Archive for the ‘Islamic Finance’ Category
It has long been an anomaly that a relatively small country like the UAE has three stock markets – the Abu Dhabi Securities Exchange, Dubai Financial Market and Nasdaq Dubai – and the logic for consolidation is overwhelming.
Now with the merger between the Nasdaq Dubai and Dubai Financial Market in its ‘very final’ stages, according to officials, there have also been talks about making this a three-way merger.
This is clearly a decision to come from the government level. The ADX is 100 per cent government owned and the DFM has only listed 20 per cent of its stock. In December the DFM announced an agreement to buy Nasdaq OMX’s remaining stake in the Nasdaq Dubai in a $121 million deal.
The merger of the Nasdaq Dubai and DFM is actually more complicated than merging with the ADX from a regulatory standpoint as the two Dubai exchanges have different regulators, the Emirates Securities and Commodities Authority for the DFM and the Dubai Financial Services Authority for the Nasdaq Dubai.
Nasdaq Dubai stocks are also quoted in dollars and not the local UAE currency the dirham. After the merger Nasdaq Dubai listed companies will have a choice over whether to trade in both currencies, although the fixed peg to the dollar effectively makes the dirham a dollar proxy in any case.
UAE bourse a big step
But the creation of a unified UAE stock market is a far more important step. It would mark a decisive breach with the past and the disappointing performance of UAE bourses since their crash of late 2005. There would be a sense of a new start, and a start from a low point.
This would also be more than a symbol of the new unity of purpose in the UAE since the savage credit crunch first struck in autumn 2008 and the country dipped into recession last year for the first time in more than a decade.
For global investors a unified UAE stock market would look far more attractive. It would be a deeper and more liquid market. The potential for initial public offerings would be considerable. And this flow of funds into equities would assist the nation in a rapid recovery from last year’s recession.
The investment community has an understandable fascination with the usually secretive world of Abu Dhabi sovereign wealth funds. But although these private, non-listed funds are hardly likely to throw open their books to public scrutiny, a lot more data is now being provided.
Yesterday the Mubadala Development Company posted its 2009 financials. The fund clearly benefited from the huge bounce in equity prices last year with a 75 per cent surge in totals assets to $24 billion under management.
Return to profit
The profit attributable to shareholders stood at $1.3 billion compared with a loss of $3.1 billion in 2008. Something described as ‘total comprehensive income’ for 2009 was $2.3 billion, with Dolphin Energy contributing $761 million to revenues.
CEO Khaldoon Khalifa Al Mubarak said: ‘We have a robust portfolio of businesses, a solid pipeline of projects, a ready access to diverse sources of funding coupled with strong support from our shareholder. This puts us in a unique position to realize value and further opportunities in 2010.’
Aside from Dolphin Energy, the fund holds stakes in Ferrari and the US private equity firm the Carlyle Group, UAE telecom company du, AMD and Aldar Properties.
But the main contributors to growth in revenues came from: SR Technics at $1.1 billion; $706 million from concession revenue from local universities; and $217 million from the sale of land on Sowwah Island.
Not surprisingly Mubadala has excellent credit lines and a $2.5 billion syndicated loan facility should be renewed within the next few weeks.
Rumors about Dubai stakes
Rumors continue to swirl in Dubai that Abu Dhabi funds are about to, or may have already, taken stakes in major local companies such as Emirates Airline, but these rumors are still vigorously denied. Nonetheless it is obvious that Abu Dhabi’s sovereign wealth funds are going to become more and more important in the development of the UAE in the future.
For these funds are the depositories for the vast accumulated oil wealth of the UAE. Here is the wealth saved for the benefit of future nations, and to ensure that passing downturns in the oil price have a lesser impact on the economy than otherwise.
In a world of debtor countries the UAE is a net creditor, even allowing for the huge debts of Dubai. That is a massive advantage is today’s world.
His arrest last Thursday caused uproar in Bahrain but by the evening the minister appeared in his majlis. He then denied reports that he was implicated in money laundering operations, protesting his innocence and saying that he would carry on his government work.
A police statement said: ‘An official has been detained on charges of committing money laundering transactions domestically and abroad. The ministry (of interior) noticed the events in early 2009, and therefore monitored the official’s activities, meetings and communications closely and secretly.’
In a telephone interview with Al Arabiya TV the former minister said: ‘My dismissal is perhaps aimed at facilitating the ongoing investigation. I have the right to defend myself … and the accusations are completely untrue.’
Bahrain has long been a major regional financial centre, although in recent years that title has largely past to Dubai with its English language, multi-national regulatory system. Bahrain still operates in Arabic and under Shariah Law.
But Bahrain is the regional headquarters of the anti-money laundering watchdog the Financial Action Task Force and issued a stern anti-money laundering law in the wake of 9/11. No high profile investigations or arrests have been made since then.
The National newspaper reported today ‘local media say there have been other arrests across the Gulf, including in Kuwait and Dubai, and the network laundered money for drug-traffickers and the Iranian Revolutionary Guard, something Bahraini officials have yet to deny. Most reports say the sum laundered exceeded $12 million, though other estimates have put it as high as $80 million’.
This is almost bound to be a trial by media, and bloggers in Bahrain have been active. All that can be usefully said at this moment is that the minister concerned, who was allowed to go home after being questioned last Thursday is implicated in a major financial scandal, and doubtless further facts will emerge in due course.
In the meantime this story is bound to be the subject of a myriad of conspiracy theories and ill-informed speculation. But in this case the truth may yet trump any fiction.
