Sunday, July 11, 2010

The Investment Dar - Restructuring Plan Does Not Incorporate New Central Bank Regulations - So What?


You've probably seen the articles (Gulf Daily News, AlWatan, and AlQabas) saying that TID, its creditors, Morgan Stanley and Credit Suisse met 6 July to discuss the draft restructuring plan and to discuss the fact that the plan does not incorporate the new Central Bank guidelines for investment companies.

Much is made of the fact that the Central Bank guidelines must be completely implemented by June 2012.

As you'll recall (and if you do not, look here and here), these impose certain rather strictly drafted ratios:
  1. Leverage of 2:1 (Total Liabilities to Equity)
  2. 10% Liquid Assets Ratio
  3. A cap on foreign borrowing - 50% of total equity.
Frankly, this seems much ado about nothing.

Barring a miraculous recovery of asset values, there are two ways that TID can get in compliance with the ratios.
  1. Its shareholders agree to fund a massive increase in capital.
  2. Its creditors, particularly the foreign ones, forgive debt.  Other options would be defeasance.  Or equity conversions.
Hard to imagine rational investors throwing good money after bad (subscribing for new equity) for the sake of complying with some regulation.

Impossible to imagine creditors forgiving debt - especially the "Islamic" ones even in light of the clear guidance in 2:280.  

Defeasance would require sufficient assets in the "trust" to provide a comfort margin.  Given the quality of TID's "core assets", one would expect a very large margin.   That would leave other creditors high and dry.  As well, the hook into the Company by not defeasing provides at least additional theoretical source of repayment. 

Converting secured debt into equity doesn't seem like a particularly appealing prospect unless the conversion could be into an instrument that was called "equity" but was actually the equivalent of secured debt.

There's no real motive for a shareholder or creditor to take any of these actions.  Both realize that the Central Bank's options are limited.  It's not going to place TID into Administration (at least not beyond what the restructuring is already doing) for the sake of  enforcing a regulation.

More likely than not the Central Bank of Kuwait will have to give TID a special exemption from the new rules - an extension beyond the 30 June 2012 "deadline".   Just as it is likely to have to give Global such a pass.

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