Kuwaiti companies being issuers of bonds that are due for
redemption are presently under duress given that the local
securities and real estate markets have turned sour due to the
global financial crisis. Such issuers having difficulty making
interest and/or principal payments are increasingly considering
restructuring their bond debt to avoid calling in a default.
There has been an increasing trend amongst Kuwaiti companies to
re-negotiate their debt obligations with existing creditors to
provide them with greater confidence evidencing their ability to
repay their obligations. This process is carried out pursuant to an
overall restructuring of the entire debt of the company.
In Kuwait, most of the debt is being restructured since companies
are unable to pay off their debt obligations on time. By adopting a
debt restructuring plan, such companies can avoid a default
situation on the existing debt.
Debt generally comprises of bilateral facilities, syndicated
facilities, bonds or sukuk (Islamic bonds). Where debt includes
bonds and companies are not able to fulfill their debt obligation
arising there under, the bonds are being restructured pursuant to
and under an overall restructuring so as to place bondholders at
par with other creditors. This enables bondholders to avail of the
same security package being offered to other creditors under the
restructuring.
In this article, we will address such bond restructurings in the
context of overall restructurings in Kuwait.
Need for bond restructuring
Issuers of bond instruments issued under the Kuwait Commercial
Companies Law No. 15 of 1960 (the "Companies Law") unable
to make periodic distribution of amounts due on the designated due
dates are compelled to announce default in light of the global
economic slow down. Failure to redeem the bonds on the mandated due
date will generally result in an event of default pursuant to the
terms and conditions of the bonds. The matter will then be referred
to the Ministry of Commerce and Industry in Kuwait
("MOCI") which will in turn refer the matter to the
Central Bank of Kuwait ("CBK"). The CBK can either assist
in restructuring the terms of the bonds or demand payment plus
penalties. While the process at this point is not too clear, in our
experience, CBK may in its discretion even push for litigation.
Given the uncertainties involved with the outcome of court
proceedings, a private restructuring emerges to be a practicable
alternative from the perspective of bondholders/creditors.
Typically, most of the bonds issued by Kuwaiti companies earlier
this decade were in light of the CBK directions with respect to the
'loan to deposit ratio'. There was a splurge of Kuwaiti
companies issuing bonds, and Kuwait banks/ financial institutions
were inclined to subscribe to such bonds as the subscription monies
were not considered to be loans for the purposes of the CBK
directions. Now due to the global slowdown, Kuwaiti companies are
recognizing their financial problems with regard to the outstanding
public debt and are therefore challenged to develop a suitable
strategy for negotiating with bondholders.
Types of bond restructuring
Generally, there can be two scenarios pursuant to which a bond
restructuring can take place.
- Stand-alone bond restructuring; or
- Bond restructuring forming part of an overall restructuring and refinancing.
A stand-alone bond restructuring is a restructuring of only such
debt component of the issuer as is represented by bonds. This may
take place without restructuring the other loans/ facilities owed
by the issuer. Such restructuring may or may not necessarily
entitle bondholders to the security created under an overall
restructuring.
On the other hand, sometimes the overall debt of the issuer
includes a bond issue. As part of the agreement with the parties,
the existing terms and conditions of the bonds are also
restructured in accordance with the commercial terms agreed between
the parties.
In either scenario, prior to entering into a restructuring plan,
bondholders should be convinced that they will be in a better
position to restructure their bonds as against filing/ initiating
legal proceedings against the issuer to recover their loans.
Key advantages to bondholders under an overall
restructuring
Security
Almost all of the bonds issued in Kuwait represent unsecured
obligations of the issuer. Restructuring bond debt could serve as a
major benefit to bondholders since they could demand a security
package from the issuer in exchange for them agreeing to
participate in the restructuring. The assets of the issuer would be
secured for all lenders under the restructuring including the
bondholders.
Pari passu ranking
Under an overall restructuring, the bond liabilities shall rank
pari passu with other liabilities of the issuer without any
preference between them.
Moreover, the transaction security shall rank and secure the bond
liabilities on a pari passu basis.
The bondholders' representative being a representative of all
bondholders (elected pursuant to and in accordance with the
Companies Law) should be a party to the transaction documents,
particularly the intercreditor agreement which serves as the master
agreement connecting the different debt components/ facilities of
the issuer under an overall restructuring. The intercreditor
agreement describes all terms and conditions between various
lenders and the bondholders. It references how any monies received
by the issuer are to be allocated amongst the creditors including
the bondholders. Therefore, any proceeds received from the sale of
assets of and by the issuer are utilized to pay down the debt
obligations owed to the lenders including the bondholders in a
pro-rata manner.
Bond restructuring under Kuwait Companies
Law
The Companies Law references how bonds may be issued and
revised.
Debenture-bonds shall be redeemed by a company in accordance with
the stipulated conditions of the issue, and the company may not
advance or delay the redemption date (Article 122).
An association of which all bondholders of a single issue shall be
members shall be constituted (Article 125). Such association will
defend all rights and interests of the bondholders. The association
will be managed by a bondholders' representative to be elected
at a meeting of the association.
The association shall be convened upon a call by its
representatives or by the board of directors of the company or by
bondholders who hold at least 5% of the bonds. The notice of the
meeting, including the agenda, shall be published in the Official
Gazette (Article 126). The resolutions of the association shall not
be legally valid, unless the meeting is attended by a number of
debenture-bond holders representing two-thirds (2/3) of the
debenture-bonds issued. If such quorum is not achieved, a second
meeting shall be called to discuss the same agenda. A quorum
representing one-third (1/3) of the debenture-bonds shall be
sufficient at the second meeting.
The relevant resolutions shall be adopted by a two-third majority
vote of the debenture-bond holders present, provided that any
resolution for extending the redemption period of the
debenture-bonds, reducing the interest or the debt principal, or
reducing guarantees or in any way affecting the rights of
debenture-bond holders may, however, be adopted only if
debenture-bond holders representing two-thirds of the
debenture-bonds issued are present (Article 127).
Bond restructuring under an overall restructuring will entail
amending the existing terms and conditions of the bonds. The
following action steps will have to be implemented in this
regard:
- Hold a board meeting of the issuer to approve amendments to the terms and conditions of the bonds.
- Prepare an agenda of the meeting to be submitted to the MOCI.
- Obtain MOCI approval on the agenda.
- Publish the agenda in the Official Gazette of Kuwait (Kuwait Al Youm).
- Publish a legal notice in local newspaper in Kuwait.
- Hold an informal meeting with bondholders to generally explain the amendments to the bondholders in advance of the formal meeting.
- Prepare proposed minutes of bondholders meeting.
- Hold a formal bondholders meeting in the presence of a MOCI official to formally obtain bondholders' consent to the amendments.
- Execution of minutes of meeting and MOCI approval on the same
- MOCI to refer the signed minutes to CBK for its approval.
- Execute amendment agreements to the bond documents.
- Exchange the original global bond certificate (being in the custody of a clearing company) with the amended global bond certificate.
- Intercreditor agreement to be executed by bondholders' representative (amongst other parties) on behalf of all bondholders.
Conclusion
Having advised on several overall restructurings from the
creditors' side, we find that restructuring bond debt under an
overall restructuring is a preferred approach from the perspective
of the bondholders since bondholders are placed at par with other
creditors with respect to their liability and transaction security.
Developing and implementing a restructuring strategy is therefore
increasingly viewed by both bondholders and management of Kuwaiti
issuers as a positive step towards effectively managing financial
problems of such issuers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.