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Sunday, April 26, 2009

Exclusive: GIH’s Ghunaim says lessons have been learnt from default

At the beginning of the year Kuwait’s biggest investment company, Global Investment House, announced that it had defaulted on about $2.5 billion in debt. It became the first big financial institution in the Gulf to default since the credit crisis began. In an exclusive interview its chairwoman Maha Al Ghunaim tells Dominic O’Neill how she plans to turn the company’s fortunes around.


Editor's note:
On Sunday April 26th we posted the following story about a default by Global Investment House. In the introduction, we incorrectly identified GIH as Gulf Investment House. The rest of the story correctly referred to Global Investment House. This error has now been corrected, but we apologise to Gulf Investment House, a Kuwaiti publicly traded investment firm, for our mistake and any confusion it may have caused.








Two years ago Maha Al Ghunaim, the chairwoman of Global Investment House (GIH), was the darling of the Middle East’s investment community. Now, the company she helped create is an emblem of all that has gone wrong in the Gulf.

As Euromoney saw today, however, the chairwoman is still to be found in the brand new skyscraper she built for her company at the height of the Gulf’s boom. Much of the bank’s human capital appears to be intact too. Despite an overall reduction of 10% in the workforce, and salary cuts of up to 20% for senior staff, no-one above the rank of vice-president has quit, according to Al Ghunaim.

A steering committee is in talks to restructure around $2.5 billion in debt, on which GIH defaulted last December. Germany’s West LB, which arranged two syndicated loans for GIH, is chairing the committee, which was chosen by some 50 creditors to GIH, mostly international banks. The committee includes one Kuwaiti bank, which represents local lender banks, and one Islamic bank, which represents Islamic banks generally but is also from Kuwait. The other seven members of the committee are from outside Kuwait. HSBC has been appointed GIH’s financial advisor. 

On 26 April GIH reported 2008 unrealized losses and impairment charges relating to investments and intangible assets of a local equivalent of $1 billion. But Al Ghunaim seems surprisingly confident of the future of her company, which is listed in Kuwait, Bahrain and London, and has lost more than 90% of its value of the past year.

Principal investments, which previously contributed up to 60% of GIH’s income, will become a much smaller part of the company’s business model. Al Ghunaim hopes to reduce by two thirds a principal investments book of some $3 billion, down from around $5 billion last June.

“The plan is to do as best we can as soon as possible,” she says, mentioning a time frame between three and five years.

GIH has a further $7 billion in its asset management arm, down from $10 billion last June. The decrease in assets, as in principal investments, has mostly been caused by falls of up to 60% in regional stock indices, and also by the falls of regional real estate and private equity values.

“During the last quarter liquidity in the market dried up so much it was impossible to sell in large volumes,” says Al Ghunaim. After Lehman Brothers collapsed, short-term international lending to GIH was withdrawn, and the company was no longer able to service its debt.

Al Ghunaim admits she should have begun selling assets and deleveraging in early 2008 but she says she, like others in the region, got caught up with the idea the Middle East was somehow immune to the global crisis – a myth destroyed by the sudden crash in the oil price and by Lehman Brothers’ bankruptcy, among other events.

“We all believed in decoupling,” she says.

Most of GIH’s funding was short term, and most of it from international sources: partly as a consequence of the situation caused by the lack of development of the debt capital markets in Kuwait, according to Al Ghunaim. On the other hand, GIH had made investments from which it planned an exit in two to three years.

To prevent similar crisis in the future Al Ghunaim says much more needs to be done for the capital markets’ legal framework in Kuwait, which she calls obsolete.

“Not much has changed since the 1970s,’ she says. In particular Al Ghunaim draws attention to the need for a dedicated capital markets authority, and for laws allowing stock splits, and for firms to be able to sell bigger bonds.

Reliance on investment gains and short-term liquidity has crippled many of Kuwait’s investment companies, which number almost 100, and of which GIH was the biggest. An earlier plan for the state to open a repo window was scrapped. However, a stabilization law was passed at the end of March after an uncooperative parliament was dissolved by the Emir.

The new law allows the government to guarantee 50% of the value of loans by banks to investment companies designated as solvent, and to what are deemed productive economic sectors. It includes clauses to protect banks against losses on loans given before 2009, and strengthens the bankruptcy law.

Nevertheless, the government has scheduled an election for mid-May, after which time the parliament may throw out the law. What seems certain is the government cannot and will not bail out all the investment companies, either partly because of concerns about creating a moral hazard, or because some in Kuwait would prefer public funds to give consumers debt relief instead.

“Kuwait’s financial landscape will be different after the mess has been cleaned up. Future crises will not be the same,” says Abdul-Majid Al Shatti, chairman of Commercial Bank of Kuwait.

Al Shatti says part of the problem in Kuwait’s investment sector was a lack of available investments outside the financial services and real estate sectors.



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