The Investment Dar - Creditors Warn TID Central Bank Will Not Impose Restructuring Against Our Will

Nancy Reagan

White House Photo in the Public Domain

Al Qabas, as it often does, has a different take on the story about TID proposing a 50% haircut than Al Watan.

Here the story is that the creditors have said that if Dar's request for a 50% haircut proves true, then this will give the Central Bank of Kuwait full justification for turning down its application for the FSL.  (You may as I have been struck by this formulation.  Either a deficient translation on my part.  Or maybe the story of the 50% haircut was wrong).

They also remarked that the Central Bank will never force a restructuring on them without their consent as they are the owners of the money and should decide their fate.  So a consensual plan agreed by all parties will be required.

Finally they are quoted as saying that there is an indication that the entity charged with preparing the report on Dar's ability to remain a going concern and pay its debts shares Dar's opinion that it can comply with the financial ratio set in the new Central Bank of Kuwait regulations if it can deal with approximately KD500 million of burden which will strengthen shareholders' equity in addition to bringing it in compliance with the new principles.   I'm taking Al Qabas description of the "entity" to mean E&Y.  And am not sure why the circumlocution is necessary.

As I've indicated before, I really don't understand the fixation on the new CBK principles.  Dar is in a life or death situation with the rescheduling.  It seems eminently reasonable that if it can't meet the new regulations that should be a very minor consideration in the greater scheme of creditor repayment and the continued existence of the Company.  There are many ways this can be "handled" to preserve the regulation but give Dar some breathing room.  Would one really "put down" Dar because it couldn't meet a ratio if it could repay a substantial portion or all of its debt?

All this talk of the regulations makes about as much sense to me as arguing about the  poor  quality  of the band as it plays the final songs just before the Titanic sinks.

Maybe one of my regular readers can tell me precisely what I'm missing. 

It's also unclear if this story came before or after this one.

Ah, Kuwait land of mystery and intrigue.  And also family values.

The Investment Dar - No Intent to Ask for 50% Haircut

Barbershop in the Bus Station Tirth Raj, Rajasthan
Copyright funky footage

Creative Commons Attribution 2.0 Generic

Al Watan quotes sources close to The Investment Dar as saying that the Company has no intent to ask for a 50% haircut (KD 500 million) on its existing debts .  That it intends to repay its debts in full.  Moreover it would never sue the Central Bank of Kuwait  which it respects and values.  I guess the meaning here is won't sue again as they did earlier.

You'll recall earlier that there were reports that TID had made just such a request bypassing its creditors and writing directly to the Central Bank of Kuwait.

The Investment Dar - Rumor of Restructuring Bombshell: Request for 50% Hiarcut

Major Al-Musallam Rides to Glory

Before we go further to be very clear this is an account which neither the Company, the Central Bank or the creditors have confirmed.
Update:  TID has denied this story.

Al Qabas reports that TID has submitted a completely new restructuring plan to the Central Bank of Kuwait which calls for lenders to forgive 50% of the existing debt, i.e. KD500 million.   According to the report, lenders were not consulted or advised prior to TID sending the proposal to the CBK.

What's going on here is anyone's guess.

Mine is that the Company and the lenders are jockeying from (what I think is) the fallout from the Ernst and Young report.  As you'll see below. TID and its lenders appear to have been discussing alternatives /modifications to the original plan. From the Al Qabas account these seem predicated on the fact that the Company cannot repay all the debt.  The unpayable quantum seems around a 50% or so.

I suspect that Ernst and Young came back with a very negative assessment of  TID's ability to repay in full and, thus, case serious doubt on the Company's ability to continue as a going concern.  As you're aware, the Financial Stability Law is designed to give protection to viable companies.  It is not intended as a mechanism to provide legal cover for disguised liquidations.  If I'm right (and as Umm Arqala will tell you that's a rare occurrence), a report like this would have thrown quite a large "wrench" into things, complicating the CBK's acceptance of the already agreed restructuring.  How could the Central Bank recommend to the Court that the Company be allowed under the FSL under such circumstances?

I'm also guessing this occurred prior to the end of the first four month period the CBK had for evaluation of the suitability of the original plan and of TID to enter finally under the FSL.

What leads credence to both assumptions are reports in the article that the lenders have floated some  proposals or modifications of their own and the timing of those negotiations.  One was the conversion of  roughly half the debt to equity with some preservation of the rights of the existing shareholders.  Presumably, the lenders could quite easily make the argument that if a debt conversion were required, the old equity has been lost .  And thus the old equity holders should be wiped out.  Their proposal is reported as more generous, though it's not clear what percentage they would allow the old shareholders in the post conversion equity.  Leaving 10% or 20% might for example be considered highly generous by the lenders and an "outrage" by the existing shareholders.  Negotiations on this proposal supposedly took place between July and September.  The story goes that TID's Board went back on a tentative agreement because some of the existing major shareholders did not want their equity interests diluted.  (Unclear to me how you dilute something worth nothing.  There's also a hint here that the major shareholders are very important people.   And, if you know Al Q's politics, you might suspect they are pointing the finger at regal personages).

As a second alternative, the lenders suggested taking some assets in exchange for the debt.  The article says  that E&Y determined that this proposal was acceptable under international principles.  Dar supposedly made a counter offer that brought things back to zero. 

At this point, the two sides are in a deadlock.  I think that TID's proposal (assuming the report is accurate) is more a negotiating tactic than a viable proposal.  Rather it is an attempt to break the logjam by setting forth a maximum position.  One they probably know both the lenders and the Central Bank would have a hard time accepting.  What this proposal does, though,  is shift the parameters of the debate.  While lenders may reject a 50% discount, it may be harder to avoid some meaningful haircut - particularly, if the choice is bankruptcy.  And in order to get itself out of having to make a decision that may prove wrong or hurt its and the country's reputation, the CBK may be inclined to lean on the parties to compromise.  TID has just set one bound on the compromise.

It could be that they are trying to play for time - hoping for a miracle.  Realistically playing for time  hurts all parties - TID, the lenders, Islamic Banking, and Kuwait.  But maybe that's the goal - to maintain the status quo.

