Kuwait Financial Centre “Markaz”
RESEARCH
September 2010
Research Highlights:
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M.R. Raghu CFA, FRM
Head of Research
+965 2224 8280
rmandagolathur@markaz.com
Layla Al-Ammar
Senior Analyst
+965 2224 8000 Ext. 1205
lammar@markaz.com
Kuwait Financial Centre
“Markaz”
P.O. Box 23444, Safat 13095,
Kuwait
Tel: +965 2224 8000
Fax: +965 2242 5828
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Kuwait Investment Sector
Taking stock two years after the crisis
“Investment companies have become systemically important and constitute
the second largest group of financial institutions. The systemic importance
of the IC’s is evident in their interconnectedness with the banking sector
and real economy through direct and indirect channels”...IMF, July 2010
“The impact of major losses faced by investment companies has yet to be
addressed by the authorities. The authorities actions to promote financial
stability have essentially focused on the banking system. Investment
companies, on the other hand, have received no financial support, although
they are regulated by the Central Bank”...IIF, June 2010
“Investment companies were among the most important economic sectors,
it was important to ensure their strength” ...Sheik Salem Abdulaziz Al-
Sabah, CBK Governor, August 2010
Since publishing our report on the Kuwait investment sector in June 2009,
things have changed a lot. Results published for the financial year 2009
gave a clear picture on the state of things:
KD billion CAGR
2007 2008 2009 1H10
%
Total Assets under management 18.56 14.21 12.7 10.21^ -12%
Total Assets 8.09 8.15 6.79 5.46 -6%
Total Equity 3.86 3.14 2.42 2.25 -14%
Net Income 0.846 (0.810) (0.778) (0.105) NM
^ Total AUM for 1H10 is an estimation based on historical relationship
between Total Assets and AUM
Source: Markaz Research
The vulnerabilities that led to the contraction in major metrics are still very
much in place (lower oil revenues, tighter credit access, asset liability
mismatch, lackluster stock market performance, etc). In a recent action by
the Central Bank, investment companies are now subjected to stress tests
on leverage and liquidity. For e.g., CBK guidelines stipulate a debt to equity
ratio of 2x, with the sector average as a whole meeting the CBK guidelines
(1.84). However, the largest investment firms still remain highly leveraged.
Furthermore, the new IFRS 7 classification of assets/liabilities point that
nearly 40% of investments at fair value are grouped under level 3, inputs
for which are not based on observable market data.
However, all is not lost. The sector managed to contain its investment
losses (major source of wealth destruction) from KD (176) mn in 2008 to
just KD (1) mn in 2009. Also, conventional investment companies were
reasonably successful in restructuring their short-term debt to medium-term
debt so much so that only 49% of total debt in 2009 is now short-term as
against 74% in 2008. While the sector may not limp back to profitability
during 2010, the scale of loss will certainly be lower paving the way for
hope in 2011.
 RESEARCH
September 2010

1. Historical Performance of the Kuwait Investment Sector1

As of the date of this writing, 28 out of our study sample of 34 investment

companies had reported their 2Q10 earnings. The group reported a net loss of KD
105 mn in 2Q10, 2.5x that which was reported in 2Q09. However, on a half year
basis, the losses narrowed; 1H10 net loss was at KD 106.5 mn, 45% lower than
1H09.
Table1: 1H10 Performance Summary (KD mn)
1H10 1H09 YoY %
Total Assets 5,636 6,522 -14%
Equity 2,356 3,001 -22%
Total Liabilities 3,280 3,520 -7%
Net Income (107) (193) -45%
D/E 1.39 1.17
Net Profit for the
Quick Ratio 9.4% 10.0%
investment sector has
swung wildly over the past Source: Company Financials, CBK
5 years
Total Assets group were down 14% to KD 5.6 bn while Equity contracted 22% to
roughly KD 2.4 bn (Table 1). The larger contraction in Equity led to a slight increase
in the Debt to Equity ratio to 1.4 in 1H10 from 1.2 in the same period of the
previous year. The Quick Ratio, as defined by the Central Bank of Kuwait in their
new regulations on the sector, dipped to 9.6% in 1H10 from 10.2% in 1H09. The
CBK has set a minimum of 10% for the sector.

The bottom line of the Kuwait investment sector has swung wildly over the past five
years, from a high of almost KD 950 mn net profit in 2005 to a KD 800 mn net loss
in 2008. The loss narrowed slightly in 2009, by 4%, to KD 778 mn and promises to
be lower during 2010.

The sector’s balance sheet
grew at a CAGR of 14%
between 2005-2008
The high volatility in bottom line results can be directly attributed to the business
model followed by the majority of firms in the sector, which places a heavy
dependence on Investment Income versus more stable, fee-based activities such as
Fund/Portfolio Management, Placement and Advisory services. The result of which is
exceedingly high net income in boom periods followed by overwhelming wealth
destruction in downturns.
Figure 1: Net Income Trend (KD mn)

Source: Reuters Knowledge, Company Financials

1
For consistency purposes, the “investment sector” figures are an aggregate of the figures for 34 listed investment firms with financials
spanning the period between 2005-2009. These figures exclude 4 companies including The Investment Dar

