Kuwaiti Banks Exposure to Saad and AlGosaibi - Update

AlQabas has an article 8 December noting that despite all the other issues in the market - Dubai, the world economic crisis - this one remains a major issue for Kuwaiti banks.

Here are the main points from the article along with my commentary in blue italics.

1.  Total exposure is not less than US$1.5 billion.  AA: Maan AlSanea is Kuwaiti by birth, former KAF pilot.  He would have the sort of connections that would overcome the general "silo focus" of local banks on their home markets.
2. Roughly 50% has been reserved to date according to sources at the Central Bank of Kuwait.  AA:  You'll recall this is the general level of provisions that the Central Bank of the UAE mandated for the non bank exposure to the two Groups - saying that it represented a consensus view of both local and international regulators.
   
3. Kuwaiti banks with exposure - save one it appears -  have formed a committee which reportedly includes Gulf Bank, Kuwait Finance House, Commercial Bank, Burgan Bank to conduct negotiations with Saad and AlGosaibi.  Efforts are said to be well co-ordinated.  The banks are speaking with one voice.
4. With respect to Saad, they have written to Saudi banks asking if a separate deal has been signed with Saad.  The existence of a deal has been mooted in the press several times.  The Kuwaiti banks reportedly are threatening legal action which they note in their letter they could direct at the branches and offices of Saudi banks in the West, e.g., London or New York.   This is similar to a letter that international banks have written to Saudi banks.  The Governor of SAMA has denied any side deal.  AA:  The fact that the letter was written even after the denial is an indication of lingering concern that there is some side deal for the Saudi banks.  As I've noted before, I was told there was a  similar side deal for Saudi banks in Redec rescheduling.  Certain government receivables were reportedly assigned to Saudi banks.  The foreign banks complained to no avail and eventually quieted down. So a similar fear that history will repeat itself.   As to the basis for the lawsuit, generally each creditor is on his own.  If he can get repaid, he doesn't have to worry about others.  The one exception to that rule is syndicated loans where banks pledge to share payments pro-ratably among themselves.  The only other avenue would be a general liquidation scenario where creditors should be treated on an equal basis.  I don't think most of the local jurisdictions have a well-defined concept of fradulent conveyance - preferring one creditor over another in some set period prior to a bankruptcy.  And even if they do, there has to be bankruptcy.  If the company keeps going, then it is merely negotiating individual deals with creditors about existing loans, just as it did when it took the loans out.
   
5. With respect to AlGosaibi, the Kuwaiti banks - along with others -  rejected the Group's offer to pay 9% with the rest of the debt forgiven as "sakhiif" - ridiculous/inferior. Apparently, some dismay that AlGosaibi didn't acknowledge the debts as a first step in the negotiations.   Also an assessment that negotiations - with both AlGosaibi and Saad - would be very difficult and might take three years.  AA:  I'm told in the previous great debt crisis of the mid 80's many Saudi borrowers did not earn high marks for ethics and fair dealing in their negotiations with lenders.  One of my mentors could be set into a tirade by the mere mention of the names of Shobokshi, Baroom, and AAA - where recoveries were pennies on the dollar while the obligors managed to protect their wealth.  Some of the assets were quite well protected from creditors.  The three year timeframe may be predicated on the time taken for the "oxygen strategy" described below to take effect.  Recall that Maan AlSanea is allowed a living expense by one Western court from his blocked assets.
   
6. Ahli Bank of Kuwait has chosen to pursue legal action against Saad in New York.  AA:  A court judgment is most easily used to attach assets in the jurisdiction of the court.   Otherwise the lender marches into a foreign court with his judgment and asks the local court to enforce it.   That doesn't work particularly well with the GCC.  Back in the USA, probably all of Saad's  major assets have been  identified and many banks are pursuing them.  The court appointed "administrator" for SICL (Caymans) has already been active in US courts blocking Saad assets.  Unless Ahli knows of something that others don't and can prove it belongs to Saad, it will be in a very long line.  Perhaps the suit is an attempt to pressure Saad for a settlement.
   
7. That the Central Bank of Kuwait is providing "every support" to the Kuwaiti banks.
   
8. The target will be to block the two Group's assets in Saudi Arabia first and then around the world.  An effort that is expected to be very complicated.  AA:  The idea is to cut off the borrowers' oxygen and force them to do a deal to unblock some of their assets and to be able to conduct their operations.
   

Assuming regulators are basically right about the level of provisions, creditors are in for a long and difficult process.  And probably substantial losses on these two names.

If you use the labels Maan AlSanea, AlGosaibi, Awal Bank and The International Banking Corporation, you'll be able to track back previous articles to get a more detailed picture.