x Abu Dhabi, UAEWednesday 24 January 2018

Abu Dhabi Islamic Bank $66m exposed to Saad

ADIB lent Dh245m to Saad in 2007 to finance an investment in Makhazen Industrial Investments.

ADIB is exposed to the value of Dh245 to Saudi Arabia's Saad group.
ADIB is exposed to the value of Dh245 to Saudi Arabia's Saad group.

A direct loan of Dh245 million (US$66.7m) by Abu Dhabi Islamic Bank (ADIB) to the Saad Group, the troubled Saudi conglomerate, sheds light for the first time on an elusive side of Saad's borrowings: its use of bank finance to make investments, many of which declined in value during the financial crisis. ADIB lent the money to Saad in 2007 to finance an investment in Makhazen Industrial Investments, a warehousing company in Abu Dhabi that never started operations, according to a document obtained by The National and verified by sources familiar with the deal.

ADIB's exposure to the group, combined with a previously reported debt of $40m, is smaller than those of many other banks in the UAE, including Abu Dhabi Commercial Bank and the Dubai-based Mashreqbank. These loans also pale in comparison to Saad's overall debt load, which has been estimated at $20 billion. Yet while they may not be so significant in scale, these exposures provide a window into how Saad operated - by borrowing heavily, with little collateral to back up loans - and how the crisis ended up wreaking havoc on it.

Makhazen is now mired in a court battle with SinoGulf, an investment banking firm that arranged the deal and raised the money to start the company in 2007. SinoGulf is asking for Dh200m in fees related to the role it played in raising the money and managing the company; Makhazen is being wound down and liquidated. ADIB is also owed an estimated $40m by Saad, its share of a much larger loan extended to Awal Bank, a Saad subsidiary, according to a document circulating among bankers in the UAE. The bank is thought to have other direct loans and trade-finance dealings with Saad, but the precise nature of those deals and how much they are collectively worth remains unclear.

In the case of Makhazen, Saad appeared to take the transaction seriously and Maan al Sanea, the group's billionaire founder and chairman, even flew to Abu Dhabi to sign the documents, according to a source close to the deal. Yet soon after the new company had its first board meeting last year, a dispute erupted over how the company would be managed, and it quickly became clear that the firm would not be able to hire staff and get started.

With the financial crisis brewing, the company was dissolved, but ADIB's loan to Saad remained. The money raised for the deal is now sitting in Makhazen's account, and it is unclear whether or when ADIB will get its funds back. Attempts to reach high-ranking officials and representatives at the bank to discuss the issue were unsuccessful. While information on Saad's indebtedness to banks through syndicated loans has been relatively easy to obtain, the Makhazen loan is one of Saad's many bilateral debts, as distinct from loans shared by several banks, which have so far been difficult to measure.

Some attempts have been made; HSBC earlier this month said that Saudi banks alone were owed about $7bn by Saad and another struggling Saudi conglomerate. Yet even credit ratings agencies that have close relationships with banks' management teams face challenges assessing the extent of bilateral exposures and the ways in which they are likely to affect provisions and earnings. "We do have more access, but we're still having trouble getting full and detailed answers," said Robert Thursfield, the director of financial institutions at Fitch Ratings in Dubai. "The banks do know they're exposed, but they don't know whether they are going to have problems or not."

Saad is one of a pair of large Saudi family conglomerates that have run into trouble in the past three months. The other, Ahmad Hamad Al Gosaibi and Brothers, has also announced a sweeping debt restructuring, and owes billions of dollars to international and regional banks. The problems at Saad began late in May, when it was revealed that authorities in Saudi Arabia had frozen accounts owned by Mr al Sanea. Last month, the company announced a restructuring of its debts and sold off part of a stake in the British home builder Berkeley to raise cash.

Later that month, the UAE Central Bank instructed local banks to cease lending to Saad, as details about banks' exposures to the company began to emerge. Since then, banks have said they are looking more carefully at the practice of "name lending", or lending based on long-standing relationships with large companies in the region. They have also been stowing away cash at a brisk rate to prepare for defaults on loans. According to figures released by the Central Bank this week, provisioning - or the practice of setting aside money that would have been booked as profits to account for an expected increase in loan defaults - rose by 11 per cent from May to June.

Analysts have suggested this sharp rise may reflect banks' preparations for defaults by Saad and Al Gosaibi. "The broader question on name lending remains whether the banks conducted sufficient due diligence when making these loans or financing these debts," said Raj Madha, an analyst at EFG-Hermes in Dubai. "The mix of economic and sometimes political power that some large family-owned groups hold, as well as the lack of transparency across the GCC, combined with the very large dislocations in the financial system globally, are bound to raise questions. We believe the banks have improved risk control over the past few years, but we will have to wait and see the extent to which this is true."

The trouble at the two groups has also led to an explosion of commercial tensions, of which the dispute between SinoGulf and Makhazen is only one small example. Just last week, Al Gosaibi said in a complaint filed in New York, in connection with a case brought by Mashreqbank, that it had been defrauded to the tune of $10bn by Mr al Sanea. Observers and investors are now waiting intently for clarity on Saad and Al Gosaibi's debts as the firms continue to reorganise and negotiate with creditors. Some provisioning connected to Saad and Al Gosaibi is likely at the UAE's banks in the second quarter, Mr Thursfield said.

Yesterday, the Abu Dhabi-based First Gulf Bank said it had taken Dh260m in additional provisions in the second quarter, partly to cover its exposures to Saad and Al Gosaibi. However, the ultimate shape of the firms' exposures may only become clear when central banks release figures and when banks' financial results begin to reflect their responses to both syndicated loans and the still elusive bilateral exposures.

The governor of the Central Bank Governor, Sultan al Suwaidi, recently said there would be "total disclosure" of exposures at the country's banks. Getting that clarity may take some time, though. Ali Khan, a director at Arqaam Capital in Dubai, said: "I think the consensus remains that provisioning and non-performing loans will peak in the fourth quarter of this year and the first quarter of next year, and that encompasses what happens with Al Gosaibi and Saad."