Kuwait Financial Centre “Markaz” 2


Assets under Management
experienced high growth as
gulf economies boomed,
peaking at KD 18.56 bn in
2007
The leverage ratio jumped
from 0.72 in 2005 to 1.84 in
2009
RESEARCH
September 2010
The sector’s balance sheet grew at a CAGR of 14% between 2005-2008; with Total
Assets peaking at over KD 8 bn before declining 17% to KD 6.8 bn in 2009 as
companies began aggressively writing off distressed/impaired assets.
Meanwhile, Assets under Management (AUM) also experienced high growth as gulf
economies boomed, peaking at KD 18.56 bn in 2007 before contracting 23% in
2008 as the KSE fell by 38% (Figure 2) followed by a further 10% contraction in
2009 (mirroring market return) to KD 12.7 bn as market conditions continued to
show tenuous and volatile returns.
Figure 2: Total Assets/Assets under Management (AUM) Trend (KD mn)
Source: Reuters Knowledge, Company Financials
The sector saw Total Liabilities steadily increase since 2005, at a CAGR of 26%
between 2005-2008, peaking at KD 5 bn by the end 2008 (Figure 3). In 2009, Total
Liabilities for the sector declined by 13% to KD 4.37 bn. Equity has grown at a
lesser pace, registering a CAGR of just 3% between 2005-2008, which is
understandable given the availability of cheap and easy credit in the market.
However, the unrealized losses of 2008 put erosive pressure on Equity, causing a
decline of 19% in 2008 followed by a further decline of 24% in 2009 to KD 2.4 bn.
Consequently, the leverage ratio jumped from 0.72 in 2005 to 1.84 in 2009.
Figure 3: Investment Sector Liabilities/Equity Trend (KD mn)
Source: Reuters Knowledge, Company Financials
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 RESEARCH
September 2010

2. Looking back on 2009

After posting a loss of over KD 800 mn in 2008, investors and analysts alike were
eager to come up with a 2009 expectation for the sector. In that vein, we
constructed a model which took into account quoted and unquoted asset
impairment/losses and their effect on the sector’s bottom line. At the time of our
previous report, the sector was vulnerable to many factors both within and outside
its control, namely lower oil revenues, tighter credit access, asset/liability mismatch,
weak disclosure and corporate governance etc; it must be noted that nearly two
years after the advent of the crisis, many of these factors remain firmly in place.
The most blatant profit reducer is impairments/losses in quoted investments which
directly impact the bottom line; whereas unquoted investments impact the balance
sheet, mainly by eroding equity.

Based on the impact these two segments had on the investment sector’s bottom-
The sector lost KD 778 mn line in 2008; we constructed a model to forecast the bottom-line that we could
in 2009 due to a more expect to see in 2009 given various contraction/expansion levels for investments.
severe contraction in We had forecasted a worst case scenario loss of KD 85 mn for the sector, based on
quoted investments a 5% and 20% contraction in Quoted and Unquoted investments, respectively, in
2009. This did not materialize as the sector, in fact, lost KD 778 mn, due to a more
severe contraction in quoted investments i.e. a larger write-off of impaired assets in
addition to weakness in the fee generating segment.

Table 2: 2009 Net Income

KD mn 2008 2009 % Change
Assets Under Management (AUM) 14,210 12,740 -10%
Fee Income 167 75 -55%
Investment Income -176 -1 -99%
Quoted Investments 1,182 816 -31%
Unquoted Investments 1,547 1,261 -18%
Net Income -810 -778 -4%
Note: Figures exclude firms with no full 2009 financials
Source: Zawya Investors; Company Financials; Markaz Research

In terms of quoted investments; which are tied to their respective markets, we had
We saw Unquoted forecasted a bottoming out. This turned out not to be the case; taking stock of 33
investments decline by companies whose full 2009 financials have been released, we find that Quoted
18% to KD 1.26 bn Investments actually declined by 31% in 2009 (against our 5% assumption) to KD
816 mn following a decline of 40% the previous year.

Unquoted investments, by nature, are harder to quantify; and many companies took
advantage of the IAS 39 amendments in order to minimize bottom line declines.
These IAS amendments were also used in the preparing of 2009 financials.
Consequently, we saw Unquoted investments decline by 18% to KD 1.26 bn
(against our assumption of 20%).

All in all, the firms booked an investment loss of KD 1 mn versus KD 176 mn in

2008 as they continued to write off impaired investments. Investment firm’s other
source of income is derived from fees charged for management, advisory services
etc; this income is by nature more stable and less subject to volatility than the
investment segment. However, poor regional stock market performance in 2009
resulted in a 10% decline in AUM to KD 12.7 bn, Fee income declined by more than
half to KD 75 mn for the year.

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 RESEARCH
September 2010

Classification of Investments

In 2009, the majority of Kuwait investment companies adopted the “Amendments

IFRS 7 Financial Instruments; Disclosures” which require additional disclosures on
fair value measurements of certain investments, namely those held at Fair Value
through Income Statement and Available for Sale (AFS). The fair value
measurements are classified in a three-level fair value heirarchy reflecting the
extent to which they are based on observable market data.

The fair value levels are measured as follows:

- Level I: Quoted prices (unadjusted) in active markets for identical assets or

41% (or KD 944 mn) of
investments among listed
firms were categorized as
Level III
liabilities
- Level II: Inputs other than quoted prices included within Level I that are
observable for the asset/liability, either directly (prices) or indirectly (derived
from prices)
- Level III: Inputs for the assets/liabilities that are not based on observable
market data

A screening of the companies that have adopted the amendments showed that 41%
(or KD 944 mn) of investments among listed firms were categorized as Level III
(Table 3) followed by 34% in Level I, i.e. quoted while the remaining KD 578 mn
(25%) were within Level II.

Table 3: Classification of 2009 Investments

KD mn Investments (at FV through IS + AFS) % of Total
Level I 799 34%
Level II 578 25%
Level III 944 41%
Total 2,321
Source: Company Annual Reports

A further breakdown of investments by a majority of companies was given between

those investments which are at Fair Value through the income statement versus
The majority of
those which are Available for Sale (Table 4). We found that the majority of
investments were in the
investments were in the Available for Sale category (69%) which we would attribute
Available for Sale category
to the adoption of the IAS 39 amendments which many investment companies
(69%)
made use of. The IAS 39 amendments allowed for a reclassification of assets from
“Held for Trading” to “Available for Sale”. Of those assets which are Available for
Sale, the majority (44%) are within Level III while the majority of Investment at
Fair Value (37%) are in Level I, which is understandable given the nature of the
assets.

