THE TRUE PERFORMERS


The global financial crisis presented CFOs in Oman with unprecedented challenges forcing them to use their skills and resources to navigate their companies to safe shores. Mayank Singh reports

Chief Financial Officers (CFOs) today are like doctors who have just been through a prolonged medical emergency. Epidemics test the ability of medical professionals and fundamentally challenge the conventional wisdom of the times. The financial crisis that engulfed the world for most of 2008 and 2009 placed CFOs in a similar situation.

Overnight, some of the most acclaimed financial strategies and innovations became a terrible mistake. Well thought-out acquisitions suddenly became over-ambitious forays. CFOs witnessed the unprecedented destruction of wealth and fought for wealthier times to come. Says Vishal Goenka, CFO, Renaissance Services, “The CFO also needs to create value by pulling together cross functional teams in the organisation to really think about how to drive productivity and efficiency, how we can allocate resources and where we can find more value in the business.”

Cash, costs, communication, confidence. Those four Cs sum up the mandate of the CFO in a year (2008-09) when everything that could go wrong – and also things that many thought would never go wrong – went spectacularly awry. And it was for the CFO to step into the breach like never before. “The finance function is the glue that binds an organisation together,” says Phil Beale, CFO, The Wave, Muscat. As demand and liquidity dried up, cash flows had to be expanded. As margins came under a squeeze, costs came under the microscope.

The CFO had to scrounge for capital in a world starved of that till-recently-taken-for-granted resource. Suddenly, the rules of the game had changed: Finance heads who once had little problems raising funds to make big-ticket acquisitions were now struggling to find capital to keep those assets afloat and squeeze growth out of them in recession-hit markets. Says Hafidh Al Harthy, CFO and secretary to the Board of Directors, Qalhat LNG “A lot of organisation’s ignored the very basics of business/risk management and suffered severe consequences of the global financial crisis.”

That’s when the other two Cs moved up in priority in the CFO’s lexicon. Investors, vendors, customers and employers had to be first told about the realities in the market place and on the balance sheet; and then confidence instilled into them that this too would pass. Now CFOs aren’t particularly known for moving out of the comfort zone of the books they keep, but the credit crisis provided them that challenge or – as some finance heads would like to see it – the opportunity.

As liquidity conditions ease, demand picks up, and clients and consumers are more prone to spend, CFOs will doubtless breathe easier, but the smart ones among them won’t forget the lessons of frugality, restraint, and the need for balance that they picked up in the tough times.

In the following pages the best financial brains of Oman Inc recount how they faced the challenges thrown up by the global financial crisis.

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“The green fuel”

Maqbool Yousuf Al Lawati, Corporate Finance Manager, Oman LNG is confident about the future prospects of gas and sees the downturn as a temporary phenomenon

Never Maqbool Yousuf Al Lawati, corporate finance manager, Oman LNG, says “The challenges faced by a CFO depended on the industry that he was in. Our company and the oil and gas sector did not have such a large impact. On the employment side too we did not have any major challenge.” This is not to say that the company remained completely unscathed by the downturn. As the government’s cash flows got affected in the wake of the financial crisis, it was forced to revisit its development plans. This in turn affected the company as the government is Oman LNG’s biggest shareholder. The LNG major had to revisit its cash flow and see how this would impact the government’s receipts. “As oil prices plummeted from $140 per barrel to $30 per barrel it became imperative for us to look at our earnings and to give the government a forecast of our future cash flows,” says Maqbool. Oman LNG is the Sultanate’s second largest revenue generator and whenever something drastic happens, the company is called upon to help out.

The other big challenge was that the government was borrowing from local banks. As the crisis intensified international banks could not continue financing local banks. And as local banks had large commitments Oman LNG was asked if it could help boost the local liquidity situation. Says Maqbool, “We had a lot of cash and were able to shift money to local banks by moving our funds in local deposits and the feedback was quite positive.”

No worries

While other companies were grappling with cash flow problems, Oman LNG had no such issues. “Though our total cash flows were affected, the nature of our transactions and the solid customer base ensured that our finances were in a sound condition and we did not have problem in our receipts.”

Cost rationalisation is a continuous process at Oman LNG. The two large overheads for the company are employee salary and the gas that it buys from the government. Though Maqbool and his team put in a little bit more effort in containing costs, this was not a big focus area. A bigger problem was managing employee expectations. During the boom years of 2007-08 there was a significant increase in the staff strength. A drastic decline posed a challenge in terms of maintaining staff levels and their morale. “We were able to meet the expectations of our employees with the help of our Board and management,”

says Maqbool. The company undertook a survey of various possibilities and scenarios. One of them being an analysis of the worst case scenario. “We looked at the pressures that the company could take if oil prices went down to $35 per barrel. This situation was unprecedented and we found that if this scenario persisted our financials would have been within acceptable limits and we would still make profits,” says Maqbool.

In the Oman LNG Board the finance function has always carried a lot of weightage and the CFO’s advice is taken seriously. During such unprecedented times, a focus on financial matters got a lot of support from all quarters.

The company could never imagine that oil prices would plummet from all time highs so rapidly. “Though we felt that $140 per barrel prices were unsustainable, people were talking about oil prices going to $200-$300 per barrel, but the sudden decline came as a shock.” This sudden fall had a ripple effect as it impacted the real estate market and financial institutions.

