Complex Made Simple

A San Francisco hedge fund ambushes UAE’s NMC Health on the London Stock Exchange

NMC health is facing its most crucial survival moments after accusations of financial shenanigans, but patients are those most at risk

A Financial Times article announced that the company planned to issue $200 million in off balance sheet debt to finance its operations Muddy Waters alleges the firm inflated cash balances, overpaid for acquisitions and understated its debt to bankers and capital markets creditors These allegations threatens the fate and health of so many poor, innocent, ill people

By Matein Khalid: Chief Investment Officer and Partner at Asas Capital   

NMC Health PLC, the UAE’s leading private operator of medical clinics and hospitals with a footprint in 17 countries was founded by Abu Dhabi based Indian-Udupi businessman B. R. Shetty and listed on the London Stock Exchange. NMC plunged a shocking 45% in five trading sessions after Carson Block of Muddy Waters Capital, one of the world’s preeminent short selling specialist hedge funds, accused the firm of draconian financial deficiencies and disclosed a short position in its shares. Not even a stock buyback program was sufficient to stabilize NMC shares, whose fall was amplified by a Financial Times article announcing that the company planned to issue $200 million in off balance sheet debt to finance its operations. The shares of London listed Finablr, a cross-border payments firm also listed in London and promoted by B.R. Shetty, plummeted 20% after the Muddy Waters verdict on NMC Health hit the tape.

B.R. Shetty is a prominent person in the UAE business and social scene and was among the billionaire expats Indian Prime Minister Narendra Modi met on his last state visit to the UAE. His enthusiasm to invest billions of dollars in Kashmir to please Modi elicited skepticism from even the Indian ambassador in a video of the meeting that went viral in the Gulf and in India. Mr. Shetty founded the New Medical Center in 1978 to cater to the medical needs of primarily low wage South Asian guest workers who moved to the UAE in the late 1970’s petrodollar gold rush. In 2016, B.R. Shetty listed Finablr on the LSE, which was originally his UAE Exchange Center, after also acquiring the remittance firm Travelex.

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Muddy Waters Capital, based in San Francisco, has acquired legendary status in world finance after it exposed a series of high stakes Chinese, Japanese, British and US corporate accounting frauds and Ponzi schemes. The short seller’s allegations against NMC Health stunned me because of its implications for the healthcare needs of so many working-class expat workers in the GCC. I desperately hope there is no truth to these allegations for the sake of so many poor, innocent, ill people.

This is yet another ugly spotlight on the admittedly – let us be polite – “challenged” corporate governance norms in the Gulf, so brutally exposed by the industrial scale theft, embezzlement and fraud at Abraaj Capital and Drake and Skull – just the tip of a very sordid financial and corporate malfeasance iceberg. I desperately hope Muddy Waters Capital’s assault on NMC is based on a misunderstanding and “unfounded information”, as its victim claimed. Anything that disrupts, the provision of medical care to untold thousands of poor ill expat workers and the staff of NMC in the Gulf. This is obviously a matter of deep humanitarian and even public policy concern, not just a London Stock Exchange ambush.

Muddy Waters alleges that its analysis of NMC Health’s financial statements suggests that the firm inflated cash balances, overpaid for acquisitions and understated its debt to bankers and capital markets creditors. The sheer scale of NMC Health’s grisly 45% fall on the LSE suggests that Carson Block’s allegation were taken very seriously among the City of London’s fund manager constellation. There is an old adage among my tribe of global emerging markets investors that originated in the operating theatres of Victorian London surgeons. When in doubt, cut it out!

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NMC predictably denied the short seller hedge fund’s claims (as Mandy Rice-Davies famously observed in the Profumo trial, well they would, wouldn’t they?) and promised an independent review by an accounting firm. This led to a massive rally in the shares to 1750 pence as the shorts booked profits. I hope NMC Health does not choose one of the Big Four accounting firms, whose partners have totally failed to predict or prevent the tsunami of high profile corporate financial disasters in the Gulf (or elsewhere) in the past decade.