Table 4: Classification of Investments at Fair Value and Available for Sale (2009)
% of % of
At Fair Value through IS Available for Sale
KD mn Total Total
Level I 264 37% 535 33%
Level II 213 30% 365 23%
Level III 236 33% 708 44%
Total 713 1,607
% of Total
31% 69%
Investments
Source: Company Annual Reports

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 RESEARCH
September 2010

GCC Comparison

The Kuwait investment sector loss continues to dwarf that of its neighbours, due to
its large size as compared to the rest of the GCC. In 1H10, Kuwait has registered a
USD 371 mn loss. The GCC has shown an aggregate loss of USD 122 mn in 1H10, a
72% YOY narrowing. For 2009, Oman and Bahrain were the only other GCC nations
to post losses, the larger being the USD 1.5 bn loss in Bahrain due to losses
Kuwait’s losses continue to suffered by two of its largest investment firms 2.
dwarf those of its Table 5: GCC Corporate Earnings - Investment Sector
neighbours USD No. of 1H10 YOY
2008 2009 1H10
mn companies Change%
KSA 5 (148) 23 10 28
UAE 7 554 316 182 (15)
Kuwait 27 (2,458) (2,052) (371) (45)
Qatar 4 66 40 43 102
Oman 22 86 (19) 32 (65)
Bahrain 9 369 (1,535) (18) (82)
Total 74 (1,531) (3,227) (122) (72)
Source: Reuters PowerPlus Pro; Markaz Research

3. Challenges

The investment sector’s challenges for the coming years are summed up on the
road towards full compliance with the Central Bank of Kuwait’s (CBK) new
regulations on the sector (deadline 2012). The regulations encompass the primary
arenas which have led to the sector’s declining performance; namely, Leverage,
Asset/Liability Mismatch and Foreign Debt Exposure.

A. Leverage

Leverage was the core problem for the industry beginning in 4Q08. Companies
relied too heavily on debt to finance expansions, operations and even dividends as
Total Liabilities contracted credit was readily available and inexpensive to come by. This high leverage
13% in 2009 after continued into 2009, though the ratio’s expansion (from 1.59 in 2008 to 1.84 in
expanding 18% in the 2009) was more a result of declining equity rather than increased borrowings.
previous year
The increased impairment in assets (booked as unrealized losses) continued to
erode the sectors’ equity which declined 24% in 2009 to KD 2.4 bn; meanwhile,
Total Liabilities contracted 13% in 2009 after expanding 18% in the previous year.
Table 6: The Investment Sector Balance Sheet
KD Mn Total Assets Total Liabilities Total Equity Debt/Equity
2007 8,095 4,236 3,859 1.10
2008 8,148 5,006 3,142 1.59
2009 6,788 4,371 2,374 1.84
Source: Company Filings, Markaz Research

CBK’s new regulations on the sector stipulate a maximum leverage ratio of 2,

indicating that the sector as a whole has some wiggle room to endure a bit more
equity erosion should there be additional asset impairments. It must be noted that
the three largest investment firms 3 (by Total Assets) remain highly leveraged at an
average of 3.4x.

2
Investcorp Bank (USD 781 mn loss), Gulf Finance House (USD 728 mn loss) FY 2009
3
Global Investment House (TL/E = 4x), Aref Investment Group (TL/E = 2.8x), International Financial Advisors (TL/E = 3.3.x)

Kuwait Financial Centre “Markaz” 6

 RESEARCH
September 2010

B. Asset/Liability Mismatch

Out of the 34 firms in our study, Total Assets for conventional firms (23 companies)
amounted to KD 5.15 bn in 2009, 60% of which was Long-term (derived by
deducting quick assets and quoted investments from the Total Asset figure) while
Total Assets for out of Total Debt of roughly KD 2.5 bn, 50% was classified as Short-term Debt
conventional firms (Figure 4) down from a 74% proportion in 2008. There has been a significant move
amounted to KD 5.15 bn in by firms to restructure short-term debt and many have succeeded in rolling them to
2009 medium term maturities.
Figure 4: Asset/Liability Mismatch Conventional Firms

Source: Company Filings, Markaz Research

Our group of 11 listed Islamic investment companies (excluding, among others, The
Investment Dar for lack of full financials) showed Total Assets of KD 1.64 bn in
2009, 64% of which were long term in nature, up from 53% in 2008. Conversely,
64% of Islamic firm assets Short term debt amounted to KD 738 mn or 79% of total debt in 2009, down from
were long term in nature, 83% in 2008.
up from 53% in 2008 Figure 5: Asset/Liability Mismatch Islamic Firms

Source: Company Filings, Markaz Research

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 RESEARCH
September 2010

C. Funding Sources

About a quarter of conventional firms’ funding has come from foreign sources,
which is in line with the newly stipulated Central Bank limit (50% of total equity or
About a quarter of
25% of total liabilities given leverage ratio limit). According to Central Bank data on
conventional firms’ funding
the Kuwait Investment Sector (listed & unlisted firms), total liabilities for
has come from foreign
Conventional firms declined by 15% to KD 7.9 bn (Figure 6) due mainly to a 28%
sources, which is in line
decline in Local Funding, which has accounted for an average of 20% of
with the newly stipulated
conventional firm funding since 2007. Within Local Funding, the majority (about
Central Bank limit
80%) is made up of credit facilities from local banks; this segment saw a decline of
16% in 2009 while funding from local non-financial institutions contracted by half in
the same period.
Figure 6: Conventional Firm’s Funding Sources (KD mn)

Source: Central Bank of Kuwait

The rolling over and restructuring of short-term debt is the hot button topic at the
moment, with Dubai institutions dominating the headlines; locally however, Global
Investment House completed a highly publicized restructuring of debt with its
creditors, payable over the next 3 years (See: Section D.1.), while The Investment
As for Islamic firms, the
Dar is undergoing restructuring under the Financial Stability Law.
reliance has been mainly
on Local funding since
As for Islamic firms, the reliance has been mainly on Local funding since 2004
2004
(Figure 7), with little contribution from foreign sources (5% in 2004), however, the
portion of foreign funding jumped to 22% in 2009. Total Liabilities for Islamic firms
declined 6% in 2009 to KD 7.2 bn where Local Funding declined 1% while Foreign
funding was up 2%.
Figure 7: Islamic Investment Firm’s Funding Sources (KD mn)

Source: Central Bank of Kuwait

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 RESEARCH
September 2010

Going forward, we would expect local banks to remain fairly conservative in their
lending practices while international institutions have engaged in restructuring of
debt with local companies but it remains to be seen whether they will be receptive
to opening new lines of credit. We expect the debt market to become a more
attractive avenue for fund raising going forward.

