Wednesday, October 6, 2010

The Investment Dar - Rumor of Restructuring Bombshell: Request for 50% Hiarcut

Major Al-Musallam Rides to Glory

Before we go further to be very clear this is an account which neither the Company, the Central Bank or the creditors have confirmed.
Update:  TID has denied this story.

Al Qabas reports that TID has submitted a completely new restructuring plan to the Central Bank of Kuwait which calls for lenders to forgive 50% of the existing debt, i.e. KD500 million.   According to the report, lenders were not consulted or advised prior to TID sending the proposal to the CBK.

What's going on here is anyone's guess.

Mine is that the Company and the lenders are jockeying from (what I think is) the fallout from the Ernst and Young report.  As you'll see below. TID and its lenders appear to have been discussing alternatives /modifications to the original plan. From the Al Qabas account these seem predicated on the fact that the Company cannot repay all the debt.  The unpayable quantum seems around a 50% or so.

I suspect that Ernst and Young came back with a very negative assessment of  TID's ability to repay in full and, thus, case serious doubt on the Company's ability to continue as a going concern.  As you're aware, the Financial Stability Law is designed to give protection to viable companies.  It is not intended as a mechanism to provide legal cover for disguised liquidations.  If I'm right (and as Umm Arqala will tell you that's a rare occurrence), a report like this would have thrown quite a large "wrench" into things, complicating the CBK's acceptance of the already agreed restructuring.  How could the Central Bank recommend to the Court that the Company be allowed under the FSL under such circumstances?

I'm also guessing this occurred prior to the end of the first four month period the CBK had for evaluation of the suitability of the original plan and of TID to enter finally under the FSL.

What leads credence to both assumptions are reports in the article that the lenders have floated some  proposals or modifications of their own and the timing of those negotiations.  One was the conversion of  roughly half the debt to equity with some preservation of the rights of the existing shareholders.  Presumably, the lenders could quite easily make the argument that if a debt conversion were required, the old equity has been lost .  And thus the old equity holders should be wiped out.  Their proposal is reported as more generous, though it's not clear what percentage they would allow the old shareholders in the post conversion equity.  Leaving 10% or 20% might for example be considered highly generous by the lenders and an "outrage" by the existing shareholders.  Negotiations on this proposal supposedly took place between July and September.  The story goes that TID's Board went back on a tentative agreement because some of the existing major shareholders did not want their equity interests diluted.  (Unclear to me how you dilute something worth nothing.  There's also a hint here that the major shareholders are very important people.   And, if you know Al Q's politics, you might suspect they are pointing the finger at regal personages).

As a second alternative, the lenders suggested taking some assets in exchange for the debt.  The article says  that E&Y determined that this proposal was acceptable under international principles.  Dar supposedly made a counter offer that brought things back to zero. 

At this point, the two sides are in a deadlock.  I think that TID's proposal (assuming the report is accurate) is more a negotiating tactic than a viable proposal.  Rather it is an attempt to break the logjam by setting forth a maximum position.  One they probably know both the lenders and the Central Bank would have a hard time accepting.  What this proposal does, though,  is shift the parameters of the debate.  While lenders may reject a 50% discount, it may be harder to avoid some meaningful haircut - particularly, if the choice is bankruptcy.  And in order to get itself out of having to make a decision that may prove wrong or hurt its and the country's reputation, the CBK may be inclined to lean on the parties to compromise.  TID has just set one bound on the compromise.

It could be that they are trying to play for time - hoping for a miracle.  Realistically playing for time  hurts all parties - TID, the lenders, Islamic Banking, and Kuwait.  But maybe that's the goal - to maintain the status quo.

