Financial stability Act
Reality and ambition
Mergers and acquisitions, a safe haven for troubled companies
 
In the Name of Allah the Most Gracious the Most Merciful
 
Allah's pace and prayers on our Honorable Prophet Muhammad, Allah's peace and blessings be upon him Initially, I would like to express my pleasure for attending the seminar organized by Global Consultants Company today, hopefully the seminar themes would be of added value for all. I am pleased to welcome our dear guests;

Dr. Yousef Al-Zalzalah, former Minister of Commerce & Industry and KGL Petroleum Chairman;

Mr. Mohamed Al-Thamer, Economical Advisor and Expert, who has great milestones in Kuwait Stock Exchange;

Ladies and Gentlemen,

The topic of our seminar today tackles a hot issue in local economy context, i.e. Law No. 2 of 2009 regarding the Enhancement of Financial Stability in the State of Kuwait which was adopted under a necessity decree and its executive procedures issued on 2nd April 2009. Let's go through significant quotes from the law and executive procedure thereof:
1. For banking sector, the law adopted that the State may guarantee, for maximum fifteen years, the decline that may occur to the value of financial investments portfolio and real estate portfolio existing with the banks as on 31st December 2008 and any resulting decrease thereto during the years 2009 – 2011
2. For productive sectors of local economical activity, the State shall guarantee 50% of new funding provided by local banks to its clients from all productive sectors of local economical activity that will be locally utilized for maximum four thousand million Kuwaiti Dinars for the total new funding during the years 2009 – 2010. Upon determination of solvency, sufficiency of the company assets shall be considered to meet payment of its short and long term liabilities taking into account determination of assets quality through a recent valuation and future cash flows. The executive procedures established standards for real estate valuations indicating that such valuations shall be conducted at least twice per year with two one of two entities, "BAITAK- Kuwait Finance House" or "AL-DAWLI- Kuwait International Bank, known previously as Kuwait Real Estate Bank" for local properties. The executive procedures indicated that "the State guarantee shall be determined on a quarterly basis and the banks shall form provisions to cover the same".
   
From the foregoing facts, we can insight strong support provided by the government to promote all productive sectors and protect them against financial downturn due to global financial crisis that adversely affected economy – reflecting the core purpose of the said law. The contemplated gains are so much exceeding the tenor of law and the executive procedures thereof.
 
However, we should ask ourselves until when companies will wait for safe solutions provided by the State without striving to improve their entities and structuring.
 
Obstacles facing companies to benefit from Financial Stability Law
1. There is an obstacle that may prevent response by local banks and Central Bank of Kuwait to provide lending many listed investment companies under Enhancement of Financial Stability Law, i.e. debt interests. Most companies that will apply for borrowing or funding by banks have outstanding debts due associated with high debt service interests. If such problem is not resolved as such interests are rescheduled, then neither Central Bank of Kuwait nor Kuwaiti banks shall approve them as solvent companies. The companies delayed payment of such interests or failed to restructure the same away from the principal which is considered as an additional debt payable by such companies.
2. Failure to meet funding requirements as prescribed under the executive procedures of the said law; either due to decline in assets value below debts or lack of quality in such assets.
   
In this regard, we, in Global Consultants Company, recommend certain proposed solutions including:
1. Restructuring debts and liabilities of companies through reaching understanding with creditors;
2. Raise the company capital through new shareholders;
3. the company capital through inviting creditors to be shareholders in these companies;
4. Merge with companies with similar business nature in order to benefit from their market share and business turnover;
   
With respect to merger concept, we simply say
It is a common corporate concept which is a trend by two or more companies towards consolidation, alliance or integration to create a new entity able to achieve the goals which the company can not solely achieve, or overcome existing or anticipated future problems. Emphasize that such processes have a significant role in enhancing merging companies’ financial position to maintain competitiveness.
 
The following is a simplified demonstration of merger types
The following is a simplified demonstration of merger types
 
Vertical merger is a merger between a company and another company carrying out another business or the concerned company is one of its suppliers or clients as such they shall form a set of integrated activities, e.g. a company operating in real estate development industry and another company operating in contracting business.
 
Horizontal mergers is a merger among companies operating in the same business.

When we come to evaluate merger conception, we find that it is one of most important safe solutions, particularly for the companies belonging to the same investment group for which merger is easy due to harmony of interests of shareholders and founders thereof.

Banking Sector Role
Banking sector has many burdens in verifying accuracy in facilities to be granted to companies. However, they should at the same time provide assistance through expediting necessary procedures for studying funding alternatives, making relevant decisions and coordinating with Central Bank of Kuwait in this regard.

Private Sector Role
For private companies, particularly shareholding or holding, that still have investment opportunities and financial capability for liquidity injection, we recommend considering good investment opportunities, approaching deliberate investment and acquiring opportunities with future promising operating perspectives. Therefore, economical community attention would not be focused on financing through local and overseas banks as this shall slow down development pace and development methods require longer time, eventually resulting in collapse and tumble of companies with promising future if required liquidity is quickly made available to them.

Developmental Projects Future
In continuity of discourse, as the State made endeavors by adopting Financial Stability Law, we find that all State sectors are working hard to drive certain developmental projects providing liquidity with many companies that have strong operating arms; however, many projects are subject to many hindrances which we hope the next government will overcome.

Accounting Standards and their Impact on Corporate Performance
Accounting standards are not a tool for wiping out the company and hanging it to loss guillotine; however, they are a tool used for transparent expression of corporate performance serving shareholders' interests. It not fair that corporate assets are inflated on illusive groundless values if compared with their market values. Therefore, such standards attempted to drive companies to evaluate their assets at least on annual basis, determine the amount of impairment, if any, and extent of its continuity. If the asset values will continue for a long period to express impaired value, then it is fair to reduce the value of assets by such value and charge the same as valuation losses.

Now, we invite guests to take the floor and then allow for raising any questions within the themes of this gathering.
 
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