Financial road-blocks in Saudi Arabia and the GCC....

Financial road-blocks in Saudi Arabia and the GCC....

The Saudi government’s decision to freeze assets belonging to billionaire businessman Maan al-Sanea, along with several of his family members’ assets, appears to be part of an attempt to bolster Saudi Arabia’s financial standing and clamp down on a wealthy Saudi family conglomerate that has become a financial liability for the Saudi royals.

KSA Finance Minister Ibrahim al-Assaf (R)

The Saudi government’s decision to freeze the assets of billionaire businessman Maan al-Sanea (and the assets belonging to his wife and four other family members), while unusual, does not appear to be the result of significant political destabilization in the Saudi kingdom. Rather, it appears to be part of a government attempt to clamp down on wealthy Saudi family businesses that have overextended themselves in undertaking questionable investments.

Al-Sanea, who ranked 62nd in Forbes’ 2009 World’s Billionaires list, has a reported net worth of $7 billion and is the chairman and chief executive of Saad Group. Al-Sanea is of Kuwaiti origin and was a fighter pilot in the Kuwaiti air force before returning in the 1970s to his birthplace, Saudi Arabia, where he started a construction and contracting business that became a massive Saudi business conglomerate comprising 37 firms in construction and engineering, real estate development and financial services, and investments spread across five continents.

Al-Sanea boosted his financial standing with the help of his Saudi wife, Sana al-Gosaibi, who owns 10 percent of her husband’s business empire and hails from the powerful al-Gosaibi family, a highly influential business clan in the kingdom. Al-Sanea owns Bahrain-based Awal Bank, is a shareholder in Bahrain’s The International Banking Corporation (TIBC) and holds a 3.1 percent stake in HSBC, Europe’s largest bank, which took a major beating in the global financial crisis but is now well on its way to recovery thanks to early private recapitalization efforts.

Sources have indicated that the Saudi political elite have long been wary of al-Sanea’s business dealings, in part because of his Kuwaiti origins, but mostly because of his “unconventional financial transactions.” Though Saudi Arabia has not been immune to the negative effects of the global financial crisis, the kingdom’s banking sector is still believed to be relatively sound and largely shielded from toxic assets, such as U.S. subprime-backed securities. In addition, Saudi Arabia put much of its record-high oil export revenues in savings, allowing the government to issue its largest-ever budget of $126.7 billion for 2009. Wealthy billionaire families like al-Sanea’s, however, are getting hammered for overleveraging themselves with financial sector and real estate investments, which have borne the brunt of the financial crisis.

Trouble surfaced May 12 when Bahrain-based TIBC — wholly owned by Ahmad Hamad Algosaibi & Brothers Co. (AHAB), of which al-Sanea is a managing director — defaulted on some of its bank debt, fueling rumors that the bank would start a group-wide debt restructuring and taking the company’s debt from investment-grade to default almost overnight. Standard & Poor’s lowered the company’s rating to “selective default,” alleging that the company made a “conscious decision not to honor debt payments,” even though it had a $400 million equity portfolio it could use to honor them. In other words, it appears that AHAB, the parent company of TIBC that is formally affiliated with al-Sanea, did not want to liquidate its assets to take responsibility for these debt obligations.

By May 22, it was revealed that TIBC had defaulted on $1 billion in foreign exchange transactions, trade finance loans and swap agreements. Al-Sanea then attempted to distance himself from TIBC and its defaults when his spokesman in London alleged that even though “al Sanea was at one time named managing director of AHAB, he has not acted in such capacity for years and is not involved in the operations of AHAB in any way.” AHAB also tried to defend itself, stating on May 28 that the company was financially solid and was capable of meeting its debt obligations.

These claims did little to assuage the Bahraini, Saudi and Emirati governments, whose banking sectors are all heavily exposed to TIBC’s bad debt. The situation turned even more dire for al-Sanea on May 22, when Standard & Poor’s revised its outlook for Saad Group from stable to negative because of the group’s high concentration of securities holdings in the global financial services sector, the volatility of its portfolio, the active use of debt to expand Saad Group’s asset base and the company’s high level of exposure in the real estate industry, which has suffered immensely in the Persian Gulf region.