The article describes the choices in front of the Central Bank as:
  1. Issue a conditional acceptance of the proposal subject to conformity with accounting principles and the agreement of the lenders.  (Or in other words neatly pass the buck.  Or is that the dinar? As Al Q elegantly puts it, getting the lenders to agree may be very difficult given the Company's breach/violation of the existing agreement.  That raises AA's first law of underwriting and due diligence "know your customer".)
  2. Reject the proposal.  In which case it's expected that TID will sue the CBK in an attempt to confuse the issue and buy more time.  As Al Qabas elegantly puts it الى ما لا نهاية . (Probably not a first choice. More likely is forcing the Company and its creditors back to the negotiating table.  Or putting them in a situation where they will decide the fate of TID, if that fate is to be bankruptcy).
  3. Push the lenders to bankrupt the Company - which will lead to all sorts of negatives for all parties and harm the financial sector, Islamic Banking and the reputation of Kuwait. (I'm guessing not an alternative high on the CBK's list).
  4. Convert TID to a holding company.  This would remove it from Central Bank supervision so that the lenders can apply the restructuring deal agreed.  Also the CBK's June ratios would not apply.  (This seems to me to be a bit of red herring.  The CBK can grant an exemption to TID as a finance company from the regulationsSupposedly the lenders will reject this because they don't think the administration of the company is really interested in solving the problem.  The lenders have on more than one occasion made it quite clear what they think about management's ethics.  They began by asking the CBK to place a minder in the Company.  Then they pushed for the appointment of a Chief Restructuring Officer).
  5. Force TID back to the negotiating table with the lenders to find a solution and return to the original plan.  (This seems contradictory.  The original plan is probably moot at this point.  I think the lenders are going to have to accept some changes - and these will be against their interests.  From the report of the alternatives they've offered already it seems pretty clear that they've accepted this - even if it was no doubt reluctantly.  The CBK may well force the parties back to the negotiating table but there will be a new deal.  Perhaps the CBK could impose a time limit for reaching an agreement using as the deadline some date prior to the date it's required to give a recommendation to the FSL Court).
  6. Give TID an exemption from the new ratios saying the old plan was devised based on Central Bank advice to the lenders and thus it's not fair to change the rules on them.  As per the article, TID has apparently been saying that the original restructuring plan doesn't conform with the CBK's  "new rules".  The implication being the plan must be modified.   (I don't think that the CBK new rules are the real issue here.  The sticking point is TID's ability to pay and to continue as a going concern.  If the new rules were the only point, then I think the CBK would have given the exemption.  This could be quite easily fudged as an agreed plan to implement the new rules. And so it could be presented not so much as an exemption but a granting of additional time to achieve the goal.  When the debt is paid in full, TID will clearly be in compliance).
  7. Exit TID from the FSL and leave it to its fate.  (The CBK probably doesn't want to be the one who puts down this dog.  Better to have the lenders do so.  The "trick" is to find a way to put the parties in a situation where they either come up with a solution or fail - a way which keeps the CBK's hands pristine.  The time limit for the CBK to give its recommendation to the FSL Court is a neat escape hatch.  If the parties haven't agreed by then, the CBK can tell the Court it cannot make a recommendation.  The Court should then refuse to allow TID final entry into the FSL.  Since this is the last extension allowed, the matter is out of the CBK's hands.  Nature and the courts then take their course.  That should be quite a frightening thought for the lenders .  As they stare into the abyss  of almost a complete loss, all sorts of discounts and compromises may become possible).
Finally to close out this post, a recap from the Creditors' Committee official letter to the Central Bank rejecting TID's new plan "in whole and in detail":
  1. TID's proposal makes a gift of the money of others (the lenders) to the Company and strengthens (supports) the rights of equity at the expense of the lenders who have not received a single fils since the beginning of the crisis but only promises.  (But they were some really nice promises. Perhaps, even said with one's hand on the Qur'an).
  2. TID's proposal is contrary to international and global practices (customary usage) and puts the lenders in the situation of a fait accompli with the proposal being put forward without their agreement or consultation.
  3. TID's management is "hitting" (harming) the interests of the creditors and shareholders.  Therefore the lenders reject the idea of a discount which is unjust.
  4. The Committee considers that TID's proposal ignores the repayment schedule already agreed.  10% in Year 1, 20% Year 2, 20% Year 3, 30% Year 4 and 20% Year 5.  (There seems to be an argument of a breach of faith here.  And, yes, while the lenders may be thinking of a breach of the agreed business contract for the rescheduling, AA also is thinking that in this context the term applies as well to  religion).
  5. TID's proposal prefers (in the sense of giving priority) the shareholders over the lenders contrary to what was agreed previously.
  6. The Company has wasted the shareholders' money hiring financial and legal advisors and wasted the banks time negotiating the past 18 months.  
This has been a bad situation from Day #1.  The passage of time has not made things better.  It's likely to get worse.

The lenders face a real dilemma.  Do they compromise to try and get back as much as they can?  Or at some point do they just bring down the house of cards?  With 18 months of time on their hands, lenders may have built rather hefty provisions against this name.  That may give them a bit more negotiating room.

