involved in a roundabout project with Pikasso [billboards]. When we maintained it, it was fine but when we left it, it died and had to be replanted within two years, probably at a higher cost. So you can see there is little incentive for us when we are let down all the time.”

Yet Debbane has sympathy for the Ministries, who he says are underfunded. “Look at the ministry of agriculture. It has 0.04% of the national budget for a sector that employs 25% of the workforce. In 1974, we were pioneers. Today, Lebanon has fallen behind its neighbors in this field, while other have learned new methods or brought in know-how.”

Value-added service and know-how

Know-how is a key strut in the Exotica corporate structure. “You have to get the best people. Without people there is no business. The key is that we have always invested in people. We have found the best and brought in the best and trained our staff abroad on the latest techniques, buying know-how when we have to.”

As a result, Exotica has 15 technical teams supervised by engineers that are on call to visit the nation’s gardens, assessing, planting and maintaining. It is, claims Debbane, all part of the total care package. “We guarantee everything. You can call us and say, ‘I have a garden in Tyre. Can I plant lavender?

’ We will ask if you have checked your water. Is it too salty? We will check the water and the conditions and if you can’t plant lavender we will tell you why. Others retailers will just say, ‘You want lavender? Take three plants, what’s the problem? If they die, come and take three more.’ We are still maintaining gardens that we planted years ago.”

June 1, 2006 0 comments

Money Matters

An idiot’s guide to hedge funds

by Executive Editors May 28, 2006

written by Executive Editors

As a follow up to recent articles published in this magazine on fund managers, such as Philippe Jabre and Marc Hochar, and the numerous mentions in these articles of hedge funds, we thought we should shed some light on the meaning or definition of hedge funds, their origins as well as their characteristics.
In the financial community, the term “hedging” usually refers to entering transactions that protect against adverse price movements. A “hedge fund” could thus reduce risks through a strategy that acts as an insurance policy, and brings the level of investment risk to a minimum. However, the term “hedging” or “hedge” is very misleading as most hedge funds nowadays use strategies which are not at all “hedged” or without risk. In fact, most hedge funds only “hedge” part of their exposure to a specific market or product (whether its equities, bonds, interest rate products, etc.) and follow specific sophisticated strategies. With time, the investment community started to call these type of funds as “hedge funds”, even when the overwhelming majority were mainly exploiting market inefficiencies through the use of various sophisticated arbitrage techniques.
Their origins date back to 1949, when Alfred W. Jones set up the first hedge fund. His objective was to eliminate part of the market risk involved in holding long stock positions by short selling other stocks. He was also the first to simultaneously use short sales (the act of selling securities you don’t own, by borrowing shares from someone, selling them, repurchasing them at a later date, and then returning them to the original lender), leverage and incentive fees. In 1952, Jones converted his general partnership fund into a limited partnership, investing with several independent portfolio managers and created the first multi-manager hedge fund. By 1966, Jones’ “hedge fund” had outperformed all the mutual funds of it’s time.
A “rush” into hedge funds followed and their number increased from a handful to over a hundred within a few years (remember, this was still the late 1960s). However, there were high losses and bankruptcies during the difficult stock market times of 1969-70 and 1973-74, a period that saw a number of hedge fund managers, with the exception of such stellar luminaries as George Soros and Michael Steinhardt, wiped off the financial map.

80s boom
A new boom in the late 1980s, helped the creation of a great number of new hedge funds and by the mid-1990s, hedge funds were accused of manipulating the market and creating high volatility, although an official inquiry and study by the IMF showed no evidence of such wrongdoings. The collapse of the Asian and Russian markets in the late 1990s ensured the much publicized collapse of LTCM, although the hedge fund industry recovered relatively quickly and is today continuing to boom.
Today, the established definition of hedge funds is “all forms of investment funds, companies and private partnerships that use derivatives for directional investing; and/or are allowed to go short; and/or use significant leverage through borrowing.” Borrowing includes margin borrowing against securities, foreign exchange, credit lines and loans. By significant leverage, we mean borrowing in excess of 25%. Hedge funds have three main features: they charge clients a percentage of the profits; they aim to achieve substantial returns; and they can only take a limited number of investors.

On the map
Hedge funds are characterized by their free choice of asset classes, markets, trading style, and instruments. Most are sold on a private basis and many are incorporated offshore, while for regulatory and administrative reasons, high minimum investment levels are often required. Other characteristics include the infrequent subscription and redemption possibilities, and the fact that managers invest their own capital in their funds. Finally, hedge funds show low correlation to traditional markets and are marketed as being oriented towards absolute performance (performance above zero) instead of performance relative to a certain benchmark or reference index.
With our own Philippe Jabre, it could be said that Lebanon is somewhere on the map of the hedge funds’ world. However, when one realizes that the West had been offering this kind of alternative investment source for more than 50 years, and we in Lebanon are still cogitating about petty political issues with a complete disregard for economic development, then it is understandable why we still have an accelerating brain and youth drain. Pity.

