Kuwaiti Financial Stability Law

This post summarizes what I consider to be  the key points in the Law for the Strengthening of Financial Stability ("Financial Stability Law" or "FSL").  I'll follow-up with a second post to discuss issues relating to TID using the FSL for its rescheduling.

On 26 March 2009, the Amir of Kuwait issued the FSL as Decree Law #2 of 2009.  He had dismissed the Majlis Al Umma on 18 March so the Majlis' ratification took place after the new elections of 16 May. 

So you can follow along and as well perform your own analysis, here's the English language version (note the Arabic text above governs). Also here are the draft implementing resolutions in both Arabic and English.  

The FSL is composed of  Preamble and 5 Sections with a total of 33 Articles.

1. The Preamble provides the legal basis for the law as well as definitions (Article #1).
2. Part 1 Banks.  The Government acting through the CBK will provide a guarantee to banks to cover shortfalls in their provisions for (a) loan losses or (b) declines in their local security and real estate investments - all of which assets must be existing as of 31 December 2008. (Articles 2 – 7). 
3. Part 2 Productive Local Business Sectors.  Provides for a State of Kuwait guarantee for 50% of certain types of collateralized new finance offered by local banks to companies in this sector. (Article 8 – 9). 
4. Part 3 Investment Companies. Chapter 1.  Provides procedures for restructuring debt outstanding as of 31 December 2008 for solvent companies.  As part of the program,  the CBK will provide a guarantee of up to 50% of  collateralized new facilities  to facilitate a restructuring.  (Articles 10 – 14). 
5. Part 3 Investment Companies Chapter 2.  Establishes the legal basis and mechanism for a US Chapter 11-like cramdown of creditors (Article 15 – 21). 
6. Part 4 Penalties.  Outlines the penalties to be applied for supplying misleading information or attempting to exploit the law. (Articles 22 – 27). 
7. Part 5 General and Final Provisions. (Articles 28 -33).
   

Part 1 "Banks" 

1. The Kuwaiti Government will provide an adjustable guarantee for provisions and investment "shortfalls" against credit facilities and investment portfolios existing as of 31 December 2008. Shortfalls in provisions on assets created or acquired after this date will not be covered. 
2. Changes in values of the portfolio as of 31 December 2008 occurring in 2009, 2010 and 2011 will be considered and the guarantee adjusted. 
3. After 1 January 2012 the guarantee may not be increased. 
4. Banks have to continue to monitor these assets and make efforts to collect them. The program is not a license to walk away.
5. Banks are required to build provisions to cover the deficit.  Starting from 31 December 2011, they must take provisions of at least 8% of the shortfall per year.  Thus, the guarantee is intended to be reduced over time.  It is not bailout (government assumption of the shortfall) but as a bridging mechanism to allow the banks time to take the required provisions.
6. The guarantee will be for a maximum of fifteen years with a 1% per annum guarantee fee. 
7. If a bank cannot cover the deficit over time, the KIA has the right to subscribe for sufficient equity to cover the shortfall.  This is the potential bailout, though it comes with increased government ownership.
8. The Central Bank of Kuwait (CBK) will set the terms of the guarantee including  conditions to the issuance of the guarantee: costs controls (including over management salaries and bonuses), imposing mergers, etc.  To get the guarantee the bank must secure shareholder approvals to these conditions.
   

Part 2 "Productive Sectors" 

1. The Kuwaiti Government will provide a guarantee of up to 50% of new  collateralized facilities extended by local banks to companies from productive sectors. 
2. The loans may not be used to refinance existing debt. Nor are they to be used by the borrower for "speculating or trading" in real estate or securities.   They are supposed to be used so the company can conduct its core business to the benefit of the Kuwaiti economy.
3. Loans are for a maximum of five years and must have regular principal amortization during their term. As noted above, they must be sufficiently collateralized.
4. The guarantee will cover 50% of the net loss after collateral has been realized and applied to the entire loan. So this is a shortfall guarantee, not an absolute guarantee of 50% of the face amount of the facility.
   

Part 3 "Investment Companies" - Chapter 1 – Restructuring Plans. 

1. Companies will be screened to determine if they  have sufficient capital (الملاءة) and are able to continue in business and face their financial problems.  Thus, the FSL is designed to help Investment Companies with liquidity problems not those with solvency problems. 
2. Specialist firms – appointed by the CBK or proposed by the company and acceptable to the CBK – will undertake studies to determine the financial condition of the firm and prepare a report taking into consideration the three points mentioned above. 
3. The FSL makes a particular point of noting that to be granted a facility the company must have   الملاءة.  I've seen this term most frequently used to mean adequate capital so it would appear it's not just a case of having a positive net worth but having sufficient capital and reasonable leverage to  be able to continue its business.
4. If the study is positive (the company meets the three tests) and the CBK believes it is qualified for the FSL program, the State will provide a guarantee for up to 50% of new finance provided by local banks. The new finance may be used for two purposes only.  First to settle obligations to local parties (but NOT local banks) that were outstanding as of 31 December 2008. Second, to support rescheduling to foreign banks and financial institutions, provided that the initial cash repayment not exceed 25% of the debt with the remainder rescheduled as per the specialist firm's study above. 
5. The company must provide sufficient assets by way of collateral to cover in full the company's rescheduled obligations and the new loans made under the FSL.
6. With respect to Kuwaiti banks providing such loans, the Government of Kuwait will include this new finance in its guarantee provided in Part 1. (The one exception to the 31 December 2008 asset rule).  Note banks are not forced to provide such loans. 
7. There's also a provision for the injection of capital by shareholders or the KIA into the investment company.  Again the government has the right to subscribe for equity.  And can take over the company if the capital need is large enough and the existing shareholders don't step up.
8. The CBK will appoint a local bank as manager of the restructuring. It will determine the amount of new loan to be provided by local banks and the collateral to be taken.  It will take part in negotiations with foreign creditors to craft a rescheduling. The Central Bank of Kuwait must approve the terms of the rescheduling.  In effect then the manager will propose these terms to the CBK, but the CBK will have the final word. 
9. The restructuring plan will have similar restrictions on expenses and a requirement for possible mergers along with CBK imposed changes in the management and organization of the company. As with banks, the investment company must obtain agreement from its shareholders to these conditions before it can obtain the guarantee.
   