After all, KPMG Arabian Gulf is still under investigation by UAE regulators for its central role in Abraaj’s hideous collapse, given a partner served as arch-criminal Arif Naqvi’s CFO twice and the firm was mandated to “audit” Abraaj’s money transfer processes after Naqvi and his henchmen looted hundreds of million of dollar from the accounts of blue-chip investors like the Bill and Melinda Gates foundation and the World Bank. This is shameful incompetence at best and God knows what at worst.

NMC Health (and Finablr) shares face a dangerous, even existential moments on the London Stock Exchange. Would I recommend bottom fishing on NMC Health shares now that a global short selling hedge fund dominates its free float and the media narrative? Absolutely not. It would also be helpful if UAE commercial banks publish their exposure to NMC Health and Finablr, as well as to B.R. Shetty’s private holding companies. After all, UAE banks lost $1 billion lending to the Abraaj Capital fraud and have multi-billion (how much exactly?) credit exposure to Drake and Skull’s insider looted contracting empire.

The implications of the Muddy Waters allegations against NMC Health, a FTSE-100 listed firm, will be as seismic as they are international. A company listed on the London Stock Exchange simply cannot let its profits, debt, asset values, cash balance or management integrity questioned by anyone, let alone one of the world’s best known Silicon Valley hedge funds. Muddy Waters has also accused NMC of “deliberate overpayment” in its acquisition of Premier Care Home Medical. After all, other very prominent emerging market medical clinic chain acquisitions in the Middle East and South Africa have the stench of “overpayment” hanging over them too.

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A private equity firm/Ponzi scheme once sent an admittedly attractive, high healed, high pressure East European “relationship manageress” to my office to persuade me to buy into its acquisition based “pre-IPO” (Dream on, Al Ponzi Capital!) fund that acquired medical/dental clinics/diagnostic in Dubai, paying inflated values for basically mundane businesses just before the 2014/15 oil price crash. My “relationship manageress” promised me a “guaranteed dividend” of 9%, which I gently pointed out was an oxymoron, as profits cannot be guaranteed and dividend can only come from profits – not at Al Ponzi Capital, which revalued its assets at whim and had a Caribbean money laundromat engine room (echoes of Abraaj and BCCI) with regulated asset management licenses in the GCC.

Later, a friend’s wife confessed to me that she was offered 5% of client assets to sell the same “pre-IPO health care fund” (leprosy in my book) to her ritzy Emirates Hills neighbors and housewife kitty parties. Now this is financial innovation on a world class scale, akin to the invention of the Eurodollar or Florentine double entry book keeping. This story would be totally laughable if it was not 100% true since I know hundreds of dollars will be facilitated to money heaven by Al Ponzi Capital dealmakers before the firm goes bust, as these scamsters always do. Sadly, the life savings of a few reckless, greedy friends who believed this fraudulent narrative will also go up in smoke. It is never prudent to try to make a killing in something surreal that can get you killed even if the product is offered by a charming Eastern European “relationship manageress”, the proverbial bunny in a Bentley, let alone the poor Third World dude who offers to double your money via black magic, a recurrent scam reported in the UAE financial press.

Muddy Waters refers to “fraudulent asset values and the theft of corporate assets” in its published NMC investigative report. This sent a chill up my spine as I desperately, desperately hope this is untrue. Carson Block alleges NMC Health deliberately understate debt by a colossal $320 million via not reporting Aspen Health operating leases as financial leases. After all, Muddy Waters’s report concluded “we do not know how deep the rot at NMC goes but we do not believe its insiders or financials can be trusted”.

NMC Health’s reported debt alone is $1.9 billion. A Sophoclean tragedy has just unfolded on the London Stock Exchange and I cannot predict its endgame. So I have no position in NMC shares – past, present or future. Not now, not ever. So there!