Eight Bumiputera furniture firms sue Mara for RM381m

GEORGETOWN, Dec 7 — They were young Bumiputera entrepreneurs who dreamed of building a grand furniture empire. They grew hopeful when Majlis Amanah Rakyat (Mara), a federal government agency charged with giving Bumiputera start-ups a leg up in business, mooted the idea for a joint-venture over ten years ago.

The deal was simple; Mara would build a common manufacturing facility and in return they would supply the dining set pieces.

The eight Bumiputera firms readily agreed but Mara failed to deliver the facility within the three-year deadline, which ended on January 1, 1998.

Their hopes have since splintered. Now they just want to recover their monetary losses, which they value at about RM381 million in total.

The Penang High Court here today heard in chambers the breach of contract suit jointly filed by the eight Bumiputera companies, Indera Perabut, Medan Data, Adi Wood, Almawood Industries, Ikrar Teguh, Phoenix Calibre, Perabot Wilayah Uata and CT Max.

The owners of the eight companies claim they had poured their savings into the project and suffered a huge blow when production failed to take off.

Mara had initially sued them for failing to settle the loans. But they filed a counter-suit in 2003, blaming their failure on Mara which did not complete the shared manufacturing facility on time.

They want the court to order Mara to pay up.

High Court judge Datuk Zakaria Sam will give his decision on January 8, said the lawyer for the eight entrepreneurs, Shuhaimi Mat Hashim.

Dubai World to face struggle to keep crown jewels

DUBAI, Dec 1 — Dubai World is looking to hold on to key revenue-generating assets including port operator DP World and its stake in Standard Chartered, but creditors may yet force it to part ways with prized entities.

The troubled state-controlled conglomerate shed some light yesterday on how it planned to restructure US$26 billion (RM88.4 billion) in debt, including through asset sales, in its first statement since requesting a delay in repaying billions in debt til May 2010.

The restructuring excludes firms on a “stable financial footing” such as Istithmar World, DP World and Jebel Ali Freezone, implying its global crown jewels would not be up for grabs, but leaving its battered property firms on the line.

“I don’t think they’re in a position to choose,” Khuram Maqsood, managing director of Emirates Capital and a former director at Istithmar.

“Dubai World desperately needs cash. Everything is for sale. I don’t think anything is sacred in the current environment.”

Bondholders are still reeling from the shock announcement and are unlikely to unanimously agree to the standstill without strong guarantees, especially after the government also distanced itself from the company’s troubles yesterday.

The assets of the two property developers in question, Nakheel, which at the end of 2008 had a project portfolio of about US$110 billion, and Limitless, are arguably the least interesting to investors.

Property prices in the emirate have already fallen some 50 per cent since their peaks last year, transactions are negligible and some analysts see a further 30 per cent decline.

Nakheel’s assets include the Palm Jumeirah, the most advanced in terms of completion of three man-made islands in the shape of palms off the coast of Dubai, and the Atlantis hotel, a joint venture with South African tycoon Sol Kerzner.

Limitless, which has completed few projects to date, says it has a US$100 billion portfolio.

“Who wants to buy these assets and at what price? If the Dubai real estate market conditions continue to depreciate and it will ... then they can wait until it depreciates further,” said John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole Group in Riyadh.

In contrast, Istithmar’s portfolio ranges from US luxury retailer Barneys to the luxury W Hotel in Washington, DC as well as sought-after property in London including 10 Whitehall Place. Infinity World, another unit exempt from the plans, is a stakeholder in MGM Mirage.

“We’re a bit surprised that Istithmar World is excluded from restructuring,” said Fahd Iqbal, Gulf region strategist at EFG-Hermes.

“We had assumed that the private equity house (Istithmar) would have some problematic debts given that it had engaged in leveraged acquisitions in the past.”

Dubai’s ruler again reiterated yesterday that the government and Dubai World were not the same , making clear the emirate’s most valuable firms like Emirates airline and Dubai Aluminium would not be part of any firesale.

“Like any other corporation, Dubai knows that it has built some great success stories and it would be a shame to get rid of them at distressed levels,” said Rami Sidani, head of asset management at Shroeders Middle East

The emirate’s overall assets could be worth as much as two to four times their debts, according to analysts. Moody’s estimates Dubai debt at about US$100 billion.

