The crisis of leverage

Just as the skill of a cricket player is judged by performance in a test match that of the businessman is challenged in recessionary times. Pakistani entrepreneurs generally perform well in dealing with tough times, but after every boom, a few business houses often come down tumbling.
Locally, the first hit group was Dewan Mushtaq (DMG). Their troubles began some three years back, just at the onset of the crisis. More recently, Azgard Nine Limited (ANL) seems to be walking down the same lane.
Lucrative profits in core businesses of both groups encouraged them to diversify rather aggressively into areas that promised larger returns. DMGs move into the cement and automotive sectors and ANLs foray in fertilizer manufacturing proved detrimental. Both houses lacked depth of knowledge in the specialized manufacturing industries they targeted.
Long term relationships with bankers enabled both houses to draw large loans for the ambitious and capital intensive projects. When the business cycle turned and interest rates shot up, it was excessive leveraging that put both houses in a financial crunch.
A return to basics approach was employed by DMG and ANL to recoup from the pinch. Dewan Salman - the polyester manufacturer was used to finance the losses from other Dewan units. Likewise, ANL purchased a textile concern in Italy in 2008 - an investment that has cash-strapped the firm further, due to economic slowdown in Europe.
Distressed corporations, as big as DMG and ANL, pose a threat to the stability of the financial services sectors as well. Currently, Dewan has outstanding liabilities in excess of Rs55 billion while Azgard Nine is due to return around Rs37 billion. Reportedly, some 51 financial services institutions are creditors to ANL, and are watching its troubles unravel very closely.
Dewan group has shown willingness to divest two sugar mills, two cement plants and 30 percent of Dewan Salman Fibre Limiteds stake in Dewan Petroleum. Similarly, Azgard Nine Limited has announced its intent to sell off its stake in Agritech, the fertilizer maker. However, due to the recent IPO of Agritech, the sale is pending regulatory and shareholder approval.
There is one key difference between the two, though.
Dewan has already defaulted and banks have formed a consortium headed by President HBL Zakir Mehmood to come to a settlement with the borrower.
ANL has managed to restructure its loans with its bankers and has assured them that it has buyers lined up. Its management is confident that it will get a good price through sale of assets to lessen the financial exposure.
Those in the fertilizer trade have reportedly conducted due diligence. Both Pak-Arab/Fatima Group and Engro Dawood-Hercules have reportedly walked away, leaving Fauji and a prominent Sindhi cash-rich businessman Devmal in the run.
Devmal owns a sugar factory and is a major fertilizer distributor in the southern province. Fauji may need prior permission from Competition Commission of Pakistan for the acquisition as it may cross the legal threshold under monopoly control laws. Devmal has no such problems.
The Sheikh family is the major share holder in ANL. But the shoe is pinching Jehangir Siddiqui as he battles to maintain his excellent track record within the financial sector.
Meanwhile, bankers are having worried nights as another prominent business house led by Tariq Saeed Saigol is having its own storm in a tea cup.