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:
- 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".)
- 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).
- 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).
- 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).
- 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).
- 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).
- 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":
- 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).
- 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.
- 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.
- 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).
- TID's proposal prefers (in the sense of giving priority) the shareholders over the lenders contrary to what was agreed previously.
- 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.
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