Uncertain times

The global scenario is still quite unstable as interest rates are fluctuating constantly. “The outlook on interest rates three to six months ago was quite different from today. On the demand side things are stabilising. Some South East Asian Economies are showing signs of positive growth but Japan has some issues and Europe and the US are still struggling.”
Companies which have borrowed money would like to have a clearer outlook on interest rates. But due to the crisis the normal rules relating to business and finance do not hold much ground. As past business cycles were completely different, the guidance in forecast has moved down international interest rates. In the first quarter of 2009 interest rate on deposits were anywhere between three to four per cent. Today it is around 1.25 per cent to one per cent.
Oman LNG distributes a significant part of its profits to its shareholders like the government, Shell and Total. The company keeps local securities ranging from three to six months, but has no long term cash. Oman and the Gulf countries were fortunate as their exposure to international financial cross currents were limited. Says Maqbool, “LNG as gas is the future as it is a clean fuel and is environment friendly. The prevailing prices of $70-80 per barrel is comfortable. While $140 per barrel was too much anything below $60 per barrel would be a concern. The current forecast for Oman LNG is pretty good.” Since its establishment in 1994, Oman LNG has progressed from a project under-construction to a world class company, liquefying natural gas in its plant at Qalhat in Oman and exporting it to international markets all over the world. Oman LNG harnesses cutting edge technology to provide the world with a purer source of energy, while contributing to the sustainable development of the Sultanate
of Oman.


 

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“Being realistic”

A We stood by our buyers during the slowdown by helping them to procure loans and giving them a payment holiday, says Phil Beale, CFO, The Wave Muscat


TheThe global financial downturn was precipitated by the sub-prime mortgage crisis and as a consequence the global real estate sector faced the financial tremors across continents. Says Phil Beale, CFO, The Wave, Muscat, “The global financial crisis created uncertainty in the minds of potential investors and the depth of the crisis was something that had never been seen before.” The lack of a legislative framework and appropriate response mechanisms globally to deal with such an eventuality made things worse. As the liquidity squeeze took hold, investors threw up their hands in despair as they did not know where their next installment was going to come from. “In Dubai, where I was working at the time, there were instances wherein customers walked away after paying deposits and installments totaling more than30 per cent of the contracted price.”

The Oman market had not increased to the same extent nor at the same rate as Dubai and other regions; this meant that the subsequent fall in prices was not as severe. The Wave had taken prudent measures in terms of its programme and financial resources and with the support of the shareholders and our bank (BankMuscat) the business had enough liquidity in place to come through the downturn. The backing of strong promoters like the Omani government, NIFCO and the Majid Al Futtaim Group (MAF) ensured stability. The response to the crisis for The Wave was implemented quickly and effectively due to the experience, prudence, and strong governance measures that were established in The Wave from inception.

Says Beale, “We did not make any new off plan sales in 2009; the focus was on helping existing customers to get credit wherever needed and to provide other advice and services where possible to assist them.” During 2010, The Wave has released 168 properties to date and has sold out nearly all of them. Initially in the wake of the crisis, some banks insisted on buyers paying up to 40 per cent of cash upfront for a loan, others withdrew temporarily from the market. “We talked to banks and introduced the bank to our customers. As a developer our role is not to plead with banks to support our customers and the project. Our role is to put the customer and the bank together, if needed, so that our customers can procure the loans they require.”

During 2009, we also helped our customers sell their properties if they chose to, though this was not always easy given the then prevailing market conditions. “People had to be patient as it was difficult to sell properties, at times it took upto six months to find a buyer,” says Beale. Other assistance was given to some of our customers who had acquired property just prior to the global financial crisis where possible to assist them in being able to continue with the property ownership. Our customer service area worked with each individual customer who requested assistance.

Price cuts versus market positioning

Oman saw prices fall on an average of 20 per cent. “Unlike Dubai where prices were shaved by 40-50 per cent or more in the worst case, in Oman the price reductions overall were much smaller.”

The response by The Wave to the new market conditions saw the development of new product lines that maintained the integrity and quality of the development but targeted at specific pricing points to meet the market. With the property development experience available at The Wave new products were designed that “met the market” in terms of price without affecting the quality or style of the development. Effective market positioning is a more effective response than price cutting which erodes value in the long term for The Wave. The developer has assured existing buyers that the specifications of the new properties would be at the same standard as their’s. The Wave has a lot of development expertise which was used to understand the market and to come to a decision through senior management and the Board that has enabled The Wave to maintain its position.

Looking globally the role of the CFO did not change in a major way. The CFO came under more pressure as he had to micro manage aspects of the business and understand in more detail what was occurring. “If there was a cash flow problem then certain decisions had to be taken whether to defer or cut something for now to preserve capital and enterprise value, The CFO also had to look at ways of raising capital.” A crisis like this tests the system.” In good times while any gaps in the system may get glossed over in times of crisis such lacunae come to the fore. The CFO along with the CEO has to instill confidence in the team. “The finance function is the glue that binds an organisation together. The Dubai experience was one of constant meetings with contractors and others to instill confidence. The experience at The Wave was business as usual due to The Wave’s strong position.

Cost cutting

The Wave reviewed all discretionary expenditure. For instance things such as software upgrades were put on hold, other expenses such as travel minimised and only essential expenditure made. The marketing staff was redeployed for reselling properties or for collecting payments. On the whole as The Wave ran a lean business, there were no retrenchments. The silver lining was that commodity prices came down, which eased the pressure on construction costs. Overall, as The Wave had a strong financial position it could ride over the problems without much pain.