Going forward, we would
expect local banks to
remain fairly conservative
in their lending practices
It is also worth noting that the Financial Stability Law (FSL), which was passed in
March 2009, was meant to loosen credit lines by extending a partial guarantee of
local bank lending; however, this did not materialize as banks went into hyper-
cautious mode and tightened credit especially to the investment sector whose
balance sheets continue to be opaque.
D. The Top “5”4

The top four investment companies in terms of Total Assets (Table 7) had assets
between KD 500 mn and KD 800 mn in 2009, whereas in 2008, a couple of firms
had equity of over KD 300 mn, by the end of 2009, the highest equity was just over
KD 170 mn.
Table 7: Top 5 Investment Companies in terms of Asset Size (KD mn)
Net Income
Total Assets
Total Equity (Loss)
Rank Name Structure
2009 2008 2009 2008 2009 2008
Global Investment
1 834 1,255 163 304 (148) (255)
House Conventional
AREF Investment
2 653 746 173 302 (127) 16
Group Conventional
International
3 619 552 145 156 (17) (65)
Financial Advisors Conventional
The top four investment
4 Aayan Leasing & Inv Islamic 510 610 31 102 (77) 5
companies in terms of
5 The Investment Dar Islamic NA 1,192 NA 167 NA (80)
Total Assets had assets Source: Reuters Knowledge
between KD 500 mn and
KD 800 mn in 2009 The Central Bank of Kuwait Guidelines

In early June 2010, the Central Bank of Kuwait issued a new set of regulations to
increase transparency in the investment sector. The regulations are summed up in
three criteria spanning liquidity and leverage. A more detailed commentary on the
new regulations can be found in our June note, “The New Regulations for Kuwait
Investment Sector”, for the purposes of this report, however, we have screened the
top 5 companies by Total Assets to ascertain their current level of compliance with
the new regulations5.
Table 8: Top 5 Firms Compliance with CBK Guidelines
Leverage Ratio Quick Ratio
Global Investment House 4.11 17%
Aref Investment Group 2.78 16%
International Financial Advisors 3.28 9%
The Investment Dar^ 4.97 2%
Aayan Leasing & Investment Co 13.9 7%
Central Bank guidelines 2.00 10%
^ Represents 2008 figures
Note: All ratios calculated as per Central Bank of Kuwait's guidelines
Source: Reuters Knowledge, Annual Reports

4
The Investment Dar is placed 5th do to its large size though 2009 figures are unavailable
5
Foreign debt criteria not screened for as CBK regulations stipulate origin of debt which companies are not obligated to report

Kuwait Financial Centre “Markaz” 9


The top 5 companies are,
for the most part, currently
non-compliant with the
CBK regulations
6
Aayan fully financials are not available for analysis
RESEARCH
September 2010
The top 5 companies are, for the most part, currently non-compliant with the CBK
regulations and newspaper reports have indicated that a handful of firms have
approached CBK stating that they will be unable to meet the June 2012 deadline for
full compliance. The CBK has appeared willing to exempt non-compliant firms so
long as they make concerted efforts towards compliance.
Aayan Leasing & Investment had the highest leverage ratios, as per CBK
calculations. Global Investment House, the top firm by total assets in 2009, had a
leverage ratio of 4x, i.e. double that which is stipulated by the regulations.
The top 2 firms fare better on the Quick Ratio, which illustrates the availability of
short-term assets (liquidate-able within a month) to cover liabilities; however, TID
and Aayan6, as per latest full financials, are below the CBK minimum coverage of
10%.
1. Global Investment House
Following an over KD 250 mn loss in 2008, Global Investment House’s (Global)
stated its plan to focus on the more stable fee generating segment rather than the
volatile investment segment (which yielded a loss of KD 105 mn for the firm in
2008) in order to shore up its bottom line while it moves to unload distressed
assets. Global posted losses throughout 2009, culminating in a full year net loss of
KD 148 mn, a 42% narrowing of bottom line losses. The narrowing of the loss was
due to lessening of investment losses which came in at KD 34 mn, 67% narrower
than the 2008 loss. Fee income declined in 2009 as well, due to continued instability
in global/regional markets.
Global posted a 1H10 net loss of KD 34 mn versus the net loss of KD 99 mn in the
same period of the previous year (Table 9), implying a 2Q10 net loss of KD 20 mn,
43% higher than 1Q10. Principal Investments reported a loss of KD 41 mn in 1H,
half that which was registered in 1H09. Fee Income was up 2% to KD 12 mn for the
period. Additionally, a 47% drop in Total Equity versus a 14% concurrent decline in
liabilities brought the D/E ratio to 4x versus 2.44x in 1H09.
Table 9: 1H10 Results
%
1H09 1H10
KD Mn Change
Fee Income 11.7 12 2%
Principal Investment & Treasury (81) (41.1) -49%
Net Income/Loss (99) (34) -65%
AUM 2,074 1,518 -27%
Total Assets 1,011 774 -23%
Total Liabilities 717 619 -14%
D/E 2.44 4.00
Source: Reuters Knowledge
Income Streams
The composition of Global’s total revenue was dominated by investment income
during the boom years of 2005-2007 (Figure 8); this came to an end once the
global crisis struck in late 2008, resulting in a gross loss of KD 26 mn. This has
continued, though to a lesser extent, in 2009 as the company continues to write-off
impaired assets. 2009 Total Revenue came in at a negative KD 13 mn, i.e. half the
2008 number. Investment losses narrowed 67% to KD 34 mn. Fee Income was
down 58% to KD 21 mn in 2009, due primarily to weakness in Placement and
Advisory fees which declined 87% to KD 4 mn.
Kuwait Financial Centre “Markaz” 10
 RESEARCH
September 2010

