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Kuwait Financial Centre S.A.K. “Markaz” announced its 2011 financial results with a net loss of KD 230,000 or 1 fils per share; compared to a net profit of KD 8.2 million in 2010, or 17 fils per share. These results were due to turbulences in local and international investment environment during the year.
Mr. Diraar Y. Alghanim, Chairman and Managing Director of ‘Markaz’ said: “Amidst these conditions in the global and local markets and the investment sector during 2011, ‘Markaz’ has sustained its approach in favor of financial prowess and preserving its investments. We continued to steadily rely on high quality assets, low debt-to-equity ratio and high operational income. We were able to preserve our investments during this tough year because of ‘Markaz’ stable income from fees of international and local equity funds and real estate funds in addition to our profitable exits from private equity funds and fee income from investment banking services. We look forward to better results as economic climates improve next year.”
Mr. Manaf Alhajeri, Chief Executive Officer of ‘Markaz’ said “Markaz’s main objective is to preserve strong solvency that enables the company to support its activities and maximize shareholders’ equity. Therefore, ‘Markaz’ continues to adopt conservative policies that include allocating sufficient provisions against investment risk and managing liquidity to overcome volatility in local and international markets.”
Mr. Alhajeri pointed out to ‘Markaz’ bonds issuance in 2011, saying: “The KD 22 million bond will mature in 2016 and as expected, Markaz Bonds were well received by investors as subscription coverage reached 145%. The bonds have received an investment-grade rating of BBB by Capital Intelligence. The bonds were issued in two tranches: one paying a fixed interest rate of 5% and the other paying a floating interest rate of 2.5% over Central Bank of Kuwait (CBK) Discount Rate.
Mr. Ali Khalil, Chief Operating Officer in ‘Markaz’ highlighted the Company’s activities in 2011, as follows:
Asset Management
MENA Equities
As the region struggled with extraordinary events such as the Arab spring and the EU debt crisis, the year ended with a loss of 9.2% for the S&P Pan Arab Composite Index. Qatar was the only MENA market to close the year positively with a gain of 7.5% while Saudi closed with a minor loss of 0.4%. Heavy spending by the Saudi Government in the social and infrastructure sectors led to a strong performance by the cement and retail sectors which emerged as the main outperformers for the year.
In Kuwait, mergers of companies and ambiguity over the Capital Markets Authority’s (CMA) rules have negatively affected the investment climate in the country. Therefore, the S&P Kuwait Index lost 16.5% for the year. Banking remained the only attractive sector to investors with its earnings and dividend visibility even though trading volumes continued to remain low.
Markaz received two Lipper Awards in 2011 for its two funds “Mumtaz” and “Markaz Islamic” for the best local equity funds in the past 5 years to reach a total of 10 awards.International Investments
2011 was a tough year for mutual funds as managers struggled to create alpha and were having trouble navigating through such volatile markets. U.S. Treasuries were the best performing asset class as 10-Year Treasuries rallied 16.7%. In addition, Emerging Markets, which were expected to lead the recovery, were by far the worst performing equity markets globally as a result of increased pressures from central banks’ tightening policies to curb inflation, thus drying up liquidity.
The U.S. Dollar remained resilient as the reserve currency increased 1.5% for the year. Even though U.S. equity markets were flat for the year, the S&P 500 traded within a band of 300 points. In Europe, legislators have failed to reach to an effective solution to end the sovereign debt fiasco. We saw slow reforms of policymakers, lagged responses from the ECB, reluctance of core countries including Germany and France to support weaker economies for fear of “socializing debt,” and Euro banks with extensive exposure to sovereign debt. The MSCI Europe Index ended the year at -13.8%.
Private Equity
Due to the volatility of debt and equity markets in 2011, there was a general slowdown of the market for private equity deals, especially exits valued at over USD 1 billion. Despite these challenges, “Markaz Private Equity Portfolio” witnessed growth in these exits and thus registered positive results.
Investment Banking
Corporate Finance
The most encouraging sign this year was the revival of the debt capital market. The appetite for Kuwaiti debt is returning, and three bond issues were successfully placed in the fourth quarter of 2011. Furthermore, Markaz witnessed a strong interest for distressed debt by regional and international investors; the Corporate Finance department executed several trades in the space, positioning Markaz as a market maker for such debt. This was encouraging as it provided the market with benchmarks to price credit default, and helped banks and creditors to agree on realistic debt restructuring plans.
Markaz continues to build strong capabilities in distressed debt and restructuring of creditors, which is helping us win asset management as well as investment banking mandates in the distressed space. In particular, we are focusing on providing advisory services related to restructuring liabilities of companies, disposing non-core assets for clients, and raising fresh capital for local corporations.
Fixed Income
In spite of the adverse economic and political events such as the Euro Debt Crisis, the downgrade of the US Debt markets by S&P, Middle East political upheaval, and the volatile oil prices, the GCC bond markets have relatively fared well in 2011. The total GCC Bonds & Sukuk issuance was USD 50.63 billion compared to USD 31.06 billion in 2010 with a total of five Bonds & Sukuk issuances from Kuwait with a total value of USD 90 million.
In January 2011, Markaz launched Fixed Income Fund (“MFIF”).The fund’s main objective is to provide investors with stable returns by investing in highly rated Bonds and Sukuk issued by GCC governments and Corporations.
