Ghabbour Auto (GB) announced earlier this month that it closed with US investment bank JP Morgan on a $20 million structured trade finance credit facility, a deal that will give Egypt's largest car company an important cash fallback to fund a number of its operations. It's been a rough couple of quarters with the collapse of the global economy last year as consumers' appetites for new cars seemed to vanish. As evidence, look to the used car market, which is widely reported to be booming as consumers look for cheaper transportation options. But now, evidence abounds that the Egyptian economy has hit bottom. This includes the auto industry, which is espousing none of the gloom it did in the first few months of this year. Auto industry leader GB Auto, which suffered acute losses in the economic downturn, is knee-deep in its efforts to turn its performance around. And to do so, it has recently sought financing from JP Morgan. It's a move practically unprecedented among Egyptian companies. "We are delighted to be a client of JP Morgan's Treasury Services business and to be among the first Egyptian companies to close such a facility with them, said Raouf Ghabbour, CEO of the car company, in a statement. The timing of this deal may be indicative of the footing GB Auto believes it currently has. "This is a multi-purpose foreign currency facility that gives the company flexibility in financing its different imports, and for any other corporate purpose, wrote Mena Sadek, auto analyst for Egyptian investment bank Beltone Financial. "GB Auto will use the facility for trade finance purposes as it continues with its plans to grow the lucrative Egyptian market while pursuing promising opportunities throughout the MENA region, said a statement from GB Auto, signaling the company's belief in strong economic winds ahead. Oftentimes, when a business stages a comeback, it suffers short-term cash shortages because income has yet to rebound while it is forced to sink added funds into its operations to affect the comeback. This structured finance facility could provide a way for GB Auto to bridge that temporary cash gap, meaning that the company is looking to turn the page on the past year and reinvigorate its operations. This facility is drawing the attention of some in the business community, not only for what it might say about GB's operations, but because facilities like this one are rare between Egyptian corporations and western banks. Sadek called GB Auto "the first Egyptian company to be granted such a facility. Providing further evidence that GB may be in the opening stages of a broader effort to turn around its operations, Sadek wrote that she believes this $20 million facility represents only the beginning of the GB Auto-JP Morgan relationship. "The significance of the granting of this facility to GB Auto is not really the amount granted, since we believe this is just the beginning of a relationship with JP Morgan, she wrote. This is a marked change for GB, which, at the end of the first quarter, posted significant declines in profits that had analysts concerned. The company had just reported a 92 percent drop in net profit from LE 84.6 million to LE 7.2 million. Some brokerage firms lowered GB's rating from "buy to "hold. Ghabbour, the CEO, said that 2009 would be a "challenging year. But then the company's fortunes began to shift. Word spread that the Egyptian economy may have bottomed out. GB's stock began to creep off its March lows. Perhaps most importantly, the taxi replacement program finally began to pay off for the company. Drivers are obliged to replace any car over 28 years old, while a second phase of the plan is expected to apply to any taxis over 20 years old. That second phase, Ghabbour said, would increase the number of cars needing to be replaced by 70,000. These developments led Bassem El-Shawy, GB's director of investor relations, to say that despite a poor first quarter performance, sales are expected to be on par with 2008 numbers, signaling a strong rebound. As part of its newfound confidence, GB announced at the beginning of last month that it would issue global depositary receipts (GDRs) to increase its accessibility to global investors. The announcement of the $20 million credit facility speaks not only to GB's outlook and strategy, but the fact that JP Morgan would extend such a loan suggests it has seen optimistic financial data. "We, therefore, believe that [the issuance of the facility] is positive news, not only for GB Auto but for all Egyptian companies that enjoy solid financial positions and are seeking expansion to capitalize on the strength of the local market, wrote Sadek. As Sadek suggests, if more Egyptian companies had interest in and access to the financial services industry in the west, they could use an array of products to grow their businesses. The GB Auto-JP Morgan partnership may help encourage that sort of change. This $20 million facility has excited analysts. This is a transitional time for GB Auto, and some who follow the auto industry see the auto company emerging from the recession in a strong position. "We still believe that the second half of the year will be much stronger than the first half, especially with the ongoing success of the taxi replacement program, wrote Sadek. "Although margins might be a little bit weaker than our original expectations, she continued, "and although we might have to revise our numbers downward, especially for the bottom line, we maintain our positive outlook on the company and our 'buy' recommendation.