While banks in Bahrain and the United Arab Emirates started calling in loans from al-Sanea and other wealthy Saudi family conglomerates believed to be engaged in risky business, the Saudi government decided to make a much more drastic move against al-Sanea to shield the Saudi financial sector. On May 28 and 30, the Saudi Arabian Monetary Agency sent internal memos to the legal departments of Saudi-based banks telling the lenders to freeze the accounts, including credit cards, of al-Sanea, his wife and four other family members. The development quickly leaked, raising questions about why the Saudi government would have made such a public and unprecedented move against one of its most powerful business conglomerates.

As in the TIBC default case, al-Sanea quickly tried to deflect blame with a statement issued by Saad Group that read: “Recent external events have caused a liquidity crisis locally, regionally and internationally. More recent events, specifically affecting the Bahraini banking sector, have led to a short-term liquidity squeeze affecting Saad Group companies in the Middle East.” Saad Group went on to say that the situation it is in stemmed from the “confluence of, among other things, the failure of companies owned by a prominent Saudi family business and the unexpected and unprecedented regional reaction to that failure,” as well as tightening credit markets. For these reasons, Saad Group said it would be engaging in an “orderly restructuring” of its companies’ debt.

In this statement, Saad Group not only is blaming deficiencies in the Bahraini banking sector for its troubles, but also appears to be pointing the finger at AHAB (the “prominent Saudi family business” that al-Sanea strangely claims he now has nothing to do with). The Bahraini banking sector, however, appears to be quite healthy in spite of lower oil prices and financial stress from the global recession. In fact, Fitch Ratings published a report June 1 reaffirming Bahrain’s A rating and stable outlook, saying that Bahrain would be able to address its economic challenges in the coming year without causing undue strain on its debt ratios.

Fitch also said it was unlikely that Bahrain would need capital infusions from sovereign to domestic retail banks. Bahrain was especially displeased to see al-Sanea try to besmirch its banking sector’s reputation and quickly had the central bank issue a statement the same day saying, “The issues connected with Awal Bank (the Bahrain-based bank owned by al-Sanea and Saad Group) are a consequence of events in the wider Al-Saad group and are unrelated to the wider Bahraini banking sector, which has otherwise continued to function normally.”

Al-Sanea took another blow June 2 when Moody’s decided to downgrade ratings for major Saad Group companies — Saad Trading Contracting and Financial Services Co. (STCFSC), Saad Investments Co. Ltd. and Saad Group Ltd. — by six levels, from investment grade Baa1 to B1, or junk status. The Moody’s report said that Saad Group’s rating could be downgraded even further because it was at heightened risk of default. The agency specified that STCFSC could default on up to $2.75 billion, while Saad Investments could default on up to $2.8 billion as Saad Group’s liquidity crunch intensifies.

Essentially, all of this means that al-Sanea is not winning in his blame game. Moreover, it is still unclear whether or not AHAB or al-Sanea actually realized the financial contagion that would result from the initial TIBC default. Nonetheless, al-Sanea’s business empire is now sinking rapidly.

Though al-Sanea is a powerful figure among the Saudi business elite, the unusually public clampdown on his assets does not appear to be related to political discontent with King Abdullah’s reformist agenda for the kingdom — especially considering that a person of Kuwaiti origin would play a marginal role at best in the al-Saud family’s major political decisions. Instead, this appears to be an attempt to restore investor confidence in Saudi Arabia by demonstrating Riyadh’s rule of law over its financial system to rein in potential hazards to its economic system.

Al-Sanea was a highly leveraged liability for the Saudis. When the financial crisis was just starting to surface in mid-2007, Saad Investments received a $2.82 billion loan from 26 European, U.S., Asian and Arab banks. Earlier in 2007, STCFSC got a $5 billion loan for a 20-year plan to diversify investments inside and outside Saudi Arabia. Though it is still unclear whether al-Sanea has fallen completely out of favor with the Saudi royal family, his financial dealings are now exposed enough to compel the Saudis to take drastic action.

An asset freeze targeting someone with large global stature like al-Sanea would be difficult to keep quiet in the first place. But the apparently public manner in which the Saudi kingdom has chosen to clamp down on al-Sanea indicates Riyadh’s primary interest in bolstering its financial standing while also sending a warning shot to other wealthy Saudi families who might be engaged in similar financial malfeasance.