COLUMN | Middle Eastern mysteries [Offshore Accounts]

Last month we looked at the failure of South East Asian offshore and vessel owning companies to restructure and address the problems of the excessive debt which they built up in the boom years. But one region has much worse governance than even South East Asia: the Middle East.

Looking at the shining towers and six-star hotels of Dubai, the massive new airport and gleaming football stadiums rising from the desert in Qatar, and the scale of Saudi Aramco’s oil production and refining facilities, it is easy to be fooled that this is a region which has embraced modernity. You’d be wrong.

Corporate governance in the Middle East remains among the worst in the world. Repeatedly, offshore companies from the region have found themselves caught up in scandal and compliance issues. In fact, it is hard to find one vessel owner there not caught up in conflicts of interest, failure to disclose or poor governance.

The issues are usually similar. Private entities take external investors’ money and misuse it, then significant litigation erupts which the local courts do not necessarily handle in a transparent or timely manner.

Take the example of the venerable, Mohammad Al-Mojil Group (MMG), owners of one of the first Saudi fleets of work boats servicing Aramco. In 2008, MMG became a publicly traded company.

Its founder Mohammad Al-Mojil decided to sell a 30 per cent stake in the company through an initial public offering. In 2012, the firm incurred significant losses, and the market regulator suspended trading of MMG shares on the Saudi Stock Exchange, then began investigating MMG’s operations and financial reporting for the period 2005 to 2012.

Name lending                                              

Once the investigation was complete, the regulator issued charges to Mohammad Al-Mojil, his son Adel Al-Mojil, and others, in relation to the share offering and the valuations stated to investors. The founder and his son were sentenced to five years in prison in 2016. MMG ended up selling its fleet of ships to Al Jana, another Saudi company.

Or take the long running case of Ahmad Hamad Algosaibi and Brothers Company (AHAB), a Saudi conglomerate, which also had interests in diving and marine operations, amongst other businesses.

When the Saudi company defaulted in 2009, its creditors lost billions and nine years of litigation commenced, between its lenders, the family and one the company’s executives, Maan al-Sanea, who was accused of fraud.

Mr Sanea married into the Algosaibi family in 1980 and was appointed to run AHAB’s financial-services division, where one of the firms he led took out more than US$120 billion (yes, billion) in loans between 2000 and 2009, according to The Economist.

Much of it was “name lending”, unsecured credit extended solely on the good name of the Algosaibi family. Last October (October 2017) the Saudi police finally arrested Mr al-Sanae for unpaid debts, and began the process of liquidating his assets.

You will note the long time periods in both the Al Mojil and Algosaibi family scandals, with the wheels of justice grinding extremely slowly and with final judgement being reached only after extensive time has passed, more than eight years in the case of Mr al-Sanea.

Which makes current events at UAE private equity house Abraaj a big concern for Stanford Marine. Stanford was already in trouble. In April this year Reuters reported that Stanford was in talks with banks to restructure a US$325 million Islamic loan. Stanford is 51 per cent owned by a private equity fund managed by Abraaj, with the remaining stake held by Abu Dhabi-based investment firm Waha Capital. Stanford was reported to have breached the loan covenants as lower day rates and weaker utilisation hit its profits, as for all vessel owners in the downturn.

Then the situation got worse for Stanford. Parent company Abraaj was accused of mishandling the funds of four large investors in its healthcare fund, including the Bill and Melinda Gates Foundation and the International Finance Corp.

Abraaj is now being dismembered by a court-appointed liquidator in the UAE, which is overseeing a forced restructuring, and the founder Arif Naqvi has resigned. Mr Naqvi is being pursued by Air Arabia, a budget airline of which he was also a director, over a US$75 million unsecured loan from the airline to Abraaj, for which he gave a personal guarantee.

The Financial Times reported that audits have discovered that Abraaj owes US$171 million to two other investment funds under its management – as manager, it had been illegally taking investors’ cash for its own purposes. So, the situation looks bleak for Stanford as its parent company certainly can’t offer additional equity to tide it over. Once again, illicit goings on at the parent company have a huge negative impact on a Gulf vessel owner.

“Management teams stacked with relatives”

The problems are recurrent. Gulf companies seem to have weak standards of governance and weak standards of control. In the region business is dominated by a small number of government owned giants, like state oil companies Aramco and Adnoc, whilst the private sector is dominated by powerful local merchant families, princes, sheikhs and other wealthy individuals.

The owners of the private companies typically behave without respect for the lines differentiating the individual corporate entities across their groups, which are often conglomerates embracing everything from crew boats to offshore catering to car dealerships and jewellery shops. Time and again, we see management teams stacked with relatives and directors holding multiple roles across multiple boards in the Gulf. Even when businesses are listed on regional stock markets, there is rarely much transparency.

But before anyone in South East Asia gets complacent, recent events at Malaysia’s Sapura Energy should perhaps cause reflection that governance seems to be getting worse there, too.

Sapura Energy’s CEO Tan Sri Shahril Shamsuddin survived an attempt at the company’s annual general meeting in July to remove him as a director, instigated by angry investors. Shareholders were angry that Shahril was paid an eye watering US$17.7 million in 2017, which amounted to nearly 35 per cent of Sapura’s profits after tax in the preceding year.

The move to remove Shahril came when Sapura announced it had incurred losses of over US$500 million in the six months to end April 2018, and when no dividends were currently being paid to shareholders. Apparently, the CEO has launched a cost cutting exercise, which Icarus Consultants said includes cutting staff salaries both onshore and offshore. As with the Middle East, good governance starts at the top. Perhaps Sharil should start by making some economies himself?