Markaz Fixed Income team aims to increase AUMs by providing investors with customized fixed income portfolios which comply with their investment needs, in addition to revisiting investment strategy of its current fund MFIF to take advantage of the prevailing market conditions. On the advisory side, the team aims to continue to offer advisory services, utilizing its structuring and placement capabilities to assist local companies in meeting their financing and liquidity needs. The team will also continue to cooperate with the Capital Market Authority, the Gulf Association of Bonds and Sukuk (GABS) and regional asset managers in their efforts to develop a secondary market for Bonds and Sukuk in Kuwait.
Structured Finance
Markaz has been the sole options market maker in the Middle East since 2005. This reflects the company’s belief in the importance of having a developed options market. Markaz employs its high caliber skills, expertise, and resources to achieve this objective.
The number of stocks covered in the Options Market at the Kuwait Stock Exchange was decreased. The removal of those stocks from the options market came as a result of adjusting the fund’s strategy. The adjustment aimed to enhance the fund’s performance by eliminating stocks that have failed to meet its selection criteria due to the rapid changes in the market’s conditions. The list of companies traded on the options market remains dynamic and changes depending on the latest risk and liquidity measures.
In 2011, Markaz Structured Finance team finalized the development and testing phases of a new application “Forsa Bridge” that will integrate Forsa Options Trading System to Kuwait Stock Exchange NASDAQ OMX new trading platform.
The team also upgraded its trading infrastructure with industry standard analytics that are fast, accurate, robust, and scalable in 2011. It has also launched a dedicated options page within the company’s corporate website, which provides information on the options market, pricing mechanisms and spot prices.
MENA Real Estate Investments
“MREF” invests in income generating properties and is unexposed to weak sectors
“Markaz Real Estate Fund”, which invests in income generating properties in the Kuwaiti Market and has no exposure to the adversely affected office sector, was able to attract significant funds from new investors and acquired a number of attractive income generating properties. The fund continued to pay monthly cash distributions to investors amounting to 7% of the par value per annum.
Markaz Real Estate Development Company (MREDco), conceived to benefit from the pent-up demand for residential units in KSA, progressed with its villas development in Al Khobar in the Eastern Province of Saudi Arabia. A first batch of villas is expected to be delivered in the first month of 2012 with buyers already expressing interest in the project. The project is on track for completion during Q2 2012 and we expect to exit the investment by the end of 2012.
In 2011 Markaz exited Lusail Waterfront Development, an investment at Qatar managed by Masraf Al Rayan. Investors in Lusail Waterfront Development investment achieved a gross return of 20%. “Markaz Real Estate Opportunities Fund”, which manages investments in Lebanon, KSA, Jordan, Syria, Abu Dhabi and Qatar was able to exit its investment in Qatar and distribute the proceeds to its investors. The fund also completed one of its developments in Jordan, expecting to exit the development and distribute its proceeds in Q1 2012. Efforts are in place for exiting residential developments in Jordan and land development in KSA while work continues for the remaining investments as planned.
International Real Estate
Markaz Real Estate Department have focused on the preservation of capital values for the company’s existing funds. Towards this:
- In the second quarter, we concluded the sale of Markaz U.S. Industrial Realty Investment Unit I’s portfolio of warehouse properties for approximately $170 million. The sale generated a net IRR to end investors of approximately 9.0% and a total return on investment multiple of 1.75 times over the life of the fund.
- During the year, we successfully secured the extension / refinancing of the mortgage loans for each of the three projects of the Markaz U.S. Multifamily Realty Investment Unit – IV. In fact, two of the mortgage loans were refinanced with agency debt at attractive terms and now each of the projects have appropriate medium- to-long-term financing in place to allow organized sale efforts.
Furthermore, in order to capitalize on the prevalent distress in real estate debt markets, we are continuing to grow our U.S. distressed debt portfolio, seeking to invest in non-performing and sub-performing commercial mortgages in the U.S. During the year, we added five new transactions to our portfolio, bringing the total number of distressed debt acquisitions to twelve.
Oil and Gas
The Oil and Gas Department manages the Markaz Energy Fund (MEF) which invests in a diversified portfolio within the oil & gas sector. MEF experienced a difficult year in 2011 with large losses stemming from the full impairment undertaken on money market funds in Q2. Furthermore, MEF’s investments in local/regional oil & gas equities had an adverse effect on the Fund’s performance. Notwithstanding, MEF was able to restrict losses during the year, with a potential for upward revision as further clarity is gained on impaired assets. For example, Kosan Crisplant, one of MEF’s major investments appears to be on the road to recovery in turnover and order backlog. The company has achieved major milestones during the year which includes securing key orders worth EUR 4.1 million in November alone. MEF continues to examine potential investment opportunities having considerable growth potential, in the drilling and oilfield services segments in the MENA region.
Kuwait First Transportation Company (KFTC), a company that leases equipment primarily to contractors in the energy sector and has both Markaz and MEF as investors, achieved 31% return on investment since inception. KFTC continued to implement its expansion plans in 2011. The company is growing its client base and is currently negotiating opportunities to grow inorganically through acquisitions.
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About Kuwait Financial Centre “Markaz”
Kuwait Financial Centre S.A.K. 'Markaz', with total assets under management of over KD865 million (USD 3,1 billion) as of December 30, 2011, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997.
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Photo Caption: Mr. Diraar Y. Alghanim - Chairman and Managing Director of Kuwait Financial Centre S.A.K. "Markaz"