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Thu 11 Jul 2013 02:28 PM

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Bahrain's GFH eyes revamp to secure recovery

Gulf Finance House hopes leaner balance sheet, revamped business model can revive fortunes

Bahrain's GFH eyes revamp to secure recovery

Bahrain-based investment firm Gulf Finance House (GFH) hopes a leaner balance
sheet and a revamped business model can revive the fortunes of a firm which once
symbolised growth of the kingdom's Islamic finance sector.

GFH's new strategy calls for it to become more involved in its investments,
and to hold projects until completion rather than passing them to third parties
to develop as was done in the past, its acting chief executive said in a
telephone interview.

For several years a hands-off approach worked well for the sharia-compliant
investment house, which was founded in 1999. Strong global markets allowed it to
book healthy premiums in the stakes it sold in real estate projects.

Profits poured in, totalling $343.3 million in 2007 and $291.9 million in
2008. But the global financial crisis then made it hard for GFH to sell assets
and in 2009 it posted a net loss of $728.4 million. Last year, it booked a
profit of $10.05 million and in the first quarter of this year, $1.5

"Because the market was hot everything was sellable, but now we are looking
at fundamentals and more calculated risks," said Hisham Al Rayes, who took the
helm at GFH in April last year. Formerly chief investment officer, Al Rayes has
been with GFH since May 2007.

"We have changed the model - instead of using sub-developers we are now going
vertical in the development of our projects."

The credit crunch piled up liabilities of over $2 billion, and GFH was forced
to restructure some of them more than once to avoid defaulting in the years
after 2008. But Al Rayes said the company had now slimmed down its debt to $223
million, with maturities extended until 2018 via two-year grace periods.

GFH completed the takeover of English soccer club Leeds United in December
through its Dubai-based subsidiary, GFH Capital; it hopes the deal will
vindicate its new way of doing business.

It did not give a value for the deal, but its cashflow statement indicates
GFH has so far paid over $33 million for Leeds, with a further $42.7 million in
liabilities. The statement values the club at $88 million.

"I think it was a transaction that to a certain extent confirmed the recovery
of GFH," said Al Rayes.

Because of its debt burden, GFH may not be able to put as much money into
Leeds as other Gulf investors have showered on European soccer clubs such as
Manchester City.

But with new players and staff, including former Reading coach Brian
McDermott, GFH says it plans to turn Leeds into a sustainable franchise by
emulating the success of clubs such as Reading.

"I would like Leeds to reach that stage as well...but you can't just do
changes overnight, you have to do it smoothly. Overall we are looking at the
enhancement of operations and enhancement of results."

GFH has had to outline its strategy not only to its shareholders but also to
the soccer club's vocal fan base, an unusual demand on a firm that has kept a
low profile since 2009.

GFH classified its stake in Leeds as being "held-for-sale" on its year-end
financial statements, but Al Rayes said this did not mean it intended to exit
the club any time soon. He said GFH planned to bring new investors into Leeds
while retaining an "influential minority" stake, declining to give a figure.

"New investors will come into the club, some directly and some under the GFH
name. This will further extend opportunities for Leeds United and further bring
resources to the club."

"To clarify, we are a private equity house - we create funds and create value
and then achieve a good return."

In March, GFH Capital sold a 10 percent stake in Leeds to Bahrain-based
International Investment Bank.

GFH also plans to extract value from some of its longtstanding investments,
such as the proposed merger of affiliate Kahleeji Comercial Bank with Bahraini
lender Bank Al Khair. GFH owns 47 percent of Khaleeji, which is capitalised at
$100 million, and is waiting for a valuation of the transaction by consultants

"In the next six months things will develop. In one or two months we will be
clear on valuation," Al Rayes said.

While GFH expects to reduce its shareholding in Khaleeji, the new entity will
benefit from having a more diverse geographical scope that allows it to better
weather geopolitical risks, Al Rayes added.

"This takes us from a focus on Bahrain to other markets such as Malaysia,
India and Turkey."

GFH also plans to seek a listing of Bahraini cement and aluminium firm Cemena
next year, after it obtains regulatory approval. GFH launched the firm in 2008
with authorised capital of $600 million.

But it has retreated from other projects, such as a proposed purchase of
Turkish lender Adabank which was initially announced in 2011. "We entered Turkey
with a premium but it was difficult for us to progress on that basis."

The Turkish banking regulator rejected the bid a year later, saying the
consortium including GFH which was buying Adabank had insufficient funds.

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