Gulf restructuring reform bears fruit amid coronavirus, oil price crisis, says expert

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Decisions taken in recent years to reform the restructuring process for companies have begun to bear fruit as the coronavirus pandemic leaves businesses scrambling for survival, a senior lawyer said.

The coronavirus pandemic is likely to cause the worst global recession in nearly a century, the IMF said, but authorities in the Gulf have been moving to reform the options available to businesses that are about to go bankrupt since the oil price crash in 2014.

These decisions were likely taken “to enable corporate restructuring processes to be supported in a more structured and stable manner,” Gareth Mills, a Partner in the London-based law firm Charles Russell Speechlys, said.

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“The virus and pandemic have converged to make this restructuring and debt management inevitable, but the Gulf states have the backup needed as far as court mandated legal processes and support firmly in place to do that,” Mills said.

Gareth Mills, Partner, Charles Russell Speechlys, who is based in the Middle East. (Supplied)
Gareth Mills, Partner, Charles Russell Speechlys, who is based in the Middle East. (Supplied)

Mills cited the UAE Bankruptcy Law No. 9 of 2016, the Bahrain Reorganization and Bankruptcy Law (Bahrain Law No. 22/2018), and the 2018 Saudi Bankruptcy Law and subsequent Royal Decree No. M/50 relating to liquidations, as examples of how regulatory frameworks have changed in support of business restructuring.

These laws were likely drawn up with the US Chapter 11 bankruptcy rules in mind which “undoubtedly remains the gold standard model for formal ‘debtor in possession’ restructuring cases,” Mills explained.

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“Near universal reach, a certainty of process and outcome, as well as access to skilled professionals operating in the Chapter 11 arena, have all led debtors around the world to pursue the Chapter 11 route.”

While each example of the UAE, Bahrain, and Saudi Arabia’s laws has its unique aspects, there are similarities, Mills notes, especially in relation to the court-mandated approaches prioritizing the “rescue” of business entities and structured liquidation, rather than a more haphazard and confrontational approach based on creditor rights and litigation.

Even pre-dating the current global financial circumstances, these new laws had begun to be utilized with Bahrain’s Gulf Aluminium Rolling Mill (Garmco) filing a voluntary petition for relief under the new Bahrain law in 2019 and the Saudi court appointing bankruptcy trustees relating to the multi-billion collapse of the Saad Group and Ahmad Hamad Al Gosaibi & Brothers (AHAB).

Bahrain Financial Harbor office buildings. AP
Bahrain Financial Harbor office buildings. AP

Summing up the scenario, according to Mills, “the clear indication is that these legal and financial frameworks will be becoming more relevant the longer the current financial circumstances subsist,” and that companies considering such steps or creditors wary of bad debts should make “considered choices” at an early stage.

Coronavirus prompts businesses to restructure

While these formal methods of restructuring have been reviewed and improved upon, many businesses in the region have already begun a process of informal restructuring, as the economic fallout of the coronavirus pandemic begins to hit.

In late April, Saudi Binladin Group (SBL), one of Saudi Arabia’s top construction companies, announced that it had appointed external advisors to assist with the restructuring of its debts, estimated to be $15 billion.

SBL’s announcement that it had appointed New York investment bank Houlihan Lokey to advise on a restructuring process is the latest indication that the current financial crisis is causing even the most established regional companies to review their current financial and corporate structures,” said Gareth Mills.

Mills has been based in the Middle East office of Charles Russell Speechlys in Bahrain since 2010 advising on commercial dispute resolution, regulatory and competition matters, international arbitrations, and corporate restructuring.

While the SBL announcement is regionally the most significant, according to Mills, “it is by no means unique and follows on from the March 2020 announcement that Dubai-based property developer Limitless is looking to appoint legal and financial advisers to devise a financial restructuring plan.”

“A similar restructuring announcement was made earlier on April 20, 2020, with regards to the re-capitalization of Deyaar Development – another UAE based property developer – having been approved by the Dubai Securities and Commodities Authority (DSCA).”

The company’s shareholders had approved the Board of Directors’ recommendation to reduce Deyaar’s capital from 5.78 billion dirhams ($1.57 billion) to 4.55 billion dirhams.

According to Mills, “SBL’s announcement has to be seen in the context of a wider regional narrative where the undoubted economic pressures brought by a weak oil price and the current coronavirus pandemic is affecting financial institutions and businesses at all levels and across all sectors.”

He says that the quicker companies and lenders address restructuring and debt management issues, “the more likely they are to strengthen their position and to future proof their processes going forward.”

Ratings agency Moody’s impression of the $70 billion UAE government stimulus package was that while it will support bank liquidity and limit likely asset deterioration due to the coronavirus outbreak, it will also increase the potential for problem loans in banks’ individual and syndicated portfolios.

UAE central bank in Abu Dhabi. (File photo: Reuters)
UAE central bank in Abu Dhabi. (File photo: Reuters)

Two weeks later, on April 20, 2020, Emirates NBD underlined the veracity of that impression by announcing they had made provision for bad debts of $700 million, and Emirates Islamic also announced that it had made substantial provisions to mitigate its bad debt position.

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The reforms are intended to ensure that there are structured, court-controlled processes in place that allow businesses to restructure without the threat of individual creditor/debtor claims overwhelming distressed businesses.

These decisions were likely taken “to enable corporate restructuring processes to be supported in a more structured and stable manner,” Mills said.

The changes in the laws are laudable attempts to balance the possibility of distressed business to change their structures to continue to trade whilst at the same time protecting the interest of creditors.

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