Moody’s Upgrades NBK’s Outlook to Positive

The rating agency, Moody’s Investors Service, has upgraded the outlook on the A2 long-term foreign currency deposit rating of Kuwait’s largest bank and the top-rated Arab Bank, the National Bank of Kuwait (NBK), from stable to positive. This upgrade came amid the bank’s strong performance and continuous growth, as well as to its pioneering position in the local market. NBK posted net profits of $704m in 2005, up 37% year-on-year. The bank’s total assets reached $21.2bn at the end of 2005, while its shareholders’ equity stood at $2.2bn. Moody’s upgraded Kuwait’s sovereign ratings outlook to positive earlier this year due to the further strengthening of the country’s fiscal and external positions and the successful conclusion regarding the succession of the new emir.

Emaar Q1-2006 Net
Profits Rise 14%

Dubai-based property developer Emaar reported a 14% yearly growth in first-quarter 2006 profits to $413m resulting in a $0.28 annualized earnings per share. The company’s revenues approached $610, down 21% year-on-year. Emaar, a joint-stock company listed on the Dubai Financial Market, recently announced plans to expand its investments into the education and healthcare business. Emaar’s share was last traded at AED16.35 ($4.5).

Country Profile: Qatar

Qatari authorities unveiled the country’s budget for 2006-2007. In the budget statement, revenues are forecasted at $15.6bn, expenditures at $15bn and allocations for infrastructure projects at $5bn. The 2006-2007 budget is significantly higher than the 2005-2006 budget mainly due to the assumption of an average oil price of $36/barrel, up from $27/barrel the year before. A surplus of $632m is forecasted for 2006-2007, up from one of $60m in 2005-2006. In fact, Qatar has realized consecutive surpluses for the last five years. The country’s current spending is forecasted at $9.5bn for 2006-2007, up from $7.2bn for 2005-2006, while capital spending is forecasted at $5.5bn for 2006-2007, up from $3.2bn for 2005-2006. Allocations for health services, education and housing would reach according to the budget $1bn, $1.6bn and $192m respectively. Moody’s agency has noted that Qatar’s booming oil sector has improved the country’s public finances. Its public debt has fallen from around 90% of GDP at end-1999 to 30% of GDP at end-2005.

May 28, 2006 0 comments

Economy & Finance

Hedge your bets

by Executive Editors May 28, 2006

written by Executive Editors

Founded by Marc Hochar, a former Lebanese investment banker who had spent his entire professional life (more than 13 years) in investment banking and global markets with US investment bank JP Morgan, Melkart Capital has become the talk of Lebanese financial circles and the region. Melkart is the first large-scale international “fund of funds” to be managed out of Beirut by Lebanese specialists. In less than 20 months, the fund has attracted around $70 million of investments from high-net-worth individuals from Europe, Latin America and, to a lesser extent, the Gulf area, as well as institutional investors, in the form of large corporations, from Europe and Latin America.

Three companies
Melkart Capital is actually made up of three companies: Melkart Capital Management, a firm incorporated in the Cayman Islands, which is an asset management company specialized in global alternative investments, including hedge funds; Melkart Capital SAL, which is a Lebanon incorporated and based company, responsible for the brokerage and distribution of investment funds in Lebanon, and the Melkart Diversified Fund, which is the actual global multi-strategy fund of hedge funds. The Melkart Diversified Fund is managed by both Melkart Capital Management and by Antarctica Asset Management, an investment management firm established in the British Virgin Islands. Antarctica is an investment advisor to Melkart Capital Management, which was founded in 2001 by former investment bankers. It specializes in hedge fund management and investment advisory with around $700 million of assets under management and a research unit based in New York. Finally, it is worth noting that Melkart Capital SAL is registered as a financial intermediary in Lebanon with a capital of LBP1 billion, and is regulated by the Central Bank of Lebanon (BDL).
The “seed” money of Melkart and its flagship fund, the Melkart Diversified Fund, was initially brought in by Marc Hochar personally as well as by a small group of international investors, who were partly brought in by Antartica. With its 5-year track record and the extensive investor relationships of its managers, Antartica has been instrumental in providing the Melkart fund with investors. Antartica still plays a vital role in the management of the Melkart fund, as it provides the necessary quality research and market and industry reports, as well as all logistical support the Melkart fund might need. Fund raising was actually carried out from the start by both Melkart and Antartica who initially joined hands to raise around $70 million in 18 months. The Melkart founders/managers raised at least 50% of the total $70 million.

