Sunday, Mar 25, 2012
(This story was originally published Thursday.)
--Debt restructurings could be further complicated by hedge funds tactics
--Bahrain's Arcapita blames hedge funds for bankruptcy protection filing
--Increase in litigation related to lack of world-class laws in region
By Asa Fitch and Nicolas Parasie
OF ZAWYA DOW JONES
DUBAI (Zawya Dow Jones)--Creditors, especially hedge funds, are taking an increasingly aggressive approach towards debt restructurings in the Arab Gulf region, raising the specter of more drawn-out legal battles as troubled companies are put on the defense.
With its filing for bankruptcy protection in the U.S. earlier this week, Bahrain's Arcapita Bank bought itself time to formulate a reorganization while shielding itself from legal action by hedge funds and other non-bank investors.
"We are starting to see hedge funds play a more assertive role in Gulf region debt restructurings and it looks like this trend will continue as hedge funds buy into more of the region's debt," said Muneer Khan, a partner in the Financial Markets practice at international law firm Simmons & Simmons LLP.
The Arcapita case is one of many recent examples where creditors of Middle Eastern firms have either filed or threatened to file legal cases amid financial restructurings. In one of the best-publicized cases to date, Dubai ship-repair giant Drydocks World faced a suit from U.S. hedge fund Monarch Alternative Capital. Monarch last week won a $45.5 million judgment in London against Drydocks, which is restructuring $2.2 billion of debt.
While Arcapita's move appears unlikely to presage similar filings by other Arab Gulf companies, as many don't have assets or operations outside the region, it does highlight the growing desire of troubled companies for protection amid legal threats from investors increasingly unwilling to play ball in restructuring deals.
Ahmad Alanani, senior executive officer at Exotix in Dubai, said Arcapita's decision to file for bankruptcy protection was partly an acknowledgment that hedge funds to which the company owes money weren't going to submit willingly to its plan to deal with its debts. Arcapita has $1.1 billion of loans coming due on March 28, and had been pushing for a three-year maturity extension before it filed for Chapter 11 bankruptcy protection on Monday.
LEGAL ACTION
US hedge fund Davidson Kempner Capital Management is one of the main creditors of Arcapita but it was another hedge fund, Fortelus Capital Management, that helped push Arcapita towards bankruptcy protection by threatening legal action and demanding immediate payment, according to a person familiar with the situation.
"I think anyone following this situation can deduce that what underlined the threats for legal action from hedge funds was the fundamental belief that a three-year restructuring was not going to work," Alanani said.
The potential prospect of more legal action, in overseas courts or not, puts the spotlight again on the underdeveloped legal framework in the Gulf region, an often-cited impediment to the region's economic development.
Abdul Aziz Al Yaqout, the regional managing partner for the Middle East at global law firm DLA Piper, said the rise in litigation--especially litigation in foreign jurisdictions--sprang partly from the lack of world-class insolvency laws in the region.
But it also reflected a shift where creditors are being more aggressive about recovering money after years of playing along with the restructuring plans of distressed companies in the Middle East, he said.
"If you look at the UAE, for example, there have been cases now where a certain taboo has been moved away with respect to government-related entities where proceedings have been taken against them," he said. "People have taken off the gloves and are saying we want the money at the end of the day, where at the beginning we were more careful to maintain a business relationship or we had to be careful not to antagonize our creditors too much," Al Yaqout said.
Hedge funds, as opposed to some of big local and international banks, have their hands less tied as they don't feel the pressure to have to arrange the next loan or bond deal for the same entities, or related companies, that are restructuring, analysts say.
-By Nicolas Parasie and Asa Fitch, Dow Jones Newswires; +9714 446-1681; nicolas.parasie@dowjones.com
Copyright (c) 2011 Dow Jones & Co.
(END) Dow Jones Newswires
25-03-12 0342GMT
