The Investment Dar - Dissension in Creditor Group?

AlQabas has a fairly negative report on this Tuesday's meeting of the Creditors' Co-Ordinating Committee with lenders.   

Here's a quick recap for those who don't read Arabic, plus a few opinions.

1. The restructuring plan is a five year term with increasing principal repayments:  6% in the first year, 10% in the second, 12% in the third year.  There also seems to be some accommodation to be made to small creditors, though the nature of that arrangement is not specified.  AA:  This leaves 72% of the loan to be repaid in the last two years.  Fairly typical in a difficult situation.  Banks structure a deal to restore the loan to performing status - those all important interest payments with a bit of principal reduction - in the near term.   After a couple of years of the borrower making those (easy) contractual repayments, a restructured loan can be considered performing and no longer need be reported in IFRS-based financials as restructured.  And, perhaps more important, as long as contractual interest and principal payments  aren't past due (usually 90 days), the loan is performing from a regulatory standpoint. No need for provisions or non accrual.  So with a  repayment schedule like this, the hope is that things will work out  in the future (a miracle).  Or failing that  those later maturities can be extended later.  Another benefit is that loan officers can present a five year restructuring to  credit committees.  Both can then pretend the loan tenor is only five years, when it may really need to be seven or more.   Today everyone can be happy.   The future day of reckoning  hopefully will be the problem of some other chap at one's bank.   In other words push the difficult bits of the problem to the future.  Extend and pretend.  Or if you're an "Islamic" banker, delay and pray.   I'm guessing the "deal" for small creditors is designed to secure more positive votes for the  restructuring proposal rather than a sudden burst of conscience. 
   
2. The plan is to get the approval of 66% of the creditors to declare effectiveness.  Legal advisors to some creditors are quoted as saying that the Committee Spokesman is either ignorant of or ignoring the law.  100% of creditors need to sign up.  If 100%  don't sign, then those who have not agreed remain free to pursue legal action.  AA:  Usually by now, especially in a difficult situation, banks have decided that their best course of action is to "go along" even if they don't believe.  At this point usually there are some small creditors looking to get bought out by refusing to vote yes.  The absence of a Chapter 11-like legally enforceable cramdown on dissenting creditors makes this a viable strategy.   100% is required for the deal to proceed.  The small creditor hopes that  if he is difficult enough, the bigger lenders with much more at stake will want to avoid recognizing a big loss, and so  will buy him out.  But  I think there is more going on.  What I think we're seeing here - assuming this article is correct - is that there is a significant group of creditors (at least 34%?) who don't want this deal.  That view is bolstered by the article mentioning two lenders - one with claims of KD20 million (US$ 70 million) and another with KD30 million (US$105 million) who are in the "no" camp.  An indication that major lenders not just small ones are opposed.  You'll remember (if you read this blog) my earlier comment about Wakala transactions perhaps being "outside" a rescheduling as they are "trust" transactions not deposits.  Perhaps, these lenders hold such obligations and feel confident of a favorable legal outcome.
3. The article also states that a large number of attendees at the creditors meeting (the word "aghlabiya" is used) complained about a long-winded boring presentation and useless details in the presentation of the plan.  So much so that they are reportedly going to ask for  detailed information in writing so they can study.  AA:  Usually these meetings turn out to be mini circuses (minus the bread) with lots of lenders speaking, many sadly who have little idea about banking or law.  And many with less than helpful ideas.  It is no fun being the chairman of such a meeting.  Again there appears to be more going on.  What I'm taking away from this comment is that  there remain substantial differences among the lenders about the way forward.  And if lenders lack confidence that the Co-ordinating Committee is up to the job, that is not a recipe for progress. 
   

Taking the article at face value, I would expect the deadline is going to have to be moved into next year.  Lenders apparently still need to be persuaded that this is the best deal and that failure to accept it means they will lose more than if they sign up.  If by now they are not convinced, a lot more work will need to be done to persuade them.  With upcoming holidays, not much chance of making the 23 December deadline.  

TID has yet to release its 2008 fiscal report.  Each day longer it is still in the water, the harder it will be for it to restart its engines and earn enough to pay banks back.  And even if it does,  it may be left fundamentally wounded by this delay.  While banks have a responsibility to their stakeholders to get their money back, they also have a responsibility to the borrower not to needlessly damage it.

We may be getting near the time to consider rescheduling under the Financial Stability Law.