The turmoil at the jewellery giant Damas International has rippled across the regional industry, leading banks to tighten standards when lending to manufacturers. Tushar Patni, the owner of Ajanta Jewellers in Abu Dhabi and a member of the emirate's Gold and Jewellery Group, said it had become increasingly difficult to borrow the precious metal after the confirmation of millions of dollars in unauthorised transactions by executives at Damas, the largest gold and jewellery retailer in the Middle East.
"[Banks] are looking for more guarantees and more collateral," Mr Patni said, adding that the dampened economic climate had also contributed to the stricter approach. Earlier this week, the Dubai Financial Services Authority (DFSA) took unprecedented action against Damas after the three Abdullah brothers, who own the majority of the company, used company money for personal investments, including a gold loan.
The DFSA fined the publicly listed retailer and the brothers for violating market rules. The DFSA also banned the brothers from any executive position at a Dubai International Financial Centre (DIFC) company for between five and 10 years, and dissolved the company's board of directors. Tawfique, Tawhid and Tamjid Abdullah are also required to pay back Dh365 million (US$99.3m) to the company in cash and almost two tonnes of gold in instalments by May 2012.
Cameron Alexander, a senior analyst at the London-based precious metal consultancy GFMS, said the difficulties faced by Damas have made financial institutions more wary of lending cash and gold without more thorough credit checks and increased collateral. "The greatest impact I can see is that banks are far more wary in lending both credit and gold without much tighter credit checks and increased collateral on loans," said Mr Alexander.
"Those importing gold also have to set up credit lines, which the banks are now taking a much closer look at due to credit exposure - The Damas situation probably added to this." Although Damas's underlying retail business remains profitable, non-performing loans have pushed Damas into losses and it is negotiating a debt standstill with its banks to stay in business. The company reported a Dh714.8m loss in its financial statements to September 30 last year.
In the statements, the company disclosed that its cash reserves had been depleted and needed additional funding to "ensure that the company can continue its operations and meet its obligations as they fall due". One of the problems at the company was the rising spot price for gold, which "resulted in a decline in sales and an increase in margin calls from financial institutions from whom the group obtains gold loans", it said at the time.
In fact, the inability to meet several margin calls led at least two banks - Scotiabank and HSBC - to convert more than $400m worth of gold loans to a fixed price, meaning Damas has to pay them back in cash at prices set in November rather than in tonnes of gold, say sources familiar with the company. The spot price of gold hit $1,172.30 an ounce on November 30 and has since declined to $1,096.52 as of late yesterday, Bloomberg reported. A Damas spokesman declined to comment on the gold loans yesterday.
The usual gold loan scenario requires the borrower to pay back the bank with an equivalent amount of gold, which cuts out the risk of fluctuations in price for the jewellery maker, said Alison Burns, the regional head of precious metals at Standard Bank. But the agreements can include clauses that convert the loans into a fixed rate in the event of a default, said Mr Patni. If gold drops in price from the date of the fixed price, then the company's precious metal assets are worth less than the debt it owes.
These fixed gold loans are another burden for Damas as it tries to negotiate with 20 lenders for a standstill of its obligations while it restructures. An agreement has been sent out to the banks for their approval and could be finalised within three weeks, sources said. Trading of Damas shares was halted on Sunday ahead of the DFSA announcement, but resumed yesterday without any trades by the end of the day, according to data from NASDAQ Dubai.
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