Kuwait was one of the first countries in the world to

come up with a stimulus package soon after the credit

crunch. The Financial Stability Law (FSL) was passed in

March 2009 and ratified by the parliament about a year

later, allocating a sizeable US$14bn1to help distressed

but potentially solvent companies with genuine

businesses and adequate assets ride out the crisis.

However, four years on, there have hardly been any

takers, as most borrowers and lenders have felt

discouraged by the stringent qualifying criteria and

onerous compliance requirements. Meanwhile,

companies continued to struggle to keep afloat as the

value of their assets eroded.

During the three-year period starting August 2008,

the market capitalisation of listed investment

companies (the worst affected sector) in Kuwait

declined by almost 80%.2

Several companies applied to their lenders for a

roll over, while a handful sought protection through

the courts. A select few were able to work out

consensual solutions, although various regulatory

hurdles are still holding up the implementation of

these already agreed schemes. As per currently

available information, no major restructuring has yet

entered the implementation phase and there are no

successful completed transactions from where one

could draw lessons. Restructurings that involve

international sukuks have presented further

complications as there is no separate regulatory

framework for non-conventional financing, rendering

potential break-up or enforcement more complex.

The existing bankruptcy laws and regulations in

Kuwait were drawn up several decades ago and do

not support consensual restructurings without a nod

from each of the lenders, irrespective of the quantum,

unless applied for and approved by a Special Court

under the FSL. This has caused companies to look

overseas, e.g. to the English courts, to effect a cram

down (This is not uncommon in the region, though,

where restructuring is a relatively new concept.

Recently, a Bahrain-based Islamic investment bank filed

for Chapter 11 bankruptcy protection in the US, after

it failed to convince one of its lenders to participate in

the scheme). The circumstances that merit creditor

protection are also not clearly defined, and

interpretations vary from case to case. The current

regulations do not specifically provide for any waiver

for acquisition of shares pursuant to a restructuring,

thus requiring the stakeholders of a listed company to

go through a normal open offer process, which

conflicts with the fundamental rationale of a

consensual restructuring.

While the Kuwaiti experience is not dissimilar to

other economies in the region that are grappling with

widespread default for the first time, some typical

characteristics have emerged.

The lending landscapeKuwait’s non-oil GDP accounts for less than 40%

3; the

oil sector is predominantly state-owned and cash rich

and does not rely on bank financing. Lending avenues

for banks and non-bank financial institutions are further

constrained by Kuwait’s low degree of industrialisation

and manufacturing activities. Consequently, a majority of

the lending was directed towards the real estate and

construction sector, which took a severe beating post

credit crunch, followed by lending to investment

companies and trade finance. The investment

companies (ICs), in turn, were overleveraged, and

during times of easy credit, used borrowed funds to

make speculative investments in the capital market, in

real estate or in risky or long gestation start-up

ventures, thereby increasing the concentration risk for

the banks.

While asset values fell below their collaterised

amounts, the Central Bank of Kuwait (the CBK)

Kuwait – One size does not fit all: The Kuwait experienceby Anindya Roychowdhury, KPMG in Kuwait

Three high profile financial restructurings involving international lenders, withan aggregate debt of around US$7bn under negotiation, put Kuwait on theglobal restructuring map four years ago. However, despite some earlyproactive action by the government to support the investment and bankingsector, there has been limited success in terms of completed transactions.Only one case was admitted under the much vaunted bailout scheme andworkouts have been held up due to regulatory hurdles. Borrowers, lendersand regulators alike are experiencing a steep learning curve but a governanceframework for the future appears to be emerging.

1

and to retain flexibility around information shared

with various lenders, some ICs felt it beneficial to

negotiate with lenders on a one-on-one basis, rather

than as a group. This practice was sometimes

encouraged by the lenders too, as they too were

keen not to reveal any issues with their loan

portfolios and also felt that that they might be able to

secure a superior position over other lenders.

However, it was soon apparent that this process

was unsustainable, exceptionally time consuming,

usually with very little chance of success, and often

resulted in alienating various lenders. To further

compound matters, shareholders were rarely willing

to bring in fresh money even if they possessed the

apparent wherewithal, or refused to liquidate viable

assets to at least partially square off the debt under

default. At the same time, shareholders sought large

haircuts from the lenders – causing the latter to

question the commitment of the owners. In some

cases, this led to a complete breakdown in

communication, resulting in messy lawsuits which

brought restructuring activities to a standstill.

A shakeout seems inevitable now. The process of

natural selection should ensure that the smarter ICs

which have built sustainable, viable businesses with real

assets, products and services, and are willing to accept

reality, will be the ones that will survive in the new

order.

LendersThe immediate preference of, local and regional

lenders, being largely unfamiliar with insolvency

situations, was usually to reschedule rather than

restructure, hoping that the problem was temporary

and that the borrower would be in a position to repay

at a later date.

In many cases, there was a general reluctance

among lenders to group themselves into a co-

ordinating committee (CoCom), due to an

apprehension that their interests could be

undermined in the collective bargaining process. In

cases where the company had issued international

bonds or sukuks, the bondholders were fragmented

across geographies with differing degrees of priority.

