Gulf Finance House faces funding crunch;S&P cuts rating by six notches

Gulf Finance House (GFH), one of the leading investment firms in Bahrain, has been hit hard by a property market crash across large parts of the region.

Experts say the firm needs to restructure its debt, raise cash through asset sales or receive some outside assistance if it is to avoid funding difficulties in the second quarter.

On Tuesday GFH said it had asked lenders to defer payment of $100 million of a $300 million loan due next week, and ratings agency Standard & Poor’s slashed its rating by six notches.

Bankers have said that loan and fixed-income debt markets will remain largely closed to Bahrain’s off-shore investment houses until the sector improves its transparency and has developed a new business model.

An end to the regional property boom late in 2008 pulled the rug out from under a sector that relied on upfront fees on money raised for real estate and private equity deals.

GFH’s revenues dried up to just $74 million in the nine months to September, from $555 million in the year-earlier period.

GFH needs to enter new business lines away from the moribund property placement market, but prospects are dim after a planned joint venture with Australia’s Macquarie Group to enter investment banking fell through in December.

Analysts say the best option for GFH is therefore to sell further assets after it sold a 10 percent stake in Qatar’s QInvest in October. Its most prized asset is a 37 percent stake in Bahrain’s Islamic retail bank Khaleeji Commercial Bank. Analysts say it is its only profitable asset.

The stake would be worth about $130 million, based on the current market valuation of $350 million for the whole bank.

GFH’s Chairman Esam Janahi owns an additional 10 percent stake in the bank, but selling Khaleeji would shut the route to broadening GFH’s revenue base by entering commercial banking.

GFH also owns a 2.5 percent stake in First Energy Bank, a Bahrain-based Islamic investment bank focusing on energy, with a paid-up capital of $1 billion. Janahi owns an additional 10 percent, according to commercial registry data.

In addition, GFH owns a stake in the Bahrain Financial Harbor building, a business tower in Manama, which it values at $175 million and which it could use as collateral to convince banks to accept deferring a portion of its debt coming due.

As of end-September GFH held $561 million in property it is developing, but regional real estate markets are still recovering from the end of the property boom in Dubai in late-2008 and it is unlikely GFH could liquidate these quickly.

In December, GFH wrote off a $300 million property project it wanted to develop in Dubai.

Analysts have also said GFH needs to step in with cash if an unspecified large real estate project in the region fails to generate returns it has guaranteed, likely to be one of the developments dubbed “Energy City” it has arranged financing for. Bahrain is a small oil producer and is generally seen as not having the resources to plough funds into its off-shore banking sector.

Central bank Gov. Rasheed Al-Maraj was cited in September as saying the Central Bank of Bahrain (CBB) was not prepared to bail out the sector, saying shareholders were responsible for supporting banks.

GFH’s shareholders include Bahrain Islamic Bank, the Royal Guard of Oman Pension Fund and Qatar Islamic Bank.