Figure 8: Breakdown of Total Revenue

Source: Reuters Knowledge

Assets vs. Liabilities

The ratio between long
and shot term has Global’s Total Assets declined 34% to KD 827 mn in 2009 (Figure 9), the majority of
completely flipped, in which (80%) were in the form of Long-term Assets. Short-term assets amounted to
2009, 82% of debt was approximately KD 167 mn, which mainly took the form of quoted investments. The
classified as long-term firm’s quoted investments contracted by 50% to KD 157 mn after shedding just
16% in 2008 while unquoted investments were down 40% to KD 121 mn after
expanding by 7% in 2008 (likely due to adoption of IAS 39 amendments).

On the liability side, 2009 Total Debt amounted to KD 606 mn, 82% of which is
classified as long-term, a stark reversal from 2008 when 89% of debt was short-
term in nature.

Figure 9: Asset/Liability Mismatch (2008/09)

In 2009, some of the short

term debt was eliminated
while the majority was
converted to medium term
as part of the restructuring
facility
Source: Reuters Knowledge, Company Filings

The ratio between long and shot term has completely flipped, in 2009, 82% of debt
was classified as long-term (an outcome of the restructuring process detailed
below) versus just 11% in 2008. In 2008, the company had KD 694 mn of debt
classified as short-term; in 2009, some of the short term debt was eliminated while
the majority was converted to medium term as part of the restructuring facility.

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 RESEARCH
September 2010

Investment Classification

In adopting the IFRS 7 amendments, Global had 55% of its investments in Level III
while 28% were in Level I (Table 10). None of the company’s Available for Sale
investments fell under Level II. Investments at Fair Value through IS made up the
bulk at 79% of total investments.

Table 10: 2009 Investment Classification (KD mn)

% of
Level I Level II Level III Total
Total
Investments at Fair Value through IS 53 43 112 208 79%
Global had 55% of its Available for Sale 22 - 34 56 21%
investments in Level III Total 75 43 146 264
while 28% were in Level I 28% 16% 55%
% of Total
Source: 2009 Annual Report

Global Debt Restructuring

In December 2008, Global defaulted on the repayment of a USD 200 mn syndicated

facility. This capital repayment default triggered cross default provisions within
Global’s other debt obligations, thereby resulting in a default of the firm’s entire
debt obligation. Consequently, the firm entered negotiations with lenders to
restructure its debt.

The result of which “is a 27.5% reduction of consolidated borrowings by KD 220 mn

through the following;
- Repayment of KD 20 mn bond that matured in Dec 2009,
- Asset-swap transactions which eliminated KD 83 mn debt (connected to
acquisition of a subsidiary),
- Elimination of KD 67 mn debt through off sets of deposits by lending
banks and short-term murabahas and repos,

“The remaining KD 495 mn (USD 1.7 bn) was restructured into a new multi-
currency three-year amortizing facility. The facility is made up of substantially all of
Global’s Principal Investment Business which are to be transferred to the Global
Macro Fund. Global will manage the fund with the aim to disposing of the assets,
the proceeds of which will be used to pay down debt. The Principal Investment
Business is worth about KD 450 mn. The mandated minimum principal repayments
are;
- Year 1: 10%
- Year 2: 20%
- 1H Year 3: 15%
- 2H Year 3: 20%
- End of Year 3: 35%7”

In addition to the 70% principal repayment due in Year 3 (2012), Global also has a
KD 41 mn bond repayment due in that year. Global announced the second principal
repayment of USD 50 mn of its restructured debt, i.e. 46% of debt due by
December 20108.

7
Global Investment House, Annual Report 2008 & 2009
8
Global Investment House, 1H10 corporate results press release

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 RESEARCH
September 2010

2. AREF Investment Group

Following a meager net profit of KD 5 mn, AREF Investment Group (ARIG) swung
decidedly into losses in 2009, posting a net loss of KD 127 mn. The firm’s revenue
was a negative KD 41 mn, due to a KD 14 mn loss on sale of investments in
addition to the booking of KD 38 mn in losses from associates. A substantial hike in
operating expenses (related to Contract/Airline Operations) also dented bottom line
figures.

In 1H10, ARIG posted a KD 21.4 mn loss, a 44% narrowing of losses from 1H09.
For 2Q10, the firm reported a loss of KD 16.9 mn, a 17% narrowing of losses from
the same period in 2009. No further details were provided. In 1Q 2010, ARIG
posted a net loss of KD 4.5 mn, 75% narrower than the KD 17 mn loss posted in
Following a meager net 1Q09. The firm posted total revenue of KD 33 mn, a 44% growth from 1Q09, driven
profit of KD 5 mn, AREF by gain on sale of KD 21 mn. Meanwhile, contract revenue (the main source of
Investment Group posted revenue) declined by 29% YoY to KD 15 mn.
a net loss of KD 127 mn in Figure 10: ARIG Total Revenue Trend
2009

Source: Company Filings

Balance Sheet

ARIG had total assets of KD 653 mn in 2009, a 14% decline from 2008 (Figure 11);
this was due to a 63% loss of value in Islamic Finance Receivables. ARIG’s Liabilities
are almost entirely in the form of Murabaha’s Payable, which are typically short-
medium term in nature. Total Liabilities in 2009 were KD 448 mn, 77% of which are
short-term in nature.
Figure 11: Asset/Debt Mismatch

ARIG had total assets of

KD 653 mn in 2009, a 14%
decline from 2008

Source: Company Filings, Markaz Research

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September 2010

ARIG recently presented 4 local banks, one of which is Kuwait Finance House, with
a 3 year restructuring plan to reschedule USD 250 mn of debt. The banks are
expected to sign off on the plan by the end of June 2010 9.

