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Case Study
Restructuring various bilateral debt into Sukuk Al-Wakalah for First Investment Company
Alex Saleh

On the 20th February 2011 Liquidity Management House (LMH), serving as structuring advisor on behalf of six Kuwait banking institutions, successfully completed a KWD92 million (US$330.4 million) debt restructuring of First Investment Company (FIC).  Serving as lead counsel, the Kuwait office of Al Tamimi & Co represented the creditors’ interests in the deal with FIC.

With its expertise in Islamic financing, Al Tamimi & Co was able to structure this transaction in a unique fashion, thus making it the first of its kind in Kuwait with respect to utilizing Sukuk for the purpose of restructuring a company’s existing debt obligations. The initial closing occurred in September 2010 involving one of
FIC’s major creditors, thus creating an opening for the remaining
creditors to join in the deal in 2011.

Objectives
The objective for all involved parties was to restructure the bilateral agreements and the corresponding unsecured debts collectively between FIC and its creditors through a syndication which was collateralized with assets equaling 150% of the debts. Thus, LMH proposed rolling the debts into a Sukuk Al-Wakalah. With both FIC and its creditors facing uncertainty with the status quo, a solution needed to be found.  The Sukuk transaction allowed FIC to continue to operate despite its outstanding debt with several unsecured creditors while at the same time protecting the creditors by collateralizing FIC’s assets.

The LMH team was led by Emad Al Monayea, the chairman and managing director; Masroor Ahmed Siddiqui, the senior vice-president of investment banking; and Mubarak al Refaei, the vice-president of investment banking.  Al Tamimi’s involvement in the transaction, which included drafting and negotiation of the documentation, was led by Alex Saleh, partner and the head of the Kuwait office, along with partner Philip Kotsis.
 

Sukuk structure
FIC is a Shariah compliant company and its debt obligations consisted of numerous unsecured bilateral Islamic financing facilities to multiple creditors in Kuwait.  According to the terms of the deal, the bilateral agreements were replaced, subject to certain conditions precedent, through the creditors’ subscription into the Sukuk Al-Wakalah.

Specifically, the creditors converted the debt with FIC for Sukuk certificates issued by a Cayman Islands special purpose vehicle named FIC Sukuk Company (the issuer). In turn, the creditors’ role became that of a Sukuk holder pro rata to the current amount of debt held against the total amount of KWD92 million. Specifically, the Sukuk Al-Wakalah, due in December 2015, was constituted by a declaration of trust made by the issuer in favor of the creditors during the term of the Sukuk.

The issuer’s role as trustee allowed it to collect from the Sukukholders (creditors) certain proceeds and in turn use the same to purchase various trust assets from FIC.  Upon transferring the trust assets to the issuer, FIC is deemed to have repaid the debt with the proceeds of the capital provided by the Sukukholders.

FIC also executed a purchase undertaking in favor of the issuer, as trustee to the Sukukholders. Correspondingly, FIC undertook to purchase particular trust assets prior to each periodic distribution date and upon dissolution, undertook to purchase all of the remaining trust assets at an amount specified by the issuer.

Al Tamimi & Co: Response
Al Tamimi’s expertise in Islamic financing was an integral factor in this unique restructuring of debt into Shariah compliant instruments.

“We believe this innovative deal will provide a positive outcome for both FIC and its creditors.  Deals such as these are primarily dependent upon both the debtors and the creditors both wanting a constructive and realistic outcome while ensuring the proper incentives are present to make the transaction worthwhile for the creditors.  The goal is not only to protect the creditors in these situations, but to develop a structure to enable the debtor to function in a manner to allow the debts to be satisfied over time.  We believe this deal will achieve the goals and protect the interests of the creditors while providing FIC with a firm basis from which it can fulfill its debt obligations,” stated partner Philip Kotsis.

Conclusion
The creditors were able to convert the outstanding debts from an unsecured basis, to requiring FIC to collateralize the vast majority of its local and foreign assets to the security agents acting on behalf of and for the benefit of the creditors. In doing so, the creditors are now poised in a stronger position as owning a secured interest as opposed to unsecured bilateral obligations.

With respect to FIC’s interests and perspective, it is now poised via a Shariah compliant vehicle to move forward with its business operations and restructure the debt in a manner intended for the future sustainability and success of the company.

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