The article describes the choices in front of the Central Bank as:

1. Issue a conditional acceptance of the proposal subject to conformity with accounting principles and the agreement of the lenders.  (Or in other words neatly pass the buck.  Or is that the dinar? As Al Q elegantly puts it, getting the lenders to agree may be very difficult given the Company's breach/violation of the existing agreement.  That raises AA's first law of underwriting and due diligence "know your customer".)
2. Reject the proposal.  In which case it's expected that TID will sue the CBK in an attempt to confuse the issue and buy more time.  As Al Qabas elegantly puts it الى ما لا نهاية . (Probably not a first choice. More likely is forcing the Company and its creditors back to the negotiating table.  Or putting them in a situation where they will decide the fate of TID, if that fate is to be bankruptcy).
3. Push the lenders to bankrupt the Company - which will lead to all sorts of negatives for all parties and harm the financial sector, Islamic Banking and the reputation of Kuwait. (I'm guessing not an alternative high on the CBK's list).
4. Convert TID to a holding company.  This would remove it from Central Bank supervision so that the lenders can apply the restructuring deal agreed.  Also the CBK's June ratios would not apply.  (This seems to me to be a bit of red herring.  The CBK can grant an exemption to TID as a finance company from the regulations.  Supposedly the lenders will reject this because they don't think the administration of the company is really interested in solving the problem.  The lenders have on more than one occasion made it quite clear what they think about management's ethics.  They began by asking the CBK to place a minder in the Company.  Then they pushed for the appointment of a Chief Restructuring Officer).
5. Force TID back to the negotiating table with the lenders to find a solution and return to the original plan.  (This seems contradictory.  The original plan is probably moot at this point.  I think the lenders are going to have to accept some changes - and these will be against their interests.  From the report of the alternatives they've offered already it seems pretty clear that they've accepted this - even if it was no doubt reluctantly.  The CBK may well force the parties back to the negotiating table but there will be a new deal.  Perhaps the CBK could impose a time limit for reaching an agreement using as the deadline some date prior to the date it's required to give a recommendation to the FSL Court).
6. Give TID an exemption from the new ratios saying the old plan was devised based on Central Bank advice to the lenders and thus it's not fair to change the rules on them.  As per the article, TID has apparently been saying that the original restructuring plan doesn't conform with the CBK's  "new rules".  The implication being the plan must be modified.   (I don't think that the CBK new rules are the real issue here.  The sticking point is TID's ability to pay and to continue as a going concern.  If the new rules were the only point, then I think the CBK would have given the exemption.  This could be quite easily fudged as an agreed plan to implement the new rules. And so it could be presented not so much as an exemption but a granting of additional time to achieve the goal.  When the debt is paid in full, TID will clearly be in compliance).
7. Exit TID from the FSL and leave it to its fate.  (The CBK probably doesn't want to be the one who puts down this dog.  Better to have the lenders do so.  The "trick" is to find a way to put the parties in a situation where they either come up with a solution or fail - a way which keeps the CBK's hands pristine.  The time limit for the CBK to give its recommendation to the FSL Court is a neat escape hatch.  If the parties haven't agreed by then, the CBK can tell the Court it cannot make a recommendation.  The Court should then refuse to allow TID final entry into the FSL.  Since this is the last extension allowed, the matter is out of the CBK's hands.  Nature and the courts then take their course.  That should be quite a frightening thought for the lenders .  As they stare into the abyss  of almost a complete loss, all sorts of discounts and compromises may become possible).

Finally to close out this post, a recap from the Creditors' Committee official letter to the Central Bank rejecting TID's new plan "in whole and in detail":

1. TID's proposal makes a gift of the money of others (the lenders) to the Company and strengthens (supports) the rights of equity at the expense of the lenders who have not received a single fils since the beginning of the crisis but only promises.  (But they were some really nice promises. Perhaps, even said with one's hand on the Qur'an).
2. TID's proposal is contrary to international and global practices (customary usage) and puts the lenders in the situation of a fait accompli with the proposal being put forward without their agreement or consultation.
3. TID's management is "hitting" (harming) the interests of the creditors and shareholders.  Therefore the lenders reject the idea of a discount which is unjust.
4. The Committee considers that TID's proposal ignores the repayment schedule already agreed.  10% in Year 1, 20% Year 2, 20% Year 3, 30% Year 4 and 20% Year 5.  (There seems to be an argument of a breach of faith here.  And, yes, while the lenders may be thinking of a breach of the agreed business contract for the rescheduling, AA also is thinking that in this context the term applies as well to  religion).
5. TID's proposal prefers (in the sense of giving priority) the shareholders over the lenders contrary to what was agreed previously.
6. The Company has wasted the shareholders' money hiring financial and legal advisors and wasted the banks time negotiating the past 18 months.  

This has been a bad situation from Day #1.  The passage of time has not made things better.  It's likely to get worse.

The lenders face a real dilemma.  Do they compromise to try and get back as much as they can?  Or at some point do they just bring down the house of cards?  With 18 months of time on their hands, lenders may have built rather hefty provisions against this name.  That may give them a bit more negotiating room.

The Central Bank is in the most uncomfortable of positions.  It's got to be hoping that third parties or events are dispositive and that it doesn't have to make a difficult decision.

The Investment Dar - New Look to the Website

Overheard on the sidelines of the recent OGM, the Chairman/CEO (in the middle) listens to two stockholders discussing the firm's fall:

"There's a 269th Rule of Acquisition?" 

Our friends over at The Investment Dar have a new look to their website.  A space theme.  Much "neater" looking than the new one over at The National.

Wonder if the lenders approved the expense for the redo? 

And wonder if they're ready to boldly go where no lender has gone before?  (Under the FSL)

The Investment Dar - Changes to Restructuring Plan?

Al Qabas reports that this Wednesday, TID held a meeting in Dubai with the Creditors Co-ordinating Committee and Ernst & Young.  This is the first meeting between the CCC and E&Y.  Earlier the CCC had submitted a letter to E&Y asking that it look out for the interests of lenders as well as the owners of the Company.   

