Analysis A lack of clear laws and clarity on the status of Saudi companies could spark an investor sell-off.
Investor disquiet over health of Saudi family firms
When the share price of Britain's biggest home builder, Berkeley Group Holdings, started falling last Tuesday, stock watchers may have guessed it was yet another round of bad housing news moving the market. But by the end of the day it emerged the real cause for the slide lay thousands of kilometres away in Saudi Arabia, where Saad Group, a huge conglomerate run by the Saudi billionaire Maan al Sanea, had just instructed Citigroup to sell 16.1 million of Berkeley's shares. The Saad Group has suddenly found itself in the international spotlight as it sells assets overseas to help raise capital at home. At the same time, it is seeking to restructure its debt after having its accounts frozen last month by the Saudi central bank. Ahmad Hamad Al Gosaibi and Brothers (AHAB), another Saudi family conglomerate investigating "irregularities" in its financial arm, is also in discussions with creditors about restructuring its debt after Standard & Poor's (S&P) downgraded the credit rating on its banking unit last month. As a result, bankers say international creditors are re-evaluating the soundness of existing loans to both Saudi groups. Analyst fear the problems could mark the start of defaults among other family groups across the Gulf, a region often noted for its relative isolation from the turmoil affecting western credit markets. "The problem is the same everywhere in the Gulf," says M R Raghu, the head of research at the Kuwaiti investment firm Markaz. "The first wave of the financial crisis was on the banks, which have experienced huge provisions on loans and declines in asset quality. "But most of these loans are given to big family businesses in the region so the genesis of all these problems has to be the family businesses. Banks are, at the end of the day, just a conduit of the transaction." Bank Muscat said last week it had exposure of about 49 million Omani rials (Dh467.2m) to the Saudi companies and a further 17m rials through its affiliate, BMO Bank of Bahrain, after the Omani bank's shares lost 6.2 per cent on Thursday. There were also repercussions in the UAE, where the Central Bank instructed local banks to offset any exposure they had to both groups against available assets, and warned lenders against extending any new credit to them. The Central Bank's directive followed a similar move by the Saudi Arabian Monetary Authority, which at the end of last month asked Saudi banks to freeze the accounts of Mr al Sanea, the chairman of Saad, and some of the al Gosaibi family members. Since news of the group's financial problems started to trickle out three weeks ago, its efforts to meet its financial obligations has shaken global markets, revealing the extent to which Gulf wealth has become an essential pillar of a still fragile global economy. Islamic bonds issued by Saad Group traded at "default level" last week on concerns that it may not be able to repay outstanding debt while it continued to sell assets. Saad Group's outstanding sukuk, or Islamic bonds, were yielding about 25 cents in the dollar last week, down from highs of 79 cents in February. After Saad sold shares in the Berkeley Group, it also sold part of its stake in 3i Infrastructure. Analysts are now watching the other companies in which Saad owns stock for signs of more divestments. Saad is a major shareholder in HSBC Holdings and Imagination Technologies Group, while Mr al Sanea retains a stake in Samba Financial Group, according to Zawya data. Meanwhile, Al Gosaibi said on Thursday it had undertaken an audit of its businesses and had found "strong evidence that there have been substantial financial irregularities within the financial services arm". The details of audit were not disclosed, although the company said it was in contact with government authorities and creditors and was keeping them up to date on developments. It said it would also appoint steering committees to represent the interests of creditors. Although AHAB can trace its regional trading roots back to the early 20th century, Saad is a more recent creation of Mr al Sanea, a Kuwaiti-born Saudi who founded the firm in the 1980s. He is married to a niece of former AHAB chairman Sulaiman al Gosaibi, who died recently. Such links between major family trading groups are common across the region. Credit ratings agencies say local banks in the UAE may have greater exposure to defaults from family-run groups than regions less dominated by closely held trading groups. "Here, the concentration risk to the banks is a lot higher [than in the UK]," says Khalid Howladar, the vice president and senior credit officer at Moody's. "This big family group may have borrowed 20 million from here and 20 million from there, and it may be a sizeable portion of your balance sheet. "One default in the UK wouldn't impair you that much. Here, one of them could be quite significant. Two or three could be very significant, if you're unlucky. And so that may lead to a sudden hit to banks' balance sheets." Many other regional, family-based groups are more secretive than either AHAB or Saad, both of which had a credit rating until last week when both Moody's and S&P downgraded Saad to junk status, and then discontinued their coverage saying there was insufficient information. This lack of transparency has left international creditors, which extended Gulf conglomerates millions of dollars before the financial crisis, to question the safety of their assets. With no clear information about the financial health of most such companies, analysts fear a default among the few could trigger a wider withdrawal of credit from the region, which has only recently began to recover from a severe funding shortage that began last summer. "These problems could cascade if the banks get scared and decided to start cutting more lines off," one UAE banker says. "If that is the case, then we could see more of these cases popping up. It's not just Saad that is stressed right now." Saad Group was not available for comment, while AHAB said it had nothing to add to the statement it issued on Thursday. email@example.com