Part 3 "Investment Companies" Chapter 2 Legal Matters. 

1. The FSL establishes a special Circuit Court at the Court of Appeals.  This Court has  exclusive jurisdiction to review and rule rescheduling plans on a summary basis.  Its decision are final and not subject to any appeal.
2. The CBK or the company may present a restructuring plan to the chief judge of this special court along with all documents necessary to support the plan. Once the chief judge records receipt of these documents there is an automatic four month stay of all legal action. All creditors must be notified. 
3. Any interested party may appeal but the appeal must be (a) lodged within 15 days of receipt of notice of the original decision and (b) well organized and giving a reason why the stay should be lifted. The Circuit Court will make a decision whether to continue the stay.   A mere objection without reasons will be rejected.
4. If the Court decides to uphold the stay, CBK then will cause a detailed study to be made of the financial position of the investment company. The study should be submitted within four months, though there is a provision for an additional extension of up to four months. The restructuring plan will then be submitted to the Court for its approval or rejection. 
5. If the Court approves the plan, then all legal cases are stayed. If it rejects the plan, affairs return to their pre-stay condition.  In this case, creditors may again seek redress through the courts.  The judgment of the court is final. The company must then advise all creditors. 
6. In the case where the plan is approved, the CBK monitors compliance. 
7. If after a rescheduling plan is approved and implemented and the company fails to comply with its terms,  the CBK shall refer the failure to the Court to render the restructuring plan null and void. In which case creditors regain their rights to sue under the original loan contracts.
   

Parts 4 and 5 deal with respectively "Penalties" and "General and Final Provisions". If you're interested you can take a look.

Some quick observations: 

1. The FSL is designed for solvent companies, except for banks where the CBK guarantee program is designed to forestall mandatory declarations of insolvency and wind-ups. 
2. The programs under the FSL come with a heavy price tag. The CBK may mandate cost cuttings, changes in organizational structure and force mergers. The Government has the right to become a shareholder.  Any new loans must be collateralized.
3. The bank and investment company programs are unlikely to be used, except in extreme situations. 
4. The guaranteed loan  program for productive sectors is also unlikely to be utilized.   Banks are being careful with new loans.  They certainly won't be making new loans to clients already past due. Companies are going to have trouble finding unpledged collateral sufficient to support new loans.   With the decline in asset values, banks have asked companies to top up existing collateral.  Not much is left to support loans of any value.

The Investment Dar Financials Update - 2008 and First Three Quarters of 2009 To Central Bank by End of Month

AlQabas quotes sources that TID has acceded to the Central Bank of Kuwait's demands that it increase reserves and provisions in its year end 2008 financial statement.  The CBK has earlier (much earlier in fact) rejected the statements presented by TID.  AlQ's sources expects that the earliest the financials, including those for the first three quarters of 2009, will be submitted is at the end of February.  It will take some time for the CBK to complete its review before the financials are approved for release.  The period will depend on to what extent TID has met all of the CBK's requests.

Hopefully, the news is accurate.  And that TID will be able to publish its financials and move on with its rescheduling.

Central Bank of Kuwait - Mandates Special Disclosure by Banks on Derivatives

This is a post from over one month ago (November 16 to be precise).  I made a small edit to it today and now it is on today's new posts lists.

About one year ago, Gulf Bank had a major loss arising from foreign currency derivatives undertaken for a customer who refused or was unable to settle.  Market speculation at the time was that the customer may have been a related party.  The loss was KD375 million requiring the recapitalization of the bank, including the Kuwaiti Government taking a 16% stake through KIA.

Today AlQabas reported that  the Central Bank of Kuwait ("CBK") issued instructions to local banks that they were to have their external auditors prepare a special audit report on their dealing in derivatives both for their own as well as customer's accounts. 

As per the press report, the CBK emphasized that the audit work and subsequent report should:

1. Review the sufficiency of the rules/principles of the system of internal control established and followed over this activity and its effectiveness
2. Examine extent of risks the bank might be exposed to, i.e., risk limits
   
3. Disclose the (financial statement) results of the existing position (of derivatives) as of 31 December 2009
4. Contain a statement outlining the development of the sufficiency and effectiveness of internal controls 
5. Compare the above points to the status as of the 31 December 2008 financials

The CBK warned that failure to provide this special report would be treated as a serious matter and would result in delays in the CBK approval of a bank's 2009 annual report.  Apparently the CBK wants to ensure that there are no more unwelcome surprises in the banking sector in 2009.

AlQabas believes that since Gulf Bank's 2008 problem, many local banks have closed their derivative positions or substantially reduced both volumes and riskiness of derivatives traded.

Kuwait: Central Bank Governor Tells Investment Companies There Are Only Two Choices: Debt Restructuring or The Financial Stability Law

AlQabas reports  that the Governor of the Central Bank of Kuwait delivered a short and sharp message to Kuwaiti investment companies at his last meeting with them.

He is reported to have told them that they have only two choices in front of them.  Accordingly, they should abandon pleas for increases in liquidity, the lowering of interest rates, or the purchase of company assets.

Instead they have to choose from one of the two courses of action:

1. Agree a rescheduling with their lending banks.  Some investment companies have done this which proves it is not impossible. It's incumbent on other firms to begin this process.
2. Submit themselves to the Financial Stability Law mechanism.  He noted that to date there have been no cases so one cannot say what the results will be.  

He criticized companies for failing to confront and disclose their current situations.  A fact that he related to the size of their problems.

What's clear is that many of these companies are still in denial about the extent of their problems.  And that they are in the typical borrower's "delay and pray" mode.  If I don't formally recognize the problem, it doesn't exist.  Maybe a miracle will happen.  Asset values could reach their previous heights.  The government will launch a bail-out.  Sadly, this has happened enough times in Kuwait to make this a credible strategy.  A profound sense of citizen entitlement - even when unjustified - is one of the legacies of a "rentier" state.  And of course, local banks who funded these wise investments similarly are looking for a way out of the predicament.  So there are two sets of voices calling for a government "rescue".