Anybody who thought this city might be destitute ought to have looked around Art Dubai last weekend. Most of the city’s leaders certainly did so.
18 months post-crash
For 18 months since the $20 million party to open the Atlantis Hotel on The Palm Jumeirah symbolized the height of excess, Dubai is a more sober city. But there is still an awful lot of creative and entrepreneurial spirit in Dubai, and that magic ingredient to commerce, money.
Many investors may have lost their shirts in the real estate boom. Yet the splendid modern infrastructure of the city remains. Art Dubai was held in the Madinat Jumeirah, a sprawling complex of beautiful Arabian themed hotels and a souk, opposite the iconic Burj Al Arab hotel.
It was not clear how much art was being sold, although ArabianMoney saw one elderly national buying three ladies in black several AED500,000 hand-painted watches. The artist who painted these time-pieces was giving a display of painting under the microscope.
Yet the surrounding hotels obviously benefited from this modern art fair. The sponsors HSBC and Abraaj Capital benefited from the prestige of association. And Dubai has an event that will probably gradually morph into something like the Royal Academy Summer Exhibition. It is another leap forward for a city that had no defining annual art show until four years ago.
Boom and bust
Of course, it will be some years before anything like the recent Dubai real estate boom can happen again. These booms do tend to be once-in-a-generation transformations that are followed by long consolidation periods.
But if anybody doubts that a global hub city like Dubai is going to bounce back then they should have taken a look at Art Dubai 2010.
Modern art is also presently in recession with auction prices on the floor. So it makes sense for the galleries to come to their potential buyers rather than expect them to journey to overseas.
Increasingly, multinationals and banks are also going to relocate to Dubai for the same reason, and to avoid taxes and take advantage of much lower real estate costs. That is the new vision for Dubai.
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.
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.
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.
The Dubai Financial Market closed 3.5 per cent lower on Sunday after Zawya Dow Jones said the creditors of Dubai World – which is seeking to restructure $22 billion in debt – may be offered 60 cents in the dollar after seven years.
The news agency cited unidentified persons familiar with the plans but there has been no official announcement or confirmation of what can only be speculation at this stage.
No news on rescheduling debts
However, the sharp stock pull back is a reminder of just how sensitive this market remains to the Dubai World debt ‘rescheduling’ as it is called in the local press who think talk of a ‘debt crisis’ before the Dubai World sukuk was repaid in full last December was alarmism by the international media.
Any thought of 40 per cent losses for investors, and a long delay in the return of this capital will result in big provisions for the lending banks, both local and international. It is also not clear whether Dubai World’s ultimate repayment will have a government guarantee or carry interest payments.
There is also a lack of information about how long this matter is likely to take to resolve. The banks have yet to agree to an official debt standstill, and until that starts the six-month clock for a new agreement can not commence.
Speculation and uncertainty
Stock markets hate uncertainty and the Dubai Financial Market is going to be plagued by speculation until the debt position is resolved. And given the substantial global press coverage of the debt crisis late last year this is also going to create a hiatus in local business investments and the moribund sukuk market for local bonds.
It is also bound to lead to further speculation about what other debts may or may not lurk beneath the surface in Dubai. Who else has overdone their construction schedule and is now stuck with half built, unsaleable or unleaseable property?
The fingers are pointing in all directions at the moment and probably make things look considerably worse than they really are in practice. But until matters are all out in the open, audited and agreed, the speculation will be that the true position is far worse than it actually turns out.
UAE bank full-year results for 2009 are coming in line with expectations, and feature substantial write-offs for the Algosaibi and Saad groups in Saudi Arabia. But the big gorilla in the front drawing room remains bank write-offs for the Dubai real estate crash.
Dubai World may have declared a $22 billion debt restructuring that brought negative headlines around the world from November 25th to mid-December last year, but Dubai World debt has not yet been classified by any UAE bank as non-performing.
That said, the Emirates NBD results showing a nine per cent fall in annual net profits to $897 million for 2009 did include the bank’s first write-down against Union Properties, Dubai’s second largest property developer that is partly owned by the bank. But $86 million is unlikely to be the last write-off against Union Properties.
The largest bank in the Gulf States said sovereign debt accounted for 22 per cent of its $58.3 billion loan book, or $12.8 billion of which analysts attribute the majority to Dubai Government related entities including Dubai World.
Provisions are guided by the UAE Central Bank which is fairly strict in demanding that non-performing loans be recognized according to international accounting standards. If such losses arise in the course of 2010 then it will be the accounts of this year that take the biggest hit.
Nobody really knows how large total losses from the collapse of the Dubai property boom will prove to be, and there are also non-performing loans in the northern emirates and Abu Dhabi as well. Indeed, the banks themselves must have an idea but are by no means sure of the precise total, and will still be hoping for the best with Dubai World, for example.
Banking crisis not over
However, to talk as some of the popular local media likes to do of a quick recovery in the UAE banking sector is clearly very premature. The full extent of the problem facing the sector in 2010 has not even be finalized, let alone resolved.
In the early 1980s, which government ministers have started to cite as a model for dealing with the current situation, several UAE banks went through hurried mergers and reorganizations as the true extent of bank finances became apparent. A similar local banking crisis in the aftermath of the recent real estate crash and global financial crisis must therefore seem a logical proposition.
But there is no need to panic. The UAE Government has guaranteed all bank deposits of any size, and that is one of the best guarantees in the world.