An Abu Dhabi business empire disintegrates

Summary: Amidst allegations of fraud and other serious financial irregularities two huge Emirati companies owned by businessman BR Shetty have collapsed.

In a measure of the huge economic impact that Covid-19 is having the ratings agency Moody’s noted in its May 2020 Default Report a significant year on year rise in debt default. Moody’s forecasts that by the end of the year the global default rate will hit 9.2%, more than double the long-term average. The report notes that in the leveraged loan market 18 corporate issuers defaulted in May, of which 16 were in the US, one in Chile and the other was Abu Dhabi-based NMC Health plc.

NMC is one of the largest private healthcare providers in the United Arab Emirates. Not long ago considered a high flyer, the company, majority owned by the Indian-born and UAE-based entrepreneur BR Shetty, collapsed into administration 9 April.  That was after NMC admitted it had underestimated its debt by US$1.6 billion, taking the total indebtedness to US$6.6 billion.

BR Shetty speaking in October 2019

Allegations of fraudulent practice had begun to swirl around the company in December when Muddy Waters Research, a due diligence investors firm based in California released its analysis that the NMC inflated cash balances, overpaid for assets and understated debt.

The analysis was brutally direct:

  • “We have serious doubts about the company’s financial statements, including its asset values, cash balance, reported profits, and reported debt levels;”
  • “inflated asset purchase prices and capital expenditures are hallmarks of significant fraud;”
  • “We believe that NMC has manipulated its balance sheet to understate debt;”
  • “the company’s relationship with its auditor, Ernst & Young (EY) raises flags.”

Noting that executive compensation had soared in just two years to US$18.7 million a year and that insiders were cashing in significant amounts of stock, the firm concluded with this damning sentence: “We are unsure how deep the rot at NMC goes, but we do not believe that its insiders or financials can be trusted.”

The rot was very deep indeed.  An independent firm headed by the former director of the FBI Louis Freeh was brought in by NMC early in the new year to investigate the allegations. The sacking of BR Shetty and other senior executives followed quickly. In a desperate bid to save the company from administration Faisal Belhous, the Emirati  founder and managing director of Ithmar Capital, stepped in , taking a 9% stake and assuming the role of executive chair of the board. In addition to Ithmar Capital, he is heavily invested in the UAE health sector, so his appointment 26 March made some sense.

It was to be a short-lived tenure.  On 4 April Abu Dhabi Commercial Bank (ADCB), owed nearly US$1 billion, petitioned the High Court in London for administrators to be appointed to “safeguard the future” of NMC. On 8 April the company went into administration and on 14 April Belhous, along with the rest of the board, was out.  Among the board casualties was  Salma Ali Saif Bin Hareb,  who had served as the CEO of Jebel Ali Free Zone and was the first woman to be appointed head of a free zone in the MENA region. None of the four new board members, all male, are Emirati.

But BR Shetty’s travails with collapsing companies were far from over. He was also the majority owner of Finablr, a financial services holding company that owns Travelex and several other money exchange and remittances firms, including UAE Exchange.  The market was already spooked by the revelation that Shetty’s sister company NMC had massively underreported its debt. In March Finablr acknowledged a liquidity crisis causing a further rout of share values.  The company shares were trading at 215p in December 2019. By 12 March they were worth less than 10p.

The company was already reeling from a huge financial loss inflicted when Travelex was hit by a cyberattack carried out by a ransomware gang on New Year’s eve.  At the time the company said it would not have a significant financial impact.  By the beginning of March it acknowledged a loss of US$ 25 million.

By mid-March the company, damaged further by the  collapse of international travel as a result of Covid-19, was seeking insolvency  to protect whatever value was left. After discussions with its lending banks and in view of “(its) present liquidity situation” the Finablr board released a statement saying it had “engaged an accounting firm to undertake rapid contingency planning for a potential insolvency appointment with a view to maximizing value in the group.”

Meanwhile, the Emirati authorities, with evidence of NMC malfeasance staring them in the face, put two and two together and took a closer look at Finablr’s financial practices starting with UAE Exchange.  In mid-March the Emirati Central Bank put UAE Exchange, which operates 100 outlets in the country, under supervision.  The bank in a statement it gave to Finablr announced “its inspection team has commenced an examination of UAE Exchange Centre LLC in order to verify its compliance with applicable laws and regulations.”

Finablr sacked its CEO Promoth Manghat in April. He is the brother of ex-NMC CEO Prasanth Manghat, who was  himself fired in February as the scandal there over financial irregularities was blowing into a category 5 hurricane.

The disintegration of BR Shetty’s business empire is of huge concern to Abu Dhabi in that two vital sectors of the economy – health and finance – have been significantly damaged. This is happening at a time when the UAE still does not have the coronavirus beaten and is taking a heavy financial battering thanks to the price to which oil has sunk.

When Faisal Belhous, the shortlived executive NMC chair, was attempting to fend off administration he argued that such an outcome “would cause instability to the operating businesses of the NMC Group, creating additional pressure on the group’s liquidity and reducing value for all creditors.” He went on to say “This would be damaging not only to the interests of creditors but, in the midst of the Covid-19 crisis, would potentially put lives at risk.” Creditors, it seemed, came first.

While sifting through the financial wreckage that BR Shetty has left behind, the Emirati authorities may want to flip that priority around and ensure that NMC hospitals continue to function smoothly and that employees of NMC are receiving their wages.  They are, after all, on the frontline of the battle against the coronavirus.

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