Looking ahead Beale feels that things will be slow in the global real estate market for the next two years as there are concerns about a double dip recession. The position in Oman appears to be more positive and the economy strong so the market here is expected to continue.

Though things are improving in the US and Europe people have still not started hiring and unemployment levels in the US remain at historic highs. Says Beale, “Property is a long term asset and in difficult times people may prefer to rent rather than buy and so it may take longer for the sector to get back on its feet. This opens up opportunities for property investors if they have confidence in the markets.” China and India are growing at a fast pace but they are unlikely to have a big impact on the global economy as they are internalising i.e. their growth is being driven by infrastructure spending and domestic consumption. Oman too is following a similar approach. If a double dip scenario were to materialise it could extend project completion schedules further. On the other hand property prices have bottomed out so it may be a good time for serious buyers to look at the real estate market.

Beale feels that the size of the fall is something that the people will remember for a long time to come. The psychological impact will wane away and things will improve if inflation continues to remain low. Being cynical, two to three years after a crash people tend to forget about it and go back to their bad old ways. But for now people have definitely learnt about prudence and the ills of too much speculation. In certain things people are going back to core values like thrift and calibrated spending. How long this will last only time will tell. Despite the downturn the regional story is still intact. The GCC has a young population and is expected to reap a demographic dividend. Secondly, the region is looking beyond hydrocarbons and is investing in tourism. The geographic location of the Gulf means that it has potential to become a value add hub. All this augurs well for real estate developments
like The Wave.

 

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"A strong legacy"

Shrinking cash cycles may be good for individual companies, but its large scale use may hamper the chance of a quick economic recovery, says Manohar Shenoy, Group CFO, W J Towell and Company

I From the early days of his career Manohar Shenoy, Group CFO, W J Towell and Company has been a firm believer in the adage –- sales is vanity; profit is sanity and cash is reality. Though this global crisis was not a depression, it came pretty close to it and the fundamental premise that stood out was that cash is king, perhaps even god!

Looking at the reasons for the crisis and its impact, Shenoy says, on a global basis there was a sudden shock with oil prices falling from $147 per barrel (dpb) in July 2008 to $39dpd in January 2009. Anything that goes up so fast is bound to fall. There is usually a lead and lag effect in economic cycles. An economy is considered to be in a recession if there are two sequential quarters of negative growth. A sudden drop in oil prices, the collapse of real estate demand and the after effects of the US subprime crisis affected the Sultanate. Globally, the recession broke in Q4, 2007, but due to the lead and lag effect it came to Oman in Q3,2008.
Real estate prices peaked in Q2,2008, but by the end of the year valuations had fallen from that peak by upto 15 per cent in some interiors and continued to fall till the end of 2009 .

During this period, banks became wary about lending to real estate companies. Despite this, W J Towell came out unscatched due to a number of reasons. First of all, it is a conservative group and has stood rock steady across business cycles for the last 150 years. Secondly, the W J Towell parent company is not into buying and selling of property but follows a prudent build and lease model. Says Shenoy, “Leasing income is our real income. The value of property going up and down does not impact our cash flows as we have stable rental flows.

 The bulk of our residential and commercial properties are in Madinat as Sultan Qaboos (MQ), and since it is a prestigious location it has not been impacted to the same extent as other areas. In any case, it appears that property prices have bottomed and are slowly but surely seeing an uptick”
W J Towell Group is underpinned by the single obligor clause applicable to lending by Omani banks. No Omani bank is allowed to lend more than 15 per cent of its net worth to any group. Any stand-alone company in which the group mother company has more than 25 per cent or more shares is also considered to be a part of the group for lending purposes. “A group’s debt ceiling is defined by the Omani bank’s net worth, so if I have reached that limit then no group company is able to borrow more from that bank.” says Shenoy. The single obligor clause forced W J Towell to go to international banks (western and GCC based) for funding its organic growth requirements. Thanks to the easy money policy of the US Fed, dollar liquidity became a boon. LIBOR came down from 5.7 per cent in September 2007 to less than 1 per cent in early 2009 and only 0.3 per cent today. Overseas borrowing came in handy for W J Towell as the group could borrow from local banks only if the latter increased their net worth or if they had a share capital infusion. In 2008-09 a number of new banks like Qatar National Bank, Ahli Bank, Bank Sohar came up in Oman which along with banks like Habib Bank and Bank of Beirut also participated in the company’s funding and non-funding needs.

Shorter cycles

Shenoy says, “In a downturn your working capital cycle has to shrink. It is a test when you have pressure on markets and your finished products.” In Oman, businesses were stuck with huge inventories as the demand was low and banks were not lending. As the malaise cut across a number of large business houses, banks could not afford to ask all of them to pay up. As a result banks extended letters of credit (LCs) helping companies. Despite problems the group ended the year with good numbers. The erosion of real estate values impacted the ability of companies to borrow. This was compounded when banks simultaneously increased the security cover for their lending by upto 50 per cent in some cases. This increased the pressure as companies did not have additional collateral. Since W J Towell has a sufficient bank of freehold properties, it was able to keep its debt at the same levels, even borrow more for its property redevelopment programmes, particularly in MQ.

