The recent notification by Kuwait's International Investment Group (IIG) KSCC that it was not in a position to make the periodic payments due on July 12, 2010 on its $200 million exchangeable Sukuk Al-Mudaraba issued in 2007 and which matures in 2010, once again turns the spotlight on the governance process, relating to especially unrated sukuk in the GCC (Gulf Cooperation Council) countries.
In fact this is the second time IIG has defaulted in meeting its obligations to its sukuk certificate holders. In April this year, IIG notified the trustee of the Issuance, IIG Funding Limited, that it did no pay a periodic distribution amounting to $3,353,062.50 which was due on April 12, 2010 in respect of $200,000,000 Trust Certificates (Sukuk Al-Mudaraba) due in 2012.
In this latest default, the Kuwaiti Islamic investment company confirmed that it was "not in a position to settle an exercise notice in the sum of $152,467,782.22 comprising $147,490,000 being the aggregate face amount of the certificates to be redeemed by July 12, 2010 and $4,977,782.22 being the aggregate of unpaid periodic distribution amounts. The purchase undertaking relates to $200,000,000 trust certificates (Sukuk Al-Mudaraba) due 2012."
Despite the defaults and the non-payment notice, IIG maintains that it and its businesses are continuing to trade on a normal basis and the day to day operations of such businesses have not been effected by the non-payment notice. The company has also appointed KPMG advisory W.L.L Kuwait to carry out an independent review of its business with the aim of restructuring its debt.
IIG says that it is seeking to establish a forum to enable it to engage in a constructive dialogue with all of its creditors with a view to ensuring that its businesses continue to operate on a normal basis.
Indeed, an interim report by KPMG was published in late July 2010 following the approval by the Central Bank of Kuwait of IIG's financial statements as at Dec.31, 2009. This has enabled KPMG to now produce a final report which will include an assessment of IIG's present financial position. IIG will then be able to assess its position and its restructuring options with assistance from its professional advisers, KPMG and NEN Al Wagayan Al Awadhi Al Saif working with international law firm DLA Piper.
Whether it is a mere coincidence or not, the only two sukuk defaults involving issuances by Islamic investment companies have been in Kuwait. In April this year, another Kuwaiti Islamic investment firm, The Investment Dar (TID), confirmed it had defaulted on a $100 million sukuk when it failed to pay a periodic distribution due on April 27 to holders of an issue maturing in 2010.
Like IIG, TID, with the support of a Kuwaiti court, brought in a Western financial adviser, Credit Suisse, to help restructure the debt and review its business. Like the default of TID, there will be no spill over to the sukuk market in general, which in fact started to thrive especially in South East Asia, with Malaysian sovereign, quasi-sovereign and domestic issuances flourishing unabatedly.
Kuwait was particularly hard hit by the financial crisis, especially the real estate sector. The irony is that these issuances took place, presumably offshore, despite the fact that Kuwait has no sukuk or trust laws in place. Companies such as Rasameel Structured Finance have been working with the Kuwaiti regulators for some time now to get such laws on the statute book, but the wheels of Kuwaiti regulatory, legal and policy machinery is breathtakingly slow, pedantic and politically contentious because of the presence of a influentially small but Luddite Islamist faction within the National Assembly.
The result has been that Islamic finance policy has failed to evolve in a modern scientific way in Kuwait as it had done in neighboring Bahrain or in Malaysia. For instance, the adoption of a standalone Islamic Banking Law took more than three years because of constant bickering over mundane banalities regarding the definition of an Islamic bank between government agencies and the Islamist MPs in the National Assembly. As if that were not enough, the Amiri Diwani (the Office of the Amir) was also involved.
This is unfortunate because Kuwaiti institutions such as Kuwait Finance House have been at the forefront of pioneering the contemporary Islamic banking movement.
Yet such defaults raise serious questions not just about the internal controls and business governance of these institutions, but also of the financial and capital market regulators in Kuwait. These defaults are not entirely due to mere over-exposure to real estate assets or the impact of the financial crisis. They also question the business models of these institutions especially their models for generating cash flows to meet their future obligations such as the periodic payments for their sukuk issuances.
How ironic that the IIG mission statement on its website states: "We at, IIG are guided by our values to maintain the highest level of integrity, treat everyone with dignity and respect, focus on our customers and demonstrate excellence in all we do. Our corporate policies and business practices are designed to ensure that these values are continuously upheld at all levels of our company. In this regard, we are implementing industry best practices in our company's corporate governance and board oversight, and will remain diligent in identifying ways to enhance and strengthen our company."
IIG was incorporated in 1993 as a shareholding company and is regulated by Central Bank of Kuwait. It is also listed on the Kuwait Stock Exchange (KSE). Its trading price of 44 fils per share was last quoted on the KSE on March 31, 2010. Since then there has been no trading and effectively its shares have been suspended pending the outcome of the restructuring.
It is capitalized at KD45.67 million and its total assets at end September 2009 stood at KD134.99 million and only KD25.24 million in cash.
By Mushtak Parker
© Arab News 2010
