Asiacell has launched what may be the world’s smallest ever public offering, raising about US$ 8,500 through the sale of 10,000,000 shares at IQD 1 each. The subscription period started on September 14 at the Baghdad and Sulaimaniya branches of Al-Shamal Finance and Investment Bank and will continue for up to sixty days.

Obviously this is not the long awaited IPO called for by the conditions of the company’s operating license. That would require the sale of a 25% stake. With share capital of 270 bn, Asiacell would have to be selling 67.5 bn shares.

The current micro-offering is merely a preliminary step to convert the company to joint-stock status. I don’t know why this couldn’t be taken care of as part of the actual IPO. My guess, for whatever it’s worth, is that the existing shareholders might otherwise have to do the entire offering at par (IQD 1).

As I understand it, the Company Law (Article 154), requires new shares to be issued when a company converts to joint stock form but does not allow for these to be sold for more than their IQD 1 par value. Once the conversion has happened, however, Article 55/4 says that new shares “may be offered at a price equal to or greater than their nominal value…and priced in light of the company’s performance.”

If I’m right, two separate offerings would make sense. In the first, you try to set the record for world’s smallest IPO, selling only a tiny number of shares at par. Then you do the real IPO, selling the shares for what they are actually worth.

At the end of last month, the Iraq Securities Commission (ISC) announced new rules on stock suspensions. Effective September 1, trading is to recommence no more than four months after general assembly meetings when rights issues are announced and immediately otherwise. Pre-general assembly suspensions are limited to one week.

This new schedule is a big improvement. Previously, stocks were suspended after general assembly meetings for as long as three weeks even when no particularly market-moving news was announced. Post-rights issue suspensions have typically lasted anywhere from four to eight months. Warka Bank is still not trading over a year and a half after its failed rights issue early last year.

The one-week pre-general assembly period isn’t really news, however. This appears to have been in place since some time in the second half of last year. Formerly, there had generally been two weeks between the suspension and GA meeting dates.

It’s unclear why any of these suspensions were necessary in the first place or what has changed to make them less necessary now. I suspect that they were never really necessary and that nothing has changed. I think the ISC is simply trying to improve the trading environment ahead of the telecom IPOs that were supposed to have taken place last month.

If that is the goal, however, the new rules obviously do not go far enough. Unnecessary trading halts are just as unacceptable whether they last for four months or for eight.

If the ISC really wants to get an ‘A’ from foreign institutional investors it will have to eliminate pre-GA and post-rights issue suspensions altogether.

Last weekend two stories, one in Al Hayat the other in the Abu Dhabi paper The National, confirmed that Standard Chartered is in talks to take over Warka Bank (BWAI). (There’s more on the story here.) While there have been rumors to this effect for over a year, this is the first time anything has been officially disclosed. Hayat cited Warka Bank Executive Director Mohammed al-Samarrai as saying that the merger has reached its “final stages.” A Standard Chartered official interviewed by The National was a bit more circumspect. He characterized the negotiations as “still in the early stages” and cautioned that “It’s not final until it’s absolutely final.”

It’s said that the opera isn’t over until the fat lady sings. While she hasn’t come out yet, it looks like she has already begun warming up backstage.

If the deal goes through, Standard Chartered will presumably be taking up the approximately 145 mn rights issue shares left over from Warka’s failed capital increase in early 2010. At IQD 1 per share, this would add IQD 145 mn to June 30, 2011 net equity of IQD 138 mn, bringing the total to IQD 283 mn. Share capital would increase to 250 mn, with the British bank holding a 58% stake.

In this scenario, book value per share would come to 283/250 = IQD 1.13.

Among the ISX-listed banks, Warka would become only the second to have a major international financial institution as a controlling shareholder. The first was Dar Es Salaam Bank, which is controlled by HSBC.

Dar Es Salaam trades at 7.0 times book value. The same rating for BWAI post-merger would mean the shares would reopen at 7 x 1.13 = IQD 7.92. Anyone who had bought at BWAI’s last traded price of IQD 1.26, got the 33.33% bonus, and taken up the 150% rights issue would be looking at a return of 710%. (Both original and bonus shares were eligible for the rights.)

The final act of this drama may turn out to have been well worth the price of admission.