Shenoy feels that one needs to balance one’s short term and long term loans. “We have been conservative and have not used real estate as a tradable asset. And as they say real estate is the only real thing and everything else, other than cash, is “unreal”. As a number of its properties were initially developed in the 1970s, the group felt the need to redevelop them in accordance with new sensibilities. In the past, the land area that Muscat Municipality allowed to be developed was small, as a result of which the houses were fewer. As the population of Oman increased the concerned authorities allowed almost 50 per cent larger areas to be developed. In another related change, the Municipality also started allowing higher vertical construction. In MQ, for example, the new rules permitted ground plus three stories and in areas like Ghala ground plus nine stories. “Thus it made good sense for us to redevelop and build new properties. We relocated some of our tenants and rebuilt to capitalise on the new norms,” says Shenoy.

Though the plans for this redevelopment was drawn up before the crisis, the group did not have to go in for a major rescheduling of any of its projects as liquidity concerns never posed a problem. The architects for the redevelopment are Towell Talati and close to 300 apartments, showrooms, offices and a few warehouses are under redevelopment.
Apart from real estate W J Towell also has a big distribution business, which also remained largely insulated from the slowdown. Says Shenoy, “We are in the FMCG business which is recession proof. We are not in branded perfumery or luxury items which get affected by a downturn. Our companies like Matrah Cold Stores and the Consumer Products Division supply to supermarkets and hypermarkets essential commodities.” Due to a big pipeline of captive and third-party projects, the group’s construction and engineering subsidiaries have seen robust improvements in their cash flows, as well as in their business performances.

During the crisis, the finance function became more centralised as W J Towell agreed with bankers that any discussion relating to finance had to be done at the group level rather than its subsidiaries. A centralised Investment Committee was drawn up to take decisions regarding any new investment, including any selective disinvestments of non-strategic assets. The group is well poised to benefit from MA opportunities as well as grow organically over the next decade.

The W J Towell Group believes in loyalty and commitment of its employees and the owners enjoy a lot of goodwill in the market with regard to its business practices which it has nurtured over the last nearly 150 years of its existence. “The recovery is going to be a U shaped one and will depend on how the West is faring as oil prices are correlated to the sentiment of the western world,” says Shenoy. He adds, the learning from the crisis is that whether the times are good or bad, it is important for us to have a pipeline of projects and orders across our businesses. Companies may shrink their cash cycle and tighten their belts as it is good for them, but if everyone does the same then it can have negative repercussions collectively for the economy, particularly as it is recovering from a slowdown.



 

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“AN Organisation’s inner strength IS KEY to ITS success”

In recession, most companies focus on cutting costs; however, history has proven that winners made disproportionate investments in talent, marketing, R&D and capital spending at exactly such times, says Vishal Goenka, CFO, Renaissance Services


Hardly In all emerging economies like Brazil, India, China, etc, the role of the CFO is becoming more prominent. His role is no longer limited to the traditional book keeping function. Says Vishal Goenka, CFO, Renaissance Services, “Finance simply means fine sense. Thus, a CFO’s profile requires a person with extremely fine sense. As you think so you become. Think human, think business, think prudent. Success is all about consistency around the fundamentals. Life favours the devoted. Behind extraordinary achievement there is always an extra-ordinary effort.”

Renaissance has always been nimble and prepared for all seasons, companies can’t predict the future, but they can build organisations that will survive and flourish under just about any possible future. The group has a number of businesses out of which some are capital intensive while others are less capital intensive. “If you are stable you can move forward and keep investing in your core businesses; thinking long term is difficult if your company’s survival is at stake. Our agile approach helped us to prepare for such a contingency and this approach is an integral part of the philosophy of the group. A CFO has to think prudently and to think business,” says Goenka. He further suggests that businesses need to get their breakeven point down so that, no matters what happens to the industry worldwide, they can be successful.

As a thumb rule, people like to do business with people whom they like and are comfortable with. When the crisis hit home, banks were forced to select a couple of companies whom they could continue to lend in a downturn due to liquidity and solvency concerns. Such a filtration process helped Renaissance as the innate confidence that banks had in the company’s business model saw the company raising capital without a hitch. In 2008-H1-2010, at peak of the crisis, Renaissance managed to invest around $500mn with full participation from local, regional and international banks. The company banks with over 25 banks across countries. Says Goenka, “Business is a relationship; people want to know that you are real, decent, kind and trustworthy. And when they sense that you are the real deal, they will open up to you. Before someone lends you a hand, you need to touch their heart.”

As a policy, the company tries not to be over reliant on a single source of funding. The fact that the company has a presence in 16 countries, with different kind of projects, also necessitates a diverse funding base. Whenever the company enters a new market and project it makes an effort to match its liabilities and assets.

There were a number of people and leading companies who borrowed for the short term and then deployed these funds for long term investment. The temptation to do this arises as short term loans are cheaper than long term loans. For instance, a short term loan costs around four per cent while a long term loan may come at six per cent plus. “You need to match your asset profile to your loans and we have consciously tried to match our cash flows with our repayment needs. If you look at our projects whether they are vessels or PACs they generate sufficient cash flows to repay the matching liabilities in five to six years while our loans are generally more than that period,” says Goenka.

He feels that wherever you find problems it is because there is a mismatch between cash flows and liabilities, but after the global financial crisis most businesses have realised that they need to be more prudent and long term in their thinking.

The challenges

Renaissance has had a pretty good run despite the crisis, though the company’s engineering business felt some short-term impact of recession, but the impact was marginal in the company’s marine services and contract businesses, which contribute to around 80 per cent of its turnover. The fact that oil prices have recovered from their lows and has been trading above $70 per barrel augurs well for the future for all companies in the oil and gas industry.