The Investment Dar - Latest on Restructuring

According to AlQabas, the Creditors' Committee held a meeting yesterday attended by representatives of those creditors who have agreed to the proposed restructuring plan as well as the Restructuring Officer ("RO").

Key points from the article are as follows:

1. First the article makes a point of describing the RO as representing the creditors.  AA:  In October TID announced it had hired Mike Grant as Chief Restructuring Officer to work as a consultant to assist the Company.  If he is now working for the lenders (but being paid by TID), then this is quite a significant development.  One I suspect reflects creditor concerns about existing management.
2. Discussions have been completed with a number of creditors about loans extended against pledges or assets.  These creditors have been informed that amounts due will be paid under the proposed restructuring plan and no single creditor will get separate funds as happened through last July.  AA: It's hard to imagine a secured creditor able to exit at  par or near par surrendering its collateral to take part in the restructuring.   And, if I am correct and there is no cram down of creditors, their participation cannot be forced.  So I'm not sure what to make of this. Perhaps these are creditors whose collateral does not cover their entire exposure.  In this case then the creditor's decision is predicated on his estimate of whether he'd be better "in" or "out" of the restructuring.  On the July reference, a key concern of creditors is that none are preferred over others, though a creditor has been known to make a "principled" exception when that preferred creditor is himself.  It's a very good idea for an obligor to treat all creditos alike as a matter of managing the creditor group to get a deal.
   
3. Investment Dar Bank Bahrain intends to appeal the judgment against it lifting the precautionary freeze of Investment Dar's assets.  AA:  If accurate, not good news for TID.  IDBB is a very substantial creditor.  If IDBB can tie up or get access to TID's assets, it can threaten implementation of the restructuring.  TID has significant assets outside Kuwait (though I don't think Kuwaiti law provides for a mechanism to force dissenting creditors to join a restructuring so creditors in Kuwait who refuse the restructuring could still sue there).  In Bahrain, TID is a major shareholder in IDBB itself as well as Bahrain Islamic Bank.  TID has major subsidiaries in Europe, Austin Martin and Grosvenor House Apartments.  So there are plenty of non Kuwaiti assets of significant size to attack.
   
4. The creditors discussed the criminal lawsuit against the Chairman of Commercial Bank of Kuwait and one of his assistants as well as other cases filed by TID with respect to its shareholding in Boubyan Bank.  AA:  You'll recall that in 4Q08, CBK and TID had entered into a "repo" agreement for the shares of Boubyan.  CBK's position is that TID defaulted and it was entitled to take ownership of  the shares on default.  TID's position is that the shares are still its property.  From CBK's vantage point, it would rather be a secured lender who took collateral (or the "Islamic" variant thereof) rather than join the restructuring.  In the first case, it recovers at least 100% of principal immediately.   National Bank of Kuwait no doubt remains interested in acquiring even more of BB.  In the latter case, CBK waits for several years with no assurance of full repayment.  And if one believes the earlier AlQabas article on the creditors' valuation of TID's estate, expectations are pretty much for an assured loss.  This is why this matter is of keen interest to the creditors.  Boubyan is a major asset in terms of value.   Getting it into TID's estate enhances their recovery.  Assuming the documentation was drafted tightly (and that is not necessarily certain), CBK should be on firm ground. 
   
5. With respect to TID's 2008 annual financials, the Central Bank of Kuwait has still not approved them.  The sticking point is that some notes and explanations are not yet acceptable to the Central Bank.  It was noted that the CB's approval was an extremely important matter for the creditors as it was a matter of confidence and a major "push" in implementing the deal.  That being said, creditors are apparently willing to move forward if the CB's approval is not obtained within a fairly limited time, then they will go ahead without it.   AA:  There isn't a consistent story on why the CB is refusing to approve the financials.  In its lawsuit reported on in an earlier post, the story was was that the CB objected to the "audit disclaimer".   Now it's that some notes and explanations are deficient.  In discussing this topic the article mentions "additional reserves and accounting entries"  --  perhaps a  hint at some or all of the issues.  My guess is that the CB does not believe the financials reflect the company's financial condition or position and will not release them until it does.  From the creditors' perspective  these historical financials are a matter of trust.  Loans are  settled by cash.   And repayment has to trump trust at this moment. By placing all the company's assets in dedicated liquidation vehicles and requiring that any asset disposition be approved by creditors, the issue of trust (or any lack thereof) is neatly settled.  One also presumes that the condition that future financials are subject to creditor approval would provide reasonable assurance of the integrity of financials going forward.  These of course will be very important in ensuring that the cash flow goes where it should: to repay the creditors.  Presumably, the financials of these liquidation vehicles will be subject to enhanced scrutiny by the creditors' committee as well as their approval.
   
6. There is a reference to 80% as the "final number" - presumably the creditors who have agreed.  
7. The Restructuring Officer is quoted as saying that TID is taking "rapid" actions to increase the value of major and prominent assets (for sale).  Austin Martin is cited as one example.
8. There is also a discussion about expense reduction from KD 14 million per annum to KD 6 million in 2009 with the goal of a further reduction to KD 4.6 million.  AA:  Since TID is essentially embarking on liquidation (or, if not a liquidation, shrinkage to a mere shadow of itself), expenses would naturally go down. Not much rationale for large bonuses - unless these are tied to the amount and speed of asset liquidations.
   
9. The meeting also discussed loans from TID to affiliated companies and the prospects for recovery.  AA:  A list of TID's affiliates in Kuwait suggests that 100% recovery may not be possible from these entities - either on an absolute or a present value basis.
10. Finally, the RO is quoted as saying that they had obtained confirmation from those organizations they had consulted with that the proposed plan is legal.  AA:  The KD64,000 question though is are the creditors who did not agree bound by the plan.  If not, how are the assets then pledged to only a segment of the creditors?      
    

The Investment Dar Wins Lawsuit (Administrative Court) Against Central Bank of Kuwait for Non Approval of Financials

The 1 January 2010 edition of AlQabas carries the news that TID has won a lawsuit in the Administrative Court against the CBB for its refusal to approve TID's 31 December 2008 financials.  The Court  abrogated the CBK's decision to refuse to approve TID's  financials and awarded provisional compensation KD 5,001 (US$ 17,500).  The competence of the court to hear the case was challenged by one of the parties (unstated, but presumably the CBK.) and this matter was referred to the Circuit Court  (?) #10 who are expected to review the matter on 28 January 2010.