As you'll recall, E&Y has been tasked by the Central Bank to perform the technical study required under the FSL as part of the CBK's determination of whether to recommend that the Special Court make the final decision to either allow TID the protection of the FSL or deny it.  So E&Y is working for the CBK and not the lenders or the owners/borrower.

What's intriguing is that the article also mentions that the CCC has been pressuring the Company to inform it of changes and amendments in the restructuring plan which were made without the knowledge of the lenders.  If you've read earlier posts here, you'll recall that I mentioned in March that the FSL gave the CBK the right to impose additional conditions on the borrower and amend the plan in order to improve the probability of the borrower's performance.  

In this situation, the CBK holds the trump card.  It's "yes" vote is necessary for obtaining entry under the FSL.  Given that a liquidation under local laws would be messy and greatly reduce recovery prospects, both TID and the lenders are going to find it difficult to say "no" - though I suppose they can try to negotiate.   The CBK can counter by citing the report of E&Y - the independent experts asked to assess TID's financial condition and the plan.

It's also important to note that Al Qabas' account is only as good as its sources.  Last July the newspaper reported that E&Y was submitting a "final" report.   Though I suppose one possibility is that E&Y's report at that time said that the Company's  financial condition meant the original plan wouldn't "work" and needed to be modified. 

Absent a direct link into the creditor group, we'll have to wait to see what develops.  If any creditor out there reads this as an invitation to comment, he'd be right. Or, if the creditor prefers, make contact outside the blog via our contact form.

The article also mentions that during the  meeting Brother Adnan, TID's Chairman/CEO, reportedly advised the lenders that he had consulted God before founding the company.  «استخار الله ثم اصدر اوامره في تأسيس شركة تحوي بعض الاصول» .  Subsequent events would appear to confirm that he failed to maintain subsequent contact for management advice.  Or perhaps ignored what advice he did receive. Or perhaps he got a "wrong number" in his original contact

Some of the creditors expressed their disapproval over some of the decisions that Mr. Al Musallam had taken.  After a closed debate, he left the meeting and did not return, leaving the CCC and creditors with an advisor.  Some creditors are reported to have objected that the advisor had no legal status. He was not an officer of TID.  He retorted that he had a position in one of the external entities (whatever that means).

Things aren't going well.  

It seems that relations between TID and its lenders are difficult.  Mr. Al Musallam should remember that during the rescheduling the lenders will be poking their noses into his business.  While the restructuring covenants are no doubt "arranged with the greatest of care in the hopes that the cashflow soon would be there", there will be times when interpretations of meaning will arise.  Disgruntled creditors can read things more strictly if their backs are up.

The Investment Dar - Dubai Creditor Meeting

TID held a creditors' meeting in Dubai 21 September.  Both Al Watan and Al Qabas have accounts.

The Al Watan (Taamir Hamaad) article is fairly bland - no fireworks.  Adnan Al Musallam  is quoted as reiterating TID's firm desire to repay its debts, adding that the reality of the financial crisis made it incumbent  on everyone the obligation to work together to reach the restructuring.   

He also proposed the formation of a holding company capitalized at between KD300 million to KD400 million - to be administered by the banks and investors - as the vehicle to settle TID's debts.  The rationale appears to be to ensure compliance with the Central Bank of Kuwait's new rules on investment companies.  Apparently to shift the debts off TID's balance sheet along with the assets - thus  improving TID's performance under the CBK's  three ratio tests.  He said that he had requested the executive and legal management of the Company to study this matter.

On the other hand Al Qabas (Mohammad Sha'baan) has a more fiery story (not unexpected) of creditor "anger".  In the Al Qabas version, some creditors are on the verge of a confrontation with TID and its Board over the following:

1. A belief that parties outside the formal management/Board structure of TID are really making the decisions
2. That the Company is deliberately stalling progress
3. That the creditors have been overly patient during the past two years but have gotten nothing from the Company
4. Board Members are deliberately missing meetings with creditors and provoking confrontations in order to evade responding to creditor requests.  A central point is the creditors' demand that they be kept fully in the picture as to what is going on at TID, including efforts to comply with the Central Bank's new regulations for investment companies
5. That some creditors are prepared to bring legal action against all parties - including against the Creditors' Coordinating Committee,  if there is an attempt to impose the restructuring plan without 100% creditor acceptance or acceptance by an absolute majority of creditors.   AA:  This is a puzzling statement.  It's pretty clear by now that all creditors are not going to accept the plan.  And equally that the whole point of recourse to the FSL is to cram down dissident creditors.  Al Qabas' informed sources may be less informed than they claim.
6. That TID has apparently stopped its program of salary reduction for senior management and that the salary scale has reverted to what it was in the boom years.  AA:  This is similar to the earlier theme about creditor anger over a raise and bonus for a member of senior management.  A neat way of attempting to finesse this is to eliminate a reduction and say that technically the fellow is not getting a raise but rather his salary is being restored to what it was prior to the reduction.  Unclear if this is what is going on. 
7. That some Board Members through related companies they control, companies which are partners with TID in certain assets, are gaming the realization of assets.  AA:  This is the fundamental creditor fear - that asset disposals will be gamed to reduce the banks' realization proceeds.  Not an unreasonable fear in the land of egregious related party transactions.

Two quite different accounts, though it should be noted that Al Qabas is speaking about creditor discontent which might manifest itself in the future not battles raging at present.

There's a creditors meeting today in Kuwait for those creditors who missed Dubai.  Hopefully, more detail will be forthcoming.

It's no surprise that creditors' patience is wearing thin.  It's been over two years.  The Central Bank is still reviewing whether to allow TID to use the FSL as cover for its rescheduling.  TID has yet to release any 2009 financials - either quarterly or fiscal year 2009.

The Investment Dar - Al-Musallam Denies Problems

This Thursday (26 August) TID held its 2008 shareholders' annual meeting (delayed because of the delay in finalizing its financials).   Both AlQabas and AlWatan have accounts of that meeting.  Some 73.11% of shareholders' interests were represented.  As per the KSE, the only disclosed major shareholders of TID are the Kuwaiti General Organization for Social Insurance (7.7%) and Efad Real Estate Company and associated companies (18.21%).  So there appears to have been broad shareholder participation.

