Restructuring Kuwait Investment Companies Various Options And Legal Strategies

In light of the recent global financial crisis, it is imperative for Kuwaiti investment companies that are likely to default on their debt obligations to adopt restructuring measures to rectify their financial situation and treat their financial problems, particularly by rescheduling their liabilities and refinancing their debts. Creditor banks stand a greater chance of recovering loans by working with such troubled debtors who are prepared and equipped to restructure their debt. Moreover, such move sends a positive signal to creditor banks that the debtor is committed to meeting its outstanding debt obligations. Cash generated through restructuring initiatives is used to repay selected debt obligations. As a result, a creditor bank is likely to be more willing to re-negotiate the terms of the debt with the debtor.

Recent Impact On Kuwaiti Banking And Investment Sector

The global economic downturn has spared only a few investment firms in Kuwait. The impact has been especially acute because the country has approximately one hundred registered investment companies and several other industrial and real estate companies with large investment portfolios. Listed investment companies alone constituted about twenty (20%) percent of the total market capitalisation of Kuwaiti listed companies at the end of the third quarter in 2008 and about fifteen (15%) percent in 2009, a higher share than in most other industrialised economies.

As in much of the rest of the world, the crises among Kuwait's investment companies stemmed from a misplaced belief in perpetual growth driven by unlimited access to liquidity. In this context, investment companies invested opportunistically in a large number of portfolio companies, often in minority shares of private companies.

The Kuwait banking industry is facing serious financial crisis with some of the largest and well-known players in the investment company sector who have either defaulted or have asked to reschedule their debts.

Various Restructuring Alternatives

By re-negotiating their debt obligations with existing creditors, investment companies can give the creditors greater confidence evidencing their ability to repay their obligations and defining a clear roadmap to improve their cash position. Under a restructuring, creditors gain greater insight into the debtor's ability to repay by being able to closely track their cash movements. Moreover, unsecured creditors can benefit from procuring collateral under the terms of the restructuring and thereby assume the position of secured creditors to such extent. We have identified three alternatives available to creditors to restructure the debts due from Kuwaiti investment companies.

Private Restructuring

Private Restructuring basically means devising a plan for restructuring and refinancing the debt obligations of the debtor in accordance with the plan, on a private basis. The creditors and the troubled debtor are the only parties involved. As almost all investment companies have multiple creditors (including foreign creditors), there is a need to have consensus among the same so as to secure their individual interest. The advantage of a private restructuring is that there is no involvement or interference of any judge or other governmental authority. The private restructuring plan can describe the terms of repayment of the outstanding debt and can also provide for necessary collateral/ security arrangements.

Phases and Relevant Aspects of a Private Restructuring Plan

As an initial step, the creditors...