Photo by: http://www.flickr.com/photos/aliens_ufo_proof_evidence/

Winston Churchill once likened observing Soviet politics to “watching two dogs fighting under a carpet.” All you can say for sure is that something’s going on.

The latest news on Warka Bank has exactly this ‘subcarpet’ quality. The ISC has ordered Warka’s brokerage subsidiary to stop its operations in the market effective July 26 following the seizure of the bank’s equity in this company by the Ministry of Trade. (See the pdf file at the bottom of this link for the Arabic version of the announcement.)

The Ministry is also seizing shares held by the bank in nine other companies. Appended to the ISC’s announcement is a letter from the Ministry’s Office of Companies Registration to the Diyala Public Company for Electrical Industries dated July 11. This provides the following list:

1.) Al-Asyl for Horse Breeding and Marketing LLC / number of shares (1,020,000).
2.) Al-Iraqiyah for Bank Guarantees LLC / number of shares (400,000,000).
3.) Afaq al-Ghad for Trading Agencies and General Trade LLC / number of shares (200,000).
4.) Al-Mas for Security and General Protective Services LLC / number of shares (200,000).
5.) Al-Mas for Real Estate Investments LLC / number of shares (135,000,000).
6.) Warka Company for Mediation in Trading Securities LLC / number of shares (980,000,000).
7.) Dallat al-Jazeerah for General Transportation LLC / number of shares (680,000).
8.) Al-Ufuq al-’Alamiyah for General Trading LLC / number of shares (1,340,000).
9.) Al-Mass for Recording of the Holy Book Verses LLC / number of shares (60,000,000).
10.) Al-Mas for Real Estate Investments LLC / number of shares (135,000,000)

Note that none of these are ISX listed companies. (6) is the brokerage.

Apparently, there must be a dispute between the bank and the Company for Electrical Industries to whom the Ministry’s letter is addressed. But there’s no way to tell what this dispute might be, why these ten names were selected, how they will be disposed of, or when the brokerage will be allowed to resume its operations.

It would be nice if someone could pull back the carpet and let us see what this fight is about.

On June 20, AK News published a cryptic article entitled “Iraq backs global bank’s initiative to encourage investment in stock market.” (See this link.) The Executive Director of the Iraqi Securities Commission (ISC) Abdul Razzaq al-Saadi was reported as saying that the global bank, “HHPT,” had “done the necessary groundwork and pledged to put up the capital needed, in coordination with the securities market, to develop the market and raise the foreign commercial shares.”

This seems almost meaningless until you realize that HHPT must be a typo. The reporter most likely means HSBC. And the initiative in question must be HSBC’s plan to act as a custodian bank for ISX-listed shares, a plan market participants have been talking about for at least the last two years.

Custodian banks typically provide services for funds rather than individuals. They help to protect a fund’s clients from fraud on the part of the fund manager and also protect the fund from fraudulent trading by its brokers.

In a market with scriptless trading, the custodian does not actually hold any shares. In Iraq, these exist only as entries in the Iraq Depository Center’s (IDC) computers. The custodian does, however, have control over the shares in its clients’ accounts. This allows it to provide independent verification that the assets a fund claims it holds really exist.

The custodian also does not execute trades—this is the broker’s responsibility. The custodian’s job is to take care of settlement—to identify the counterparties to the client’s trades and receive or deliver whatever securities were purchased or sold. (With scriptless trading this is just a matter of moving shares electronically between depository center accounts.) This eliminates the possibility that brokers will trade for their own accounts with their clients’ shares.

Custodians also offer a variety of administrative services such as processing corporate actions (e.g. rights and bonus issues), providing daily and monthly reports, and assisting with annual audits.

If HSBC were really moving forward in this area it would be big news for the market. At the moment, no custodian banks are active in Iraq. While this doesn’t matter to most individuals, many funds’ mandates do not allow them to invest without proper custody. If HSBC began providing this service, a flood of new foreign institutional money could potentially flow into the market.

Support from the head of the ISC is certainly a good sign. But others must sign off as well—the IDC, for example. It would be premature to conclude that HSBC’s custody breakthrough is a done deal. But perhaps it is getting closer.

Erbil property has been one of the best investments in Iraq over the past year. While the ISX is up about 50% over the last twelve months, prices for residential and office space in the Kurdish capital have more than doubled. 600 sq m single detached houses in the city’s Italian Village development, for example, are now listed at US$ 1.5 mn, up from only $600,000 a year ago.