The company’s engineering business, which is among the top 25 EPC contractors in the Middle East, felt slight tremors as the ship repair and ship building business got affected and orders on the fabrication side were slow to come by. The silver lining was that the company had a good order backlog during the crisis period which helped it to tide over the crisis. The fact that the engineering business is less capital intensive helped it to continue making money through the crisis and now the engineering business has started picking up as well. “If you look at our business model you see that 75 per cent of our revenue and cash flow are long term. Only 25 per cent of our revenues come from short term contracts. We have long term contracts in our PAC and in our vessels business, so our revenue model is secure; and our clientele includes reputed blue chip firms like BP, Shell, Total, PDO etc,” says Goenka.

In anticipation of the severity of the crisis, Renaissance did a stress test at all levels – the company assessed each revenue stream, put emphasis on collectability and investment in the long term rather than the short term. The company never went in for speculative gains and looked at each of its overheads to optimise costs. As a result of these it was able to make savings; in fact during the first quarter of 2010 there was an improvement in margins and profitability. “The stress test also included a stringent test on our billing pattern. We focused on good revenues during the crisis because it became really critical. In difficult times you need to be confident that your revenues are collectible,” says Goenka.

Inaction is the riskiest response to the uncertainties of an economic crisis, but rash or scattershot action can be nearly as damaging. Irrespective of the external environment, the company does a quarter-to-quarter cost optimisation assessment, a simple example; wherever possible, it reduces travelling expenses by using video conferencing as a cost cutting device. Such meticulous planning and innovation helps the company to optimise savings.

Enhanced mandate

The crisis also called upon CFOs to take on a bigger role in instilling confidence amongst employees. The company designed a communication strategy wherein it proactively shared the challenges to its employees, shareholders, bankers, clients, suppliers etc.

Looking back, Goenka says that what was happening in some of the markets gave us a feeling of anxiety, but no one knew that things would turn out to be so abysmally low. The sequence of failures in the US, Europe and then in our neighbouring countries created a lot of nervousness in the market, but things are more controllable now, in the last six months. There has been some thawing, visibility has improved, banks are opening up, people are more optimistic and the energy outlook is better.

The CFO plays two distinct but equally important roles. First, he must be a good strategic partner to line management. This part of the job usually involves financial structuring, inorganic opportunities and managing investors relations etc. He must also deal with external constituencies like consultants, bankers, analysts, investors, competitors etc. This role makes him the company’s ambassador to the outside world. The second part of his job is equally critical, that is the traditional policing role – the CFO as cop must be the guardian, the leader of good planning and performance management. Today business fundamentals and creditable accounting have become the new touchstone by which investors judge corporate quality.

The CFO also needs to create value by pulling together cross functional teams in the organisation to really think about how to drive productivity and efficiency, how we can allocate resources and where we can find more value in the business. He should work as a net exporter of talent to the rest of the group, says Goenka.

 

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“BACK TO BASICS”

Dr Hafidh Al-Harthy, Finance Manager, Qalhat LNG had an enviable problem at hand during the crisis – managing surplus cash judiciously

Hafidh Al-Harthy, finance manager and secretary to the Board of Directors, Qalhat LNG (QLNG) is a firm believer in following fundamentals. “A lot of organisations ignored the very basics of business/risk management and suffered severe consequences of the global financial crisis,” he says. These basics being – not putting all your eggs in one basket; high returns equal high risks so it is important to know your risks and to be prepared for the consequences; take calculated risks to succeed and finally cash is king and in a difficult year like 2008 cash was akin to God. A business can be very successful in generating good returns but if cash is not properly managed its creditors can shut it down.

Steady growth

Says Hafidh, “QLNG has never ventured into the unknown, but we picked everything on our way that wets our risk appetite to generate additional value for our business; of course this did not come without risks as we always believed that nothing ventured is nothing gained.” QLNG is highly geared with 90 per cent of its funds being financed by a syndicate of local, regional and international banks. But this has been done at very attractive terms and significantly low pricing. The project was completed in 2005 and it started operations at the beginning of 2006. It is counted as a landmark not only within Oman or the region but also at an international level.

The success story started right from the beginning and it went onto achieve significant milestones on its way like:
The project was completed before time and well below budget in line with global benchmarks. This did away with the need for additional cash flow for cost overruns. On the contrary, the company drew a lot less cash from the loan facilities than the commitment that it had signed with the banks.

As a consequence, QLNG was able to go back to its lenders and renegotiate the pricing structure of its loans and it successfully managed to lower interest rates substantially. At today’s money market rates, this is almost zilch.

In addition to lower draw downs from the loan, the project started to generate more cash than initially projected, an early start-up translated into production before the due date. As a result more cash was generated than what was needed for the business which helped the company to pay 100 per cent of distributable profits to its shareholders as dividends.

The loan facility that was signed with the banks is repayable over 14 years but in the very first year of repayment (2007) the company prepaid (accelerated repayment) almost 26 per cent ($140mn) of its total loan. In 2008, when the whole world was suffering from cash flow problems, it went ahead and surprised its lenders with another prepayment of 11 per cent (or $60mn), which meant that more than a third of the loan was repaid in the very first two years of the 14 years loan tenor, and the company now does not have to make any scheduled loan repayments until 2013.

