Bahrain investment house Arcapita has filed for Chapter 11 bankruptcy protection in the United States after it was unable to reach a $1.1 billion debt deal with creditors, it said on Monday – a first for an indebted Gulf-based entity.
Arcapita blamed non-bank creditors – hedge funds, in other words – for its inability to strike a deal on its proposal to delay repayments by three years.
“The actions of certain non-bank creditors have precluded Arcapita from reaching such a consensual resolution before the March 28 maturity date, jeopardizing Arcapita’s ability to satisfy its fiduciary duties to its stakeholders,” CEO Atif Abdulmalik said in a statement.
The filing will allow for a “comprehensive restructuring that rationalizes Arcapita’s capital structure and maximizes recoveries to creditors and other stakeholders,” the firm said in the statement.
No immediate asset sales are planned, the company added, saying they would only be carried out “at a time we consider to be the appropriate point of the investment cycle.”
Arcapita’s debt maturity has been regarded as one of the most challenging liabilities facing the region in 2012, given its poor cash position and the difficulty it has faced in selling assets because of the market volatility caused by the European debt crisis.
The investment firm had $119 million in cash on its balance sheet on Dec. 31, according to a Standard & Poor’s’ report published in February.
Most of its portfolio companies are based in the United States, according to its website, hence its Chapter 11 filing.
The cost of insuring Bahraini sovereign debt against default for five years rose on Monday to 370 basis points, up 12 bps from Friday’s close, according to data monitor Markit.
HEDGE FUNDS COMPLICATE
Unlike other restructurings in the region, hedge funds hold a significant portion of Arcapita’s debt – thought to be around 25 per cent of the $1.1 billion murabaha facility. A murabaha is a cost-plus-profit arrangement which complies with Islamic law.
This exposure was reflected in the presence of US hedge fund Davidson Kempner Capital Management on the creditor committee, the first time that a hedge fund has fulfilled such a role on a Middle Eastern debt restructuring.
However, two sources familiar with the restructuring talks said a separate hedge fund was the main opponent to the plan but declined to name the fund.
While most restructurings in the Gulf region, such as Dubai World’s $25 billion debt deal, have been bank-only affairs and have seen long extensions to maturity dates, hedge funds have fewer concerns about maintaining relationships and were expected to force a shift from the usual conciliatory attitude.
The other four members of the creditor committee are Barclays, CIMB, Standard Bank and Royal Bank of Scotland, sources familiar with the matter told Reuters last week.
Arcapita’s legal advisors are Gibson Dunn & Crutcher and Linklaters, while its financial advisor is Rothschild, the statement said.
PricewaterhouseCoopers and Clifford Chance are working with the creditor committee, sources told Reuters last week.
Like most investment firms in the region, Arcapita was hit by the financial crisis as it struggled to exit its investments due to global investor woes and its fee income from raising fresh funds in the Gulf Arab region collapsed.