May 2009

In a surprise move, Riyadh was selected as the location for the GCC Central Bank headquarters; the Saudi Gazette reported at the regional summit of GCC leaders in Riyadh.

Riyadh had already been chosen as the location for the GCC monetary council, the precursor to the Central Bank. The UAE delegation expressed its reservations over the selection of Riyadh as the host and subsequently indicated it may drop out altogether from monetary union.

The GCC had originally set 2010 as the deadline for a launching a single currency in the Gulf countries. More recently this deadline has been relaxed and member states are now working to ratify the Charter of Monetary Union which will also establish a timeline for launching the 'Khaleeji' – the proposed name for the single currency.

The UAE response has delayed integration efforts at a time when oil prices are starting to rebound and the importance of a unified GCC is growing. It is important for regional governments to redouble the efforts to drive monetary union.
 
Source: Saudi Gazette Report

Small companies listed on London’s AIM market are unable to attract investors as they shift emphasis to mid-cap and large-cap companies. With the proportion of micro-cap companies on AIM growing and number of de-listings rising, it might be the right time to look at AIM differently. In his recent article – “Small firms bail out of AIM Market” – Matthew Goodman reports that the costs might outweigh the benefits of a listing as investors shun the AIM market.

Institutional investors including pension funds, insurance companies and certain hedge funds continue to remain illiquid in these market conditions and view mid to large cap companies as safe havens as compared to small-caps. This puts further pressure on some 600 companies out of the 1,450 listed on AIM that have a market capitalization of £5 million or less. Global redemptions in open ended funds has had a near permanent effect in that many AIM supportive funds have had to close or downsize significantly e.g. RAB Capital, a well known investor in more than 400 AIM companies, faced redemptions that took its total portfolio from £8bn invested to around £2bn.

When such investors exit they cause havoc for the investee company. One particular unnamed company saw its share price dive from £4 to 80p. This shows that the overall macro economic situation and the financial crisis are shaping opportunities rather than company driven events. Today there are around 200+ companies trading below cash according to Hemscott.

Those companies with a stable share price are usually ones with better liquidity and shareholders without severe redemption issues.

AIM looks broken and this creates opportunities for investors who are prepared to view it as a private equity opportunity. The AIM market as a whole will recover but it will take time.

Source: Small Firms Bail out of AIM Market

Britain’s Alternative Investment Market (AIM) market is being severely tested this year. There have been very few flotations - only £3m was raised in the first quarter of 2009 compared to £300m in the same period of 2008; 77 companies have delisted compared to 45 in the same first quarter of last year; and the market appears to be being dominated by micro cap companies which deter general investor interest (out of 1,500 listed AIM companies there are 600 with a market value of less than £5m – a 100% increase over the last 6 months). Moreover, March 2009 represented the lowest point of AIM’s valuation with its highest point being over 9 years ago.

This all begs the questions – should and can AIM survive as a sub market of the London Stock Exchange?

Let us first look at what AIM can offer investors:

Since its launch in 1995 AIM has raised nearly £34b for over 2,900 companies; its main selling point was to allow smaller companies to float shares with a more flexible regulatory system than found on the main London market. Less regulation is also complemented with no requirements for capitalisation or number of shares issued. Furthermore, admission to AIM was and remains a relatively simple process. On the investor side, purchasers of AIM stocks benefit from significant tax advantages and are offered a choice of companies from around the world in a multitude of different sectors.

The present world is one where capitalism is now under threat from overzealous regulators now aided by politicians and policy makers eager to placate angry electorates who place blame for the present economic crisis on the financial system to include capital markets.

I write as a firm advocate of capitalism as the best way forward for wealth creation. One should remember that one can only distribute wealth (for schools, hospitals and welfare) once one has created it! Therefore capital markets are essential in bringing together providers and users of capital to expand the planet’s wealth. The AIM market remains a successful medium for capitalist endeavour. Therefore in answering my first question – Yes, it should survive.

The second question is less easy to answer:

The number of small cap companies mentioned above is a major problem. It is also a paradox for the cost of an average listing is £150,000 / year. This surely weighs against the advantages of being listed and will no doubt lead to a shake out of many of the smaller companies. Such delisting will be aided by so-called vulture funds eager to pick up viable businesses, take them off AIM and fund them via private equity cash. Obviously such funds will benefit from those AIM companies whose net cash on balance sheet is in excess of their market value! There are estimated to be more than 200 of such companies.

Another issue is that the advantage of less regulation can lead to problems for investors in that AIM has been likened to gambling. In fact, in March 2007, Roel Campos, the US securities regulator, condemned AIM as a casino by criticising the high number of new issues which liquidate each year.

Linked to this is the problem of liquidity and wide spreads. On any day up to 40% of AIM companies do not trade. Indeed liquidating large tranches of AIM stock can prove difficult for nimble investors.

The promise of addressing these issues has been given by AIM’s new Chief Executive, Marcus Stuttard, who was appointed this April and who also supports an AIM shakeout.

This appointment, and the recent rise in the value of the AIM index along with a recent renaissance of new funds being raised, gives investors hope that AIM can survive and continue as a useful lubricant for capitalist endeavour.

Source: Heading for the Exit

The writer is a former Conservative Party candidate and presently works as a Company Doctor restructuring and rescuing companies in severe financial and sales difficulties.

The global petrochemical industry is rapidly changing with the Middle East rapidly increasing its share of global capacity. There are not only a growing number of petrochemical ventures but state-owned firms are continuing their expansion internationally even as global demand falls sharply. According to a recent article in Trends magazine [Fertile Ground] the Middle East is on its way to cornering the global petrochemical industry.

According to Chemical Markets Associates, Inc. ('CMAI') Middle East, the decline in global demand is mainly due to sharp falls in take-up for durable fittings, but 70% of business is “non-durables” where demand is flat. Nevertheless the drop in demand has pushed western petrochemical companies into survival mode making them interesting strategic targets for GCC businesses. In the current circumstances, most firms will find it difficult to fund acquisitions but sovereign wealth funds could end up supporting these acquisitions to enable access to foreign markets and proprietary technology.

The Petrochem industry in the Gulf capitalizes on its competitive advantage of cheap and readily accessible hydrocarbon inputs (mainly natural gas, 40% of global reserves). The cost advantage in the Gulf remains intact despite sharp declines in oil prices because hydrocarbon inputs cost 60 to 70 percent less to local producers as compared to Asian counterparts. With growing economies of scale and proximity to emerging markets, the Gulf is expected to become a global center for this industry.

Mega projects like Saudi Kayan complex in Jubail - the world’s largest integrated petrochemical facility at an estimated cost of US$8 billion - and the new Borouge facility in Ruwais costing US$5 billion will significantly expand the GCC’s share of the global market. In addition to capacity building a number of polymer processing facilities are being built to achieve higher value add in the region.

We will wait to see how many foreign acquisitions actually take place and the impact of weakened international partners on local projects. It is still too early to say whether state-owned Gulf organizations will be able to complete some of the world’s biggest petrochemical projects and subsequently dominate the global market. Whatever happens, the inherent competitive advantage will remain.

Source: Fertile Ground by Scott MacMillan Dubai

The wealthiest individuals in the Gulf have lost at least 25% of their wealth in the past one year due to the global economic crisis. The combined wealth of the top 20 billionaires is down from $115.4bn to $82.5bn. This figure is likely to be conservative as other estimates which take into account the decline in real estate and the stock market point to a fall in wealth of approximately 50%.

This is worth keeping in mind by those visitors to the region who are looking to raise capital and thinking the region is not impacted by the global crisis.

Source: Business 24/7 May 4, 2009