First with Financial Comment from Arabia

Investment Dar shows how Kuwaiti investments went wrong

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The financial problems of Kuwait’s Investment Dar are a classic illustration of how investors can get carried away buying prestige assets in an oil boom when borrowing money is only too easy and neglect fundamentals.

It is not as though the 50 per cent shareholder in Aston Martin, and proud owner of the Australian continent on Dubai World’s The World archipelago of offshore islands, is alone. Kuwati investment companies blossomed in the recent oil boom with more than a hundred launched, and many of them are now in deep financial trouble.

Government rescue?

Investment Dar is just arguably the most high profile. Late last week the group announced it would be seeking government support under the $5.2 billion Financial Stability Law established last year.

It explained ‘although terms of a restructuring plan have been approved by more than 80 per cent of Investment Dar’s banks and investors, a small minority have continued to resist supporting the plan’.

The group is now seeking to borrow around $1 billion to refinance its $3 billion debt. Its shares have been suspended since last April following a failure to produce 2008 financial statements on time, and late last year Investment Dar defaulted on a $100 million Islamic bond, the first default of its kind by a major financial institution.

The Kuwait central bank has appointed a temporary supervisor to monitor the debt restructuring process, and news that 80 per cent of creditors had accepted an agreement to reschedule debts over five years first came last December. So Investment Dar’s fate is clearly a matter of national concern.

Yet this is clearly shutting the stable door after the horse has bolted. The quality of the investments made in the oil boom is the real problem.

Poor investments

Aston Martin makes great cars, but was any thought given to how such luxury car sales might hold up in a recession? The Dubai World project The World always looked commercially risky, and is now also a part of the $22 billion debt restructuring at Dubai World.

Kuwait occasionally pays off all the bad debts of its citizens with a munificent gesture from its oil wealth. But this kind of approach to debt carries a moral hazard. Investors start to think that they can never go wrong because the government will always pick up the tab.

But no amount of money will turn lead into gold when making an investment. And from the follies of the boom years, investors in Kuwait and the rest-of-the-world now have to go back to basics.


Written by Peter Cooper

March 14, 2010 at 9:24 am

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