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MENAFN - Arab News - 17/05/2009

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(MENAFN - Arab News) The Central Bank of Kuwait (CBK) is likely to step in to bail out troubled Kuwaiti Islamic investment company, The Investment Dar (TID), which last Tuesday announced that it had defaulted on a periodic coupon payment to certificate holders on its 150 million Sukuk which fell due on April 27, 2009 and which is due for maturing in 2010.

The interim Kuwaiti government's plan is for a number of Kuwaiti state utilities to participate in a debt-for-equity swap, the proceeds of which would help ease some of the cash flow problems at institutions such as TID, which in January 2009 called in Credit Suisse to help with a major debt restructuring plan.

In the case of TID, the plan is to inject 200 million dinars of new capital immediately raised through the contributions of the Kuwaiti state utilities. GCC (Gulf Cooperation Council) sources confirmed that a meeting is scheduled to take place today between officials from the ministries of finance and commerce, the CBK and TID's board of directors.

The new funds will be used to pay off some of the period payments due and other creditors and then to agree to a restructuring of the debt payment schedule over the next year or so. This formula is aimed at giving TID some breathing space, especially for the debt restructuring to start taking effect.

In a statement, TID Chairman and Chief Executive Officer Adnan Al-Musallam stressed, "We believe in the long-term value of The Investment Dar and as part of our proactive plan. To reach this objective we have undertaken a program of cost cutting internally and are working hard toward a satisfactory solution to our financing issues. The company is well placed to withstand the difficulties of the current credit market conditions."

Investment firms and banks in Kuwait have been affected most by the credit crunch and crisis. They include TID and Global Investment House (GIH). In December 2008, TID announced it was seeking to borrow up to 1 billion to refinance its debt. In March it said it was considering selling non-core assets to raise cash. Indeed, TID approached several institutions including the Islamic Development Bank to help refinance some of its deals including the Aston Martin deal.

There has been some criticism of the IDB in not being more proactive in helping some of the more viable troubled Islamic financial institutions. The IDB in the past has helped several troubled Islamic banks in which it had equity stakes - Al-Baraka Turk in Turkey, Bank Muamalat in Indonesia and Ihlas Finance in Turkey, which subsequently went bankrupt.

Last month in an official statement TID announced "that the release of its financial results for the year ending Dec. 31, 2008 has been delayed as a result of additional reporting requirements from the company's subsidiaries and associates. These requirements are integral to the reporting of Investment Dar's consolidated accounts."

Indeed, TID is one of 36 Kuwait firms that had their shares suspended on the Kuwait Stock Exchange after failing to publish their financial results in time.

Amr Abou El Seoud, senior executive vice president at TID, explained in a statement that "during the first quarter of the year, TID has focused on two objectives: Firstly, to prepare a financial restructuring plan, in consultation with its advisers Credit Suisse, for proposal to its banks and investors. Secondly, the production of the financial results of its subsidiaries and associates in order to finalize the audit of TID's consolidated accounts for the year ending Dec. 31, 2008. TID is making every effort to finalize its full year figures for the year ending Dec. 31, 2008 and will announce audited figures to the market as soon as possible to ensure shareholders, investors and banks continue to have a clear understanding of the business as part of the company's proposed restructuring plan."

One Kuwaiti official stressed that the main reason for TID's problems is a miss-match between the company's cash flow streams and reserves, and its liabilities especially its investments with high debt. There have been questions also about the wisdom of investment in high risk transactions such as the GBP522 LBO (leveraged buy-out) of a luxury brand such as the Aston Martin Car Company, which although was a debt-free company at the time, was financed partly through equity and partly through a secondary Murabaha facility.

There are questions also about TID's very 150 million Sukuk offering, especially about its ability to meet the periodic payments given the investment company's highly leveraged business model. In hindsight, these transactions also raise questions about the role of the arrangers, structurers, advisers, consultancies and even rating agencies (if any) involved.

Bankers agree that the TID default may be a one-off and would not have a contagion effect even if there were one or two more defaults in the Sukuk or wider Islamic finance market. The financial market generally also prices in default probabilities to a certain extent.

Another Islamic capital markets expert, however, warned that the main "issue has always been a lack of transparency in the structure and Shariah compliance process. The issuance is also not under a well-regulated jurisdiction familiar with Islamic financial products. Obviously there will be some contagion, as investors will now relook at the structure of the product they are holding. But it is fortunate that there is no secondary market otherwise the mark to market valuations across the board would be in a state of disarray."

The Kuwaiti restructuring effort also means that the government is more interested in finding a viable solution to the problem rather than it be dragged through the courts. A number of TID creditors have already tried to seek recourse in Kuwaiti courts in trying to recoup monies or investments due to them. However, a Kuwaiti judge has dismissed these applications on the ground that he would like to give TID the chance to restructure its debt rather than see the company go bankrupt, which would not be in the interest of the stakeholders.

The only other unconfirmed report of a Sukuk default is that of the 66 million East Cameron Gas Sukuk in the US.

By Mushtak Parker


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