x Abu Dhabi, UAEThursday 18 January 2018

Costs rise after gold loans cut-off

Difficulties with gold loans at Damas International increased its finance costs and caused a loss of Dh73.3 million

Difficulties with gold loans at Damas International increased its finance costs and caused a loss of Dh73.3 million (US$19.9m), its latest financial statements show. In the 12 months to last March 31, the publicly listed company defaulted on some margin calls against outstanding gold loans because of liquidity problems. The defaults led bullion banks to fix the price of about 502,000 ounces of gold owed by Damas.

Commercial banks ring-fenced some of Damas's unencumbered deposits, exacerbating its liquidity crisis by making it difficult for the retailer to gain access to bullion loans, which are much cheaper than other forms of financing. The company's financing costs rose by 72 per cent over the 12 months, from Dh76.7m to Dh131.8m, Damas said. "The finance cost for the business increased during the year, reflecting the increased level of funded exposure within the overall borrowings compared to a higher proportion of bullion loans in the previous period," Damas said.

The Dubai-based retailer settled one of its loans by handing over jewellery inventory it valued at Dh140.1m, but the bank valued the inventory at just Dh66.8m, resulting in a loss of Dh73.3m. Sanjay Kalsi, the chief financial officer of Damas, said the company was slowly buying back the inventory at the original valuation price and had begun selling it in its stores to try to recover the loss. "Hopefully in another two months' time, all our inventory will be back with us," Mr Kalsi said.

Damas and other jewellers regularly borrow gold on an unfixed basis to be later converted into gold jewellery or to be traded as bullion. But Damas's high-profile issues with gold loans sparked reforms of these long-standing practices at banks, said Cameron Alexander, a senior analyst at the precious metals consultancy GFMS in London. "All the banks that were lending in the bullion side reviewed their whole process," Mr Alexander said. "It's created a whole review of lending practices within the region. People were lending money on a handshake, on a strong family name. I think that this whole thing did create a much closer review."

Mr Alexander said banks were being more careful in lending to jewellers. As a result of the changes, some local jewellers are reported to be having trouble borrowing gold. Tushar Patni, the owner of Ajanta Jewellers in Abu Dhabi, said in March that banks had begun demanding additional guarantees and more collateral. aligaya@thenational.ae