Saturday, July 24, 2010

The Investment Dar - Central Bank to Impose Conditions to Enter FSL

Muhammad Sha'baan at AlQabas quotes informed sources that the delay in the Central Bank's approval of TID's entry under the protection of the FSL reflects some fundamental concerns and that as a result the CBK is likely to impose conditions and constraints as the price for TID's entry - which they will secure prior to any approval.

The steps will protect the interests of creditors as well as support the rehabilitation of TID.  And this "workshop" (or perhaps worklist) of effective and swift measures will immediately follow entry under the FSL. 

The article notes that TID's "file" is complicated (and presumably this is the reason for the CBK's caution):
  1. A significant amount of creditors want nothing to do with the restructuring and are determined to continue legal action.  The concern is that a foreign judgments will be immune from the FSL and thus will disturb the Company and upset the legal protection given.   AA:  There is no real way that the CBK or Kuwaiti authorities can get 100% a priori assurance this will not happen.  The hope is that a foreign jurisdiction will recognize the FSL as being analogous to USA Chapter 11 and stay legal actions in their countries.  This is something the Kuwaiti authorities have to make a leap of faith on once they've decided the larger issue - whether it is better to liquidate or rehabilitate TID.  The USA (State of New York to be precise) has recognized the Administration of TIBC in Bahrain as a fair and reasonable process and has stayed legal actions. One would hope Kuwait could get similar treatment.
  2. The Company has yet to issue any financial reports from 2009 or 2010. The article describes several legal/regulatory issues -- the holding of annual shareholders' meetings, restoration of trading on the KSE --  as well as the determination of the Company's financial situation.  AA:  The regulatory issues are immaterial to the issue of ability to repay creditors.  The major issue is whether it makes sense to liquidate the Company or run it as a going concern (which will have a higher expense level).  Which course provides the highest net payout?   Which course does the least damage to Kuwait? The longer the file is left undecided the more value that will be lost. 
  3. Complete and detailed information and explanation from the Company is lacking.  The Creditors Co-Ordinating Committee failed in obtaining information on some issues - where the answers are still "floating" according to creditors.  AA:  The CBK, CCC and creditors need to determine if the Company is being forthright.  If it is not, then it's time to remove the Board and management and go forward with the restructuring.  Or put the Company in Administration.  If the situation is unclear because of external factors and the Company cannot respond with precision, then the creditors will have to learn to live with ambiguity.  One would have hoped that by now the creditors would have made a decision on this score or decided to accept less than forthright answers.
  4. Some points remain open.  It appears the chief one is shareholder support.  AA:  It seems a mite optimistic to expect shareholders to put more money into TID at this point (as it does for Global) until shareholders seem the direction of the restructuring.  Presumably, any money put in will wind up immediately in the creditors' pockets.  A rather hard sell to shareholders who have probably lost most if not all of their past equity.  Invest money not to build for the future but to pay off loans. Even putting money in to build the business requires a bit of optimism - perhaps irrational - at this stage.
  5. Another major unresolved issue is expense reduction/control including grants, bonuses etc for management.  AA:  Unless this is the typical bankers' myopic focus on pennies in a restructuring, this is a rather disturbing bit of news.  If repayment of TID's mountain of debt depends on reducing relative hillocks of expenses, it may be time to consider Administration.  Unless of course the intent of the plan is a disguised liquidation.  Or there is no alternative to current management and controls are required to avoid dissipation of assets.   
  6. Ernst and Young (who the CBK hired to evaluate TID's financial condition) ran a series of stress tests (to use a term common in the press).  Apparently under some of these TID was unable to repay principal and/or service debt.  That led E&Y to comment on the Company's debt burden and  reliance on two sources of revenue.  The CBK is said to be looking for 100% assurance that TID will be able to service its debt according to the plan.  AA:  Perhaps this is just a flight of rhetoric.  But if the CBK is looking for 100% assurance, it needs "tae think again".   The only thing the CBK can be sure of with that level of precision is that banks under its supervision are likely to make manifestly stupid loans again and get themselves into a serious deteriorated situation.  It cannot be sure that TID will sail through.  What it needs is a reasonable assurance - tempered by a keen understanding of what a bankruptcy this size will mean for Kuwait.   The US Court didn't have 100% assurance when it let General Motors through the gates of reorganisation.  
There are a couple of other points of note in the article:
  1. Legal experts say that the CBK is not bound by the Special FSL Court's request.  That as the Central Bank it has certain powers beyond and above the FSL.  
  2. The Company is described as being in the position of "one standing on shifting sand" given the decline in asset prices and the problem of coming up with asset values given different and moving prices.
  3. Some local banks (Kuwaiti) have provisioned between 50% to 100%.  In any case by the end of the year according to CBK requirements, provisions will have to be at 100% as for other troubled investment companies.  AA:  Presumably at that point, having taken the pain, banks don't need to accommodate a plan because they have nothing to lose.  The bankers' rule that a recovery on a fully provisioned loan is found (new) money as opposed to recoveries of old lost money.
Additional conditions and safeguards - while no doubt justified - are unlikely to provide 100% assurance of TID's success.  At some point the CBK will have to make a decision - formed largely by the intersection of approximations of fact and the realities of policy - what is best for Kuwait.   And then prepare itself for criticism that its decision was flawed.  With no doubt a major part of that criticism coming from the "wise and learned" members of the Majlis al Umma.

