Sekitar LIMA 2009 kat Langkawi

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