Investors have always been attracted to Dubai’s main revenue generators and even if Dubai were to stave off this crisis, it could still prove a catalyst for a wider privatisation plan.

DP World’s IPO, for example, raised US$5 billion and to this day remains the only one of its top companies to have been offered internationally.

“If you look at other emerging markets, privatisation is a normal course of action ... you have some governance over vital sectors, but at the same time semi-privatisation of assets is not a bad thing. This might be the catalyst,” said Haissam Arabi, managing director at Gulfmena Investments.

Dubai’s neighbours will remain cautious despite being flush with liqudity and are likely to pick and choose their moment.

“It’s surrounded by rich friends and Abu Dhabi ... you can’t rule out some intervention,” Arabi said. “The problem is it’s an issue of when, what price and which assets to pick and choose from.” — Reuters

Dubai crisis tests Islamic finance laws

NEW DELHI, Dec 2 — The debt crisis in Dubai is about to test one of the fastest-growing areas in banking, Islamic finance, and put the city-state’s opaque judicial system on trial, according to bankers and experts in finance.

Many loans and bonds that comply with Syariah, or Islamic law, were issued in recent years by Dubai World, the investment arm of Dubai, and other Persian Gulf companies as oil-rich Middle East nations increased spending, and the global credit crisis fed debt investments in emerging markets.

But, because there have been few major defaults in this market, there is little precedent for arbitrating the unique terms of these instruments.

That is likely to create many legal issues for investors in Dubai World, which sent jitters through global markets by seeking to delay payments on US$59 billion (RM200 billion) in debt. Abdulrahman al-Saleh, director-general of Dubai’s finance department, said on Monday that Dubai World was not guaranteed by the government, and the creditors would need to “bear some of the responsibility” for the company’s debt.

Syariah-compliant investments prohibit lenders from earning interest, and effectively place lenders and borrowers into a form of partnership. Yet there are no consistent rules about who gets repaid first if a company defaults on such debt, said Zaher Barakat, a professor of Islamic finance at Cass Business School in London.

The first test of what that means for investors may happen around Dec 14, when payments on a US$3.5 billion Syariah-compliant bond owed by Dubai World’s real estate subsidiary, Nakheel, come due. If Nakheel defaults on its payment, legal proceedings may be initiated.

It is unclear what may happen next. Nakheel bondholders have formed a creditors’ group representing more than 25 per cent of the outstanding debt, a legal adviser to the group said on Monday.

Holders of these bonds “are going to argue that they are in the secured position on the underlying asset,” said one bank investor involved in the issuance of some of Dubai’s Syariah-compliant debt.

That means that bondholders could insist on being repaid before banks, upending the traditional bankruptcy hierarchy. “No one has tested the legal system or the documentation,” a lawyer briefed on the situation said.

The 237-page prospectus for the Nakheel bond provides little clarity. In the case of a bankruptcy by Dubai World or Nakheel, bondholders have no guarantee of “repayment of their claims in full or at all”, it said. Under Dubai law, it added, no debt owed by the ruler or government can be recovered by taking possession of the government’s assets.

A default would also pose a major new test for Dubai’s courts, which have never handled a major bankruptcy of one of the government’s own companies, lawyers and bankers said.

Unlike its neighbours, Dubai has kept its judiciary system separate from the United Arab Emirates Federal Judiciary Authority. The decisions of the Dubai courts, which are controlled by the emirate’s ruling family, can be fickle, say lawyers in the region.

For example, in order to bring a court case against a government-owned or government-run entity, a corporation or individual needs to get permission — from the government. In the prospectus for Nakheel bonds, investors are warned that “judicial precedents in Dubai have no binding effect on subsequent decisions”, and that court decisions in Dubai are “generally not recorded”.

Global issuance of Syariah-compliant bonds and loans grew 40 per cent in the first 10 months of 2009 from a year ago, Moody’s Investors Services said in a November note to clients. The total amount of Syariah-compliant debt outstanding is estimated at about US$1 trillion, up from US$700 billion just two years ago. About 10 per cent of Dubai’s US$80 billion debt load complies with Syariah, bankers and analysts estimate.

