Where is Kuwait's troubled Al-Ahlia Investment Co. finding the cash to service its half-billion dollar debt?
Shuaa Capital, the UAE investment bank involved in underhand practices in its dealing with a Kuwaiti company, Al-Ahlia Investment Co., can breath a small sigh of relief. Not because it is out of the woods regarding its stake in Al-Ahlia - it still has a huge stake in an Al-Ahlia subsidiary sitting on its books - but because at least it managed to extract itself from Al-Ahlia before things got really bad.
"I think by the second quarter they're going to go bust," says Zied Al Awadi, a former shareholder in Al-Ahlia and the nephew of the company's former chairman, Abdulsalam Al Awadi. "It's clear from the balance sheet. Last year they had 30 million Kuwaiti dinars ($103.8 million) to pay to banks, this year it's 50 million. So they're going to be under. They're going to be in the red. I think the banks are going to go in and foreclose the whole company."
Zied Al Awadi may well have his own ax to grind with his uncle - Kuwaiti business disputes can be nasty internecine affairs - but his accusations are backed up by other former board members, and by Al-Ahlia's own published figures. Under Abdulsalam Al Awadi's control, debt at the company has soared to more than half a billion dollars, profits have slumped and investigators have pored over Al-Ahlia's books on a number of occasions. A year ago, Al Awadi was removed from the Al-Ahlia board by Kuwait's Central Bank after investigations revealed he was misappropriating funds, but he has managed to regain control of the company.
Although any investigation into Kuwaiti business dealings is notoriously difficult a lack of transparency combined with myriad murky deals with and between subsidiaries obscure the real picture TRENDS has managed to piece together enough evidence to reveal the perilous state of the company's affairs. The consequences for Kuwait's financial reputation if Al-Ahlia does go under will be severe: the company is intimately linked with the country's biggest real estate development the half-billion-dollar Kheiran Pearl City Project - and its biggest Islamic bond issue to date, a $200 million sukuk issued by a subsidiary, Al-Ahlia Gulf Holding Co.
Questions regarding Al-Ahlia's 2006 balance sheet were put to Abdallah Al Awadi, Al-Ahlia's current chairman and managing director, on three separate occasions, by fax specifically with regard to what the company is doing with the cash raised from the sukuk, but he declined to comment.
Profits tumble.
Most of the evidence of Al-Ahlia's increasingly dire straits can be found in its company figures for 2006, a year in which it saw its annual profits tumble from 32.8 million dinars ($113 million) to 6.4 million dinars ($22 million). The company lists total current assets, the cash it should be able to raise this year, of 84,105,662 dinars ($290 million), against current liabilities, payments to banks and others scheduled for this year, of 72,714,186.
However, if you take into account the board's decision to award a dividend to its shareholders of 20 percent of share capital, which works out at more than 15 million dinars ($52 million), the company moves into the red by the second quarter. The cash dividend - which is not accounted for on the balance sheet as it is subject to approval - represents an increase of 5 percent on last year's dividend, despite profits plummeting at the company. The report also reveals that the company's debt has soared exponentially over the past four years, from around 24 million dinars ($83 million) in 2003 to more than 154 million dinars today ($534 million).
Lagoon City: This debt has mostly been secured on Al-Ahlia's property portfolio. Listed on the books, under non-current assets, is the vaguely titled "freehold land held for improvement" at 53,184,502 dinars ($184 million). This is the land earmarked for the Lagoon City project, itself part of the Kheiran Pearl City Project, Kuwait's biggest real estate development to date (see box). (In a side deal, the land was purchased by Al-Ahlia Investment Co. in 2006 from a subsidiary, Al-Ahlia Gulf Holding Co., for 56,110,000 dinars. The report states that any profit from this deal was "eliminated on consolidation.") Plots of this land with a value of 41 million dinars were used as security against short-term loans totaling nearly 20 million dinars in late 2005.
Combined with other property interests, this land was also subsequently mortgaged against a new, far bigger, bond issue, an Islamic compliant Musharaka sukuk of nearly 60 million dinars, which successfully closed late last year. The sukuk, rated "BBB+" by Capital Intelligence, a Cyprus based company specializing in rating emerging markets, opened in 2005 at $100 million and was doubled after it was oversubscribed. As Ahmed Abbas, the chief executive of Bahrain's Liquidity Management Center, which was the lead arranger for the deal, said at the time: "The Islamic Musharaka Sukuk, which is an international sukuk, has achieved an oversubscription of $75 million and the bank has elected to increase the facility to $200 million, making it the largest corporate sukuk issue in Kuwait to date. This is a reflection of the significant confidence of the investors in the Sukuk issue, our strategy and unique structured products."
