NMC: Salvaging a future?

To long time residents of UAE NMC and the name of B R Shetty were hallowed as a rags to riches story that Emaratis and expatriates both alluded to with pride. That success story has crashed to the ground amid allegations of fraud, deception, and left a gaping hole in the financial stability of the NMC group. Considering it’s future being torn between a forced liquidation and court administration leading to some semblance of normality it is important to understand how all this happened.

Only a few days ago B R Shetty was interviewed by a Dubai based newspaper and all he had to say was wish the newly appointed Chairman the best. The reporter did not bother to ask what B R, as he was commonly known, thought of the debacle of his mighty empire? How could $4 billion plus of loans not only not be recorded in the books of the company but the proceeds used for ventures of related companies? With Central Risk data on each borrower available did not the lending banks reconcile their exposures with the central risk data? How much of this lending by banks, especially in the UAE was name lending because it was BR and how could it go wrong? The Board of the company had stalwarts from auditing powerhouses who after retiring were serving on the Board of the company. Surely was their experience not available to create compliance within the company?

Bankers who piled in such colossal debt, $6 billion of it, of which $4 billion was unrecorded, cannot plead ignorance to the situation. We are not talking of a 10% misreporting of debt but a misreporting of over 200%? One of BR’s modus operandi was to cultivate bankers within different banks who were sold on the BR story and credit compliance may have been out aside to please the man. The authorities will need to do a massive forensic exercise into the lending process and credit decision making in the case of the exposure to BR and his group of companies.

This brings one to what is the solution. Someone once said that when banks have over lent to a company then they only hurt themselves in enforcing a liquidation. The total worth of the group is perhaps $2 billion with a forced sale value of perhaps less than half of that. Banks will lose a great deal by being stubborn about this settlement. A white knight buying the business, which in the long run can become solvent, is unlikely given the current situation.

Thus in my view the banks should agree to roll their exposures into a consolidated ten year loan with all lenders agreeing to inter-creditor agreements. A board including major lenders and industry experts should be created and a recovery path be worked out. Side by side actions to recover the funds diverted to related companies should begin in earnest and quickly. All $4 billion of unrecorded debts could not have just disappeared without creating an asset trail.

Lenders should be prepared to extend the ten year consolidated loan even further depending on the recovery process. It is important to get the patient out of ICU, don’t mind the pun, and given the critical role health care plays in the country and region it is likely down the road strategic long term investors including government entities will emerge. The health care model is good and it would seem that BR and his cohorts were smart not to cripple that part of the company. Why would they? It was the cash cow they could leverage to take unrecorded loans. While these remain allegations it would seem in time more details will emerge of the massive hole that has been left in the company.

If banks want to be short sighted and seek a forced liquidation I suspect that there will be enough eager investors to pick up select health care assets. However the realised values will be no where near the level of he current exposure. A forced sale might well be the eventual course that this saga will take, however of all the options it will more than likely be a very painful process.