Arcapita’s Chapter 11 isn’t for all Gulf companies
Bahraini investment house Arcapita's move to file for bankruptcy protection in the US is unlikely to prompt other regional firms to follow suit.
March 21, 2012 2:20 by kippreport
Arcapita became the first Gulf Arab firm to file for Chapter 11 in the US on Monday, under pressure from hedge funds which demanded full repayment ahead of the maturity of a $1.1 billion Islamic finance facility on March 28.
With multiple Gulf debt restructurings in the works – including some which have dragged on for more than two years – other debtors could use the framework provided by the legal code as a way to settle their own debt issues.
“Surely this means others will proceed to use it,” said a source involved in the Arcapita restructuring. “It’s an example of the maturity of the local market that a company is looking to use this process.”
Hedge funds are known to hold other Gulf debt, with United States-based Monarch Alternative Capital securing a $45.5 million legal win against Dubai’s Drydocks World earlier this month.
But such moves look unlikely for the vast majority of cases and Arcapita, facing special circumstances which left Chapter 11 as the most viable option, will probably be the exception rather than the rule.
STIGMA OF BANKRUPTCY REMAINS
Despite a slew of restructurings in the wake of the 2008 global credit crunch, which left overleveraged Gulf entities exposed, the region still has an awkward relationship with the insolvency concept.
In Dubai, whose 2009 debt crisis stunned global markets, a new law, called Decree 57, had to be introduced by the emirate’s ruler to provide a framework for state-linked conglomerate Dubai World’s $25 billion debt negotiations.
Public discussion of debt troubles is rare, with Middle Eastern culture dictating that any such issues be privately resolved among the involved parties.
That reluctance to publicly admit to debt woes saw Arcapita only appoint advisors in February for a March debt maturity that was widely regarded as one of the most challenging regional obligations of 2012.
The region has also seen potentially embarrassing debt defaults averted by government intervention. In 2009, Abu Dhabi lent Dubai $10 billion partly to help avoid a bond default at state developer Nakheel.
Unlike Abu Dhabi, Bahrain doesn’t have massive financial resources to implement large-scale rescue plans, especially for its offshore banking sector, whose liabilities dwarf its overall economy.
Also, most government rescues in the United Arab Emirates have been for state-related entities or strategically important firms. Moves by Abu Dhabi to bail out indebted developer Aldar Properties – the emirate’s largest listed developer and 49-percent owned by a state fund — over the past year are an example of the latter.
Arcapita would not qualify for such assistance if it were an Abu Dhabi-based firm, according to a senior Moody’s analyst.
“In Abu Dhabi, they made it very clear that they would make support decisions on a case-by-case basis if it is a private company. So if it was private and strategic, they might – as they have shown with Aldar,” said Martin Kohlhase.
“You have to ask if Arcapita would be strategic enough and the answer is probably not.”
So without any government bailout coming, Arcapita had no choice but to go it alone and find the best solution for its debt problems.
Arcapita was able to seek Chapter 11 protection because it had numerous links with the United States, with most of the portfolio companies based there, according to its website.
However, the vast majority of other regional firms in debt difficulties are Middle East-focused, meaning any claim would have to go through the local insolvency regimes which are regarded as untested and opaque.
While Arcapita’s business model, with most of its assets domiciled offshore in special purpose vehicles, allowed it to pursue Chapter 11, it could also undo the firm’s plans.
“The company’s investment portfolio is comprised of European and US assets held through offshore SPVs and that undoubtedly enhances the recovery estimates and enforcement prospects,” said Ahmad Alanani, senior executive officer at frontier investment firm Exotix. The structure of the portfolio was probably one reason why hedge funds bought Arcapita’s debt.
Arcapita could also find its future being decided outside of the US court system entirely as the hedge funds seek the most favourable jurisdiction to enforce their claims.
“There is a lot of (US) case law on not accepting cases which can be worked out in the Cayman Islands, so I wouldn’t be surprised if it all went to Cayman,” said a source at a hedge fund that is an Arcapita creditor. (By David French)