That confidence may well be misplaced. According to insiders, the real purpose of the sukuk wasn't to develop Lagoon City - it was to pay off the company's spiraling debt and keep creditors and shareholders at bay. According to informed sources, 20 million dinars ($62.9 million) was used to pay back banks in the last quarter of 2006. The remaining 40 million dinars ($138.4 million) is booked as a fixed deposit on the company's current assets.
The sukuk issue attracted some of the region's big financial names, including Emirates Islamic Bank, Bahrain Islamic Bank and Liquidity Management Center as senior lead managers; Rayan Bank, Islamic Development Bank, Capital Management House, Sharjah Islamic Bank, Kuwait Finance House Malaysia, The Arab Investment Co. and Emirates Bank International as lead managers, Khaleeji Commercial and Kuwait Real Estate Bank as co-lead managers; Commercial Bank of Qatar and Bank Muscat International acted as managers along with National Bonds, Arab Islamic Bank and Al-Amin Bank as participants.
Notable for their absence on this list are Al-Ahlia's previous creditors, including National Bank of Kuwait, which issued a 10 million dinar ($34.6 million) bond in 2002, and Global Investment House, which were behind a bigger bond issue of 20 million dinars ($65.2 million) in 2005, as well any of Kuwait's bigger players.
Among Al-Ahlia's most pressing concerns are the above bonds: the former matures in full this year, while a large tranche of the second is also due. The total it's due to pay out this year on those two alone is around 21.5 million dinars. In addition, around 40 million dinars is due to banks on short- and long-term loans.
If the proposed dividend is stripped out of the equation, and Al-Ahlia manages to convert all current assets into cash, it would be able to cover the due debt. But that begs the question that bondholders need to put to the company: what is the company doing with the 60 million dinars Al-Ahlia raised from the sukuk to purportedly develop the Lagoon City project?
Those same investors should also be concerned about the progress on the Lagoon City project itself. According to Al-Ahlia insiders, Abdulsalam Al Awadi has been re-evaluating the price of Al-Ahlia's investment properties upward, boosting the value of assets on the balance sheet, but pricing the property out of the market. For example, the figure put on investment properties held by the company have swollen by 300 percent from last year to 97 million dinars ($335.5 million), with the bulk of these properties mortgaged on the bond issues. Though some of this is the result of a land purchase in 2005 for 45 million, revaluation has helped to the tune of 9.6 million dinars in 2006, 16.3 million dinars in 2005 and 1 million dinars in 2004. In 2003, the company listed investment properties worth just 572,565 dinars.
"They've reevaluated the land to unsustainable levels," says one deposed board member, who said that when he departed in 2006, Al-Ahlia Gulf Holding had booked only 6 million dinars in sales on the land in two years. "No one's going to pay what they ask," he says.
To add to their worries, the bigger project Lagoon City is facing huge delays because of an energy crunch in Kuwait. According to a front page report in Al-Watan newspaper last month, the Kheiran Pearl City project, as well as another mega-development, Al-Ahmad City, will need to be put on hold because of an electricity supply crunch. It quoted a letter from the Energy Ministry to the Public Housing Care Authority Energy Ministry about the problem, and added that the projects could be delayed until after 2015 as a result.
Troubled history If the Al-Ahlia saga really has reached its endgame, as the figures suggest, it marks the end of one of the most ignominious phases in Kuwait's financial history. Launched in 1974 by a group of young investors determined to tap industrial development in Kuwait, for all intents and purposes it was a successful, if unremarkable company, for most of its history.
Things got interesting after Abulsalam Al Awadi became involved. The chairman of Gulfinvest was a close friend of Al-Ahlia's then chairman and managing director, Abdallah Gabandi, who had bought up a large number of Al-Ahlia shares on the open market, and suggested that the two companies would form a natural fit and should merge. Initially resistant, Gubandi eventually agreed to the deal, and in 2002 the companies formally merged, with Al Awadi taking over as chairman and managing director, and Gubandi assuming the role as CEO of the enlarged company.
