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 - Extension of Time for Creditor Approval

AlQabas quotes an unnamed financial source that he expects that the Creditors' Co-Ordinating Committee will announce an extension of the deadline for creditors to agree to the restructuring proposal.  At least two weeks perhaps more.

The extension is being justified as needed to complete certain legal requirements and comply with requests from creditors.

Here's my take on the story behind the story:

1. The comment about the completion of certain legal requirements and creditor requests may indicate that some creditors may have imposed conditions on their agreement requiring some changes to the deal, though I think this is just the story to provide cover for an extension without admitting failure in securing creditor agreement.
2. Clearly not all creditors have agreed.  As outlined before, 100% of creditors are required to close the deal.  In an earlier post  on 6 December press accounts, I noted that at that point it seemed that only 66% of creditors (by amount) had agreed. Investment Dar Bank Bahrain at 27%  had not but was expected to agree "soon".  One would think that its agreement would have been trumpeted as a way of building momentum to sweep up the other creditors.  Since this hasn't been announced, it's a safe bet that it hasn't happened.  Though looking at Dubai's PR campaign you might well object that there is a completely plausible alternative explanation.  After all, TID is still running a rather boastful account of its 2007 earnings on its website, which seems (at least to AA) as a bit out of place given its current situation.
   
3. What's telling is the reference in the article to persuading creditors to join who are determined on pursuing their rights through court cases.  An ongoing court case or two could derail implementation of the restructuring as creditors rush to protect themselves.
4. It's now been approximately two weeks since TID submitted its 2008 financials to the Central Bank for approval.  It will be very interesting to see how long before they are released.
   

If the AlQabas story is accurate, this is not good news for TID.

You can access previous posts on The Investment Dar by using the label section on the right side of the Suq Al Mal homepage.

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.

The Investment Dar - Legal Suit Update: Investment Dar Bank and Aref

More from AlQabas.

Investment Dar announces following results of legal actions on 24 November:

1. Bahrain:  The Bahrain Court (presumably Court of Appeals though not specified) has ruled in TID's favor and lifted the legal freeze on its assets in Bahrain, including those all important (from a monetary standpoint) shares in Bank of Bahrain and Kuwait.
2. Kuwait:  TID noted that the judgment in Aref Investment Company's favor was issued by the Court of First Instance and the mere lodging of an appeal (to the Court of Appeals) would stay the judgment.

There are two interesting points to note:

1. Investment Dar Bank Bahrain is listed by Investment Dar Kuwait as an affiliate/subsidiary.  And there was earlier speculation in the Kuwaiti press about the rumored resignation of one of Investment Dar Bank's directors.  Earlier post here.  It is highly uncommon for a subsidiary/affiliate to sue a parent.
2. As I commented earlier, the existence of the Aref lawsuit is not helpful to the restructuring process.   Bankers don't like the threat of lawsuits hanging over obligors.

For more on TID use the label: The Investment Dar.