Classifieds powered by Gulf News

Worldly Wise: Investment Dar's overlooked creditors

In 2009, The Investment Dar (TID) missed a payment on a $100 million sukuk, defaulted and ceased to service its $3.7 billion debt pile

The Kuwait City skyline
Image Credit: Reuters
The Kuwait City skyline. In 2009, The Investment Dar missed a payment on a $100 million sukuk, defaulted and ceased to service its $3.7 billion debt pile.
Gulf News

It's usually small equity investors in Kuwait that suffer the unfair and predatory practices of larger investors, this time, however, small creditors face a similar fate.

In 2009, The Investment Dar (TID) missed a payment on a $100 million (Dh367 million) sukuk, defaulted and ceased to service its $3.7 billion debt pile.

The problem's resolution requires complex financial and legal decisions that should ensure lenders to TID are protected and repaid.

As lenders edge painfully toward getting repaid, the restructuring and legal teams involved in TID's case appear to be making significant oversights that set undesirable precedents.

The oversight relates specifically to individual investors in the Al Dar Money Market Fund, managed by Al Dar Asset Management Company (Adamco), a wholly owned subsidiary of TID.

According to Adamco's website, the fund currently values its assets at about 71.9 million Kuwaiti dinars.

By most industry definitions, money market funds should invest with diversification across liquid, high-quality cash-equivalent instruments. In return for allowing investors to withdraw only on a weekly basis, investors should receive slightly higher yields than a conventional deposit account.

Good governance

In Adamco's case however, all redemptions from the fund have been suspended, preventing investors from exiting since their parent company, TID, defaulted.

It appears the reason that investors cannot redeem their shares in the fund is that the majority of the fund's capital is redirected back into the TID parent company itself, via a series of private loan transactions known as "murabahas".

It turns out that this money market fund, which should be diversified so as to provide low-risk returns to its investors, was in fact used as a source of funding for the TID parent company's other activities.

It's a struggle to see how this is in line with best practices or good governance. According to the Code of Ethics and Standards of Professional Conduct from the CFA Institute, an international industry association, this kind of arrangement gives rise to huge potential for conflicts of interest.

Some could even argue that Adamco's decision to lend the fund's capital to TID breaches the fiduciary duty Adamco has to its investors.

A decision has been made by Kuwaiti courts that TID will initially pay back about 8 per cent of their total debt. This amounts to around 82 million Kuwaiti dinars or 100 per cent of the money currently owed to "individual investors" and "non-financial institutions".

All ‘financial institutions' will, however, only begin seeing repayment sometime in 2013, stretching out to 2017; nearly 8 years after TID first defaulted.

Small individual investors in the Al Dar Money Market Fund are thus lenders to TID (via the questionable Murabahas the fund entered into with TID).

However, according to TID and the court, investors in the money market fund do not qualify for a single fils of the 82 million dinar repayment, as their investment is not regarded as one made by their definition of an ‘individual' or ‘non-financial entity'.

Not only are individual clients of the TID-owned Adamco locked up in a poorly managed money market fund that cannot liquidate assets, but they face another blow by being left out of the restructuring event that will see other individuals owed money by TID paid in full six months from the ruling date.

Raising the issue

Putting in simple words, TID is not really paying back all individual creditors that should be eligible to receive payment as claimed.

The irony is that individual investors in a fund managed by the TID subsidiary Adamco, will come out worse than those who lent directly to TID.

Al Dar Money Market Fund investors should collaborate to make their issue heard and fairly addressed, especially given that Adamco continues to accrue management fees for its money market fund, though they have not yet been paid. One hopes Kuwait's newly formed Capital Markets Authority is taking note.

 

Ali Al Salim is a Kuwaiti financial consultant based between London and Kuwait.

Loading...