AlQabas notes that the meeting was held in an atmosphere of "impressive calmness".   All items on the agenda were approved, including agreement with the Board's recommendation that no dividend be declared for 2008. (TID reported a net loss of  KD80.3 million for 2008 of which KD78.6 million is attributable to TID shareholders.  From 2007 to 2008 TID's total shareholders' equity declined from KD349.6 millionn to KD168.5 million due to KD52.9 million of 2007 dividends, KD 37.4 million of losses recorded directly in equity and net purchases of treasury shares of some KD12.2 million.)

The tenor and results of the meeting no doubt a clear reflection of shareholders' confidence in Mr. Al-Musallam's stewardship and performance.

Mr. Al-Musallam also took the opportunity to "set the record straight" on several points, including most of the assertions in a recent AlQabas article:

1. As he has on several earlier occasions, he noted that statements that TID was going to be liquidated were not true pointing out the strength of TID's assets.
2. The CCC is not discussing resigning.
3. In that connection he commented that TID is happy to have the Central Bank of Kuwait's supervisor, Dr. Abid AlThafiri, stay on, but that decision is solely the CBK's.
4. There are no differences with the CBK.  The CBK poses questions and TID answers them.
5. More than 83% of the creditors have agreed to participate in the rescheduling.  The remaining 17% represent only KD110 million.
6. He expects to achieve success with Commercial Bank of Kuwait and Cham Islamic Bank (Syria)  and then will have 89% agreement.
7. He's optimistic about obtaining the Central Bank of Kuwait's approval for TID to enter under the protection of the FSL.  
8. He noted that many of the creditors who have indicated they intend to pursue legal claims (the 17% soon to be 11%) were waiting to see the results of the current stage (presumably whether TID gets under the FSL) before proceeding.  The unspoken point here being that if TID enters the FSL, then perhaps some or all of these holdouts may join the rescheduling.  Not an unreasonable assumption.
9. Contrary to rumors, there is no raise for any senior member of TID's management.  Apparently, not even an "unrealized" one! 
10. TID is not late with its prior year's zakat.  Though the wording used here seems to imply that perhaps the committee has not yet distributed it - which would qualify as being "late" for a simple minded guy like me.  وأكد المسلم أنه لا يوجد تأخير في دفع الزكاة عن الشركة، مستشهداً برأي لجنة الفتوى والتشريع التي أكدت على ان الشركة لم تتأخر ولكن هذه الزكاة تعود الى السنوات الماضية، منوهاً الى ان اللجنة تقوم باخراج الزكاة من وقت الى آخر حسب الحالات التي تقوم بدراستها من وقت الى أخرى
11. Perhaps, the answer is that "class is not yet over" and the studies continue?  Anyone who can confirm or amend my translation, please jump in with a post.
12. He did take the time to point out that the 2008 loss (largely due to provisions of KD89.5 million) was not realized.  
13. Asked about 2009's financials and the CBK's requirements for additional provisions, he declined to answer, commenting that the Company respected its regulator's (the CBK's) views, would have the auditors review them. But in the final analysis will do what the CBK requires.
14. One other important "bit" he stated that the Company had appointed new auditors (dual case used).  In 2008 TID used the local incarnations of Deloitte and Touche and KPMG.  
15. The Ministry of Commerce and Industry raised comments during the meeting that the Board did not meet during 2008 (I take this to mean regarding 2008 financial performance not that there were no board meetings that year) and that TID failed to properly register its shares in Bahrain Islamic Bank,.  These shares (8.7% of BIsB) were acquired by TID in satisfaction of a financing receivable and are discussed in Note #8 to its 2008 financials. Mr. Al-Musallam said that the Board did not meet because the financials were not approved (presumably he's referring to the auditors and CBK).  The BIsB shares are in the process of being registered.

A new Board was elected as follows:

1. Adnan Abdul Qadir Mohammed Al Musallam, Chairman and MD
2. Rajam Al Roumi
3. Ghanem Al Ghanem
4. Adel Behbehani
5. Adnan Nisif
6. Musa'id AlMukhaytar
7. Nabil Abdul Rahim

And "reserve" directors (in case of need for a replacement of a sitting director):  Nabil Amin, and Abdul Muhsin Al Kandari.

Hopefully, this impressive performance (there's that word again) will silence the unfounded criticism of TID in the market, leaving only the founded sort.

The Investment Dar - Creditors Committee "Fed Up" or Posturing for the Central Bank?

Today's (25 August) AlWatan and AlQabas carried two quite different articles on the Creditors Committee.  One can consider these straightforward news items.  And perhaps, just perhaps, attempts to influence the Central Bank's decision making process.

Playing the role of good cop is Bader Abdullah Al-Ali, CEO of Gulf Investment House Kuwait, the official spokesman of Creditors' Coordinating Committee ("CCC").  As reported in AlWatan, he noted:

1. That the Central Bank of Kuwait had played a pivotal role in the rescheduling expending considerable efforts to bring agreement between the concerned parties.
2. That the CCC believed the rescheduling remained the best means available and offered the ideal reclamation of lenders' rights.
3. That the fundamental goal of the CCC was the essential role of involving the lenders in crafting the rescheduling according to generally accepted international principles.
4. That the CCC was confident that the CBK understood the role the CCC played.
5. That the CCC hoped for the response of the CBK in the shortest time possible.

Or in other less polite words:

1. You've done your part and we acknowledge your professionalism.  So now it's time to acknowledge ours.
2. The plan is fine we, the CCC on behalf of the lenders, crafted it according to generally accepted international principles (which should no doubt trump any purely local or regional views that you might have).
3. So don't tamper with it.  And be sure not to exclude us in the process.
4. Get off your duffs and approve it.

The bad cop role falls to unknown sources who have provided AlQabas with the background for its article.

