Although The Investment Dar (TID) is so far on track with debt payments following the implementation of its restructuring plan on the 30th June this year, the suspension of its shares from trading on the Kuwait Stock Exchange presents a stark reminder that the Islamic investment firm has yet to bounce back from the 2008 financial crisis.
Having racked up around US$5 billion in debt and faced with tight liquidity following the crisis, TID has not reported its financial results since it announced an KWD80.31 million (US$290.4 million) loss in 2008. With its portfolio mainly concentrated on investments in GCC real estate, which remains depressed, can TID hope to return to business as usual in the near future?
Balance sheet conundrum
Apart from its debt restructuring plan, TID has not detailed any measures to strengthen its balance sheet, which as at the end of 2008 included almost KWD1 billion (US$3.62 billion)-worth of liabilities and a reduction in its equity base to KWD201.41 million (US$728.3 million) from KWD387.63 million (US$1.4 billion) the year before.
Its latest available portfolio of assets also shows KWD74.71 million (US$270.15 million)-worth of investment properties, KWD60.08 million (US$217.25 million)-worth of land under development with another KWD277.87 million (US$1 billion)-worth of investments in real estate associates, most of which are Kuwait-based.
While a disposal of TID’s property assets could comprise a key driver for the firm to free up some cash and help it regain its financial footing, the remaining downside risks to Kuwaiti real estate may hinder the firm from realizing returns from its investments.
In an October report on Kuwait’s economy, local rating agency Capital Standards noted that while the country’s residential and investment property segments remain buoyant, despite the investment segment’s share of total transactions declining to 34% in the second quarter of 2011 from 39% in the first quarter, uncertainty prevails in the commercial properties segment.
“The commercial segment continued to suffer, as oversupply registered in all zones with vacancy rates at 20-25%, similar to the previous (first) quarter. Nevertheless, one-off transactions for selective key commercial properties reported minor increases in sale price during the (second) quarter because of growth in demand after several inactive quarters. Transactions and deals increased by 88% in the second quarter of 2011, compared to the previous quarter,” said the rating agency.
Financial fizzle
Apart from its real estate forays, TID’s fortunes are also tied to the performance of its exposure to the financial industry. As at the end of 2008, its investments in two banks, Bahrain Islamic Bank and Kuwait’s Boubyan Bank, amounted to KWD206.7 million (US$747.42 million), while TID itself also provided motor vehicle and property financing.
Its 2008 financial statements show its investments in its banking associates contributed to a KWD61.56 million (US$222.6 million) impairment provision of its financial assets, while it also booked KWD1.37 million (US$4.94 million)-worth of provisions for impairment of financing receivables. Its latest financials show financing receivables of KWD82.95 million (US$299.95 million).
The assessment of Kuwait’s banking industry is similar to that of other markets in the GCC following the 2008 financial crisis. According to Capital Standards: “Credit conditions weakened post the global economic crisis in Kuwait during 2009 and 2010. The banking industry suffered due to the decline in the stock markets and the value of investments and also falling property prices.
“This is because the total credit extended to the non-banking financial institutions and real estate and construction segments, which stood at 11% and 25% respectively, registered substantial impairment losses. Though the government took initiatives through the implementation of the financial stability program, this only made a limited impact.”
In addition to its attempt to recover from the financial crisis, Kuwait’s banking industry is also expected to see an impact on asset quality and profitability due to the MENA uprising. “The profitability of the banks is also expected to remain low due to lower provisioning and narrowing interest margins,” said Capital Standards.
Eyeing the next up-cycle?
Despite its woes, it does not appear to be all doom and gloom for TID, which also owns luxury automaker Aston Martin. Last year, the company reported a 36.3% increase in revenue to GBP474.3 million (US$740.94 million), with operating profits growing 46% to GBP35.3 million (US$55.15 million) and net profit nearly doubling to GBP7.6 million (US$11.87 million).
Additionally, the firm made its first restructured debt payment on the 31st October, as part of the KWD82 million (US$296.51 million) it is to pay individual investors and small non-financial institutions in the first year of its restructuring plan. The second through to the fifth year of its plan will see TID making fixed payments to the remainder of its banks and investors, followed by a final payment before the 30th June 2017 to those creditors, including compensation amounting to an annual profit rate over the eight-and-a-half years of the restructuring plan.
With the plan also detailing a set of commercial restrictions on TID including a freeze on dividend payments, new investments and taking on new debt, in addition to maintaining constant and open communication with its creditors and investors on its rescheduled debt payments, the firm clearly has its hands full with its deleveraging process.
As the outlook on investments remain murky due to current volatile markets, TID may be shielded from any further downturn thanks to its setbacks from the previous crisis. With its foreseeable future firmly focused on repaying debt, a recovery of its financial position may yet allow TID to take advantage of the next investment up-cycle. — EB