Creating a more effective and liquid market for the trading of non-performing loans (NPLs) in the GCC has been seen as a vital next step for the region’s debt capital markets, market participants told Debtwire.
Despite a lack of trading, there are no shortage of NPLs in the region. GCC listed banks are sitting on around USD 50bn equivalent of NPLs, which represents on average around 2% of total bank assets in the region, said Hisham Ashour, managing director at Saudi-based Haykala Advisors & Managers.
The United Arab Emirates (UAE) has some of the largest levels of NPLs across the region, coming in at SAR 91bn (USD 24bn) equivalent, said Ashour. As a proportion of total banking assets, the UAE continues to top the leaderboard, at 3.4%, with Oman closely following in second place, as shown below.
Source: analysis by Haykala Advisors & Managers, data provided by S&P Capital IQ
Many investors in the GCC do not regularly participate in the purchase of non-performing loans due to the lack of a historically reliable legal framework in the region as well as the slow movement of restructuring processes, said one UAE-based buysider.
Participating in a restructuring in the Middle East is like “death by a thousand paper cuts, I wouldn’t wish it on my worst enemy. No one wants to work together, and conflicting stakeholders’ squabble for years until there is nothing left,” said the buysider.
On the restructuring of Zubair Corporation in Oman for example, conflicting interests across many different creditors has held up talks, with self-imposed deadlines consistently getting extended.
“For that reason, it’s not really a market that we’d actively seek to get involved in,” added the buysider.
What has historically been a tricky market for investors to trade may be about to change though as many sukukholders of NMC Health will be given new loan instruments to trade in the secondary market once its restructuring reaches its effective end date, said one UAE-based trader.
Given the size of NMC’s total debt, the transparency of the administrators in the wake of the BR Shetty scandal and the number of participants in the restructured deal, the liquidity of trading in the secondary market for this loan may be somewhat higher than what the market would usually expect, said a second buysider.
Other chunks of special-situations debt have come up for sale in recent months, including that of Maridive & Oil Services and KBBO Group, which are relatively illiquid, said the second buysider.
The importance of markets
The establishment of an efficient market for NPLs in the GCC would act to facilitate more and faster restructurings in the region, said Ashour.
This is because it would allow special situations teams to come into distressed events with the intention of genuinely turning the business around and injecting new capital, added the trader.
Through the adoption of recent insolvency legislation in the UAE and Saudi Arabia, this is a strong basis for NPL trading to increase, added Ashour.
“The first step is to establish the framework of an insolvency regime, which have begun in Saudi and the UAE. Companies like Azmeel Contracting in Saudi Arabia are starting to work with their creditors to utilise the new regime to its fullest, which is equivalent to the Chapter 11 process in the US,” said Ashour.
Creditors have agreed in principle on the Azmeel restructuring to convert the majority of its bank debt into a perpetual sukuk, which has the benefit of being treated like equity and can be traded, as previously reported. Hisham Ashour is also acting as chief restructuring officer of Azmeel Contracting.
“As more companies and creditors test the system, people can see how it works and will gain confidence to utilise it,” said Ashour.
Once the insolvency legislation is established and used frequently, the question then comes down to how authorities can encourage new entrants to invest and trade such NPLs, said Ashour.
“In most jurisdictions, you can’t buy and sell NPLs unless you have central bank approval, which is possible but requires meeting high regulatory standards,” added Ashour.
Culturally, a shift is needed for creditors to agree to work with each other much more freely too before people voluntarily choose to get involved in such distressed situations, said the first buysider.
“For anyone getting involved in the market, they’d have to be buying this stuff very cheap as the workout process is so tough. There are so many workouts and painful restructurings that go nowhere. None of the banks work together, it’s a free for all and everyone fighting over scraps,” said the first buysider.
Despite the challenges and hurdles that the GCC needs to overcome before an effective market is established, what is clear is that the market sees this as a real opportunity for development. All eyes will be on how liquid NMC’s new loans trade in the secondary once its restructuring effective date is reached, as one of the most high-profile cases in the region.
by Alex Dooler in Dubai
Debtwire Restructuring Database: CEEMEA cases (Access required)