Bank tells the real story
Troubled Investment house produced pamphlets telling its clients what happened and how they plan to bring the company back on its feet
Financial Times Published: 00:00 March 18, 2010
Gulf companies are rarely known for transparency and often become even more opaque at times of financial distress. But Global Investment House, a Kuwaiti investment bank that defaulted in December 2008, has chosen another tack.
Rather than retreat into a shell, the bank opted to be open and transparent about its restructuring. Global management produced pamphlets detailing what the company was going through, and distributed badges to employees that exclaimed: "I am up to the challenge."
When a restructuring plan was signed late last year, the bank's employees wore "We did it" badges and marked the occasion by erecting a large blue sign outside its headquarters in Kuwait City, "celebrating Global's debt restructuring", and listed its multifarious creditors.
"2009 had its battlefields, and there was a lot of pain, but things are looking better now," says Maha Al Gunaim, Global's chairwoman and managing director.
Regional bankers, some of whom doubted Global could survive its default, grudgingly salute its conduct over the past year — and point to it as a model for other troubled companies.
Loan and bond interest payments continued to be met during the initial restructuring period, and Global garnered praise from creditors for its constructive approach.
However, the bank still has work to do to restore its reputation. Beyond the default — a result of too much debt and proprietary investments in illiquid, hard-to-sell assets — it was revealed that Global had also partially financed itself with client money.
At the time of default in December 2008, Global owed $611 million (Dh2 billion) to its funds and investment banking subsidiaries — including a London-listed private equity subsidiary — through repos and so-called murabaha, money market instruments that comply with Sharia.
Of this about $150 million was owed to Mazaya Saudi Arabia, a start-up property subsidiary where investors' money was deposited at Commercial Bank of Kuwait. CBK anticipated the default and, despite the fact that it was not Global's money, seized the account to offset its exposure to the investment bank.
"I don't think we did anything that breaks with the central bank's rules. In general, investing in murabaha to generate higher returns for investors was fine, but products we manage should not have invested in Global murabaha," Gunaim concedes.
"In the future it will not be repeated."
Global has settled all the murabaha, mostly by transferring some of the bank's own assets. The focus is now shifting to reinventing itself as a leaner, cleaner investment bank capable of generating the returns it needs to repay the $1.72 billion owed to creditors.
Restructuring involves unwinding the bank's proprietary investment division and placing the assets — valued at about $1.7 billion by PwC, the accountants — in two closed-end funds, a Global Macro Fund and Real Estate Holdco.
These funds will act as collateral for creditors and be sold down gradually over the next three years to repay debts. In addition, Global has $400 million of bonds that have to be met over the next three years. The first 20 million Kuwaiti dinar (Dh253 million) bond was successfully repaid on December 23.
Creditors can convert their debt into shares in the bank if Global fails to repay $700 million of the $1.72 billion by the second year of restructuring.
As part of its efforts to rebuild its reputation, Global promoted Bader Al Sumait, one of its co-founders, to chief executive and parted company with Omar Al Quqa, another co-founder. At the instruction of creditors, two independent directors will also be appointed to the board later this year.
"I didn't take the job because I wanted the title, I took it because there was an important job to do," says Sumait. "I've been through tough times before, like the Soukh Al Manakh crash in the ‘80s and the Iraqi invasion, but I've never experienced something of this magnitude."
Path to profitability
To return to profitability the bank has cut its staff by a fifth and salaries by up to 20 per cent, and plans to focus on its asset management and brokerage franchises, and expansion in Saudi Arabia and Egypt.
"We have a wide geographical spread of brokerage licences across the Middle East, and we can offer easy, one-stop access to all the markets for emerging market and Gulf funds and investors," says Gunaim.
The bank is also trying to build up its advisory business, and recently worked on Bharti Airtel's $10.7 billion bid for the African assets of Zain, the Kuwait telecoms company.
Global is not the only Kuwaiti investment company to have faltered amid the financial crisis. Bankers say most of the 100 investment companies in Kuwait are struggling to repay loans, and predict that many could be wiped out.
"Investment companies owe it to their stakeholders to deal with their problems. It's hard, but you have to accept the fact that you have defaulted," argues Sumait. "You cannot live in denial, and there are a lot of investment companies that are still in denial."