Most of the article - roughly three-quarters - consists of a letter that TID says it sent the Central Bank on 14 July 2009 (and which appears to be part of the  documentary evidence submitted for the case).  The letter states that the financials were fully prepared and signed by both auditors, though the auditors stated that they were unable to give an opinion (in accountant-speak a "disclaimer of an opinion").   TID argues that the auditors had no issues with the company's assets, did not find any violations of law, etc.  and so the disclaimer does not mean there are any of these sort of problems.  TID states (in the letter) that CBK asked for the removal of the disclaimer.  TID pointed out that the auditors had the "first and last" word on their opinion and that the company could not compel the auditors to make a change and that to do so would be to violate Kuwaiti law.  The letter ends with a statement that CBK's refusal is causing serious damage to TID and its shareholders.

Some reactions to the news story:

Global Investment House released its financials on 26 April 2009.  These contain an audit disclaimer.  If the disclaimer in TID's report is broadly similar to that in GIH's, it is hard to understand why the CBK would approve GIH's financials but hold TID's.   Unless there were other serious factors involved.  The alternative explanation - that the CBK is engaged in a vendetta against TID -  doesn't seem credible to me.

As a side comment, GIH's audit opinion is dated 3 February.  The release date suggests that the CBK required roughly three months to content itself with GIH's financials.  

What might those factors be?  And what might be some signs? 

1. GIH's financials were submitted fairly quickly to the CBK.  The presumption is shortly after the auditors signed off on them - 3 February 2009 - and GIH's board approved them.  TID's took a bit longer.   TID explained this as the need for "additional reporting requirements" in April 2009. 
   
2. At the request of creditors, the CBK appointed a special monitor at TID.  It did not at GIH.
3. As a result of negotiations with creditors, TID appointed a Chief Restructuring Officer.  Creditors at GIH did not require this.  The two creditor groups are not exactly the same so this may reflect their different composition.   Or there may be another reason. 
   
4. TID's restructuring agreement - as described by AlQabas - contains strong statements about increasing transparency and strengthening corporate governance.   There is also what might be a telling condition:  All asset sales to be undertaken on a sound basis (sahih), legally done, at market prices and not to related parties.  Without direct knowledge of the negotiations between TID and its creditors it's not possible to know what motivated this requirement.  One might infer that a provision of this sort is designed to prevent the recurrence of an event.  Then again creditors often impose "silly"  or "belt and braces" conditions given the dynamics of restructurings.
5. Similarly, the restructuring agreement gives the creditors' committee power over the company's financial statements - that is, creditors have the right of approval over financials.  Again there is no way of knowing for certain why this was included.  One might infer that this reflects some creditor concern about the quality/integrity of the financials.  And then again it might simply be creditor "overkill" in imposing conditions.
   
6. Finally that same report said that TID was submitting its financials to the CBK for approval.  It may be that with progress in the restructuring negotiations the auditors were willing to remove their disclaimer (no opinion).  Or perhaps there were some changes to the contents of the report.  As outsiders it is difficult to know.  However, auditors are generally reluctant to stick their necks out.  And in difficult situations like a restructuring, their natural caution increases. I would expect that until the definitive legal documentation for the restructuring were signed by all parties, the auditors would be cautious about issuing a "clean" audit opinion.  One compromise could be a "matter of emphasis" opinion - in which they put their concerns into a note to the financials.
   

It seems to me that there is more to the delay than just the auditors' disclaimer.  I don't have the impression that the CBK is capricious or vindictive.   It would seem to have some questions or concerns about TID's financial position.  But we will have to wait to see what happens when TID's financials are released. 

KFH Lawsuit Against Commercial Bank of Kuwait - Re Bank Boubyan Shares

AlQabas has an article on the above topic today.

Kuwait Finance House ("KFH") has filed suit to keep Commercial Bank of Kuwait ("CBK") from disposing of shares in Boubyan Bank that it acquired because of a failed "repo" agreement with The Investment Dar ("TID").

KFH which has KD 44 million of exposure to TID apparently is arguing that CBK should not be allowed to sell the shares but rather that these should be placed at the disposal of TID's creditors.  As I understand it (and note that caveat), KFH is arguing that CBK is just another creditor of  TID and should share the collateral with other lenders.  The amount involved is significant.  At the last closing price, some US$387.5 million.  If you'll recall the estimate of assets versus liabilities, the creditors believed there was likely to be a shortfall in TID's repayment.  So including these shares in  TID's "estate" would improve the overall payback rate roughly 9 to 10%.

In any case, as per the article, the High Court has transferred the case to the Experts Department.

Some background:

1. Boubyan Bank ("BB")  was formed in 2004 as an Islamic Bank.  
2. In December 2008 TID sold CBK its BB shares (19.16% of BB) with an option to repurchase.  In effect what appears to be a form of "repo".
3. Around this time NBK received approval from Kuwait Central Bank to purchase up to 40%  of BB.  NBK is interested in BB in order to expand its franchise into Islamic banking.  For those who don't know, NBK is the premier non Shari'ah bank in Kuwait and a very strong contender for that position throughout the Arab world.
4. In May 2009 CBK announced that TID had failed to buy back the shares within the agreed time frame. And therefore it was taking control of the shares.
5. June 14 NBK announced it had agreed to buy the shares from CBK. The price  was roughly $420 million.
   
6. On 16 June responding to a motion from TID,  the Kuwaiti Court stopped the sale pending determination of ownership.
   
7. In July/August 2009, KIA auctioned its 19.8% share in BB.  National Bank of Kuwait  won 13.2% and Securities Group 6.6%.  NBK previously held 14.3% or so.  After the auction, it held 27.5% of BB and was the largest shareholder. 
   
8. NBK acquired Securities Group's shares plus some additional shares.   It is now the largest single shareholder in BB with some 40%.   And at the limit of shares it may own without further approval from the Central Bank of Kuwait.
   

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.

