Kuwait bail-out gathers pace


Dominic O’Neill
Published on:

One month after the Kuwaiti stock exchange reached its lowest point for more than three years, there has been a turnaround. On November 17, the market had lost almost half its value since the beginning of the year and fallen by about a third in just one month. One month later, however, it had recovered almost half the previous month’s loss. Why?

Faisal Hasan, head of research at Global Investment House, says government and central bank support for struggling investment companies is helping.

Investment companies in Kuwait are in trouble because of stock market losses coupled with a now unviable reliance on dollar funding, according to Ali Khalil, executive vice-president at Markaz, a Kuwaiti investment company. Khalil says Markaz is not one of the struggling investment firms because its own dollar bond matures in four years’ time.

Hasan’s Global, however, had already been unable to meet one obligation because of cashflow problems, as Euromoney went to press. The firm said Commercial Bank of Kuwait would advise it on renegotiating existing facilities.

Investment companies play a larger role in Kuwait than in other stock markets in the Gulf. They have helped foster a culture of research and institutional investing lacking elsewhere in the region. The companies’ importance to the financial system extends far beyond the equity exchange, they control an estimated 25% of financial assets in Kuwait.

Sources say support will take the form of investment companies being assigned a local bank to lead a syndicated facility with other Kuwaiti banks. The banks will apparently not be required to underwrite the debt. Kuwait Investment Authority will provide banks with funding for the duration of the facility for the exact amount lent to the companies. The banks, however, will assure the credit risk, being responsible for evaluating the collateral (mostly local equity). Kuwaiti Investment Authority will furthermore buy stocks from investment companies’ portfolios, giving the companies the opportunity to buy back the stocks at a later date at the same price.

The Kuwait stock market’s rebound started on November 17 when it reopened after a four-day closure urged by investors. That day there was an announcement from the government on the creation of an apparently separate plan involving Kuwait Investment Authority buying stocks directly from the stock exchange to prop up the equity market itself.

"The government’s intention to create a fund to stabilize the market has sent a positive signal," says Global’s Hasan. "Institutional investors started to pick up stocks again because their valuations looked very attractive."

Moody’s announced last month that it was reviewing for downgrade four Kuwaiti banks as well as a conglomerate, National Industries Group, which has a market capitalization of about $4 billion. The banks are in danger because of exposure to real estate, and because of lending for purchasing securities. Portfolio losses from local and global markets were to blame in the case of NIG.