Kuwait : Global Investment House KSCC’s second deal with creditors to restructure $1.7 billion (Dh6.24 billion) of debt may help Kuwait’s struggling investment companies to recover after the nation’s credit crisis slowed lending.

Shareholders of Kuwait City-based Global agreed this month to issue 122 million Kuwaiti dinars (Dh 1.59 billion or $433 million) of shares to be held by a special purpose vehicle, which would manage $435 million of the company’s debt. Global would transfer the remaining liabilities to a second SPV, enabling it to focus on reviving asset management, brokerage and investment banking businesses after reporting consistent losses since the end of 2008.

“We view the restructuring of Global’s debt as generally positive to the extent that it provides for a resolution process,” Stathis Kyriakides, a Cyprus-based analyst at Moody’s Investors Service, said in an e-mailed response to questions on September 7. For banks, “it appears that a clearer path toward recovering a portion of their exposure is gradually being developed.”

Total debt of the more than 90 investment companies in Opec’s fourth-biggest oil producer amounted to 4.5 billion dinars at the end of July, according to Bloomberg calculations based on central bank data. Local banks have scaled back lending as they await progress on restructuring and amid political conflicts that hindered the nation’s development plan. Loans to private businesses grew 4.6 percent in July, trailing regional peers with growth of 14 percent in Saudi Arabia and 16 percent in Qatar, central bank data show.


New deal


The average yield on Kuwaiti debt has dropped 84 basis points this quarter to 5.91 percent yesterday, according to JPMorgan Chase & Co.’s CEMBI Broad Kuwait Blended Yield index. The equivalent yield for the UAE, where a series of debt restructurings in Dubai has pushed borrowing costs to record lows this year, declined 53 basis points in the period to 4.02 per cent, JPMorgan data show.

Global last reorganised $1.7 billion of debt in 2009 and still requires creditor approval for the capital-raising plan, which would give one of the SPV’s ownership of 70 percent of the company’s capital. In the future, banks would deal directly with the SPVs for repayment, and would receive payments when assets are sold and the company generates income from its businesses.

“The core fee-business company will be protected against any volatility in the market” and creditors would benefit directly from the company’s recovery, Chairwoman and Managing Director Maha Al Ghunaim said September 2. A “good number” of creditors to Global have already agreed to the terms, she said.


‘Right direction’


Other investment companies in the country of 3.8 million people have also worked on debt resolutions. Noor Financial Investment KSCC said in July it rescheduled about 120 million dinars of debt with local banks including Burgan Bank SAK, Gulf Bank KSC, Commercial Bank of Kuwait SAK and Kuwait Finance House. National Industries Group Holding said last month it would pay $475 million of Islamic bonds on maturity after proposing a four-year extension in July.

“Investment companies may now be going in the right direction, though it may be slow,” Jassim Al Saadoun, head of Al Shall Economic Consultants in Kuwait, said by phone on September 6. “Global now just gave up and accepted to be a minority in its own company, there was no choice. Shareholders won’t be under pressure and can concentrate on positive things and putting the company on the right track, building for the future.”


Volumes recover


Trading volumes on Kuwait’s stock exchange are picking up amid a broader uptick of interest in Middle East equities. On August 28, 1.3 billion shares were traded on Kuwait’s bourse, the highest in more than three years. Volumes were 861 million shares today, compared with a 12-month daily average of 418 million.

The Kuwaiti benchmark, which has fallen in each of the last four years, is up 0.2 per cent in 2012, compared with advances of 15 percent in Dubai, 8.1 per cent in Abu Dhabi and 10 percent in Saudi Arabia.

Kuwait’s banks are still struggling to recover after private-sector borrowing grew at the slowest pace in at least 17 years in 2011. About 8 percent of bank lending in Kuwait goes to investment companies, more than 50 per cent of which will need to merge or liquidate, according to Al Saadoun.

The nation’s three biggest banks set aside more provisions to guard against non-performing loans in the first half of this year than they did in the same period last year. National Bank of Kuwait SAK, the country’s biggest lender, more than doubled provisions in the second quarter.

“We continue to see investment companies in Kuwait as troubled entities and we haven’t yet seen much positive signs,” Jaap Meijer, director of equity research at Arqaam Capital Ltd. in Dubai, said by e-mail on September 6. “The cost of risk for the Kuwaiti banks should remain elevated, though can be absorbed by strong pre-provisioning earnings.”


Without government


The government hasn’t actively participated in the restructuring effort, leaving the onus on investment companies to come up with agreements. Global’s al-Ghunaim described the latest restructuring as a plan that makes “everybody comes out better than what they were.” International Investment Group KSCC said in March it made “significant progress” to restructure its debt, including $200 million of Islamic bonds due this year.

“Global’s restructuring will not necessarily act as a blueprint for other troubled Kuwaiti investment companies,” Kyriakides of Moody’s said. “The action doesn’t appear to have been driven by external regulation or the government, which is why shareholder willingness to proceed with such action remains key.”