To achieve 90 per cent gearing the project needed to have sufficient long term sales agreement in place to make the project bankable, and this is what QLNG did, as it sold almost 90 per cent of its long term capacity. Says Hafidh, “We could have easily clasped our hands and continued fulfilling our committed sales agreement and got what was forecasted in the economic model that was used during the Final Investment Decision (FID). However, we did not sit on our laurels but applied ourselves to reviewing every opportunity that could arbitrage those long term deals (without additional production) and generate more value with minimal additional risks.” Hence QLNG ventured into re-trading its already sold volumes to higher paying markets and procured resupplies for its long term commitments. This generated a significant upside not only for our bottomline but this was shared with our long term buyers, the government as feed stock supplier and with the shareholders.

The company, as is customary in the oil and gas industry of Oman, took a right decision at the beginning of operations to set aside one per cent of its net income for Social Security Funding, hence the additional revenue generated from the arbitrage activities also contributed to community funding. “What we have achieved as a responsible corporate citizen in this area is beyond imagination and speaks for itself,” says Hafidh.

As energy prices were going through the roof in 2008, QLNG approached its long term buyers to review the already agreed pricing formulae. This was also done to support the government in increasing its revenue. As a result the company achieved substantial improvement in its pricing formulae for its long term sales, almost all of this is being passed to the government as an increase in feed stock prices.

QLNG has constructed its own state-of-the-art building in Airport heights where it has moved in recently. Financing of this project was also done from internally generated funds.

Says Hafidh, “In spite of meeting all our payment obligations including accelerating loan repayments, meeting our dividend expectations, financing our new office building, we still are building up significant surplus cash. So our problem is not lack of cash but what to do with the surplus cash.” So far the company had been investing its surpluses in fixed deposits with banks internationally but over the last few years it has over weighted its local deposits slightly to support local banks, the economy and the local markets liquidity. As a matter of policy QLNG never ventured into stocks and bonds and thus escaped the adverse consequences faced by organisations which had such exposure. In an effort to deploy its cash surplus, the company once again convinced its Board and shareholders to take private equity in projects related to the energy sector. “The projects in the energy sector tend to be stable and it is an industry that we understand best.”

As a start, QLNG has taken a 10 per cent equity in a power plant in Japan. The LNG major has been a trendsetter of sorts as it was the first foreign investor ever to enter the Japanese energy sector. Moreover, although the investment was effective from December 2008 it has already received significant dividend returns from this investment. Says Hafidh, “we are looking for more opportunities in this sector whether locally in Oman, regionally or internationally in projects where risks are low with moderate returns, and we welcome anyone who may be interested in having us as their partners. Cash is not issue if the proposal can wet our appetite.” That is a proposition that few are going to resist.


 

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“Tight fisted”

Good financial management is important irrespective of the economic environment, says Jorgen Latte, CFO, Nawras




Though times may be difficult but people continue to talk and this has proved to be a comforting factor for Nawras during the global downturn. Says Jorgen Latte, CFO, Nawras, “We were fortunately not affected by the recent global financial crisis continually growing successfully despite the economic slowdown in other parts of the world. Funding for our ongoing ventures was possible due to the excellent relations that we had with our banks.”

The telecom major has consistently shown a strong performance clocking impressive financial results with increasing numbers of customers choosing its pleasingly different services to meet their evolving communication needs. In keeping with good business practices the company has always kept a close eye on expenses. Nawras kept a close eye on costs including all purchase decisions in even greater detail, as news of the world economic slump became known.

Says Latte, “The role of a CFO is always a multi-faceted one and as a member of the executive team at Nawras I do take a keen interest in all areas of the business. Company decisions are made after considering the marketing, financial, commercial and technical aspects of our business. Communicating clearly with my team and the rest of the Nawras family is important and I am always open to ideas and suggestions that can contribute positively to improve our performance further. The open plan style of seating favoured by Nawras is conducive to a frank and frequent exchange of information.”

Business cycle

While no one had an inkling of the latest financial crisis before it hit the world stage Latte feels that one always needs to be prepared for declines or dips in business conditions. “I would always be looking for prudent business practices to be practiced even when the economy is booming and times are good.”

The good news is that Oman was largely unaffected by the global financial woes, there was little need of recovery and economic signs are looking good. As an Omani company, Nawras has continued to grow its business, recently becoming a full service provider and a one-stop shop for business and residential customers in Oman be it mobile or fixed, broadband or voice. Latte signs off, “Good financial management is always important and you should not wait for a crisis situation to get your house in order.”


 

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“Devil and the deep sea”

The cycle of the automobile business, large inventories and an uncertain environment made some tough decisions imperative, says C S Badrinath, CFO, The Zubair Corporation



Zubair Automotive rewrote the rules of the book during the global financial crisis by launching one of the biggest discount offers as a dealership. Says C S Badrinath, CFO, The Zubair Corporation, “We are working in an uncertain environment. This is a part of the business cycle that happens every five to six years. Moreover, since this downturn came on the back of strong growth witnessed in 2007-2008 the delta effect was much more sharp. It was sudden and more severe than before. The second challenge was that there was a lot of uncertainty, and this was more of a financial crisis rather than a business crisis. The environment in which banks operated became difficult and as they came under pressure they clamped upon others raising liquidity concerns. Banks started to reduce credit lines.”

Lending support

The silver lining was that despite their concerns, banks continued to support businesses in the Sultanate and principals like Mitsubishi, Dodge, Audi etc stood by their distributors. The latter stemmed from the fact that though principals had their own set of problems to grapple with, they realised that the Middle East was one area that was providing them with some opportunity and they had to support the region in a better way. The fact that distributors were left holding large inventories also made it imperative to back the Middle East dealers. Realising the gravity of the situation, principals started giving credit extensions.