Investment Classification

The majority (65%) of the company’s investments are held at Fair Value through
the income statement. Furthermore, 38% are under Level II followed by 33% which
fall under Level III.

Table 11: 2009 Investment Classification (KD mn)

% of
Level I Level II Level III Total
Total
Investments at Fair Value through IS 17 24 - 42 65%
Available for Sale 1 - 21 22 35%
Total 18 24 21 64
% of Total 28% 38% 33%
Source: 2009 Annual Report
In 1H10, IFA reported a
Net Loss of KD 11.7 mn, 3. International Financial Advisors (IFA)
a tripling of the KD 3.64
mn loss seen in 1H09 In 1H10, IFA reported a Net Loss of KD 11.7 mn, a tripling of the KD 3.64 mn loss
seen in 1H09. Total revenue was a negative KD 2 mn versus a positive KD 9 mn in
the same period of the previous year. Total revenue dropped into negative territory
due to a KD 3.3 mn loss recognized in investments available for sale while share of
profits from associates showed a loss of KD 2.5 mn. Rental income more than
doubled to KD 2 mn for the period whereas fee and commission income declined
27% YoY to KD 0.56 mn in 1H10. On the balance sheet, Total Assets increased 2%
while Total Liabilities were up 13%, bringing the D/E to 3.2x from 2.2x in 1H09.

2Q10 net loss was KD 8.3 mn versus a loss of KD 3.4 mn in 1Q10. Operating
expenses were up 21% QoQ while total revenue was a negative KD 3.97 mn in
2Q10 driven by a KD 3.46 mn loss registered in available for sale investments.
Table 12: IFA 1H10 Results
%
1H09 1H10
USD Mn Change
Fee Income 1.68 2.62 56%
Investment Income/Loss 3.27 -5.06 NM
The firm’s total revenue Gain/Loss from share of associates 1.73 -2.49 NM
is driven by investment Net Income/Loss -3.64 -12 221%
income Total Assets 607 622 2%
Total Liabilities 420 473 13%
D/E 2.25 3.18
Source: Reuters Knowledge

The majority of the company’s revenue comes from investment income (Figure 14),
with a non-material contribution from Fee-based Income, which peaked at KD 7 mn
in 2008 and declined 47% to KD 4 mn in 2009. The firm’s total revenue is driven by
investment income, which propelled the former to a peak of over KD 190 mn in
2005. After registering negative revenue of KD 8 mn in 2008, IFA reported total
revenue of KD 10 mn in 2009. Net loss for 2009 came in at KD 17 mn, a 74%
narrowing of the KD 65 mn loss in 2008.

9
AlQabas newspaper, 27th June 2010

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 RESEARCH
September 2010

Figure 14: Investment Income/Total Revenue Trend

Source: Company Filings

Asset vs. Debt

In 2009, IFA had Total Assets of KD 618 mn, a 16% growth over 2008. 85% of total
assets were characterized as Long-term versus 81% in 2008. On the debt side, IFA
had total borrowings of KD 180 mn, an increase of 16% from 2008, 77% of which
was considered long-term (with a maturity of over a year).
In 2009, IFA had Total Figure 15: Asset/Liability Match
Assets of KD 618 mn, a
16% growth over 2008

Source: Company Filings, Markaz Research

Investment Classification

The majority (68%) of The majority (68%) of IFA’s investments fall under Level 1 followed by 29% under
IFA’s investments fall Level III. IFA also has a fairly even split between investments held at Fair Value
under Level 1 through IS and Available for Sale investments at 57% and 43%, respectively.

Table 13: 2009 Investment Classification (KD mn)

% of
Level I Level II Level III Total
Total
Investments at Fair Value through IS 16 1 18 34 57%
Available for Sale 25 1 - 26 43%
Total 41 2 18 60
% of Total 68% 3% 29%
Source: 2009 Annual Report

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September 2010

4. Aayan Leasing & Investment Company

In late July, Aayan Leasing & Investment Company (Aayan) announced its
preliminary full year 2009 results, showing a net loss of KD 73 mn; given that 9M09
losses were at KD 27 mn, this provides for a 4Q09 net loss of KD 46 mn. Since
these losses exceed 75% of the firm’s capital, it is compelled by the Ministry of
Commerce and Industry10 to call an extraordinary meeting of shareholder’s to
propose a solution. Recourse for the firm would be through 1) raising new equity,
2) reducing capital 3) some combination of 1 & 2 or 4) dissolving the firm. The
Ministry will set the agenda for the meeting, set for August, and will present its
report on the company to the shareholders. Aayan has nearly USD 1.4 bn of debt to
restructure, the majority of which is short-term. Aayan’s 1Q10 loss was at KD 7.78
mn, a 38% narrowing from the KD 12.55 mn loss of 1Q09.
Figure 16: Revenue/Income Trend

Aayan had total assets of

KD 510 mn in 2009, a
15% decline from 2008

Source: Company Filings, Reuters Knowledge

Assets vs. Liabilities

Almost all of the
company’s Debt is short- Aayan had total assets of KD 510 mn in 2009, a 15% decline from 2008. In 2009,
term in nature 82% of total assets were Long-term in nature, up from 70% in 2008. However,
Aayan has not been able to resolve the Debt issue as almost all of the company’s
debt is short-term in nature.
Figure 17: Asset/Liability Mismatch

Source: Company Filings, Markaz Research

10
Article 171 of the Commercial Companies Law stipulates that an extraordinary shareholders meeting must be called in the event that
a company’s losses exceed 75% of capital

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September 2010

Investment Classification

All of Aayan’s investments are in the form of Available for Sale assets; given the
illiquid nature of such assets, it follows that the majority 51% and 47% fall under
Levels II and III, respectively, while a mere 1% is under Level I.
Table 14: 2009 Investment Classification (KD mn)
% of
Level I Level II Level III Total
Total
Investments at Fair Value through IS - - - - 0%
Available for Sale 1 16 15 32 100%
Total 1 16 15 32
% of Total 2% 51% 47%
Source: 2009 Annual Report

5. The Investment Dar

In March 2010, The Investment Dar (TID) became the first firm to apply for
restructuring under the Financial Stability Law (FSL) in order to stay legal action
In March 2010, The
against it by creditors until a debt restructuring plan has been approved. Under the
Investment Dar (TID)
law, the Central Bank will monitor the restructuring process. TID announced that
became the first firm to
most aspects of the 5 year restructuring plan have been approved and that first
apply for restructuring
interest payment is expected in March 2011 with principal repayments beginning in
under the Financial
September of the same year. TID had announced in December 2008 that it was
Stability Law
looking to restructure upwards of USD 1 bn in debt.