Solid structure
For the moment, 60% of the Melkart fund’s total is accounted for by European investors, while Latin American investors make up around 25%. Middle East investors make up for the remaining 15%. Most of the present investors are high net worth individuals, who normally invest into the Melkart fund through international asset managers and private banks. The latter offer the Melkart fund to their customers as one of the funds they officially represent. Currently, the fund does not include many Gulf investors. The aim is to start approaching these investors when a solid enough track record would have been built, as Gulf investors are usually reluctant to invest into funds or other investment products if there is not a few years’ track record. Only Antartica has a five-year track record which shows a more than decent return, while Melkart shows an eighteen months track record. For instance, the return of the Melkart Diversified Fund (MDF) for 2005, given net of fees was close to 15%, and has already reached 5.21% for the first two months of 2006. If all goes well, the MDF should yield perhaps more than 25% for 2006.
Melkart Capital’s structure is a solid one, in the sense that its management and distribution are carried out in Beirut, while the custodian and administrator for the Fund, HSBC, is based in the Isle of Man. The latter is highly regarded by fund managers, as it is the strictest of off-shore centers in terms of regulation for anti-money laundering. Given the Beirut base of Melkart Capital SAL, the broker/distributor, an Isle of Man custodian and administrator is of prime importance. The actual funds coming from investors are placed with the Melkart Diversified Fund (MDF), which is based in the Cayman Islands. The MDF places its funds into more than 30 hedge funds throughout the world with different investment strategies. The MDF is principally invested into equity (21.7%), while the rest is spread between global macro hedge funds, event driven funds, emerging markets, distressed and credit funds, fixed income, convertible and statistical arbitrage, managed futures and commodities. The auditors of the MDF are Deloitte and Touche, while Société Générale is the leverage provider (provider of cash through a credit facility) with a pledge on the Fund’s assets. The legal counsel for the MDF, Walkers, is also based in the Cayman Islands and is of international repute.

Experience
Not only is Melkart Capital’s structure solid, with big names in support and an internationally approved legal structure, but the investment management skills and strategy are also performing. The managers (Melkart and Antartica) have a strong understanding of the hedge fund industry, have expertise in risk management and last but not least, have access to top quality managers. The investment managers (Melkart’s managers, including Hochar, and Antartica’s managers) have a combined experience of 50 years in the fields of quantitative analysis and derivatives trading, which are widely used by arbitrage hedge funds to manage risks. It is also worth mentioning that both Melkart and Antartica have extensive relationships with a large number of global fund managers, who used to be their trading counterparties, and often, their working peers.
The investment strategy of Melkart is principally to choose the right funds to invest into, as well as the right mix in terms of diversification. The Melkart investment managers pay particular attention to the volatility of the funds they are contemplating in both absolute terms and relative to their peers. The consistency of returns is thoroughly scrutinized as well as the funds’ management quality and strategy.

New niche
A background check on managers of funds is also carried out extensively. This task is seriously facilitated with the help of Antartica, which not only has the experience and track record in the field, but also sufficient resources to carry out thorough checks of funds’ managers, their strategy and reputation. Melkart’s managers nevertheless pay a visit to the funds they invest in once every two to three months. They also remain prudent in their strategy, in the sense that they make it a policy to maintain three layers of hedge inside their investment strategy.

Melkart provides its investors significant added value. it provides access to top tier hedge funds

Overall, Melkart provides its own investors significant added value, in that it provides its investors access to top tier hedge funds, which are normally closed to individuals or new investors. Through its extensive relationships in the fund management world, Melkart can identify and provide privileged access to talented new managers. The MDF itself was short listed for “Best Newcomer Fund of Funds” in the HFR 2005 European Fund of Funds Awards, while the various Antartica funds were nominated during the same year as “Best Arbitrage Fund” and “Best Fund of Funds”. MDF not only provides access to closed funds, but also its relatively small size allows for quick asset allocations switches and investments, for a customized approach for every investor, for full transparency (monthly update, statistical data, etc.), for a full diversification benefit with a minimal investment size, and for improved liquidity.
By building such a sophisticated tool and making it accessible to investors, Marc Hochar and his partners have capitalized on an extensive experience accumulated during years of work spent among the elite of world finance. Melkart can hence be safely described as a solidly constructed pioneer, which should pave the way for the establishment of a new highly specialized niche in Lebanon.

May 28, 2006 0 comments