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Investment firms on road back

Hard-hit companies in Kuwait and Bahrain have some way to go

The Gulf's investment companies have come a long way since cracking last year under the weight of too much borrowing and too little cash, but analysts say a return to financial health may still be some way off. Several investment companies based in Kuwait and Bahrain started to default on financial obligations and restructure debt last year.

Global Investment House (GIH), one of Kuwait's largest investment firms, missed a payment on a US$200 million (Dh734.6m) loan in December 2008. That was followed by a default by The Investment Dar, another Kuwaiti company, on a $100m Islamic bond in May last year. Three Bahraini investment companies - Investcorp, Arcapita and Gulf Finance House (GFH) - also reported heavy losses last year. Given the size of their investments and the chaos their distress caused, the companies have come to be seen as a proxy for the effect the global financial crisis has had in the Gulf. The fate of investment companies is being especially closely watched in Kuwait, where they hold more assets than banks.

"The situation is still very difficult," said Jidhesh Gobi, the head of research at the Securities and Investment Company, an investment bank in Bahrain. Since last year, many troubled investment companies have fundamentally changed the way they do business, refocusing on traditional sources of profit while paring down debts where possible. A few have raised fresh capital from investors to shore up their balance sheets. Some have been forced to restructure loans. Others have turned to cost-cutting.

GFH has recently sold assets, written down investments and extended maturities on debt. GFH, which booked strong profits in previous years by selling stakes in multibillion-dollar property projects to once-eager regional investors, is planning to open a bank in Syria. GIH this year signed a $1.7 billion debt restructuring, and The Investment Dar is close to an agreement on a $3.5bn restructuring, albeit with the help of the Kuwaiti courts.

"A few defaulted on their financial obligations," Mohammed Damak, a Standard & Poor's analyst, wrote this week in a report on the sector. "And their moves to raise capital met with far higher obstacles than in the past. This has consequently called into question the sustainability of their business models." It will probably take years, though, before the success or failure of moves made by the likes of GFH and GIH is evident. For now, analysts say, the companies are still struggling with short-term priorities .

"There have been plans last year as well as at the beginning of this year [at GFH], but we haven't really seen results," Mr Gobi said. "These plans are not going to yield results in the short term or even the medium term ? The change in the business model and things like that, these things might take a bit longer. That's our take on it." Regulators might help speed the change in Kuwait, where authorities recently enacted rules the country's 100 or so investment companies will have to comply with by June 2012. The regulations set a maximum leverage ratio of two to one and a cap on borrowing from foreign banks. At present, about half of Kuwait's investment companies meet the criteria, says a report by the Kuwaiti investment bank Markaz.

"These regulations provide a level playing field of sorts whereby the health of the sector, and its constituent firms, could be objectively measured and compared, which would significantly ramp up investor confidence in the country with a positive trickle-down effect to the banking sector," MR Raghu and Layla al Ammar, analysts at Markaz, said in the report. The cumulative profit of GIH, Investcorp, Arcapita and GFH in 2007 was more than $750m. But those companies lost more than $2bn last year. A reversal may already be under way - Kuwait's investment companies lost only $100m in the first quarter of this year - but analysts say such firms may still need support from shareholders.


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