In April 2010, TID announced its 2008 financials showing a net loss of KD 80 mn
due to an investment loss of KD 9 mn and the booking of KD 87 mn as provisions
against the impairment of assets.

By the end of July, the Central Bank of Kuwait applied for a one-time four month
extension to determine whether TID should be allowed to restructure under the
FSL. In August, TID held an extraordinary general shareholders meeting to discuss
TID’s performance, restructuring etc. The meeting was attended by roughly 65% of
Out of total assets worth
shareholders. 83% of TID’s creditors have approved the restructuring plan with the
KD 1.2 bn, 97% were
inclusion of BLOM Bank.
categorized as Long-term
while 91% of Total
Figure 18: TID Total Income Trend
Liabilities were short-
term in nature

Source: Reuters Knowledge

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 RESEARCH
September 2010

Assets vs. Liabilities

TID’s Asset/Liability mismatch is at the core of its financial issues and remains
evident as per 2008 financials (Figure 19); out of total assets worth KD 1.2 bn, 97%
were categorized as Long-term while 91% of Total Liabilities (or KD 906 mn) were
short-term in nature, mostly in the form of Murabaha’s and Wakala’s.

Figure 19: Asset/Liabilities Mismatch

Source: Company Filings

Conclusion

The investment sector in Kuwait has a long way to go on its path towards health
especially in light of the Central Bank’s increased oversight on the sector, which
may lead to reduced activity among some firms that need to clean house. Given
how unpredictable and difficult the sector’s assets are to value, it is difficult to
predict the future performance of the sector, especially given the wide variance in
case-by-case health.

We are optimistic that 2010 will show a further narrowing in bottom line losses,
though we remain skeptical of a return to profit. Not only will companies be looking
to offload more of their investments, booking impairment losses in the process, but
regional/global equity markets have shown lackluster performance for the year,
which may have an adverse impact on both the firm’s quoted investments in
addition to the AUMs (thereby reducing fee income), all of which will put downward
pressure on the bottom line.

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September 2010

Appendix 1: Investment Classification in 2009 as per IFRS 7 Amendments

Investment Classification 2009

Company Level I Level II Level III
1 Global Investment House KSCC 28% 16% 55%
2 Aref Investment Group SAKC 28% 38% 33%
3 International Financial Advisors KSCC 68% 3% 29%
4 Aayan Leasing & Investment Co KSCC 2% 51% 47%
5 Commercial Facilities Co SAK 37% 15% 48%
6 Noor Financial Investment K.S.C.C 85% 5% 10%
7 Kuwait Investment Company SAK 12% 44% 44%
8 First Investment Company KSCC 30% 0% 70%
9 National Investments Company K.S.C.C. 55% 34% 12%
10 Housing Finance Company KSCC 15% 29% 56%
11 Al Mal Investment Company KSC 0% 33% 67%
12 Al Safat Investment Co KSCC 30% 2% 67%
Kuwait Finance & Investment Company
13 KSCC 51% 49% 0%
14 Al Deera Holding Co KSC 98% 1% 0%
15 Kipco Asset Management Co KSCC 21% 28% 51%
16 Al Madina for Finance & Investment Co 18% 58% 24%
17 Coast Investment & Development Co KSCC 72% 28% 0%
18 Industrial & Financial Investments KSCC 38% 62% 0%
19 International Finance Company 75% 21% 4%
20 Al Tamdeen Investment Company KSCC 44% 6% 50%
21 Kuwait Financial Centre SAKC 12% 53% 35%
22 The International Investor Company KSC 50% 0% 50%
23 Sokouk Holding Co. S.A.K.C 100% 0% 0%
24 Gulf Investment House KSC 5% 0% 95%
25 Bayan Investment Company KSCC 84% 16% 0%
26 Kuwait & Middle East Fin Inv Co KSCC 33% 67% 0%
27 Kuwait Invest Holding Company KSCC 97% 1% 3%
28 Al Aman Investment Company KSCC 10% 89% 0%
29 National International Holding Company 13% 0% 87%
30 Al Qurain Holding Co KSCC 100% 0% 0%
31 Osoul Investment Co KSCC 15% 63% 22%
32 Gulfinvest International KSCC 100% 0% 0%
Total 34% 25% 41%
Source: Company Financials

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September 2010

Kuwait Financial Centre “Markaz” 20

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September 2010

Appendix 2: Kuwait Investment Companies –Key Financials (KD mn)