Many lenders had their finite management bandwidth

focused on larger exposures in other countries and

did not find the risk reward trade-off of a lengthy

negotiation process, in a geography that they had little

understanding of, to be worthwhile. There was also a

general scepticism about the outcome of legal battles

against powerful and well-connected local groups. As a

result, these fringe lenders adopted a do-nothing

policy, hoping that the others with larger amounts at

stake would do the hard work to find a solution for

everyone’s benefit.

2

introduced further prudential measures by asking ICs

to bring down their debt-equity ratios to 2:1, maintain

minimum liquidity and reduce foreign debt exposure

within a two-year period ending June 2012. Though

the CBK subsequently marginally relaxed these norms

in January 2012, these well-intentioned regulations

further compounded the troubles of ICs by limiting

their options. Mounting losses had eroded the net

worth of ICs and the inability of shareholders to

either generate sufficient liquidity to reduce the debt

or to inject fresh capital meant that many companies

were now headed towards default, necessitating a

restructuring.

The experience so far is analysed below from the

perspective of the three key stakeholders – the

borrower (typically, an investment company), the

lender (typically, a commercial bank, an Islamic finance

institution, or a bond or sukuk holder) and the

regulator (the Central Bank of Kuwait, Capital Markets

Authority).

Investment companiesThe Capital Markets Authority (CMA) was established

in 2010 to regulate securities’ activities in Kuwait. Prior

to this, the CBK governed both banks and investment

companies (ICs). Though the CBK closely monitored

the 22 banks operating in the country, it did not have

the bandwidth to fully oversee the hundred or so

investment companies, approximately half of which

were listed.

Many ICs did not fully appreciate the extent of

their financial difficulties until it was too late to remedy

the situation. These ICs typically operated through a

holding company structure without generating any

direct cash from business activities. Their financial

problems were usually worse than that which was

reported, as a result of complex shareholding

structures and on-lending between related parties,

which did not necessarily show up in the consolidated

accounts. In short, ICs operated like a bank or a

private equity fund to their subsidiaries and associates,

but often without imposing the necessary fiscal

discipline. In several instances, the borrowed funds

were used to acquire minority stakes in assets spread

across the region, including in countries that later

became conflict zones following the Arab Spring. ICs

sought to upstream cash from investee companies but

had limited management influence to enforce any

disposal decisions.

Both shareholders and management at many ICs

were in denial and instead of pro-actively discussing

long-term solutions with lenders, opted to simply put

off the problem by securing successive periodic short-

term deferments in the hope that things would

somehow improve. In order to avoid wider publicity

3

Local lenders on the other hand were familiar with

the lay of the land and tended to believe that moving

the matter to the court was a more practical solution,

considering the amount of time and effort a workout

would require as lenders often did not have dedicated

or specialised teams to oversee this process.

Traditional tenets of a workout, like haircuts, debt-

for-equity swaps, etc., were relatively new and frowned

upon by the more conservative local lenders. Lenders

were also sometimes reluctant to look at solutions

involving new money, or leaving cash in the business to

help meet critical operating expenses and for retaining

and attracting management talent. These measures are

often key to ensuring the continued viability of the

business post-restructuring. On the other hand, a

forced sale of assets in a depressed market rarely

benefits anyone and, least of all, the lenders.

The experience so far suggests that, in the

instances where a CoCom was set up, and where

there was a general willingness of the borrower and

the lender groups to meet each other half-way, the

process was more effective. On the other hand, the

inability of all lenders to speak in ‘one voice’ more

often than not resulted in a stalemate.

The aftermath of the past four years, during which

the profit margins of local banks more than halved, has

caused a virtual clampdown on lending, except to

existing blue-chip clients who offer a very low credit

risk. As a result, the economy is hurting and many

genuine businesses are suffering.

Given the lack of diversity in the economy, the

borrower mix is unlikely to change in the near future.

Once the banks restart lending operations on a full

scale, they will once again need to lend to investment

companies and to real estate. Therefore, it is imperative

that a governance framework is worked out, within the

constraints and imperfections of the market, in order

to reduce the impact of the next crisis.

RegulatorsTo combat the crisis, the government and the CBK

introduced a combination of facilitative and preventive

measures – the FSL, the guaranteeing of consumer

deposits of banks, the tightening of ratios and a squeeze

on mortgage loans. Side by side, the government also

pushed through a couple of long pending reforms, the

establishment of the CMA (2010) and the new

Companies Law (Dec 2012) which dwells on

corporate governance at length and, among others,

prescribes a framework for dealing with non-

conventional debt instruments like bonds and sukuks.

To stimulate the economy, the government also

allocated over US$100bn for infrastructure projects,

and is reportedly finalising a new Foreign Direct

Investment (FDI) law which will streamline the existing

process and ease the limits in certain hitherto

restricted sectors. The first few mega projects under

an ambitious Public Private Partnership scheme, which

has generated considerable interest among the

international developer community, are approaching

financial closure.