Malaysia was traditionally the hub of Islamic finance, but much of this new activity has been centred around Dubai, and foreign and local law firms and banks there helped the emirate raise much of its debt. Dubai even has a school that turns students into “certified Islamic finance executives”, whose stamp of approval is required for an instrument to be deemed Syariah-compliant.

The surge in Islamic finance has led to hiring sprees at banks, and given rise to a series of new financial indicators like the Dow Jones Islamic Market index. — NYT

Malaysia’s next big thing?

KUALA LUMPUR, Dec 2 — The threat of Dubai’s billion-dollar debt default is casting a shadow in Malaysia, the would-be global centre of the fast-growing Islamic finance industry. Islamic finance is designed to comply with Syariah law, forbidding interest on loans and investment in gambling, alcohol and other industries deemed unethical in Islam. It substitutes profit-sharing for interest, though profit shares can be pre-set to mirror interest on conventional loans.

It may seem unlikely that a country where only half the population is Muslim would seek to be the standard-setter in this field. But if Islamic finance keeps growing, Malaysia’s comprehensive system of products and regulation may enable it to become a significant trading centre.

Islamic finance is estimated to be growing at over 20 per cent a year, fuelled partly by oil wealth but also by ethical demand. Some non-Muslim trading centres have created their own systems. London has been particularly active. France has changed some tax laws to enable some products to have equal footing, but efforts to allow sukuk, or Islamic bonds, have fallen afoul of the country’s constitutional court. The French Finance Ministry backs changes to help compete with London, but many secularists object.

Malaysia is now the leader in sukuk issues, with 60 per cent of a global market of around US$100 billion (RM340 billion). It has little direct exposure to Dubai, but the prospect of a US$4 billion default next month by Dubai’s Nakheel group is hurting the whole sukuk market and could weaken the attraction of Islamic products generally. One of the selling points behind the recent expansion of Islamic-based finance has been the belief that it remains rooted in the real economy, avoiding the derivatives and excessive leverage that undermined conventional banking. Though that remains true in principle, excessive exposure to over-ambitious Gulf countries could damage its image.

Moreover, beyond Saudi Arabia and the Gulf countries, Islamic finance, despite its rapid growth, is still just a niche market. Even in Malaysia it accounts for only 20 per cent of financial sector assets, despite efforts to promote it by the government-linked institutions that are major factors in this economy. But promoters see huge potential in Muslim and non-Muslim countries alike.

The surpluses of Muslim oil-exporting countries have been a major factor in its growth. But these surpluses have been dwindling; even before the Dubai shock some issuers of Islamic paper in the Gulf and Saudi Arabia had run into difficulty.

In some Muslim countries, poorly managed experiments have given Islamic banking a bad name. In others, many Muslims — including in Malaysia — seem not to be concerned about whether conventional banking is contrary to the Quran. Many argue that in practice so-called Islamic products simply copy conventional ones. Differing interpretations by Islamic scholars of what is permissible have created confusion and inhibited cross-border trading.

Nonetheless, Islamic finance seems likely to continue to spread in countries with significant Muslim minorities and in secular but predominantly Muslim nations like Indonesia and Turkey. Moreover, Japan, South Korea and other wealthy countries have been changing tax laws to encourage investment from Islamic countries.

In Malaysia, the industry has evolved from basic banking to bonds, insurance and fund management — all within a framework consistent with the same supervision as the conventional finance sector. The net result is that the biggest players in Islamic finance now include international names like HSBC. In mortgage finance, insurance and fund management there is competition between the systems based more on price and performance than piety. Many non-Muslims here buy Islamic products.

Whether Kuala Lumpur can truly develop as a major trading centre is another matter. So too is the question of whether Islamic finance will ever be more than a minority system, even in most Islamic countries. But it seems likely that — despite the Dubai mess — the sector can bring rewards to Malaysia’s innovators. — IHT

Russia Offers 'Outstanding' Opportunities

Russia's public image has been seriously tarnished over recent months, with accusations of corruption, human-rights abuses and fraud becoming commonplace.

But investors willing to look through the headlines will see the country is improving and could provide impressive returns, Jochen Wermuth, founder of Greater Europe Fund, told CNBC.

"Russia presents two different faces these days. One is the disregard of civil rights and the rule of law… The other face is President Medvedev," Wermuth said.