Global Kuwait to Sign Restructuring Agreement 10 December

AlQabas reports that Global reached agreement on the restructuring with its lenders 6 December.  A formal signing ceremony is slated for 10 December to be accompanied by a party and press conference.  The Governor of the Central Bank of Kuwait, Shaykh Salim AbdulAziz AlSabah,  has been asked to attend.

You'll recall that in yesterday's post on Global Ms. AlGhunaim had said that GIH had reached agreement with all but two of its creditors.

Good news for Global.

The Investment Dar - Restructuring Update: Not So Good Times

6 December AlQabas has a fairly long article on recent developments.  See also this earlier post.  Also you can use the label The Investment Dar to see all other previous posts.

My following analysis is based on the working assumption that this report is basically correct.  I'm not in a position to make a final determination.  Bear that in mind as you read what follows.

60 second summary.  The restructuring agreement sounds like a financial Treaty of Versailles.  Draconian. It appears to me to be controlled liquidation based on expectations for less than a full recovery - probably with a large loss.  Perhaps up to 50% of the face amount of claims.

To quote an appropriate song, this leaves TID:    بين شدو و حنيني وبكاء وانيني

Here's a rough translation of the AlQabas article.  My analysis/comments in blue italics:

First Principles

The proposal begins with an "open letter" to creditors encouraging them to approach the restructuring with a philosophy of justice and equal treatment for all parties. That there should be no spirit of one creditor trying to get its rights at the expense of another.  As well, no revenge (presumably against management) but a mutual co-operation to get out of the strait/predicament.  AA:  It's always nice to start with noble intentions.  The details of the Plan will show to what extent these are implemented.  And we will be able to get quite a precise understanding of any issues the creditors have with TID and its management as we step through these details.

Menu of Options (With a "tilt" to the desired outcome)

Then the three options are outlined as well as the reasons why only one of them makes sense.

1. Option 1 is the pursuit of legal claims.  Dismissed  as these will be very long and complicated steps, outcome uncertain, involve creditors paying legal expenses and consume a great deal of time.
2. Option 2 is wind-up/dissolution.  Dismissed as resulting in the destruction of the value of assets, the appointment of a liquidator (no control by banks over the process), as well as possible diversions.  AA:  Presumably the latter refers to the liquidator following his own procedures. and desires.  Those familiar with liquidations will recognize the worry that the liquidator's realization of assets may take longer than necessary, not result in the best sales price and incur extra expenses.  Lawyers, accountants and liquidators feast first in corporate dissolutions well before the creditors.  Note the key creditor issue: a concern about "control".  The Arabic says "Lack of any control by banks or investors".  We'll see that theme sounded more than once as we proceed.  Usually creditors want control when they have an issue with the way those in charge have exercised their powers.
   
3. Option 3 is the restructuring.   Done of course by mutual consent (AA:  Presumably the creditors made TID an offer it decided was wise not to refuse).  Rights of all creditors to be protected to the maximum extent.  AA:  I'm reading this that there is some doubt about a full recovery. And of course I've "read ahead" of you at this point so I know what's coming.   Banks and investors have "full control" to protect their rights.  AA: There's a sign of serious concern here.  An indication perhaps of strong dissatisfaction.  You'll recall the creditors asked and the Central Bank of Kuwait appointed a monitor to watch over things.  A step not taken at Global Investment House.  Certainly of implementation of corporate governance at TID and steps to protect the rights of creditors.  AA:  Apparently, the creditors see this as a needed change from the past.  

Basic Goals

The proposal then describes the basic goals of the restructuring.

1. First, the separation of the assets of the company and an orderly disposal thereof in a reasonable time to preserve asset values.  AA: Signs of a liquidation.  Asset realization to repay the debt.   Not cashflow from operations.
2. Second, the setting aside of a package of security (collateral) sufficient to protect against any situations resembling the current distressed situation. AA:  More signs of a liquidation.  And more indication of a lack of confidence.
   
3. Third, strengthening the corporate governance of TID and raising the level of transparency and disclosure vis-a-vis the creditors.   AA:  Not a ringing vote of confidence in TID management.
4. Fourth, additional measures to ensure that TID's liquidity is kept with creditors not with third parties.  AA:  This provides the creditors a right of set-off.  Presumably there will be sharing arrangements among the creditors to protect those who don't hold the deposits.  Another sign of lack of confidence in TID management.  And another indication that there is concern about ultimate recovery so the need to keep all assets under the control of the creditors.
   
5. Fifth, facilities and financial services able to be traded according to Islamic principles.   AA:  I'm guessing this is so those who want to get out early can - though they'll have to sell at a discount .
6. Sixth, justice for all creditors and investors by establishing the principle of equal treatment in payments.  

Quantum of Debt and Value of Assets

These two topics are the heart of the creditor decision process.  The higher the value of assets relative to the quantum of debt the less restrictive and onerous the terms of the restructuring.  And here we get confirmation of the basic problem the creditors think they face:  an asset value shortfall.

The Co-Ordinating Committee states there is KD1.220 billion of total debt (US$4.227 billion!) composed of KD 272 million in banks and wakala, KD586 million in various bi-lateral and collective loans, and KD 362 million in sukuk. (KD1 = US$3.50).

TID and its advisors estimate the value of the assets is between KD1.350 billion (short term) and KD1.650 billion long term.  AA:  Assuming these values, at the end of the process with any sort of interest payments, creditors and various other parties will leave little behind - another indication that liquidation is most likely.  TID's incentive is clearly to give a highest possible value in the hope that time will work in their favor.

On the other hand the creditors' and their advisors' view of asset values is different.  KD 600 million for a short term liquidation and KD 1.3 million for a long term liquidation.  The text indicates a 50% recovery rate.  AA:  Equally clearly no one on the creditor side wants to be proven wrong later if there is an asset shortfall.  So the bias is to lower values.  But the disparity here with TID's valuation is  large.  This indicates the strong possibility for less than a full recovery.  In fact a fairly substantial loss.  Hence, the need to control the process to try and extract maximum value.  Of course, anyone who's been involved in a creditor-led disposal of assets knows that creditors are not that much better than liquidators in realizing maximum values.

