Manaf Alhajeri, the general manager of Kuwait Financial Centre ‘Markaz' explains how the company has become one of the leading investment banking institutions in the Arab region.
Navigating through the crisis: options and opportunities
There are five important factors which led to the current economic crisis and financing gap in the region:
1. High dependence on debt for economic growth (especially that of non-hydrocarbon growth),
2. Debt levels reaching a breaking point in some economies,
3. Excessive use of short term debt to fund longer term projects,
4. Heavy reliance on commercial banks as a source for long term developmental finances, and
5. Inability to enforce legal contracts leading to lack of trust in the system by foreign and domestic lenders.
The expected impact due to the financing gap are: a decline in credit off take; an increase in provisioning in banks; drying up of finance; cancellations of projects; and increase in cost of funding.
The most important fallout of the financial crisis is the impact on upcoming projects and infrastructure spending. The GCC witnessed a 23 percent project cancellation. UAE and Kuwait lead the table in project cancellation. While planned infrastructure is on stream, new projects have been delayed especially the ones with private partnerships.
The private sector is too frail to provide the needed support to kick-start project and infrastructure spending. In some cases, restructuring over a lengthier time period has resulted in a reduction of fire sale of assets to a gradual sale. However the value realised from such sales continues to be low due to market conditions. Asset values have decreased from 60-80 percent in most cases.
Banks were the predominant fund providers prior to the crisis. However, given the steep fall in their asset quality and increasing provisioning, credit growth has come to a standstill recording zero percent growth. The next major source of funding is the own capital (shareholders equity). Existing shareholders are being asked to participate in the recapitalisation efforts of companies. However, given the steep losses in wealth, shareholders may be not too forthcoming with this invitation.During the boom years, bonds were hardly used and hence remain undeveloped. But with traditional financing drying up, it looks to be promising for Sukuk to come up as an important source of finance. Recent issues also point to that direction though pricing remains very high. Private equity is an emerging source and expensive.
Raising equity for the funds is rendered difficult. However, funds that raised money earlier may be keen to exploit the current opportunity and there will be lack of support on the leverage side which may make deal closure difficult. Government funding was hitherto totally absent and should seriously be considered going forward. It may take some time for traditional financing to come back. Till that time, governments should set up some sort of stabilisation fund and implement them with full vigour.
At the broad level, lenders have two options (ie) legal and non-legal. The legal options (including bankruptcy) has various limitations including time and enforceability. The non-legal options can include covenant amendments, refinancing, asset disposals, debt buybacks, equity injections and restructuring. Of these, amending the covenants, refinancing and asset disposals are the least expensive whereas the remaining three are more expensive options. However, the number of options available for creditors significantly differ depending on the robustness of the legal system and the will of the government.
Kuwait Financial Centre ‘Markaz'
Kuwait Financial Centre ‘Markaz' was established in 1974, and offers full fledged services in asset management and investment banking. The current crisis has shown that sound companies are based on agility and thoroughness in their research approach. Markaz has been applauded for its conservative, compliant, research-driven investment approach.
Its solid financial standing is due to its low leverage, high liquidity and stable fee driven performance. Relative to the industry, Markaz is in the bottom quartile in terms of leverage with very low debt-to-equity ratio and zero short-term debt and is one of the few investment companies with sufficient liquid assets. In short, depth matters.
Markaz has been voluntarily operating under strict guidelines long before corporate governance was the norm. This has acted as a frontline buffer against the many market cycles and economic crises the company has overcome. We think that 50 years from today Markaz will continue to conduct our business with the same commitment to values held today.
Markaz works as a conduit between capital markets and companies and creates capital for businesses while acting as an agent or underwriter. This could encompass equity and debt financing, mergers and acquisitions, dispositions and financial restructuring. Markaz advisory teams are sector focused, with strong expertise in real estate, oil and gas and the financial sector.
Markaz asset management solutions cover all asset classes including equities, real estate, private equity, derivatives, and debt instruments. Markaz mutual funds enjoy a solid risk-adjusted track record and market leadership. Two funds were recently given an "A" rating by S&P and Markaz won four Lipper-Reuters awards in the last two years.
Additionally, Markaz is no stranger to applying strict corporate governance and risk management guidelines that are beyond and above the regulatory requirements. One of Markaz Funds which is managed on behalf of a Luxemburg-based client is UCITS III compliant signifying very high levels of compliance, guidelines and transparency. Assets under management as of Sept 30, 2009 exceeded $3.3bn.For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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