Arif Naqvi, CEO of Abraaj Capital, speaks at the Milken Institute Asia Summit in Singapore last year. A UAE prosecutor has issued an arrest warrant against Naqvi on a cheque bounce case. Image Credit: Bloomberg

Dubai: A dramatic turn of events in lender claims against embattled private equity firm Abraaj has increased ambiguity on the company’s ability to meet its obligations to investors and lenders.

Analysts and private equity industry sources said lenders to Abraaj will have more to worry about the court cases and the liquidity crunch than investors in funds managed by Abraaj.

“Most Abraaj managed funds’ underlying assets are robust. The current legal troubles are unlikely to affect their valuations and investors in these funds are better off than lenders in the overall context the new developments relating to the company,” said the CEO of a UAE-based private equity firm, who asked that his name be withheld.

In a sudden turn of events earlier this week a UAE prosecutor issued an arrest warrant against Abraaj’s founder Arif Naqvi on a cheque bounce case. Tomorrow, a Sharjah court is expected to determine whether to bring charges against Naqvi and a colleague, Mohammad Rafique Lakhani.

The case relates to $300 million in loans from Hamid Jafar, the founder of the Sharjah-based Crescent Group to Abraaj and Naqvi. In the UAE, cheque bounce is treated as criminal offence.

Private equity industry sources and independent analysts said criminal proceedings against Naqvi in the UAE could seriously jeopardise the company’s efforts to liquidate assets and mobilise funds to pay its lenders.

Abraaj and its lawyers said they were surprised by the cheque bounce case and the subsequent arrest warrant. Naqvi is represented by Dr Habib Al Mulla, executive chairman at Baker McKenzie Habib Al Mulla, who argues that the cheque was provided as security for the loans.

“The case has come as a total surprise to us at a time when we were negotiating to settle the matter. The criminal charges and threat of arrest is likely to impact the company’s ability to address the claims of creditors and investors,” said Dr Al Mulla.

Essam al Tamimi, Senior partner at Tamimi and Co. which submitted the bounced checks to the prosecutor said, “The cheques were not a guarantee and were part of documentation which confirms the accused’s liability to repay the debt on the due date of the cheques.  As a matter of UAE Law, cheques by definition are due on the date the cheque bears. The criminal complaint was submitted on behalf of the beneficiary of the bounced cheque in accordance with the relevant judicial procedures.”
  
A threat of arrest in the UAE will seriously impair Naqvi’s mobility in the country and the company’s ability to negotiate with debtors to find amicable solutions.

Negotiated settlement

While a few unsecured lenders had initiated litigation in Cayman Islands a week before the company filed for a provisional liquidiation, secured lenders, particularly, banks are waiting in the hopes of a negotiated settlement.

Kuwait Public Institution for Social Security (PIFSS) and Saint Vincent-based based Auctus Fund were the first to file suits against the company in the Cayman Islands following loan defaults. The court case in the UAE relates to a $300 million in loans to Naqvi from Hamid Jafar, founder of the Sharjah-based Crescent Group. A part of Auctus’ claim, approximately $100 million is linked to Jafar’s loans.

Sources close to the case said Auctus’ claims — which include a part of the claims of the Al Jaffar family — are now covered under the liquidation and should “stand still” until the liquidation process is completed. “To Abraaj’s knowledge, Auctus is now the assignee of the said loan. In the view of our legal counsel, this raises questions of unjust enrichment and the overall basis and merits of the lawsuit,” Abraaj said.

“The issue is now a matter for the public prosecutor, the accused has signed cheques it is now clear he had no intention of honoring and is refusing to appear to face these criminal charges in the UAE,” said Al Tamimi.

Secured lenders, mostly banks, are waiting for Abraaj to honour the debt covenants. A group of banks including Societe Generale, Mashreq, Noor Bank and Commercial Bank of Dubai, have reportedly lent money to Abraaj on a bilateral basis under secured loans.

Analysts said Abraaj’s ability to meet these obligations may largely depend on the speed with which the company is able to liquidate some of its assets, particularly the money it has invested in its own funds.

Banking industry sources and lawyers said, these banks have little choice but to wait until Abraaj makes an orderly exit from its investments to generate liquidity.

K-Electric stake

At the core of Abraaj’s liquidity issues is its inability to complete a deal in Pakistan. Abraaj’s cash position has been eroded as one of its largest-ever exits, the proposed sale of a 66.4 per cent stake in K-Electric, is yet to be completed. The company had agreed to sell the asset to Shanghai Electric Power Co for $1.77 billion in October 2016, but the deal has been held up due to negotiations over electricity tariffs with the government.

“Criminal charges and potential arrest of Naqvi will not serve the interest of any of Abraaj stakeholders,” said Dr Al Mulla.

In addition to banks, industry sources said private offices, corporates and sovereign wealth funds have exposure to Abraaj funds while some have exposures through bilateral loans.

“Without the rescue loan [from Jafar] , Abraaj would probably have collapsed six months ago,” Mr Al Tamimi said. 

The Securities & Commodities Authority, UAE’s market regulator last week sent a letter to UAE-listed companies disclose their exposures before June 28. While Air Arabia has declared a $336 million exposures investments, Dana Gas announced investments of $6 million in a fund managed by an affiliate of Abraaj Investment Management Limited, the investment management arm of Abraaj.