Restructuring Conditions

1. Imposition of requirements for complete transparency and methods to ensure it.  AA:  Pretty clear why this is being hit.  And notice it is the first point.
2. No sale of any asset without the creditors' consent.  AA:  Completely understandable in a liquidation with insufficient assets to cover debts.
   
3. All asset sales on a sound basis (sahih), legally done, at market prices and not to related parties.   AA: That this point is raised speaks volumes about the creditors' impression of past practice. 
4. TID will not be permitted to dispose of any of its liquid assets without the knowledge of the Co-Ordinating Committee and the agreement of the "restructuring officer" (unclear if this is the CRO appointed by TID earlier or a new position).  AA:  No big surprise here.
   
5. Any amount to be distributed by TID goes to creditors first before management or shareholders.  AA:  No cash to grow/develop the business.  Pretty clear implication for the future of TID.
   
6. Co-Ordinating Committee has the right to refuse to agree the company's financials.  AA:  Again less than a vote of confidence in management.  They're not allowed any control over assets.  And now aren't even allowed to finalize financial reports.  Perhaps a hint of disputes over the long delayed 2008 fiscal report.  Or other concerns about the integrity and completeness of financials.

Small Creditors' Deal

To accomodate small creditors - defined as those with claims less than KD 3 million (US$10.5 million) - a special deal is offered:

1. 25% of claim amount paid quickly.
2. 50% of claim paid in second tranche.
3. 25% remaining along with other large creditors.

AA:  Gets the small creditors votes.  Recall there's no Chapter 11 in Kuwait so 100% agreement is required to close the restructuring.  Letting the small creditors out early is the price the bigger creditors have to reluctantly pay to maximize their own recovery. 

More Protective Conditions

As a prelude, there is a repetition of the argument that the restructuring will be quicker and more certain than legal proceedings.  It's noted that such proceedings will be complicated and take a long time to get the first level judgment which of course is automatically stayed when the losing party lodges an appeal.   But the deal has a legally enforceable fail-safe mechanism if the borrower fails to honor the restructuring plan.

1. Clear and strong condition that if the company fails the creditors will be entitled to take possession of all assets immediately to protect their rights.  AA:  To be incorporated into the restructuring agreement so exercise of the right can be immediate.
2. Complete transparency and the ability to track the Board to ensure that measures are being implemented.  AA:  We've seen this theme before.
   
3. Pledge of the assets for the loans effective so that court action is not required to enforce rights. AA:  The restructuring terms formalize the granting of collateral so that legal procedures in case of TID's subsequent failure will be more straightforward and simple.
   
4. Structuring the debt so that it is capable of being traded (according to Shari'ah principles) for those who want an early exit.  AA:  Some creditors just want out.  This gives others or new creditors the opportunity to acquire debt at a discount (probably a very steep discount).  Existing creditors can average down their cost base.  New creditors can hope to earn substantial returns.
   
5. The ability to study the assets of the company one by one and the opportunity to secure pledges on them.  AA:  Since this is a liquidation, this makes perfect sense.
   

Implementation

1. Creditors are asked to respond by 23 December with the goal of implementing the restructuring in February 2010.
2. Formation of 3 SPVs to which the Company's assets will be transfered:  real estate, shares, and foreign assets.  AA:  If you didn't see this as a liquidation before, this should be the final proof.  The SPVs will provide another layer of creditor protection in case of a need to seize the collateral.
   

Status of Acceptance

1. TID's Board and managment have agreed.  AA:  An offer they decided was wise not to refuse.  Can't imagine this was embraced with enthusiasm.
2. 80% of creditors have accepted (appears to be by number of creditors not volume of debt) and KD880 million by amount.   AA:  This may be the 66% percent referred to in my earlier post.  
3. The main remaining creditor is Investment Dar Bank which is reported to hold 27% of the debt.   And which is expected to agree shortly according to a source connected with TID.  AA:  I'm hoping this is IDB and its clients as 27% of the debt is KD 324 million which would appear to be an excessive credit concentration for a bank like IDB to have with anyone much less a related party.  You'll also recall the earlier post about Mustafa AlSalih's rumored resignation from IDB and Adeem which would appear to be related.

Status of Financials

The article quoting a source at TID states that the company will present its 2008 financials to the Central Bank of Kuwait either 6 or 7 December.  We'll see how long it takes the CBK to approve.

Co-Ordinating Committee

I had made a point that the CC was largely invisible and had apparently not weighed in to support the restructduring.  The article concludes by saying that they have done so.  It also identifies the spokesman for the CC as Bader Abdullah Al Ali.  AA:  This is the name of the CEO at Gulf Investment House Kuwait.   Usually CEO's of creditors don't get involved in restructurings.  Usually most of the roles on committees are given to major creditors.  GIH is relatively small with some KD 59.9 million of shareholders' funds as per their 30 June 2009 financials.  I hope that GIH is holding a small amount of this paper.

Central Bank of Kuwait Requires Local Banks to Prepare Estimated 2010 Financials

AlQabas reports that the CBK has issued an order to local banks that they must prepare projected financials for 2010 shortly after the end of Fiscal 2009.  These are to be supplied within the deadline for the submission of the 2009 financials.

Given the financial crisis in 2008 and the impact on the banks, the CBK had not required projected financials for 2009.

Other than the obvious motive of instilling greater discipline in banks' planning, the CBK can use these reports to gauge current bank sentiment to business in 2010, the scope of their planned activities and thus the likely impact on the economy. 

Zain Share Price and KSE Decline - What are the Implications?

There has been a lot of analysis about the decline in Zain shares and the implications for the Kuwaiti market.  Usually along the lines of the importance of Zain's volume.  Here's one from AlphaDinar.  A good explanation of the key role played by the blue chip Zain.

What I'd like to do is look at the implications of a prolonged decline in Zain's share price and in the KSE  on local borrowing and debt service.

First an introduction to set the stage.

Anyone familiar with the term "Kuwaiti investor" also knows that this term is generally associated with the terms  "capital appreciation", "OPM",  "leverage",  and "collateral".   And only rarely with the concept "cashflow from operations".

Let's deal with these one by one.