1. TID's application for entry under the FSL has effectively ended the productive work of the CCC.  The Central Bank has the entire file in its hands.  As a result, the CCC is reduced to holding meetings to discuss the latest developments without being able to influence them.
2. The FSL represents the last chance of the Company.  If entry is rejected, a myriad of lawsuits against the Company and its management will be launched seeking bankruptcy.
3. Ernst and Young have bluntly told the CCC that they were engaged by the CBK and have no connection with the CCC or the lenders.  Their marching orders come from the CBK alone.
4. The CCC, mindful of its responsibility to the lenders, are fearful that actions may be taken affecting the Company without their involvement or knowledge.
5. As a result, they discussed at their last meeting whether or not they should withdraw and resign en masse.
6. Adding to their rancor from exclusion from the process are several items, some of which have recently emerged.  
7. Apparently TID has advised the CCC that it had some KD12 to 15 million of  unpaid Zakat arrears which date from before the crisis.  The CCC do not understand why these were not paid as the associated profit has already been distributed.  There was no note of these in information provided.  Nor does there appear to be any fatwa authorising the delay.
8. There are increases in salary for one of the senior executives as well as a requested bonus.  (No doubt a "performance" bonus.  And, yes, the term "performance" is used in the same sense as in my recent post on GFH's 2Q10 financials).
9. The Company's failure to present financials for periods after 2008.
10. The resolution of TID's file is dragging on and may extend to next year.
11. The dissolution of the CCC would deal a fatal blow to the Company as the CCC is the glue which binds the "alliance" of consenting creditors.
12. Failure to obtain the protection of the FSL will lead to thousands of lawsuits which will rain down on the Company.
13. The article closes by noting the frustration of the CCC with TID's public relations firm who are felt to have issued a torrent of meaningless press releases about nothing.  Adding insult to injury, it seems that TID has incurred payables of 7 million (presumably KD) for these services.  This last bit has me questioning my translation as I'd expect there would be some sort of expense controls in place from the CBK appointed manager and/or the CRO.  So I'm inviting comments on my translation - the last sentence in the Al Qabas article.

Certainly, there's a lot of justification for rancor in the CCC and among the lenders.  They've expended a lot of time dealing with the rather slippery management at TID to get this far.  That matters aren't moving more quickly has got to be distressing.  As I am sure are the latest "shenanigans" of the Company - though frankly speaking, the lenders can no doubt expect many many more during the implementation phase of the restructuring.

But as we did above with the good cop's position, let's translate the bad cop's argument into less politically correct speak:

1. We, the CCC, are the critical guys in the process holding the creditors together. If we walk, TID comes crashing down.
2. You're ignoring us.
3. We're fed up by your inaction and by the Company's shenanigans. (Notice, as usual, AA is being highly charitable.  And my zakat in that respect is being paid on time!).
4. If we don't get what we want, we're going to take our ball and go home.
5. Then you'll be the culprit as TID collapses.

While no doubt this tactic does put a bit a pressure on the CBK, in the final analysis it's not very credible.  The lenders are not going to walk away from their best hope of recovery:  the rescheduling and the FSL.

If the Central Bank is looking for way out of approving TID's request, then this may be just the entree they're looking for.    That being said, I don't expect that.  My worst case scenario is that the CBK comes back with modifications to the plan - which by that time the parties thereto should be sufficiently exhausted that they will willingly accept what the CBK wants in order to finally close the file and move forward.

AlFarabi Investment Company Planning to Enter Under Financial Stability Law

Yesterday Al Watan published an article stating that Al Farabi had received agreement in principle from the Central Bank of Kuwait to enter under the protection of the Financial Stability Law.

Today AlWatan published an article in which AlFarabi's GM confirms the news.  But denies being the source of the leak as the Company's intention is to wait until the upcoming shareholders' general meeting.

AF is primarily Kuwaiti owned by financial institutions KFH and  Industrial Bank of Kuwait and corporate groups.  From Kuwait:  Al Mousherji, Al Sayer, Hasibat Groups of Kuwait and the Olayan Group of Saudi Arabia.   It states it conducts its business according to the Shari'ah.

It is a private equity, direct investment firm which is probably best known for winning the privatization of the lube oil blending plant from KNPC.  The lube oil venture is separately capitalized from AF.

The Investment Dar - Musallam at Today's OGM - The Future is Bright

The following is based on AlAmir Yusri's article in the 10 August AlWatan.

Monday (9 August) TID held an ordinary general shareholders' meeting at the request of the MOCI in the words of Badr AlShamary, the representative of the MOIC, the meeting was called "in consideration for the shareholders, to protect the national economy, and in conformity with the Commercial Companies Law."  The Company will be holding its "own" OGM on 26 August.

Some 64.88% of shareholders were present and so there was a quorum.  AlWatan notes that the meeting was a vindication of sorts for the current management and board as not a single shareholder lodged a formal complaint or objection regarding management's or the board's conduct.  One shareholder did raise an objection about the MOCI's conduct with respect to TID.

During the meeting TID's Chairman and Managing Director, Adnan AlMusallam, made the following points:

1. TID is not going to be liquidated.
2. In fact its brightest days are ahead of it, apparently by 2012 if not sooner.
3. It has no "poisoned" assets but rather its assets are real.
4. While they were affected by the crisis, they did not die.  Such assets as Bank Bubyan, Aston Martin, Bank al Bilad, Oqyana and Khabaari are solid.
5. BLOM Bank has joined the restructuring after a conversation with the Company and the CCC - even after winning its court judgment in London.  (There is a critical difference between getting a judgment and getting the cash).
6. Now 83% of the creditors have agreed the restructuring.
7. Good progress is being made with Commercial Bank to come to a friendly resolution of the Bank Boubyan shares problem.
8. The Central Bank of Kuwait handled the crisis -- that's probably the global (small "g") financial crisis -- in the most professional of manners.
9. A small thing like a lawsuit wouldn't disturb our great relationship with the Central Bank.  (You'll recall that TID sued the CBK over what it claimed was unfair treatment concerning its 2008 financials).
10. TID has four month extension of the stay on legal claims against it in Kuwait.  You'll recall the Central Bank asked for an additional four months to decide whether to recommend for or against TID's final entry under the Financial Stability Law.

