As investors looked on in dismay at the 2009 default of Islamic bonds from Saudi Arabia to Kuwait, many critics forecast the demise of the Gulf’s sharia-compliant industry.
Islamic bond structures were seen as too complicated and too far removed from the real economy. While financial instruments appeared to be based on collateral, they turned out to be just like any other conventional product.
At least $10bn of Islamic debt is maturing in the Gulf this year, according to Zawya, the data provider. The high value of maturities is explicable given that 2007 was a bumper year for sukuk issuance and most had five-year tenors.
The complexity of the sharia-compliant sukuk structures made the debt restructuring talks more difficult and discussions ground on for months, even years, with little progress. The financial crisis caught Islamic banking unawares and left it struggling to convince investors.
However, after a spattering of Islamic debt restructurings, bankers hope the industry is better placed to understand such debt workouts. Trying to spot problems early will be key to companies’ chances at successful negotiations.
“There’s no cookie-cutter restructuring,” says Afaq Khan, chief executive of Standard Chartered’s Islamic unit in Dubai. “Each restructuring will bring a different angle, but we should take comfort that practical solutions with a win-win for everybody have been found.”
The restructurings, such as Kuwait’s Investment Dar, Saudi Arabia’s Saad Group sukuk, or Bahrain’s Gulf Finance House, have taken years to unfold – and some remain unresolved.
Deals that appeared favourable several years ago at the height of the financial crisis have not held their ground as the economic slowdown has dragged on. That has forced companies to return to the drawing board and restructure again.
Analysts are concerned about a number of upcoming Islamic debt maturities. Distressed debt traders are circling companies at the same time as some Islamic bond yields rise.
With a $1.1bn Islamic loan maturity looming, Arcapita, the Bahrain-based Islamic investment bank, has filed for Chapter 11 bankruptcy protection to protect its $3.6bn in global assets from any possible legal challenge from hedge funds.
Dana Gas, the Sharjah-based energy company, has hired Blackstone to help it manage its upcoming $920m sukuk payment after receivables rose on the back of unrest in Egypt.
Dubai government-owned Jebel Ali Free Zone Authority and Dubai International Financial Centre Islamic bonds also are a concern.
All restructurings need to be approved by a sharia board, further complicating the process. Bond restructurings tend to be more difficult than discussions over the repayment of bank loans. Hedge funds, which do not depend on relationships with the company, are often more aggressive at the negotiating table than banks, which may want to maintain good relations.
To avoid such complex debt workouts, companies have felt under pressure to spell out their Islamic bond structures more clearly in prospectuses. Sukuk buyers are also paying more attention to the small print after the financial crisis signalled the end of buying without really understanding the product, bankers say.
Lessons have been learnt from the financial crisis after Islamic finance industry sharia-compliant structures defaulted publicly for the first time. Companies and creditors have as a result learnt to act more quickly and have changed the way they structure debt in the first place.
“You’ve seen a lot of businesses try to not let things slip to a restructuring – rather they’re proactively pushing out maturities. They’re sizing up the refinancing risk they’re willing to live with,” says Muhammad Farhan, head of Islamic finance for HSBC in Saudi Arabia.
One of the problems is the lack of specific advice. “One has to question the quality of advice that’s available in the sharia-compliant sphere,” says Harris Irfan, managing partner at Cordoba Capital, a sharia-compliant advisory firm in Dubai. “It’s very hard to find the right advice.”
Unlike conventional restructurings, in which multitudes of investment boutiques and larger firms compete for business, there are few examples of specialist outfits offering specific Islamic advice to companies in distress. Small teams or individuals offer the service in the larger investment banks.
While some high-profile Islamic restructurings have removed the shock factor that hovers around the fear of default, companies still face few options when it comes to advise on debt management.
With so much debt maturing over the coming months it will soon become clear what lessons have been taken on board. Though some sharia-compliant restructurings have taken place there are still few examples to guide companies in the right direction.
source: Financial Times