1. Capital Appreciation - The typical Kuwaiti investor has a unique "appreciation" for the strong potential of his assets to increase in value.   Cashflow is generally a secondary consideration if at all.  The belief is that in the not-too-distant future one will be able to sell one's assets to another party at a substantial premium. A trade sale.  A primary market sale or IPO.
   
2. OPM - Other Peoples' Money - especially bank debt - is always preferable when funding investments. If something unexpectedly goes wrong, one has not committed one's own capital to the  full entry price.
   
3. Leverage - The more that one can lever one's investment the higher the IRR.   And the more one can lever one's equity into multiple investments, the richer one can become  Also, if as is typical one's investments have no appreciable cashflow,  the ability to secure additional borrowings is a lifesaver when it comes time to pay the interest on the original loans.  As you'd expect, this works really well in a rising market.  The lender believes it has extra collateral and so can extend another loan.  Local lenders  too share the appreciation of capital appreciation.   In a small overbanked market like Kuwait, it is also difficult to get new customers.  A bank grows with its existing customers - one way or another.  And what bank does not want to grow its bottom line and balance sheet?  But a key risk is overlooked:  cash funded debt is being based  primarily on paper increases in value  - which are subject to negative as well as positive investor sentiment.   
   
4. Collateral - The way to get leverage is to pledge one's assets.   And to the extent that the same asset can be used to support more than one loan the higher one's leverage.   As the asset increases in value, one gives a second lien to another hungry banker and then builds a whole new pyramid of investments. And this brings us back to another virtue of using OPM:  in the event of a problem  with an investment, the investor (borrower) can simply walk away surrendering the asset to the lender. 
   

The result is an inverted pyramid of investments fundamentally supported by growing debt.

Second, now to the analysis.

What could go wrong?

1. In 4Q07 the Central Bank of Kuwait tightened the calculation for 80% loans to deposits ratio moving from a month-end basis to a daily average basis.  (Page 36 here).  In 1Q08, in an effort to control inflation, the CBK pushed banks to lower commercial and consumer lending.  The money tap was turned to a trickle.
2. In 3Q08, the global financial crisis hit.  Foreign banks began restricting loans.  As the tide of liquidity flowed out, asset values declined.  
3. A double barreled effect.  Not only were new funds cut off.  But as asset values declined, collateral values for existing facilities eroded.  Lenders began demanding reductions in principal of loans.  And banks might demand that interest actually be paid.
   

Where to get the cash?

One turns to one's best asset.  One that actually generates cashflow.  For example, Zain.

Plan A was to try to sell off a division or two (initial focus Africa).  Sales proceeds could be dividended to "needy" shareholders. 

That didn't work out. 

So Plan B is to sell a stake to a strategic investor.  Recently Zain shareholder(s) announced the sale of 46% of existing shares to a collection of  Indian investors "Vivasi Group".   Note:  Zain is not issuing new shares to fund expansion.  Existing shareholders are cashing out to get needed cash.

The problem is with Zain's share price down to KD0.960 (Market Cap KD3.93 billion US$13.8 billion - down 50+%) Plan B gets more difficult.  Just this week, BSNL announced that it saw the need to renegotiate the price.  As you might guess, they're not offering to pay more.

The problem is further compounded because as the market drifts lower more investors' collateral is worth less.  Lower collateral cover is generally accompanied by higher banker anxiety and demands for additional collateral or cash.  This affects not just individuals but corporate entities - like the investment companies.  Or the "industrial" companies in the country many of whom only had profitable years in the past because of their investment portfolios.   Let me emphasize that point to make sure it's clear:  their actual business operations did not turn a profit.  They only made a profit because of   (paper) investment income.

With that as background the import of the decline in Zain and the KSE is outlined in stark fashion.

Aref Investment Group Kuwait Releases 3Q09 Financials - KD55.1 Million Loss for First Nine Months 2009

You'll recall that Aref was one of the firms whose trading was suspended this Monday for failure to file its 3Q09 financial report with the KSE.

On 18th November it announced its results:

1. KD17.1 million loss for 3Q09 and KD55.1 million loss for the first nine months of 2009.  In 2008 those figures were respectively KD12.1 million profit and KD39.6 million profit.
2. Total shareholders' equity stood at KD245.1 million versus KD329.5 million at 30 September 2008.
   

From the wording of the KSE announcement, it's clear that Central Bank of Kuwait approval was holding up release of the financials.

You can find the KSE announcement on its Arabic language page under AlBayanat AlTarikhiyya and then under 'Ilanaat AlSuq AlTarikhiyya for 18 November 2009.  There's a problem with the English page formatting.  In any case the announcements there are all Arabic language.  There are no English translations.

BTW Aref is now trading again.  

Kuwait Stock Exchange Warns 25 Companies of Potential De-Listing - Sign of Continued Financial Stress in Kuwait

The press reports that 12 November the KSE warned 25 companies that unless they provided  their 3Q09 financial statements by this coming Monday it would suspend trading in their shares.    Earlier this year in May, the KSE gave just such a warning and suspended firms - many of whom are from the distressed "investment firm" sector.  Suspension is lifted when the financials are provided.

The key takeaway from this announcement is that serious distress in the financial sector continues.

Current data on the KSE website differs from the press accounts  Perhaps, an earlier KSE statement was amended.  The latest KSE statement (Arabic only) is here.  (Note:  This news page will be updated on  the next trading day (Sunday) and so after then this link won't be valid).

In the latest statement the KSE's warning is to only 23 firms. 

First, you're probably asking yourself about the discrepancy.  The press reports say 25.  Suq Al Mal  says 23.  I presume the difference are the two firms the KSE suspended this morning:  IFA (investment firm) and Watha'iq (insurance company).  The KSE also suspended the trading of Commercial International Bank Egypt.  As noted above, all three stocks are suspended until the provision of their 3Q09 financial reports.

Second, 6 of the 23 firms are already suspended.  These are probably the stragglers from the 26 the KSE suspended last May. So the potential incremental trading suspensions  are 17 not 23.