All in all a very optimistic assessment.  As Adnan noted even during the Iraqi invasion he refused to be pessimistic.  And if you've read the Arabic text closely ( ان شاء الله..والله على ما اقول شهيد ) , you'll have noticed that Adnan not only swore by God but also called Him as a witness.  So it's doubly hard not to take his comments at face value.

And no doubt with good reason.

Those persuaded by his performance will have to wait to buy shares as TID remains suspended on the KSE.

The Investment Dar - Central Bank Gets Another Four Months to Ponder

Quoting Reuters, AlQabas reports that the Central Bank of Kuwait applied for an additional four months to determine whether TID should be allowed to enter the FSL process - a step that would give it protection from court actions in the State of Kuwait.  And as well, I suspect, from court actions in most other jurisdictions.

The new period runs from 10 July.

Clearly, the CBK is not as convinced as it would like to be that TID can make the current restructuring plan.  

As noted in an earlier post, it's expected that the CBK will impose some conditions on TID as the condition for an approval.  And perhaps propose some modifications to the restructuring plan itself.

From this distance it's hard to see what the CBK's motive is:

1. Reluctance to make a decision that may turn out to be wrong?
2. Hope that if it waits long enough, events will make the decision for it? 
3. Desire to put pressure on the parties to revise the deal - more to the CBK's liking?
4. Need for time to figure out what the right additional conditions are? And negotiate with the parties?
5. Hold TID's feet to the fire a bit longer as a form of punishment?  Though this risks alienating creditors.

The danger with a delay is that those creditors who are pursuing legal cases may win judgments in foreign jurisdictions.  Though I would expect TID to mount a legal defense in such cases that it was partially under the equivalent of Chapter 11 and that foreign proceedings should be stayed until the CBK made its decision, such a defense may prove less effective than TID being finally and formally under the FSL.

A delay does allow the CBK to increase pressure on both TID and the creditors to accept its conditions with minimum negotiation.

The Investment Dar - Central Bank to Impose Conditions to Enter FSL

Muhammad Sha'baan at AlQabas quotes informed sources that the delay in the Central Bank's approval of TID's entry under the protection of the FSL reflects some fundamental concerns and that as a result the CBK is likely to impose conditions and constraints as the price for TID's entry - which they will secure prior to any approval.

The steps will protect the interests of creditors as well as support the rehabilitation of TID.  And this "workshop" (or perhaps worklist) of effective and swift measures will immediately follow entry under the FSL. 

The article notes that TID's "file" is complicated (and presumably this is the reason for the CBK's caution):

1. A significant amount of creditors want nothing to do with the restructuring and are determined to continue legal action.  The concern is that a foreign judgments will be immune from the FSL and thus will disturb the Company and upset the legal protection given.   AA:  There is no real way that the CBK or Kuwaiti authorities can get 100% a priori assurance this will not happen.  The hope is that a foreign jurisdiction will recognize the FSL as being analogous to USA Chapter 11 and stay legal actions in their countries.  This is something the Kuwaiti authorities have to make a leap of faith on once they've decided the larger issue - whether it is better to liquidate or rehabilitate TID.  The USA (State of New York to be precise) has recognized the Administration of TIBC in Bahrain as a fair and reasonable process and has stayed legal actions. One would hope Kuwait could get similar treatment.
2. The Company has yet to issue any financial reports from 2009 or 2010. The article describes several legal/regulatory issues -- the holding of annual shareholders' meetings, restoration of trading on the KSE --  as well as the determination of the Company's financial situation.  AA:  The regulatory issues are immaterial to the issue of ability to repay creditors.  The major issue is whether it makes sense to liquidate the Company or run it as a going concern (which will have a higher expense level).  Which course provides the highest net payout?   Which course does the least damage to Kuwait? The longer the file is left undecided the more value that will be lost. 
3. Complete and detailed information and explanation from the Company is lacking.  The Creditors Co-Ordinating Committee failed in obtaining information on some issues - where the answers are still "floating" according to creditors.  AA:  The CBK, CCC and creditors need to determine if the Company is being forthright.  If it is not, then it's time to remove the Board and management and go forward with the restructuring.  Or put the Company in Administration.  If the situation is unclear because of external factors and the Company cannot respond with precision, then the creditors will have to learn to live with ambiguity.  One would have hoped that by now the creditors would have made a decision on this score or decided to accept less than forthright answers.
4. Some points remain open.  It appears the chief one is shareholder support.  AA:  It seems a mite optimistic to expect shareholders to put more money into TID at this point (as it does for Global) until shareholders seem the direction of the restructuring.  Presumably, any money put in will wind up immediately in the creditors' pockets.  A rather hard sell to shareholders who have probably lost most if not all of their past equity.  Invest money not to build for the future but to pay off loans. Even putting money in to build the business requires a bit of optimism - perhaps irrational - at this stage.
5. Another major unresolved issue is expense reduction/control including grants, bonuses etc for management.  AA:  Unless this is the typical bankers' myopic focus on pennies in a restructuring, this is a rather disturbing bit of news.  If repayment of TID's mountain of debt depends on reducing relative hillocks of expenses, it may be time to consider Administration.  Unless of course the intent of the plan is a disguised liquidation.  Or there is no alternative to current management and controls are required to avoid dissipation of assets.   
6. Ernst and Young (who the CBK hired to evaluate TID's financial condition) ran a series of stress tests (to use a term common in the press).  Apparently under some of these TID was unable to repay principal and/or service debt.  That led E&Y to comment on the Company's debt burden and  reliance on two sources of revenue.  The CBK is said to be looking for 100% assurance that TID will be able to service its debt according to the plan.  AA:  Perhaps this is just a flight of rhetoric.  But if the CBK is looking for 100% assurance, it needs "tae think again".   The only thing the CBK can be sure of with that level of precision is that banks under its supervision are likely to make manifestly stupid loans again and get themselves into a serious deteriorated situation.  It cannot be sure that TID will sail through.  What it needs is a reasonable assurance - tempered by a keen understanding of what a bankruptcy this size will mean for Kuwait.   The US Court didn't have 100% assurance when it let General Motors through the gates of reorganisation.  