Al Awadi's nephew, Zied Al Awadi, whose family had a sizable stake in the merged firm, takes up the story: "Our share place was used as collateral for his loans. He was just getting loans for himself, and using our shares as collateral - my father had given him power of attorney. But, when the banks started calling, wanting their money back, he decided to sell the shares, and he convinced Shuaa to buy them."
By the time of the Shuaa deal in 2005, the board at Al-Ahlia, led by Gubandi, had already noticed some serious discrepancies in the dealings between Al-Ahlia and its many subsidiaries. They took their concerns to the Kuwait Central Bank, which in turn sent a team of inspectors to the company in November 2005. By this time relations between Gubandi and Al Awadi had broken down irretrievably: Al Awadi refused to hold a meeting with board members to discuss their concerns, and Gubandi found himself in the remarkable position of being kept out of his own office by security guards hired by the chairman.
After the inspection, the Central Bank team prepared a damning report on Al Awadi's management of the company, accusing the chairman of misappropriating some 14 million dinars in funds. Acting on this, the Central Bank on February 5 resolved to kick out Al Awadi and Abdulaziz Al Nabhan, the managing director of investment. On February 6, the board convened and appointed Gubandi as chairman and managing director.
The revived board's first act was to send in a specialist company to look over the books of Al-Ahlia's subsidiaries, particularly Gulfinvest and the Al-Ahlia Gulf Holding Co., which Al Awadi owned with Al Nabhan. However, the team was stonewalled, and was unable to get much useful information. The report did, however, shed some light on the shadowy deal with Shuaa Capital, who had bought 8.94 percent of the company in October 2005. The team unearthed an underwriting agreement that specified a sale price of 410 Kuwaiti fils per share instead of the 480 announced to the press. When TRENDS reported this story in February, we were under the impression that it was the press and the public who had been deceived by this discrepancy: former Al-Ahlia board members have now told us that they themselves were kept in the dark over the details of the deal.
The board of Al-Ahlia told the Kuwait Stock Exchange (KSE) about this anomaly, but the exchange declined to take any action on the issue, despite the fact that details of the underwriting agreement had been kept from the board, the press and investors, because, technically, the deal adhered to KSE rules on block trading. The board didn't follow up, ascertaining that their collective responsibility had ended with informing the exchange.
Exit strategy As the board tried to put things right at Al-Ahlia, directors and shareholders who thought the worst was behind them were in for a shock. Shuaa Capital, sitting on a huge stake in Al-Ahlia that was going south fast, had two options - support the new management and allow the cleanup to take place or use its controlling stake to sack the new management and return the old guard. With Shuaa looking at losing money on the deal, Iyad Duwaji, the CEO of Shuaa, threw his weight behind the former chairman, a close personal friend, and Abdulsalam's son was nominated as CEO of the company. The interim board members, including Gubandi, were sacked and a new regime, firmly under Adulsalam's control, was put in place. Between Duwaji and Abulsalam, the infamous "exit deal" was concocted, which saw Shuaa dispose of its holding in Al-Ahlia in return for cash and a controlling stake in an Al-Ahlia subsidiary, Al-Ahlia Industrial Projects Co. At the time the deal resulted in a small profit for Shuaa - as well as a substantial part of Al-Ahlia's profits for 2006 - but the paper aspect of the deal, the Al-Ahlia Industrial Projects Co. shares, hasn't fared well. Shares in the chlorine company are trading significantly lower than the 690 fils value at the time of the deal.
The crisis at Al-Ahlia can be seen as yet another damning indictment of the regulatory regime in Kuwait, which had been given ample opportunity to act against the company, and supports the case for those former Shuaa insiders who claimed that no due diligence was done on Al-Ahlia at the time of the original deal. While the Central Bank has censured the chairman, and the KSE has suspended the company a number of times for various minor infractions, Abdulsalam Al Awadi remains resolutely in control of Al-Ahlia and its subsidiaries. As Zied Al Awadi puts it: "In our region we have thousands of people like my uncle. I took this on as a personal challenge. It's not because of a fight between me and my uncle, it's the system: the system's not right; you can't convince people to come in and invest and trust us unless you have a system that supports us," he says.
"Everyone knows what's going on, but nobody has the guts to say 'stop it.'"
By Alistair Crighton, Dubai
© Arabies Trends 2007