Meanwhile, along Erbil’s 100 m ring road numerous projects are under construction. When completed these will add hundreds of new units of both high and low rise supply. (Several of the international hotels mentioned in this post are coming to this area as well.)

I have also been told that land is selling for prices similar to those in Baghdad. This despite the fact that Erbil still has many large and well situated empty sites available for development.

Are these signs of a bubble?

In any ordinary city you would have to say yes. But Erbil has some special features that make the usual signs of overheating unreliable indicators.

As John Drake points out in his latest post, Kurdistan is an oasis of peace in comparison with the rest of the country. The region thus has an obvious role to play as a “gateway” to Iraq. For foreign investors and vendors and their local partners and clients, locating in Erbil will be a no brainer.

And Iraq’s coming oil bonanza virtually guarantees that the foreigners will keep coming. (John’s observation that many of them don’t yet even realize that Kurdistan is safer than the rest of the country is another bullish sign.) They will come not only to work on oil and gas projects but also to participate in the whole spectrum of activities necessary to Iraq’s reconstruction. They will also come because the Kurdish region, with 70 bn barrels of oil and 200 tr cm of natural gas, is on the verge of a fossil fuels boom of its own.

Finally, property bubbles do not usually occur without leverage. And the Iraqi banks have yet to really start lending. Most of the ten thousand dollar “blocks” of US hundred dollar bills being used to pay for properties are evidently not borrowed money.

Until this changes, it is still much too early to call a top in Erbil property.

(Photo by Aysegul Ozge Ozgur. Used by permission.)

At the end of last month, a spokesman for the Central Bank of Iraq (CBI) told reporters that a plan to redenominate the Iraqi dinar will be presented to the Council of Ministers in the near future. (See here and here.) The Council is then expected to submit the relevant legislation to Parliament for a vote. If the lawmakers approve the project, all existing banknotes will be replaced with new currency at the rate of 1,000 old dinar for one new over some unspecified period of time.

Given Parliament’s current backlog, this change can hardly be imminent. Still, you might think they could get around to voting on the CBI’s proposal some time before the end of this year. In that case, the redenomination could presumably be completed by the end of 2012.

The process will necessarily involve both the exchange of new banknotes for old and the restatement of contractual obligations in terms of the new currency. Among other things, three zeros will have to be eliminated from the share capital of the ISX listed companies as well as from the number of shares each has outstanding. (This will keep the par value at one dinar.)

I’m told this should be a relatively straightforward change for the depository center to make. Trading should not have to be suspended for more than a few days and it may be possible to proceed in phases of a few names at a time so that the entire market does not have to shut down during the transition period.

Similarly, it seems reasonable to expect the CBI to exchange new dinars for US dollars at one thousandth the rate for old dinars. In other words, if the original rate were IQD 1170 = US$ 1, post-redenomination this would become IQD 1.170 = US$ 1.

All of this seems reasonably straightforward for anyone holding assets such as currency or shares inside the country. For those holding dinar cash outside Iraq, however, things may not be so simple. How and on what terms their old dinars will be convertible into the new currency remains an open question.

Recently ISX CEO Taha Ahmed Abdul Salam told reporters that foreigners now hold 19% of ISX-listed shares. (See this link.) This seems like a big percentage but in fact reveals that foreign institutional participation in the market remains quite limited.

As of the end of last month, strategic shareholders in the eight foreign-invested banks held 328 bn shares. (See Table. Figures for total shares are from the May ISX monthly report.) This number is 17% of the total for the whole market. (Doing the same calculation by market cap you get 22%.)

These investors are not really market participants. Most are large banking groups like HSBC, which owns 70.1% of BDSI, or National Bank of Kuwait, which owns 75% of BROI (the IFC owns another 10%). Their Iraqi bank holdings are not short-term punts but rather form part of a long-term business strategy. They are generally unlikely to trade and their holdings cannot be thought of as part of the free float.

The remaining share of only 2% for all other foreigners is actually a more interesting number than the 19% cited by the CEO. If this is also their share of total ISX market cap, their holdings would only be worth about US$ 76 mn. Considering that US$ 20 mn in assets under management is often cited as the minimum threshold for a viable fund-management business, it seems there can be no more than a handful of small foreign funds in the market so far.