There are a couple of other points of note in the article:

1. Legal experts say that the CBK is not bound by the Special FSL Court's request.  That as the Central Bank it has certain powers beyond and above the FSL.  
2. The Company is described as being in the position of "one standing on shifting sand" given the decline in asset prices and the problem of coming up with asset values given different and moving prices.
3. Some local banks (Kuwaiti) have provisioned between 50% to 100%.  In any case by the end of the year according to CBK requirements, provisions will have to be at 100% as for other troubled investment companies.  AA:  Presumably at that point, having taken the pain, banks don't need to accommodate a plan because they have nothing to lose.  The bankers' rule that a recovery on a fully provisioned loan is found (new) money as opposed to recoveries of old lost money.

Additional conditions and safeguards - while no doubt justified - are unlikely to provide 100% assurance of TID's success.  At some point the CBK will have to make a decision - formed largely by the intersection of approximations of fact and the realities of policy - what is best for Kuwait.   And then prepare itself for criticism that its decision was flawed.  With no doubt a major part of that criticism coming from the "wise and learned" members of the Majlis al Umma.

The Investment Dar - No Decision from Central Bank

It's been roughly four months since TID received the preliminary approval of the Special FSL Court to begin the process for the Company to seek protection under the FSL.  Under the law, the Central Bank of Kuwait has four months to review a proposed  restructuring plan, the financial condition of an applicant and make a determination as to whether it believes there is a reasonable chance that the a company will be able to meet its restructured obligations.  Earlier post on details of FSL here.

At this point the Central Bank of Kuwait has not issued its final conclusive decision.  

Mohammed Al Itribi at AlQabas reports TID held a consultative meeting yesterday (14 July)  with the Creditors Co-Ordinating Committee to advise them of the lack of a decision by the CBK. 

The article notes that this can mean that (a) the CBK is about to issue a negative decision or  (b) as allowed under Article 19 of the FSL ask for additional time no to exceed another four months.   The FSL allows only a single four month extension.

I still think it's unlikely the CBK is going to reject TID's restructuring given the negative fallout on Kuwait.  Perhaps, they're looking to find a way to approve.  And that ties into the E&Y report.   

The  KD64,000 question is precisely what it said.   Did it support the restructuring plan?

If not or if the CBK is uneasy,  then a possible alternative would be to change terms of the plan - extend the tenor or re-profile payments to push any perceived problem out far enough so that the possibility of repayment is increased.  The promise of CBK approval for changes in the Plan could be a powerful incentive for banks to go along and agree - as this will provide some closure to the TID file.   Even if it's only a temporary pushing of the problem to the future.

The article also notes that some alternatives were discussed if the CBK's decision is negative.

The central issue with alternatives is ways to prevent dissident creditors' lawsuits from threatening the viability of the restructuring plan.   One would expect that dissident creditors would seek Court orders  forbidding the disposal of assets by TID during the course of their legal action.   That cuts off cash flow for repayments under the restructuring.  If the dissident creditor wins, assets could be lost - though no more than the creditor's claim (including legal interest, costs, etc).  

One strategy is to just tough it out delaying court decisions as much as possible. Seeking court permission to sell assets and place the  amount at dispute (but not the entire proceeds) in escrow pending the court's decision - allowing the remainder of the proceeds to make payments under the restructuring. 

Or trying to substitute less desirable assets.  Here take my shares in TIDBank and let me have the Bahrain Islamic Bank shares. 

Following the tough it out strategy requires  the co-operation of the  agreeing creditors to go forward.  And strong discipline in their ranks.  It also depends in the final analysis on the amount of the dissident creditors' exposure and their ability to bring suit in various jurisdictions.     

Aayan Leasing and Investment - Financial Stability Law is the Last Refuge

Muhammad Shabaan at AlQabas has an article in the 12 July issue with the headline:  "Aayan:  FSL the Last Refuge."  Which I suppose is perhaps an apt update of Samuel Johnson's April 1775 aphorism - at least in this case.

The article quotes financial sources that the Company is considering resorting to the FSL as it has been unable to reach agreement with its creditors.  Negotiations began over two years ago with the lead bank (KFH, I think), then morphed into multilateral negotiations.  No real progress has been made.  The Company has reportedly stopped servicing its debts.

Some lenders are planning to provision 50% of their outstandings - which is given as evidence that not much more progress is expected.  And which is it suggested will make progress more difficult. 

The article closes by noting that changes in the executive suite will be forthcoming.

It also repeats market talk that Aayan's 2009 financials submitted to the Central Bank some time ago (not specified how long) show a KD40 million loss.  And that the CBK and ALI have not yet been able to agree on the numbers.

If this is true and note that all we have is a market rumor, then ALI's 2009 FYE equity is probably around KD59 million.  That's derived in case you wonder from 3Q09's KD71 million plus and additional KD12 million in losses for 4Q09.

I'm going to go out on a limb here.  I suspect that's because CBK thinks the loss and any asset writedowns should be larger rather than smaller.  Though we did have one Islamic bank state earlier today that it had taken the option of increasing provisions to enhance its financial position.  Maybe the CBK is unlike the Central Bank of Bahrain not open to such moves.  (In case you're wondering, in a radical departure from most comments you read here, that comment is made with tongue firmly in cheek).

The Investment Dar - Good News? Aston Martin Planning a Stock Offering

If the report in AlQabas (which quotes the Internet financial site, City AM,) proves to be correct, there could be some very good news for TID and its eager creditors.

David Richards, Austin Martin's Chairman, is quoted as saying that AM is considering an IPO with valuations mooted in the GBP 1 billion range.  Or a tie up with another manufacturer.

And the news couldn't have come at a better time for TID as the Central Bank of Kuwait carefully considers E&Y's "fateful, final" report on TID's financial position and its ability to meet its obligations under the proposed restructuring as the basis for its decision on letting TID enter the "safe harbour" of the FSL.

Of course, there can be many a slip twixt cup and lip, particularly when one is only at the stage of considering an IPO.   

One might, I suppose, also wonder about the credibility of this source which believes that Austin Martin "is majority owned by the Kuwaiti sovereign wealth fund Investment Dar, which bought it for £503m from Ford in 2007." 