In the automotive sector there was a sharp rise in business during 2006-08 which was immediately followed by a steep fall. The demand was going down and psychologicallycustomers were shaken. There was a knock on effect as funding lines got squeezed and purchase decisions were postponed. The automobile business has its own set of constraints that aggravated matters. The business has a long forecasting and delivery schedule. “Due to a stretched lead time if you place an order at the time of manufacture and demand slows down, then one is left holding large inventories,” says Badrinath.

Faced with this predicament, the group decided to go in for aggressive marketing to liquidate its stocks. “In 2008 our carrying cost was high, the choice was to hold onto our inventory for a longer period of time and to endure the pain, make our principals unhappy or to endure short term pain and then to refocus.”

While some models have a natural pull for customers, others needed a certain amount of push in the shape of discounts, incentives etc. Says Badrinath, “We were the first ones to take an aggressive stance by going in for push driven marketing. The market reacted positively to the move and we came out stronger.” The discounting has raised customer expectations but once things are back to normal they would need to adjust themselves to the new reality.

Fleeting impact

Apart from the automobile business the group was not impacted similarly in its other lines of business. The hospitality business saw a marginal knockout effect, but in the oil and gas sector it was business as usual.
 
The pressure started mounting in the last quarter of 2008 after the collapse of Lehman Brothers in September 2008. In a globalised market the aftermath of the collapse of institutions like Bear Stearns, Fannie Mae and so on had an impact on the banking scenario. Banks became wary of lending not knowing where the next default is going to come from.

Says Badrinath, “The main job of banks is to lend, and despite the problems local banks did support the local companies during Q’4, 2008 and Q’1 and Q’2 of 2009. Being a big conglomerate The Zubair Group has relations with regional and international banks. This in turn affected credit lines as these banks had liquidity issues.” There is a subtle difference between banking with local and international banks. With local banks there is a relationship based approach as they are stakeholders in operations, but with international banks the relationship in more impersonal.

Business planning

Talking about planning Badrinath says, the planning scenario is determined by market conditions as business is a cycle in which things move up and down. As and when the business goes down, staff strength gets rationalised accordingly. The CFO has an HR role as he has to do a lot of communication. Looking at costs is a natural part of a CFO’s role, “We look at the MIS on a monthly basis in management committee meetings. We have a working capital cycle and the effort is to ease the pressure on the cycle, this is done through debate and discussions.

It is a continuous process and we continued the process during the downturn.” The group uses forecasting tools to gauge future demand, but it is difficult to place a finger on demand exactly in the short run.

As a part of the corporate structure people are made aware of the prevalent situation and they are a part of the joint efforts to work on the situation. “As a CFO we do wave the red flag whenever the need is felt for it. In the past also we have had downturns but since this drop took place after two years of robust growth, the impact felt was much sterner. The speed and frequency of collapse of some global players was a huge shock and the psychological impact created by such events made sure that people who would otherwise change cars every three to five years postponed their decision.”

Badrinath is not sure whether people will be more intelligent to avoid a crisis next time around. “The Middle East region is a different market compared to other parts of the world as countries in the region are closed and inward looking. Second, compared to international cross currents more weightage is given to local factors like development contracts, government spending etc.” With the oil outlook looking positive, the airport project and other developments in Duqm, he is confident that the positive effects will rub off on business. The local liquidity has gone up and corporates have come to a subnormal capital cycle, with the situation becoming more comfortable.

Getting decisions right in a crisis period becomes that much more imperative. It becomes important to motivate the staff, work together as a team and to win over adverse circumstances to come out successful. The CFO’s role should be to avoid knee-jerk reactions to economic swings. It all goes down to getting the basics right – “The problems started because someone wanted to gear their organisation 40 times. As long as you follow the standard norms things are unlikely to go awry.”

 

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“Lending support”

Our organisation played an important role in stabilising tourism related projects in the Sultanate with its proactive measures says Prakash Gabra, CFO, Omran


Omran is the government of Oman’s tourism development and invest-ment arm. It was established in 2005 with a mandate to develop the infrastructure and facilities required to expand the country’s existing tourism industry to support the Sultanate’s plan to develop tourism as a major national industry by 2020. Strangely, Omran has lived a double life through the crisis. Being a government organisation, it has had no liquidity concerns of its own thanks to its strong equity and asset base, but in some of its joint ventures it has faced issues.

Omran is developing the Oman Convention and Exhibition Centre; the Asian Beach Games complex; Fort Hotel; Muscat City Hotels; Duqum Beach Hotel; Khasab Hotel, and the Jabal Akhdar Hotel on its own. In addition to these it has entered into many joint ventures with various other partners to develop ITC’s, resorts and hotels. For example, Yiti project is being done in partnership with Sama Dubai; Ras Al Hadd Resort is a joint venture with the Qatari Diar Real Estate Investment Company; Saraya Bandar Jissah is being developed with Saraya and Muriya Tourism Development a joint venture between Omran and Orascom Hotels and Development is developing Jebel Sifah and Salalah Beach, Al Sadah Island. Omran owns 4 operational hotels InterContinental Muscat, Swiss Belhotel Masirah, Golden Tulip Khasab and Diba and also asset manage and supervise Al Bustan Hotel and Oman Dive Center on behalf of Government. All Omran projects are running on time and are at various stages. Asian Beach Games is going ahead as per the schedule and will be delivered on time.

