February 21, 2010 9:31 pm

Kuwaiti investment model feels strain

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Emirati men look at an Aston Martin automobile

High finance: trophy assets such as Aston Martin were bought by Kuwait’s finance houses while credit was cheap

Buoyed by inflows of petrodollars and cheap credit, Kuwait’s finance houses have been aggressive investors in regional and international markets in the past decade, snapping up trophy assets in everything from luxury car brand Aston Martin to property and stocks.

But the financial crisis has starkly exposed a toxic mismatch between short-term loans and often illiquid assets whilst also highlighting a reliance on paper investment gains rather than asset management or brokerage fees, or recurring revenue from portfolio ­companies.

The sector’s woes are not new. Problems first emerged towards the end of 2008 and two of the largest finance houses are now tentatively emerging from restructuring after defaulting in the wake of the collapse of Lehman Brothers.

However, bankers say the rest of the bloated sector has yet to tackle its debt woes, depressing lending and weighing on the oil-rich emirate’s economy.

“The investment companies suffered last year and are still suffering now,” says Majdi Gharzeddeene, head of research at Kamco, the asset manager of a large investment company. “They have a huge debt problem.”

Until recently, all that was needed to receive a licence from the central bank was KD15m ($52m) in capital and, over the past decade, the number of registered Kuwaiti investment companies ballooned to 100.

Most are vehicles for local banks, companies and merchant families to borrow and invest in stocks, private equity and real estate, with little regulation or supervision from the central bank. Some are conventional investment houses while others follow Islamic sharia principles.

Common to all of them were freewheeling investment strategies that swelled the sector’s total assets from $16.5bn in 2004 to a peak of $52bn in 2007, according to Kamco research.

While the value of assets has since shrunk to $47bn by September 2009, analysts and bankers say the true extent of the global financial crash has yet to be ­recognised by investment companies.

Meanwhile, liabilities have remained relatively steady at about $31bn.

Global Investment House and The Investment Dar were early casualties, defaulting on international loans and bonds at the end of 2008 and beginning of 2009.

Global has reached an agreement with its creditors and people familiar with the matter say Investment Dar may emerge from a restructuring within a month. While both look like they will survive, many other investment companies could, in reality, be insolvent, bankers and analysts warn.

“Global and Investment Dar are the big ones but they’re far from the only problem,” says a senior Kuwait-based banker.

“No one’s talking about the many smaller investment companies, which jointly probably have multi-billion dinar balance sheets but are facing serious ­problems.”

International bankers say that, rather than facing up to the fact that many investment companies may never be able to repay their debts, clean up their balance sheets and rebuild capital bases, local banks are merely rolling over loans to avoid embarrassing themselves and their clients – a common practice in the Gulf.

“Banks are pushing as much as possible under the carpet, restructuring and rescheduling loans so they don’t have the true extent of the hits, and the central bank is tacitly allowing it,” a Kuwait-based analyst says.

As a result, Kuwaiti banks have had to cut back on lending, hurting the private sector at a time when the government is rolling out ambitious projects that may need financing if they are implemented.

Apart from shareholders hoping for dividends, few are worried about the local banks. All can expect central bank support and should be able to raise capital either privately or from the government.

However, the survival of the Kuwaiti investment company model is more doubtful, bankers and analysts say.

“Only a handful should survive and grow,” says a senior analyst. “The rest may not become insolvent but will gradually see their balance sheet shrinking, [and they will] eventually [get] out of the field.”

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