Across the Middle East and beyond, shock waves from the surprise defaults of Saudi Arabia’s Saad Group and Ahmad Hamad Al Gosaibi & Brothers are being felt.
Up to 37 creditors provided $6.3 billion in syndicated loans to the two groups. Citi and BNP Paribas have the biggest exposures, accounting for about 16%. That will be just what is so far visible, though, as other forms of credit were provided through more private channels.
With no official reason for the defaults put forward, theories abound as to what might have triggered them. One is that Maan Al Sanea, Saad’s chairman, got into a dispute with the younger leadership of the Al Gosaibi group – perhaps partly as a result of Al Sanea’s former influence in the Al Gosaibi group. Both Saad and Al Gosaibi insist, however, that their troubles are not connected.
In a statement in June, the Al Gosaibi group pointed to “strong evidence that there may have been substantial financial irregularities” within its financial services arm. But no more information was given.
Complicating matters is the fact that Saad and Al Gosaibi’s Bahraini bank subsidiaries, Awal and The International Banking Corporation, have also defaulted, leading to more questions being raised about the validity of Bahrain’s lightly regulated offshore financial sector. Bahrain has already suffered some of the most spectacular losses of the regional financial crisis.
More defaults are expected from Middle Eastern family offices, which was a sector thought relatively safe. The steel subsidiary of the Saudi Al Tuwairqi family group is thought to be restructuring loans worth $1 billion, for example.
In general banks were keen to lend to Gulf family offices because they often assumed that well-known family names would never be associated with financial difficulty. Sufficiently detailed information about the accounts of Gulf family offices has not been obtained. As a result, some families in the Middle East have been able to use inappropriate amounts of leverage – for example, using the same collateral for multiple bank loans.
A compromise will emerge between the various debtors and creditors involved in the recent defaults. But the fallout will be that in future banks in the Middle East will be far more reluctant to lend solely on the basis of a good name.
Before the recession, regional business expansion and a younger, more western-oriented generation of leaders were already factors pushing family offices towards the public debt and equity markets. The recent contraction in bank lending has been another impetus to new methods of financing.
As more family offices default, it will spur a bigger push towards more corporate-style governance and transparency.
