The Investment Dar - Creditors Fail to Approve Standstill Agreement - Time for Plan B

Subsequent to this post, TID announced majority approval of its Standstill Agreement.  See updated news here.

The Investment Dar has announced that it will be calling meetings with creditors and investors in Kuwait and Dubai on 24 and 25 November respectively to present its restructuring proposal.  Creditors will then be given some time to accept or reject the plan.

As you'll recall, 12 November was the deadline for creditors to vote on the proposed Standstill Agreement.  Since the press release is silent on that topic, it's pretty clear it failed.  Something predicted here at Suq Al Mal.

The Company and its advisor are now going to Plan B.  Under this scenario they will try to make the Standstill moot by persuading creditors to accept the restructuring plan. 

The upcoming meetings will be critical for TID's restructuring. TID is in a difficult situation and success is likely to be difficult to achieve. The one thing in its favor is the size of its debt  - KD 1 billion (US$3.5 billion).   There is a term describing the behavior of conventional lenders faced with huge loan losses: "Extend and Pretend".  Given the "Islamic" nature of TID and a good number of its creditors, a more apt phrase may be "Delay (the loss) and Pray".

The difficulty is that TID and its advisors are not going into the meetings with any perceptible positive momentum.  The Standstill failed to garner enough support.  There is no success to build on.

In fact TID has achieved a standstill of another sort - no progress - an definitely unwelcome standstill.

Also they are burdened with some fairly negative baggage:

1. Creditor skepticism
2. An apparent lack of a leadership among the creditors to sell the restructuring
   

The earlier requests for a CRO and a Central Bank of Kuwait appointed  monitor point to a high  degree of skepticism among creditors.  The no vote on the Standstill Agreement  shows  no change in this attitude. 

In an earlier post I commented that the change of name of the creditors' committee from a "Steering Committee" to a "Co-Ordinating Committee" seemed to reflect a lack of willingness of key creditors to take a leadership role in advancing the restructuring.  Bolstering this negative view is the lack of any public statement attributed to the Committee in the press.   In fact, the names of the banks  and other creditors comprising the Committee have not been publicly disclosed.   They are not only invisible but it seems silent as well.  A situation much different from that in the Global Investment House restructuring. And one that represents a real negative given TID's situation.  TID needs a champion among the creditors.  It appears to have none.

As I said before, getting creditors to agree to a debt restructuring is like herding cats - even with leadership and a firm hand from key creditor banks.   It takes a lot of work and a lot of knocking together of heads.

It's not just the matter of bridging gaps among the creditors and forcing compromises to arrive at the term sheet.  It's also a matter of controlling the process so it doesn't get derailed or needlessly prolonged by creditors who don't know what they are doing or are trying to use their recalcitrance to engineer their exit.

The first group are composed of creditors  that complicate the process with pointless, trivial, silly or impossible conditions. And sometimes all four at once.  They waste time in closing the restructuring as their points have to be debated and resolved.  With strong leadership these distractions can be kept  to a manageable level.  There is also an equal chance that a creditor will come up with a "brilliant" idea that actually does harm.   In one debt restructuring a bit further East, a smart creditor insisted that it be allowed to re-engineer the cash flow capture mechanism (a device to ensure that excess cash flow is used to prepay the loan) to make sure it was proper.  The result of its brilliant financial engineering was that  the borrower had to pay 50% less under the new and improved cash flow sweep than the original mechanism.  You can guess how reluctant the borrower was to agree to this!   Sadly none of the creditors seemed to notice!!

Also there are always one or two small creditors that refuse to go along,  planning that bigger creditors desperate to avoid a loss of their much larger stakes will buy them out so the restructuring can close.

In this environment, the smart strategy is not co-ordination.  It is leadership and, if required, coercion. 

After the upcoming meetings, creditors will be given time for a response.   I suspect the next critical milestone -that approval date - is likely to be in January.  I'd guess at least late January to accommodate the upcoming holidays.

If Plan B doesn't work, the borrower may be forced to puts its fate under Decree Law 2 of 2009 a/k/a the Financial Stability Law ("FSL").   That suggests that a post on the FSL - issued by the Amir during the Majlis AlUmma's well deserved "vacation" - might be in order.