Third, let's look at the data a bit closer to see what conclusions we might draw from it  Industry categories are per KSE definitions. The first number followed by a "W" is the number warned.  The second number followed by an "S" are those already suspended:

1. Banks:                       2W 0S
2. Investment Firms:   11W 2S
3. Real Estate:              2W 2S
4. Industrial Firms:       3W 2S
5. Service Firms:          4W 0S
6. Parallel Market:        1W 0S

As noted above the presence on the list of two banks and 11 investment firms (there are 46 investment firms listed on the KSE) indicates the serious distress in the Kuwaiti financial sector  continues  The investment firms have been particularly hard hit losing something on the order of KD 9 billion (US$31.5 billion).  And are currently locked in difficult negotiations with the local banks over debt restructurings as well as the provision of new finance.  Here's a recent article from AlQabas about an upcoming meeting called by the Association of Investment Companies with the Association of Kuwaiti Banks to discuss those two topics.  It's titled "Crisis in Financing (to be discussed) in Meeting between Association of Banks and Investment Companies".

Fourth, the financial statements of all banks and investment firms licensed by the Central Bank of Kuwait ("CBK") are subject to its approval prior to release.  This gives the CBK considerable leverage over these firms.  It can demand changes in the financials.  And it can use the approval process to press for a firm's acquiescence to other of its requests.

Fifth, let's look at the three names on the list which were mentioned in the press accounts:  Commercial Bank of Kuwait, Burgan Bank and Aref (Investment Firm).

One possible interpretation of the delay is that discussions are ongoing between the CBK and these two banks over the level of their provisions (the most likely sticking point between banks and the CBK) and/or as a way of encouraging them to commit to raise new capital.

The inclusion of Aref is a bit of a surprise.  In late September Kuwait Finance House (KFH)  - a 52% or so shareholder in Aref - announced that it was providing facilities so that Aref could reschedule some KD 132 in liabilities.  So Aref should be well placed to finalize its 3Q09 report.  Not clear why they have not. 

The Investment Dar Kuwait - Standstill Agreement - 12 November Key Date - Creditor Response Uncertain

 

Today is a key date for TID and its advisor, Credit Suisse.

12 November is the deadline already extended once from 15 October for a response from creditors to a proposed standstill agreement.  A standstill would involve creditors voluntarily halting legal action against TID in return from some reciprocal actions and commitments from TID. 

Signs are not encouraging.  Failure to get creditors to agree to the Standstill would complicate matters but would not necessarily be "fatal".  The problem is the situation is complicated enough already.

While it's long past the end of the day in Kuwait, the lack of an announcement is not necessarily confirmation that creditors have not agreed.  TID is likely to have creditors in other jurisdictions and votes may still be coming in.  And if history is any guide, there will be ambiguous answers or contingencies placed on "yes" votes.  So some "hanging chads" to be resolved.

However, since votes like this don't take place on a single day, it's probably safe to assume that there wasn't a landslide of yes votes.   Otherwise, TID would have announced victory already. 

If asked to, I'd guess that the standstill is not likely to be accepted.  And if it's accepted, it will be by less than the number necessary to ensure protection from legal actions by dissident banks.

As you'll recall that in an earlier post, I noted the reported reluctance by certain participants in wakala transactions with TID to sign the standstill, preferring instead to rely on the "trust nature" of their transactions to secure repayment outside any debt restructuring.  And some speculation on the rumored resignation of an Adeem and Investment Dar Bank Bahrain director and connections with the TID restructuring.

TID's restructuring has been complicated by the fact that unlike Global Investment House ("GIH"), it has not issued any financial statements since its 30 September 2008 interim report.   Bankers don't like uncertainty.

As well unlike GIH, the Central Bank of Kuwait has appointed a temporary monitor at TID apparently at the request of creditors to oversee the completion of financials and the restructuring process  Perhaps a sign of the level of uncertainty of the creditor group.

A bit of background regarding the negotiations with creditors regarding some KD 1 billion (US$3.5 billion) in outstanding debt via announcements:

1. December 2008:  discussions with Commercial Bank of Kuwait to lead refinancing.  These do not succeed.
   
2. 25 January 2009:  announcement of engagement of Credit Suisse as a financial advisor.
3. 12 February 2009:  announcement that Credit Suisse will assist in developing a financial restructuring plan.
4. 1 April 2009:  KSE suspends trading in TID.
   
5. 12 May 2009:  TID defaults on US$100 million Sukuk
   
6. 28 May 2009:  announcement of formation of Creditors "Steering Committee" and upcoming meeting with creditors
7. 10 June 2009:  progress announcement.  (AA:  Note creditors have hired Morgan Stanley as their advisor).
   
8. 7 September 2009:  CBK appoints monitor at TID. (AA: The language used reflects the apparent concern of creditors.  There is of course always a break down in relations between banks and debtors when they advise they have difficulty paying or might have difficulty.  In effect the creditors have asked the CBK to look over the shoulder of TID's existing management.  A theme we'll see repeated with the Chief Restructuring Officer).
   
9. 26 September 2009:  announcement that "Creditors Co-Ordinating Committee" and TID had agreed a standstill agreement which was being submitted to all creditors for ratification with a deadline of 15 October. (AA:  Note the change from a "Steering Committee" to a "Co-Ordinating Committee".  That sounds like the members of the committee decided they  want to de-emphasize responsibility.  So they've taken their hands off the steering wheel and are now co-ordinating not leading).
   
10. 4 October 2009:  announcement of appointment of Chief Restructuring Officer, fulfilling a TID commitment under the proposed Standstill Agreement.  (AA: The creditors request for the appointment of a CRO is another indication of creditors' concerns.  It is not a vote of confidence in favor of existing management.)
    
11. 12 October 2009:  announcement of the extension of the deadline until 12 November.  "The intention is that the revised timeline will give a greater opportunity for TID’s banks and investors to actively participate in the standstill process. As such; the new date by when TID’s banks and investors can accede to the Standstill Agreement is 12 November."  (AA:  In other words not enough creditors signed up by 12 October and it was clear they wouldn't by 15 October. So the deadline was extended.  But their language sounds more eloquent than mine).

Failure to achieve the standstill need not be fatal.  But TID and CS will have to move quickly to create some forward momentum that will keep creditors engaged in discussions rather than court rooms.  A task as difficult as the proverbial herding of cats.

I'll be following this and update as more news becomes available.