Together, these initiatives are expected to both

diversify lending avenues into more sustainable and

long-term products like project finance and

infrastructure finance, as well as improve controls and

introduce global best practices. Access to financing for

good assets is expected to pick up in the near future,

while raising funds for mediocre assets could become

more difficult.

Unfortunately, despite best intentions, there was

limited follow-through on approved schemes such as

the FSL due to a number of practical issues with the

Figure 1: Kuwaiti banks’ performance was severely impacted by the marked decline in asset quality

Source: Published Annual Reports of 10 Kuwaiti banks

2,468

1,866 2,195

936

59.4%

46.2% 50.8%

37.0%

0

10%

20%

30%

40%

50%

60%

70%

2009 2010 2011 September2012

US$

m

Impairments and provisions

as a % net profit before impairments and provisions

Note: (1) Data relates to 10 Kuwaiti banks, and excludes the newly constituted Warba Bank.(2) Kuwait’s banking sector comprises 22 banks , of which 11 are local; and the remaining 11 are branches of international and regional banks. Of the 11 local banks, five are Islamic and one is a specialised bank for industrial lending.

0

500

1,000

1,500

2,000

2,500

3,000

confidential court in the UK, to bypass the

bureaucratic hurdles of the kingdom, to deal with

such cases in an efficient and focused manner.

Kuwait could set up a specialised, fast-track authority

along similar lines.

• Special Situation Fund: The funds allocated underthe FSL could be used to kickstart a Special

Situation Fund which would negotiate and buy

discounted debt from banks.

• Emergence of new type of financiers: For e.g.mezzanine, sub-debt and distressed funds set up in

the private sector, could provide alternative finance

at risk-based prices to viable businesses which may

not be able to fulfil the stringent asset cover norms

of commercial banks.

• Emergence of specialised providers: Credit ratingagencies and asset recovery companies which could

increase the comfort of lenders, and enable credible

businesses to raise cost-effective financing.

• Pre-emptive rather than reactive monitoring bylenders: Evolution of a monitoring framework by

banks to track end-use of funds, to prevent

unpleasant surprises.

ConclusionWith the benefit of hindsight and experience, the

Kuwaiti restructuring landscape is likely to mature.

However, a fundamental shift is required in the mindset

of stakeholders before any holistic workout framework

can evolve. Regulators and lenders alike need to create

a more enabling environment for distressed companies

to seek out and receive timely assistance.

Notes:1 The Law on Financial Stability and Enhancement of

Banks Conditions, Decree No. 2 of 2009,

www.cbk.gov.kw.2 www.bloomberg.com.3 IMF Country Report No. 12/150, June 2012.

Author:Anindya Roychowdhury, Partner

Head, Transactions & RestructuringKPMG Advisory W.L.L.

Al Hamra Tower, 25th floorAbdul Aziz Al-Saqer Street P.O. Box 24, Safat 13001

KuwaitTel: +965 2228 7000Fax: +965 2228 7444

Email: anindyaroychowdhury@kpmg.comWebsite: www.kpmg.com

4

new regulations, and this has considerably hindered

the success of restructuring in Kuwait. The allocated

corpus under FSL is virtually untouched and the

deadline to apply for a financial bailout has passed,

although other aspects of the Law, which allow a

company to seek creditor protection, are still current.

Prospective applicants could benefit if the government

considers revitalising the FSL by modifying some of

the eligibility criteria that the borrowers and lenders

found difficult to fulfil. These could include:

• relaxing the stipulation that the majority of assets

and loans have to be local. This restriction puts

companies with diversified asset and lender bases at

a disadvantage;

• reviewing the need for the mandatory annual cost

reduction clause which discriminates against

companies that have already voluntarily put through

such measures prior to the application; and

• revisiting the levy of stiff penalties, including penalties

on lenders, for even seemingly minor violations.

OutlookBringing restructuring practices in Kuwait closer to

mature markets will require the following:

• An enabling framework: Regulators could take on amore mentoring stance to encourage distressed but

viable companies to work out consensual solutions.

Procedural delays need to be minimised and

conflicting laws will need to be aligned.

• Shake-out, consolidation, operational restructuring:A merger that pools cash flows, reduces operating

costs and cures gearing is one of the most practical

ways forward to preserve distressed assets.

However, this process could be prone to delays, as it

requires a series of statutory approvals and reviews;

unsurprisingly, very few companies have opted for

this route, though, of late, there was an increased

activity in this space. Financiers are likely to insist on

higher levels of governance and disclosure, which

would necessitate ICs to unwind and simplify holding

structures, raise fiscal discipline and ensure greater

control over underlying assets. Many ICs will turn

asset-light and focus on core, fee-based business

models, and those without real assets will either be

acquired or wind down.

• Establishing a Special Court or Tribunal: Dubai

World prompted UAE to pass decree no 57 to

expeditiously deal with the situation. The scope of

the decree is reportedly being expanded into a

full-fledged bankruptcy legislation; UAE has also

invited senior judges from the UK to add depth and

experience to their judiciary. Saudi Arabia is

reportedly contemplating setting up a special