Making a difference

Says Prakash Gabra, CFO, Omran, “The government is keen on not delaying any project.” Keeping this goal in mind the company has initiated a slew of measures to mitigate problems. We are building 12 hotels in Oman and have got financing for all of them and most of these projects are funded by 100 per cent equity.

After banks started showing reluctance for financing real estate projects, Omran and our joint venture partners differentiated its real estate and tourism components of the projects. Thus bank funding for hotel projects in Jebel Sifah and Salalah Beach were secured easily. “Hotels have an internal rate of return (IRR) of 8 to 15 per cent and are seen as a secure option by banks for funding.

In another big move, Omran infused its share of cash immediately in all its joint ventures whenever our partners brought in their share of equity holding. Says Gabra, “We put up cash in line with our shareholding and our joint venture partners were able to bring to the table their commitment.” This move has ensured funding for most of Omran’s joint ventures. In cases where the joint venture partner has been impacted in a big way, the government is looking at taking over projects completely.

Gabra admits that despite such measures the speed of projects has slowed down not because of cash shortages but due to other problems like a slowdown in real estate sales. “Given the situation we have little choice but to adopt a wait and watch strategy. So while values and prices have gone down, so have construction costs.” As construction costs have fallen by 30-40 per cent, Omran is hopeful that its joint venture partners will quicken the pace of their projects, giving a jumpstart to the market.

Enviable state

Omran has had a problem of plenty on its hand. Due to its frenzied growth in the last two years the company has been finding it difficult to find talent for its needs. The strength of the organisation has gone up from 20 to 86 between 2008-2010. This has meant creating space for new recruits forcing the company to shift from its old office premises to a new building in Al Khywer. To cut costs it has reduced entitlements like travelling allowances etc.

Gabra who was the first employee to be recruited at Omran has always been an important figure in the company. Looking ahead he is unsure about the time that it is going to take for the real estate market to pick up. “It depends on Dubai and the rebound in the regional markets. The prices of real estate properties though have stabilised.”

In the initial phase Ministry of Tourism was targeting European tourists, but with Europe being impacted by the sub-prime crisis and the global liquidity situation, the focus has now shifted to attracting Asian and GCC buyers also. Recently an official represetative for Oman tourism office has been appointed for the Indian market as well. Oman as a destination is being promoted in Malaysia, Thailand and other South East Asian countries. Oman Air is backing these efforts by starting flight connectivity to these places.”

Though demand for properties from the GCC and Europe dried up, Oman was able to withstand the impact because of the limited size of the ITC market. Says Gabra, “If we put together all ITC’s being developed in Oman they add up to 20,000 residential units. So whenever the market picks up these properties will sell without much trouble.”

The real estate market has kept people guessing and Gabra is not ready to place his bets on the market in the short term. “It is difficult to hazard a guess as to when the market would recover fully. We were hopeful that 2010 would see a robust recovery, but that has not materialised, to be on the safer side I would say that things should get better by 2011,”
says Gabra.

Despite such a scenario, Oman has not seen much of an impact as almost all projects are going ahead without a hitch. Construction, infrastructure and roadwork’s are proceeding apace. Spending investment has gone up. My personal learning’s from the crisis have been two-fold “One sell with targeted profits during the boom time and be patient during recession,”
he concludes.

 

“A good deal”

We turned the crisis into an opportunity by taking stakes in reasonably
priced companies, says Venugopal Venkatesh, CFO, Oman Oil Company



Says Venugopal Venkatesh, CFO, Oman Oil Company, “Being a project development company we are uniquely placed as we invest our surplus in projects. Fortunately we have not invested in any major projects in the last two years. Conversely, the crisis has given us a lot of opportunities to pick up assets as valuations are cheap.” Oman Oil bought a good stake in a company in Eastern Europe, when the market was down by around 50 per cent. The share price of the company has since recovered and is trading at 75 per cent of its peak value. “We are on the look-out for more opportunities. The share price on the market is not a price for bulk trade but for small trade and whether the kind of stake that we are looking for is available is an important concern. We also need to analyse the targets that we are looking at and what premiums we can earn.”

Good tidings

Venkatesh feels that the worst is over and that the world has recovered from its lows. India and China are driving this recovery but people should avoid over heated markets because if something goes wrong then everything will collapse.

Oman Oil is owned by the Ministry of Finance and therefore it has never faced a cash constraint. But despite this the company keeps a keen eye on its overheads. Says Venkatesh, “We do not have any fat. We have a plan and every manpower addition is carefully thought through.” In the last two years the company’s strength has gone up from 55 to 75. Venkatesh narrates an example, “I need two senior accountants, but I have hired only one and have been managing things with him for the last seven months. Everytime we get arequest for manpower upgrades, we ask – if there is enough pressure on the person. If not, then he may be underutilised. Being an investment company Oman Oil outsources its advisory work.”

Many of the CFOs are driven by a herd mentality. If they see others doing something they feel that there is money on the table that they are foregoing. A big learning from 2008-09 is the fact that people learnt that they needed to have more equity in their company. Earlier if they were using 70-80 per cent leverage, now they learnt that they needed to have at least 40 per cent equity.

“In the last ten years we saw two years of extraordinary growth, and that is a blip or an aberration rather than a rule. People need to get used to this new normal treating the 2006-08 period a euphoria. One cannot expect a huge bonus every year,” says Venkatesh.


 

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