The Investment Dar and the Financial Stability Law - What's Involved?

 

TID has been unable to secure the acceptance by 100% of its creditors to its restructuring plan.  A sufficient number of these creditors have launched or plan to launch legal actions.  Since these actions could derail the restructuring, TID has recently indicated that it is considering resorting to the cramdown procedures available in Kuwait's Financial Stability Law to stop this legal threat.

Let's run through the pertinent bits of the FSL.

1. TID has stated it does not require any new financing so it will focus on the legal protections afforded under the FSL.  That's probably a good thing because I rather doubt that Kuwaiti banks would rush to lend TID more money even with a 50% Kuwaiti Government shortfall guarantee. 
2. The basic condition for the cramdown procedure is that the investment company have sufficient capital, be able to continue its business and meet its obligations.  The FSL is not to be used as a cover for winding-up companies.  TID would then be subject to a study of its viability.  The question is can it pass?  My recollection of earlier accounts of the restructuring is that the restructuring seemed to be pretty much a disguised windup.  All the assets were being pledged to the lenders and all of them would have to be sold in order to have the possibility of 100% repayment.  That probably explains why 20% of creditors have chosen not to get on to the restructuring "boat" but are pursuing their claims in court.
3. The FSL requires that that study be performed by a specialist company.  To determine if it is viable and as well to provide the basis on which to found an appropriate restructuring plan.   Will the Court take the existing analysis on TID and the "agreed" restructuring plan with no need for a  new study?  Or will it require another study of TID's financial standing and viability?  Note that as per the Implementing Regulations Article 43 this study is the same as if TID were applying for financing under the FSL (Implementing Regulations Article 23).  If a new study is undertaken, could this reopen the terms of the restructuring deal?
4. And here the issue of TID's 2008 audited financials could be critical.  As of yet, the Central Bank of Kuwait has not yet given its approval.  All the press reports I've seen indicate that sticking point is asset valuation - with the CBK pressing TID to take some significant writedowns or provisions.  These must be quite major because the parties have been arguing over them since late last summer (by my calculation).  It's hard to see the FSL process going forward without audited financials.  They are for the "magic" date of 31 December 2008.   If the CBK mandated write offs are severe as they appear to be,  then TID may be on the borderline between solvency and insolvency.  And recall the test is not just solvency but capital adequacy.
5. Under the FSL, the CBK must appoint or approve the specialist who undertakes this study.  Will the CBK approve the creditors' or the company's consultants?  The choice could be material in determining whether TID "passes" or "fails" the viability test.  Earlier press reports said that there was a rather wide value in assessment of repayment with the company's consultants very optimistic and the creditors' consultants predicting a significant shortfall.  No doubt one reason why some creditors are pursuing repayment through the courts.  One potential solution would be to throw both studies out and come up with a new one.
6. But, if a new consultant is engaged, there is a "danger" that it could come up with its own restructuring plan.  One that might have terms not to the liking of one or both parties.  For example, an extended repayment tenor.  A debt to equity conversion.  A haircut.  And even if no such dire things occur, TID and its creditors may be looking at four+ more months of waiting.
7. As part of the process, the Central Bank of Kuwait must provide its own report on the restructuring plan to the Court.  Presumably, its statement would be critical.  If it opposed the restructuring, that would likely greatly lessen the Court's probability of approving the deal.  If it supported the restructuring, that would be a powerful argument for the Court to approve.  This process also apparently gives the CBK the opportunity to comment on the plan itself.  To suggest helpful amendments or new points.
8. Assuming the plan is approved by the Court and then implemented, the CBK becomes the monitor of adherence.  That could prove a double edged sword as in the discharge of these duties, the CBK make a decision one or both parties might not like.  
9. Finally, as per the Law, if the agreement is implemented by the Court and TID subsequently breaches  it, the CBK can ask the Court to abrogate the restructuring, thus re-instating creditors' rights to sue under their old contracts.  With a deal outside the FSL, there might be more scope for "forgiveness" by the banks over borrower transgressions under the agreement.

Of course, there is an old financial principal at play that can trump all of the above.  Where there is a will there is a way.  Or to paraphrase a canny Scot, facts are sometimes fixed around the policy.  AA has seen this done more than once during his career.  Sometimes as an observer.  Sometimes as one of the "repairmen" who helped "fix" something.