Debt of Kuwait investment firms hampering recovery

Collapse in asset values, frozen debt markets has seen many investment firms default
Debt of Kuwait investment firms hampering recovery
About 10 percent of bank lending in Kuwait is to investment companies
By Bloomberg
Wed 07 Dec 2011 08:56 AM

Kuwait’s failure to
deal with the debt of almost 100 investment companies is hindering government
plans to boost economic growth through investment in infrastructure.

Lending by Kuwaiti
banks to non-bank finance companies, including investment firms, fell 12.6
percent in October from a year ago to KD2.46bn ($8.89bn), according to data on
the Central Bank of Kuwait’s website. Loans to investment companies dropped 3
percent in 2010 and 8 percent this year, said Naveed Ahmed, a banking analyst
at Kuwait-City based Global Investment House.

“Kuwait’s government
has announced an extensive investment program for the next four years, but
bureaucracy and legacy exposures of distressed investment companies may subdue
the economic recovery,” Khalid Howladar, and other analysts at Moody’s
Investors Service wrote in a July 6 report.

“Such firms are a
key driver of non-performing loans, as the leveraged business models of these
diverse institutions collapsed amid funding mismatches and rapid asset-price

Kuwait’s government
wants the private sector to meet almost half the cost of its four-year, $111bn development
plan aimed at modernizing the oil-based economy. These include investments to
increase oil and gas production, the construction of a metro and rail network,
the expansion of the airport, new power stations, hospitals, roads and a port
on Boubyan Island.

About 10 percent of
bank lending in Kuwait is to investment companies, some of which have defaulted
since the onset of the global financial crisis after the value of their assets
collapsed and frozen debt markets prevented them from raising new loans. These
companies used cheap credit during the boom years to invest in real estate and
private-equity assets.

Kuwait’s benchmark
share index has dropped 48 percent since the beginning of 2008. The measure
fell 16 percent in 2011. Kuwait’s ruler, Emir Sheikh Sabah Al-Ahmad Al-Jaber
Al-Sabah, on Nov 30 appointed Sheikh Jaber Al-Mubarak Al-Sabah as the new prime
minister, replacing Sheikh Nasser Al-Mohammed Al-Sabah who resigned two days
earlier after months of protests by the country’s opposition movement calling
for his ouster.

“We have to get rid
of at least half of the investment companies, so far we lost only four since
December 2008,” said Jassim al-Saadoun, head of Kuwait-based Al-Shall Economic
Consultants. “How to deal with the problem is our real problem. Banks will have
a tendency to avoid the whole sector, and won’t distinguish the good from the

Global Investment
House, Kuwait’s biggest investment bank
that restructured $1.73bn of debt in
2009, requested in September creditor support to defer debt repayments due in

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Global said on Dec 5
that bondholders agreed to delay repayment of a KD45m bond to June 2012 from
April 2012. Kuwait Stock Exchange on Dec 5 suspended Global’s shares until it
manages losses that exceeded about 80 percent of its capital.

Investment Dar Co,
the owner of half of Aston Martin Lagonda, has altered the terms on $5bn of
loans after defaulting in 2009. Finance company International Investment Group missed
periodic payments on a $200m Islamic bond in 2010, and Aayan Leasing &
Investment signed an agreement with nine creditors to reorganize $741m of debt
in May.

Aref Investment
Group plans to sell some of its assets as part of a plan to restructure KD280m of

The total distressed
debt of Kuwaiti investment companies is estimated at about KD3bn, according to
a Kuwait- based senior banking official.

Nearly 50 percent of
that debt is from a few companies and is held equally by local and
international banks, said the official, who asked not to be named because of
the sensitivity of the issue. Banks will have to take some losses and convert
debt to equity, while one solution would be for the government to intervene and
buy some distressed assets, the official said.

Kuwait’s investment
companies have KD20bn of assets under management, equity of KD4.8bn, and employ
as much as 30 percent of the country’s private sector Kuwaiti workforce,
according to Ahmed at Global Investment.

“Lending to
investment companies has dropped significantly, which indicates that new loans
disbursement is not happening while loans are reducing on account of repayment
and or possible write-offs,” Global Investment House’s Ahmed said by email on
Dec 5.

Sluggish economic
growth also poses a challenge to local investment companies.

Gross domestic
product in the Kuwait has climbed at the slowest pace in the GCC over the past
five years, according to International Monetary Fund data. GDP expanded an
average 2.6 percent a year, compared with 4.2 percent in the United Arab
Emirates, 5.7 percent in Bahrain and 18 percent in Qatar, the data show. Kuwait
increased spending by 11 percent to KD19.44bn in the fiscal year that started
in April to pay for higher salaries and the development plan.

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Kuwait will be the
only member of the GCC to experience a slowdown in private-sector credit growth
next year, according to economists at HSBC Holdings.

Central Bank
Governor Sheikh Salem AbdulAziz Al-Sabah said in July that Kuwait’s economy is
struggling with “three imbalances” including an overly dominant public sector
and a state budget dependent on oil revenue.

“Without urgent and
rapid capital spending on various state projects, there will not be good
growth,” Sheikh Salem told CNBC Arabia in an interview.

“Without providing
good investment opportunities to the private sector to enable it to expand its
local financial activities, the outlook will be limited.”

Investment companies
“have to accept the reality and try to solve their problems at the level of
prices pre-2008,” according to al-Saadoun at Al-Shall.

While reported
levels of non-performing loans “appear to have peaked at around 10 percent during
2010, we still see potential risks in the investment-companies sector because,
in many cases, the indirect liquidity provision by the government to these
institutions may simply delay a resolution of any problems,” the Moody’s report

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