2009 Financials
Total % Total % Total % Net % % Change
sr. Company Assets Change Liabilities Change Equity Change Income Change AUM
1 Global Investment House KSCC 826 -34% 664 -29% 161 -46% (148) -41% 1,709 -23%
2 Aref Investment Group SAKC 647 -12% 475 8% 171 -43% (125) NM NA NA
3 International Financial Advisors KSCC 613 12% 470 20% 143 -7% (22) -70% 109 -25%
4 Aayan Leasing & Investment Co KSCC 501 -17% 429 -15% 72 -29% (76) NM NA NA
5 Commercial Facilities Co SAK 319 -17% 168 -29% 151 2% 14 -6% NA NA
6 Noor Financial Investment K.S.C.C 284 -7% 202 -1% 82 -19% (28) -78% 339 -9%
7 Kuwait Investment Company SAK 272 -8% 165 -4% 106 -15% (13) -68% 2,500 -4%
8 First Investment Company KSCC 230 -7% 131 2% 98 -18% (22) NM 209 -3%
9 National Investments Company K.S.C.C. 216 -18% 42 -36% 174 -12% (26) 21% 2,573 15%
10 Housing Finance Company KSCC 202 -20% 181 -17% 21 -40% (14) NM NA NA
11 Al Mal Investment Company KSC 195 -12% 130 -13% 65 -9% (13) 62% 29 182%
12 Al Safat Investment Co KSCC 183 -11% 69 -17% 115 -6% (16) -35% 139 -17%
13 Kuwait Finance & Investment Company KSCC 177 -12% 158 -7% 19 -35% (14) -45% 348 -14%
14 Al Deera Holding Co KSC 171 15% 65 54% 106 0% (13) -78% NA NA
15 Kipco Asset Management Co KSCC 163 -8% 77 -11% 86 -6% 6 423% 2,200 -15%
16 Al Madina for Finance & Investment Co 161 -15% 94 -16% 67 -13% (10) NM 40 2%
17 Coast Investment & Development Co KSCC 143 -21% 95 -20% 48 -23% (13) -45% 257 -14%
18 Industrial & Financial Investments KSCC 134 -22% 88 -25% 46 -14% (8) 367% 82 -7%
19 International Finance Company 133 -13% 51 -27% 82 0% 0 NM 5 -32%
20 Al Tamdeen Investment Company KSCC 124 -19% 57 -20% 67 -19% 2 25% 113 -37%
21 Kuwait Financial Centre SAKC 118 -10% 37 -33% 81 10% 3 NM 799 -3%
22 The International Investor Company KSC 110 -24% 94 -12% 16 -57% (21) -28% 16 -39%
23 International Investment Group KSCC 105 -31% 82 -5% 23 -64% (36) 67% 105 -5%
24 Sokouk Holding Co. S.A.K.C 104 -23% 15 -18% 89 -23% (28) 85% NA NA
25 Gulf Investment House KSC 99 -14% 59 7% 40 -34% (19) NM 87 -2%
26 Bayan Investment Company KSCC 99 -20% 50 -21% 49 -20% (19) NM 21 -28%
27 Kuwait & Middle East Fin Inv Co KSCC 85 -9% 41 -3% 44 -15% (9) NM 690 -29%
28 Kuwait Invest Holding Company KSCC 62 -9% 17 -5% 45 -10% (5) -67% NA NA
29 Al Aman Investment Company KSCC 55 -23% 26 3% 29 -37% (17) 180% 366 -22%
30 National International Holding Company 53 -10% 7 -9% 46 -11% (5) -31% NA NA
31 Ekttitab Holding Company 48 -34% 18 -2% 30 -45% (14) NM NA NA
32 Al Qurain Holding Co KSCC 31 -72% 8 -88% 22 -43% (4) NM NA NA
33 Osoul Investment Co KSCC 26 -17% 8 -22% 18 -15% (4) -78% 2 -8%
34 Gulfinvest International KSCC 22 -68% 46 -10% (24) NM (42) -17% 240 -52%
Source: Company Filings
 RESEARCH
September 2010

Markaz Research Offerings

Strategic Research Periodic Research Sector Research

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The Golden Portfolio (Sept-10) Daily
The New Regulations on Kuwait Investment Sector (Jun-10) Markaz Daily Morning Brief GCC Power
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Kuwait Capital Market Law (Mar-10) Daily Fixed Income Update GCC Water
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GCC Banks - Done with Provisions? (Jan-10) Weekly GCC Roads & Railways
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Kuwait Investment Sector (Jun-09) KSE Market Weekly Review
Missing The Rally (Jun-09) International Market Update Real Estate – Market Outlook
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Diworsification: The GCC Oil Stranglehold (Jan-09)  Dubai Real Estate - Trends and Outlook(Apr-10)
This Too Shall Pass ( Jan-09) Monthly  Egypt Real Estate - Trends and Outlook(Feb-10)
Fishing in Troubled Waters(Dec-08)  Kuwait Real Estate Outlook(Dec-09)
Down and Out: Saudi Stock Outlook (Oct-08) Mena Mergers & Acquisitions  Abu Dhabi Residential (Nov-09)
Option Market Activity Office Investment in KSA (Jul-09)
Mr. GCC Market-Manic Depressive (Sept-08) 
Global Investment Themes (June-08) GCC Quants  Saudi Arabia – Residential Real Estate Outlook (Jun-
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To Yield or Not To Yield (May-08)
Banking Sweet spots (Apr-08) GCC Corporate Earnings  Saudi Arabia (Sep-08)
The “Vicious Square” Monetary Policy options for Kuwait (Feb-08)  Abu Dhabi (July-08)
China and India: Too Much Too Fast (Oct-07) Quarterly  Algeria (Mar-08)
A Potential USD 140b Industry: Review of Asset Management GCC Equity Funds  Jordan (Mar-08)
Industry in Kuwait (Sep-07) Thought Speaks  Kuwait (Feb-08)
A Gulf Emerging Portfolio: And Why Not? (Jun-07) Equity Research Statistics  Lebanon (Dec-07)
To Leap or To Lag: Choices before GCC Regulators (Apr-07)  Qatar (Sep-07)
Derivatives Market in GCC (Mar-07)  Saudi Arabia (Jul-07)
 U.S.A. (May-07)
 Syria (Apr-07)
Real Estate Strategic Research

 GCC Distressed Real Estate Opportunities (Sep-09)

 GCC Real Estate Financing (Sept-09)
 Real Estate Earnings -2009 (May-09)
 Supply Adjustments Are we done? (Apr-09)
 Dubai Real Estate Meltdown (Feb-09)
RESEARCH
September 2010