The Investment Dar - Ernst and Young Delivers "Final" Report on Restructuring Plan

AlQabas reports that E&Y has delivered its "final fateful" report on TID to the Central Bank of Kuwait.  The report includes a valuation of the Company's assets which is the basis for E&Y's judgment as to whether TID is capable of continuing as a "going concern" and meeting it repayment obligations under the restructuring.

As well, that the Company held a meeting with E&Y to discuss its analysis.  And that according to sources close to the Head of the Creditors Committee, the CCC held a meeting with Credit Suisse, Morgan Stanley and the Company to discuss the latest developments.

And finally that there are members of the CCC who are ready to propose alternatives should the CBK take an adverse decision on the restructuring plan.

I'd be rather surprised if the CBK did not approve the plan.  Rather if it has serious concerns, it might seek to amend the plan in one or more areas, though again I don't expect this. 

Presumably, the development of alternatives is a further demonstration of AA's Law of the Conservation of Due Diligence.  If you fail to do proper due diligence in the underwriting stage, you "catch up" in the restructuring stage.  And then of course the amount of work reflects the impact of time value (present value).  Much more is done.

As you know, the CBK's approval is required for entry by TID into the safe harbour of the FSL which will protect it - at least in Kuwait and probably in other jurisdictions - from dissident creditors' legal actions.  And recall that the FSL does give the CBK the right to amend the restructuring plan if it feels that such is needed to ensure its implementation.

Aayan Leasing and Investment - Recourse to Financial Stability Law Remains a Possibility

AlQabas quotes Aayan as saying that the Central Bank of Kuwait has not told it to refrain from using the Financial Stability Law as an option to deal with its problems.  Instead the Central Bank has been urging the Company to take the appropriate decision in the interest of creditors and shareholders to exit its financial crisis as soon as possible.

Aayan said that it will continue in a positive manner with its creditors.  And that if it decides to use the FSL, it will only do so after consultation with its creditors.

You'll recall from earlier posts (which  you can retrieve using the label "Aayan") that the Company has some KD416 million in debt.  As well KFH is a significant shareholder and seems to be trying to shepherd this case to a positive conclusion.

The Investment Dar - Update on Financial Stability Law Process

AlQabas reports that Ernst and Young has presented its preliminary report on TID to the Central Bank of Kuwait.  It's expected that its final report will be presented in July.  The Central Bank will then study both reports to determine if TID is solvent and should be allowed to used the Financial Stability Law to implement its restructuring.  After completing that study, it will make its recommendation to the Special FSL Court.

The article goes on to note that if the Plan is approved the Central Bank will retain a monitoring role.  If the Company fails to abide by the restructuring, then the Central Bank would recommend whether TID should be given a second chance or should be put into liquidation.

I suspect that this means that a final decision on TID's entry under the FSL will take place in late July or early August.  A September implementation - as discussed earlier in the Kuwaiti press - might take place.  One potential timing issue could be Ramadan - which is expected to begin somewhere just before mid August.

Earlier posts on the Financial Stability Law can be accessed using the label "Financial Stability Law".

The Investment Dar - Restructuring Update: Moving Forward Toward Implementation

Quoting informed sources "close" the Creditors' Co-ordinating Committee ("CCC"), AlQabas reports that the advisors to the CCC will finish drafting the documents and all preparatory steps to begin implementing the restructuring just before the end of the coming week. And that these will be discussed with the Company in the weekly scheduled session Thursday.  Then implementing regulations to the restructuring plan will be submitted to the Shari'ah boards of TID and the CCC's advisors, Morgan Stanley as well as to Ernst and Young who the Central Bank engaged to review the Plan as required under the Financial Stability Law.  The article notes that the Plan will be submitted at a later stage to the Court for final approval and that this may help in getting final approval for the Plan leading to its implementation under the FSL.

AlQabas also notes that the CCC and TID have been discussing the Company's five year budget/financial plan (the period of the restructuring) and the details of repayment of the debts which is expected to begin this September once the Court approves the Plan and the Central Bank gives the "green light".  The article ends by noting the complicated and thorny condition of TID.

The Investment Dar - Financial Stability Law - Central Bank Appoints Ernst and Young

AlQabas reports that it has learned that the Central Bank of Kuwait has appointed Ernst and Young as consultant to study TID's financials.  E&Y is said to have received the formal engagement letter yesterday (4 May).

As you'll recall from the earlier discussion of the Financial Stability Law, there are several steps in the process.

Once the special FSL Court has received the completed application from an investment company to enter under the FSL, the Court issues an immediate but temporary stay.  After interested parties receive formal notice of this action from the Court, they are given time to file any objections as to why the Court should not continue with the FSL process (which ultimately may result in the cramdown of dissident creditors through the staying of all legal cases).

At the end of this period and if there have been no objections or the Court did not find any of them compelling, it issues another notice and refers the debtor's case to the Central Bank of Kuwait.

That's the point we're at now.  The relevant chapter and verse from the FSL is Part 3 Article 19.   The CBK is to study the debtor's financials and determine whether a restructuring makes sense.  In other words can the company be saved?  If not, the company should be liquidated.  It then also evaluates the proposed restructuring plan to determine if it is  fair as well as sufficient to allow the company to continue as a going concern.  The CBK has four months to submit its report, though t is allowed an additional four months if required.  It's very important to note that the FSL gives the CBK the power to amend the restructuring plan if the CBK believes changes are required.

AlQ also mentions that next week TID's and the Creditors Co-Ordinating Committee's lawyers will meet in Dubai in a small working meeting to discuss certain (undescribed) details of the restructuring plan that they were unable to cover in the last meeting.

The article also notes that various courts have delayed hearing open cases and appeals related to TID until 17 and 24 May.  Technically these are not finally stayed until the FSL Court issues its final acceptance of the plan - which will follow the Central Bank of Kuwait's report.  The courts are  therefore going to keep these cases "live" but "napping" until the FSL Court issues its final ruling.  That way, if by some chance the FSL Court rules against TID's request,  the courts can proceed with these cases.