"He very openly highlights Russia's shortcomings and urges his fellow citizens to fight corruption, backwardness, lack of human rights, election fraud, or drunkenness," he said.

"The outlook for rates of return is unusually good given the very negative perception of Russia among investors," Wermuth said.

Greater Europe Fund, which is focused on investing in Russia, recently won an award from for its September return of 16.71 percent. The fund has seen a 134.86 percent gain over the last 12 months and 212.22 percent over the year to date.

"The glass is at least half full and not half empty. On balance, Russia continues to move in the right direction. This creates outstanding investment opportunities," Wermuth added.

Many investors will likely remain wary of buying into Russian growth after high-profile incidents such as Hermitage Capital Management. Sergei Magnitsky, a lawyer who was imprisoned while representing the firm, died recently in prison while awaiting trail.

Dubai World Debt Gets No State Guarantee

The Dubai government disclaimed responsibility for the debts of its Dubai World conglomerate on Monday, crushing earlier assumptions by creditors that the Arab emirate would guarantee its liabilities.

"Creditors need to take part of the responsibility for their decision to lend to the companies," said Abdulrahman al-Saleh, director general of Dubai's department of finance. "They think Dubai World is part of the government, which is not correct."

United Arab Emirates stocks plunged on Monday as investors waited for clarity on Dubai's request for a six-month delay on repaying billions of dollars in debt issued by Dubai World and its Nakheel unit, developer of three palm tree-shaped islands.

"The government is the owner of the company, but since its foundation it was established that the company is not guaranteed by the government," Saleh explained on Dubai Television.

"It deals with all parties on this basis and it borrows based on ... its projects and not the guarantee of the government," he said.

Saleh said market reaction to last Wednesday's announcement by Dubai World, which initially shook global financial confidence, was exaggerated.

"The restructuring is a wise decision that is in the interest of all parties in the long term but might bother creditors in the short term," he declared.

The standstill agreement would affect about $5.7 billion of debt due to mature before the end of May.

The UAE central bank has promised additional liquidity to local banks, but Saleh said he doubted it would be required.

"I think banks are not at a stage where they need any extra liquidity from the central bank," he said.

Dubai World is one of the emirate's three big holding firms, along with Dubai Holding and Investment Corporation of Dubai.

Meanwhile, contagion effects for Abu Dhabi from the restructuring of Dubai World debt will be "unavoidable", ratings agency Moody's said, and the restructuring could lead to downgrades for United Arab Emirates bank ratings.

"The contagion effect for Abu Dhabi will be unavoidable, as doubts will be raised as to how Dubai is going to finance its growth," Moody's analysts said in a weekly note.

"The form of the proposed debt restructuring could increase the likelihood of downgrades of bank financial strength ratings (BFSRs) for the (UAE) banks that are already on review." Moody's said the potential default of quasi-sovereign Dubai World "changes long-held market assumptions regarding implicit government support of local credits".

Grand Theft Malaysia

The Port Klang Free Zone scandal may be big, but it is only the latest in a long line of Malaysian scandals going back to the early 1980s. Time Magazine quoted Daniel Lian, a Southeast Asia economist at Morgan Stanley in Singapore, saying that the country might have lost as much as U$100 billion since the early 1980s to corruption."

The scandals listed below are only a small sample of the looting of the country's coffers:

In July of 1983, what was then the biggest banking scandal in world history erupted in Hong Kong, when it was discovered that Bumiputra Malaysia Finance (BMF), a unit of Bank Bumiputra Malaysia Bhd, had lost as much as US$1 billion which had been siphoned off by prominent public figures into private bank accounts. The story involved murder, suicide and the involvement of officials at the very top of the Malaysian government. Ultimately it involved a bailout by the Malaysian government amounting to hundreds of millions of dollars.

Mak Foon Tan, the murderer of Jalil Ibraim, a Bank Bumi assistant manager who was sent to Hong Kong to investigate the disappearance of the money, was given a death sentence, and Malaysian businessman George Tan who had participated in looting most of the funds, was jailed after his Carrian Group collapsed in what was then Hong Kong's biggest bankruptcy, and a handful of others were charged. No major politician was ever punished in Malaysia despite a white paper prepared by an independent commission that cited cabinet minutes of Prime Minister Mahathir Mohamad giving an okay to a request to throw more money into the scandal in an effort to contain it.