The Central Bank is in the most uncomfortable of positions.  It's got to be hoping that third parties or events are dispositive and that it doesn't have to make a difficult decision.

    8 comments:

    Laocowboy2 said...

    Admiral Byng time. Call the (multiple) bluffs and put the wreck into bankruptcy. If the shareholders really see values, they should offer SIGNIFICANT fresh capital. If they will not, they should be wiped out.

    FT said...

    The story is true, from very reliable sources. Other interesting news today:

    http://alraimedia.com/Alrai/Article.aspx?id=230431&date=07102010

    http://www.alqabas.com.kw/Article.aspx?id=641624&date=07102010

    The second article is very important it contains a lot of information from Central Bank.

    jo said...

    The best solution is bankruptcy. An excuse like Kuwait’s reputation is at stake if TID goes under is rubbish. I do know why the Creditors committee is still wasting their time.

    The Rageful Cynic said...

    I think the FSL expires at the end of the year and to my knowledge CBK hasn't mentioned a renewal so I wonder how that impacts this fiasco...

    anyone know what the creditor pool looks like here? is it primarily minority creditors or a handful of creditors with large % of the debt? I'm guessing its the former as thats the situation that the FSL is more tailored to...

    I'm not sure how much of a disaster letting TID fail would be, what's the exposure of local banks to its debt?

    It certainly doesn't set a very good precedent for the FSL and CBK's efficacy as a regularing body. All this dilly dallying and wasting time is not good for anyone.

    Abu 'Arqala said...

    LC2 and Jo

    There is a fundamental problem for the bankers with bankruptcy.

    If they put this dog down, they are likely to walk away with fleas and very few of them at all. Bankruptcy and insolvency proceedings even in the best of jurisdictions "evaporate" a lot of value. There isn't a lot of value here. And in a hot dry place like Kuwait (from a legal perspective) there's likely to be a lot of evaporation.

    In that vein, the lenders have apparently determined that they can maximize recovery through a restructuring.

    The major obstacle is that - as the saying goes (a saying which is probably not correct in the other context) - they don't have a "reliable partner" for this.

    The best tactic would be to try and get a restructuring in place. (And the existing plan neatly allows a disguised liquidation which avoids the pitfalls of formal bankruptcy).

    Along with strong controls and a resident monitor in the Company. Not just the typical post facto review by the lenders' special accountants of what's gone on. They need to make sure that value doesn't leak from the firm before it happens. Not find out afterwards.

    When there's a default seize the collateral and leave the existing shareholders "high and dry". The holding company structure for ownership of the assets would facilitate that.

    Abu 'Arqala said...

    A general comment.

    The CBK is dam*ed no matter what they do.

    When lenders and investors encounter a bad loan or bad investment, they clearly know the responsibility is someone else's fault. Even the most hard bitten free marketer (the sort of guy who will tell you that the free market solves all problems and no government regulations are needed) will excoriate the local central bank for its manifest failures.

    So the fact that lenders stupidly made bad loans to TID is you guessed it the CBK's fault.

    If the CBK is seen as pulling the switch on the electric chair, they will come in for criticism. And the evaporation of TID's estate in bankruptcy (a normal occurrence in any jurisdiction) will be laid at the feet of the CBK.

    If they do nothing and the situation drags on, they will be blamed. But perhaps not so much.

    Being in a bad zip code to start, the CBK and authorities have to be worried by all this.

    Which is why they probably will look for a deus ex machina to save them.

    Merely saying well this is our Bernie Madoff or Ken Lay apparently won't suffice.

    Abu 'Arqala said...

    FT

    Thanks for the articles.

    I'll take a look at the Al Q one in detail.

    And maybe post on it.

    Abu 'Arqala said...

    TRC

    I'd guess that the local banks have a significant exposure to TID. Probably not enough to bankrupt any of them.

    Very good point on the FSL window for transactions.

    As to the dilly dallying that's a fundamental problem for the CBK. Does it step in and force a settlement? In which case one or more aggrieved parties may complain?

    Does it let the parties themselves decide the outcome? This is the general approach taken by regulators - particularly when the institution is not a bank with depositors. There the central bank can intervene and seize the bank to sell it or liquidate it.

    TID is not a bank. And I'm not sure the CBK has the powers to intervene TID.

    But a messy situation and no easy answer. Any course taken will have its pitfalls.