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.

Investment Dar Bank Website Now Password Protected - Adeem Investment Company Website Down for Maintenance/Upgrade

From time to time I like to follow up on my earlier posts to see if there have been any developments. 

So I decided to check today to see if indeed Mustafa Ibrahim AlSalih had resigned his board directorships at Investment Dar Bank Bahrain and Adeem Investment Company Kuwait as had been rumored in AlQabas, a Kuwait newspaper.  For the record:  I have seen no further news confirming that press account.  One would expect that both websites would note the resignation of a board member as significant news.

Investment Dar Bank's website is now password protected.  And the previous link on The Investment Dar Kuwait's website has been removed.  The links to TID's other two banks:  Bahrain Islamic and Boubyan are, however, still there.

In an interesting coincidence Adeem Investment Company's website is also down for unscheduled maintenance so they can upgrade their systems to improve service.  

Rumors of Resignation of Vice Chairman of Adeem Investment Company Kuwait - Link to The Investment Dar Restructuring Saga?

There is an unconfirmed rumor that Mustafa Ibrahim AlSalih, Vice Chairman / Managing Director of Adeem Investment Company Kuwait and a Board Member of Investment Dar Bank Bahrain  ("IDBB"), an "Islamic" investment bank, has resigned due to differences over strategy.

The Investment Dar Company Kuwait, also an "Islamic" investment bank,  ("TID") is the major shareholder in IDBB.   TID and Adeem have partnered in some investments including the purchase of Austin Martin.

The rumor is that Mustafa objected to certain actions TID proposed to take at Investment Dar Bahrain.  Since major shareholders generally get their way, a director opposed to the majority's wish might resign if he felt strongly enough. 

One article also unconfirmed and therefore a rumor suggests a possible reason he might have felt the need to resign.  Another from a TID press release may also indicate possible areas of conflict between TID and IDBB. See the third paragraph.

What's less clear is why he would resign from Adeem as well.  Perhaps Adeem is supporting TID's proposal at IDBB?  Or it may be something else.

What makes this story worthy of note is that TID is the midst of the very difficult debt restructuring of  KD1 billion (US$3.5 billion) of its own liabilities.

That suggests a post on TID would be timely.  And, perhaps, one on Global Kuwait, another major Kuwaiti investment firm in the midst of a debt restructuring.

Given the TID link,  more news is likely to come on this story.

Stay tuned.

And, finally, while it should be clear from the above, it's important to note that I am merely commenting on rumors rather than vouching for their accuracy.