The Investment Dar – “Out of Breath” in Its War on Many Fronts

Update:  AlQabas had a more upbeat assessment in its Monday 12 April issue.  Here' s the link to my post.

So says AlQabas. 

First, let's review what AlQ had to say. Then some comments.

AlQ cites the following issues:

1. TID's 2008 audited financial report remains "frozen" at the Central Bank of Kuwait which refuses to approve it. Reportedly this is leading to a loss of confidence among many creditors that the restructuring plan will be implemented. 
2. The legal case by AlMasar Leasing – involving debt in excess of KD10 million – poses a threat to creditor acceptance of the restructuring plan. AlMasar is close to the implementation of the judgment in its favor and has obtained a precautionary block on assets sufficient to repay the debt. TID has filed an urgent challenge (motion) to stop the implementation of the order. The Court is reviewing TID's motion. Legal sources say that there are fears that the creditor alliance will disintegrate if AlMasar's judgment is upheld and enforced. That other creditors will see courts as a way to get their money back "early". 
3. The legal struggle with Commercial Bank of Kuwait over Boubyan Bank remains unsettled. AlQ says that in its weekly meeting held right before the end of last week TID took the pulse of the Creditors' Coordinating Committee about a potential negotiated settlement to this dispute. Details were not discussed. The goal was to determine if there were any creditor objections. If not, then TID has a green light to proceed. 
4. Also at the same meeting the CC discussed whether to retain the Chief Restructuring Officer in the coming phase or replace him. Three international firms reportedly have submitted proposals as well as the existing CRO. Details of the four proposals were reportedly not discussed.
   

Now to the comments.

1. Indeed TID has to be a bit short of breath with all the battles it is facing. Clearly, this case is quite different from that of Global Investment House. The key difference is a lack of confidence.   The Central Bank isn't confident in the financials.  Dissident creditors apparently think expensive and messy court cases offer a higher prospect of recovery than the restructuring - though they could be hoping to prompt a buyout by other creditors if they threaten to destroy the restructuring through their recalcitrance.  The rest of the creditors clearly want a monitor at TID.  All this makes for a very fragile situation.  
2. Why hasn't TID's audited 2008 financial report been released? Why is the Central Bank refusing to sign off? Presumably, TID's auditors, the local affiliates of KPMG and PwC, have completed their audit. Unless there is a substantial problem in their opinion (say an adverse opinion or a disclaimer), they have signed off on the "numbers". If the latter is the case, the Central Bank  would appear to be saying it doesn't trust the audit work of two major firms.  Ouch!  This is not just a slap at TID but also at these two firms.  
3. Why doesn't TID just give the Central Bank what it wants?  Quibbling over numbers would seem rather silly when the patient is  barely alive in intensive care.  The rumors are that the Central Bank is demanding additional provisions and reductions in the carrying value of assets. Seems simple to just sign on the dotted line. - whatever the results.  Historical statements from 2008 are just that history.    It's hard to see there being a major impact on the banks.  They have their own advisor's (Morgan Stanley's) cashflow focused analysis on the best path to recovery. And without any audited financials a significant number of them have decided that the restructuring is the "best" deal for them.   And, as I've written before, this looks a lot like a disguised liquidation.   So how would adverse financials change that?  The diagnosis would remain the same.  And the conclusion very likely the same.  A fire sale by a liquidator is not a good recipe for recovery. 
4. It must be is that the additional amounts are so large that they pose a serious problem.  Negative shareholder equity would probably  greatly complicate recourse to the Financial Stability Law if not make it impossible. The FSL is designed to rehabilitate companies.  Not to provide cover for a  liquidation. No clear cut Chapter 7's need apply. Similarly, there could be other problems.  A law that if losses exceed a certain portion of  paid in capital, the firm must raise more or enter formal liquidation.  Sometimes problems like these can be solved by having an Extraordinary General Meeting of shareholders vote to use reserves (share premium, mandatory and voluntary reserves to offset retained losses).  Presumably, if it were that simple a matter then  TID would take the step.   If it's a need for additional new equity, that's probably something that shareholders probably aren't particularly keen to do right now.  So the battle on the financials is to prevent getting into a worse situation.
5. The real issue with AlMasar would seem to be it's formal objection to TID entering under the protective wing of the FSL.  There are other creditor cases out there, e.g. BLOM.  Yes, AlMasar has the "block" on some assets.  But if TID is successful with the FSL won't that solve its legal problems, especially those in Kuwait?  So isn't the FSL objection the key? The AlQ article is silent on this topic. 
6. Also the comment about AlMasar success leading other creditors to similar action is probably correct in one sense.  But, if all the creditors rush for the exit, the ultimate recovery is going to be  affected.   If any bank's creditors and depositors suddenly asked for their money back, no bank could pay them back immediately. Not Deutsche Bank.  Not National Bank of Kuwait.  And TID is very very far away from being in NBK's very strong position. The best recovery is going to come from a controlled process.   Hopefully, the banks have figured this out by now, though I suppose in a panic logic is the first casualty.
7. Boubyan turns not only on the relative strength of the two parties' legal positions but more importantly on the ability of the weaker party to tie the shares up in court for years and years.  In terms of legal advantage, I think the legal definition of the transaction is  critical  If the  original transaction is considered a sale, then CBK owns the shares which it bought at a bargain price.  TID had the opportunity to buy them back but failed to do so.   Tough luck.  Unless in consideration of "equity" the Court allows TID the opportunity to go "back in time" and complete the repurchase.  In which case, it would make abundant sense for the banks to lend TID the money.  Lend $200 million, get shares worth $400 million, sell them to NBK and  put a cool $200 million  extra into TID's estate.  If it is a secured loan, then CBK owes TID  the excess of the realization proceeds from the collateral over the  repayment of the loan.   In which case  the result is the same as the Court sanctioned "time travel" mentioned above.   In terms of waiting, Commercial Bank probably has a less urgent need for the cash than TID.  Luckily for CBK, NBK is running the show at Boubyan so the likelihood of something going really wrong going there is fairly low.  That should put a floor of sorts under the share price - assuming there are no legacy problems from before NBK's stewardship began. And make waiting a bit more palatable, though there are signs that shareholders at CBK aren't particularly happy now - if AlQ's account of the recent OGM is accurate.
8. The debate over the continuing role of the CRO is pretty clear evidence of the creditors' continuing lack of confidence in TID's management. Under the restructuring, they are taking TID's assets into companies they will control (assuming that AlQ's earlier account of the restructuring is correct).  Yet, they still seem to feel they need an on site minder at TID.   Usually in a restructuring the creditors would form a committee to monitor the borrower.  Or perhaps require an accounting firm to do periodic reports to confirm the borrower was discharging its obligations.  Both of these mechanisms on a post facto basis.  That is, the creditors check on the borrower after the fact -  to review its conduct in the last quarter.  It seems that with TID the creditors want a monitor for  "real time" monitoring.  With the assets in separate (from TID) holding companies,  it's unclear just precisely what the CRO will monitor.  Will he run those holding companies?  And how will his position fit in with that of the Central Bank "monitor"?  Especially, since if TID is successful in getting under the FSL umbrella, the Central Bank is probably going to have a monitor  in the company to keep an eye on things.  This isn't a trivial matter since the expense isn't trivial.  The creditors are in effect saying we're willing to pay a price to make sure we keep an eye on TID's management.