7 comments:

Laocowboy2 said...

While it might be tempting to criticize the CBK for how long the FSL decision is taking, for once I believe it is more important that they get it right rather than get it fast. To follow TID in the process there is no shortage of other stretcher cases to be dealt with (A'Ayan etc) and some (as they say here in India) that will arrive at the retructuring hospital and would be anywhere else declared "brought dead".

At some point in the future it would be interesting to see an analysis of thise restructurings that have worked (e.g. KFIC hopefully) and those that haven't - and to draw conclusions.

Abu 'Arqala said...

Laocowboy2

Yours isn't an unreasonable comment. And certainly there is no need to rush to make a decision.

I think the decision rests ultimately on two points. (1) An estimation of the prospect (amount and timing) of TID's repayment. (2) The fall out on Kuwait of a bankruptcy. There may be a lesser fallout if TID fails in the future. And at that point the quantum of unpaid debt may be lower.

On the first, the CBK has had its "man" in TID since the beginning of the restructuring (2008). It has the benefit of the work of the lenders' expensive expert. It has the E&Y Report.

By now it should have formed an estimate of the reasonable probability of TID repaying its mountain of debt. If it has not, then perhaps it's time for someone to gently wake up the CBK.

As to policy implications of a bankrutpcy, the CBK has since 2008 to ponder these. These are the factors that might cause the CBK to take a punt and put TID under the FSL even if it had some doubts.

As to conditions, the CBK has had the proposed plan for quite some time. It should be well familiar with it. And its internal experts should have had a look much earlier since as was clear recourse to the FSL was a real possibility. If the plan is defective, it should have an idea where it is defective.

Abu 'Arqala said...

Part 2
delaying a decision by the CBK is fear of making a decision and being wrong. And then being criticized.

That's a common human trait. My experience suggests though that in this part of the world this failing is more acute.

If the CBK is looking for certainty on TID, it is fooling itself.

The most it can get is a reasonable probability. And even then one that could be upset by a multitude of factors. For one, there is a non trivial possibility that military action in Iran will occur. Another is that there will be a downturn in the world economy caused by (take your pick) (a) reckless stimulus spending or (b) premature austerity. ووو as they say.

An analysis of the restructurings would be fantastic.

The first problem is getting someone with the right skills and access to enough information. The second is to interpret it - and avoid the natural tendency to use the time honored analytical tool of 20:20 hindsight. To understand the constraints on the set of alternatives actually available at the time for constructing the terms of the restructuring. etc.

Anonymous said...

These folks need to just get some liquidity through the system and unwind their money market fund - I cant believe redemptions are still suspended, what a joke.

Abu 'Arqala said...

Anonymous

A rather unfunny joke for clients.

The Rageful Cynic said...

here, here to AA's analysis of the situation... there's no logical reason for all the dilly-dallying ...

Chapter 11 said...

"Initially TID had hired Gulf Bank - presumably for something other than its imagined expertise in the field of debt rescheduling ..."

LOL, love it.