That was just the first Bank Bumi scandal. The government-owned bank had to be rescued twice more with additional losses of nearly US$600 million in today's dollars. Ultimately government officials gave up and the bank was absorbed into CIMB Group, currently headed by Nazir Razak, the prime minister's brother. That scandal, which stretched over several years before its denouement in 1985, set the tone for 24 years of similar scandals related to top Malaysian officials and was the first to prove that in Malaysia, you can not only get away with murder, you can get away with looting the treasury as well.

Perwaja Steel, for instance, lost US$800 million and its boss, Eric Chia, a crony of Mahathir's, was charged with looting the company. He stood trial, but was acquitted without having to put on a defense.

In the mid 1980s, the Co-operative Central Bank, a bank set up to aid the Indian smallholder community, had to be rescued by Bank Negara, the country's central bank, after hundreds of millions of ringgit in loans granted to a flock of United Malays National Organisation and Malaysian Indian Congress politicians became non-performing. Some had never been serviced at all. Although the chief executive and general manager were charged with criminal breach of trust, none of the politicians were ever charged.

Before that, the Malaysian government was believed to have lost US$500 million in an attempt at Mahathir's urging to corner the London tin market through a company called Maminco, driving the world price of tin from US$4.50 per tonne to US$7.50. It then sought to cover up the loss by establishing a US$2 company called Mukawasa from which allocations of new share issues to the government's Employees Provident Funds' were diverted. Mukawasa expected to sell the shares at a windfall profit to hide the tin speculation.

Mahathir also was behind an attempt by the then governor of Bank Negara, the central bank, to aggressively speculate in the global foreign exchange market. Bank Negara ended up losing an estimated RM20 billion. The governor, Jaffar Hussein, and the head of forex trading, Nor Mohamed Yakcop were forced to resign.

There have been many other political and financial scandals since. In 2005, Bank Islam Malaysia, the country's flagship Islamic bank, reported losses of RM457 million mainly due to provisioning totaling RM774 million as a result of bad loans and investments incurred by its Labuan branch. Cumulatively, Bank Islam ran up nonperforming loans of RM2.2 billion, partly from mismanagement and poor internal controls but also "years of regulatory indifference fueled by the misconceived notion of an untouchable Bank Islam because it was a favorite child of the Malaysian government, being the first and model Islamic bank in the country and region," according to a December 19, 2005 article in Arab News.

"Bank Islam had a reputation in the market for being the spoilt child of the Malaysian Ministry of Finance; and the perception of the bank was more of a Muslim financial fraternity or government development financial institution," the report said.

In 2007, in what was called Malaysia's Enron scandal, the publicly traded Transmile Group Bhd, whose chairman was former MCA President and Cabinet Minister Ling Liong Sik, was caught having overstated its revenue by RM530 million. A pretax profit from Rm207 million in 2006 was actually a loss of RM126 million, and a pretax profit of 120 million in 2005 was a loss of RM77 million, causing the government postal company Pos Malaysia & Services Holdings Bhd to warn that its earnings for the 2006 financial year might be affected by the reported overstatement, as the postal group owned 15.3 percent of Transmile.

Over the years 2001 to 2006, the government had to spend billions to rescue seven privatized projects including Kuala Lumpur's two public transport systems, the perennially ailing Malaysia Airlines, the national sewage system and a variety of others that, in the words of one study, "had been privatized prematurely." The government also repeatedly bailed out highway construction concessionaires, all of them closely connected to Umno, to the tune of another RM38.5 billion.

In 2008, it was revealed that Rafidah Aziz, who had served as trade and industry minister for 18 years, had been peddling approved permits for duty-free car sales and allegedly lining her pockets. Two companies which didn't even have showrooms – one of which belonged to the husband of Rafidah's niece – received scores of permits. Although Rafidah came in for heavy criticism from within Umno, she remained in office until she was defeated in party elections.

In the 1960s, federal prosecutors in the United States who were attempting to jail the late labor boss Jimmy Hoffa for looting the Teamsters Pension Fund of millions of dollars with his cronies were puzzled by the fact that their revelations appeared to have little effect on the union's rank and file. It was because no matter how much money Hoffa and his cronies stole, there was always money left because the fund was so rich. That appears to be the case with Malaysia.