Once perceived as a relatively moribund restructuring market, where stressed and distressed borrowers and lenders ended up stuck in interminable refinancing cycles faced with court proceedings that, at least in perception, prioritized local creditor interests, today’s landscape could not be more different.
Earlier this year, Abu Dhabi Commercial Bank PJSC (ADCB) sold a US$1.1 billion non-performing loan (NPL) portfolio of loans to US-based investment firm Davidson Kempner. The transaction is believed to represent ADCB’s first sale of a significant portfolio of NPLs and appears to be the biggest NPL deal in the United Arab Emirates (UAE) to date.
The ADCB NPL deal is just one example that demonstrates how the region’s biggest banks are now embracing a variety of tools necessary to monetize assets, extend maturities and unlock different pools of liquidity. Banks are seeking to reshape their portfolio, refocus on certain sectors and proactively manage stress in a shift toward stress and distress being recognized as part of an economic cycle and not a personal affront to those in charge of stressed companies. Rather than sitting on NPL portfolios and eventually booking provisions, banks are now proactively exploring how to deal with issues early and find solutions to protect value.
Flexible solutions—including entering into NPL deals—now appear to be firmly on the agenda, with the adoption of recent insolvency legislation in the UAE and Saudi Arabia providing a solid legal framework for such transactions. In most Middle East jurisdictions, NPL trades still require central bank approval, which adds a layer of complexity to the process, but the ADCB NPL sale has set an encouraging precedent as similar deals are now in the pipeline.
In addition to NPLs, stakeholders are looking at other products that can extend maturities, unlock liquidity and facilitate refinancing, reflecting the region’s dynamism and alignment with positions taken across the globe.
For example, there have been significant increases in margin-based lending and transactions based on the securitization of receivables. Institutions in the region are also becoming more comfortable when it comes to consolidating books of debt and then undertaking a “jumbo” refinancing to push out maturity. A decade ago, banks were reluctant to pursue this kind of solution, but now they are more comfortable with taking action when assets require attention, even if they are not distressed.
New entrants set up shop
The transformation of the restructuring landscape has put the Middle East firmly on the global restructuring radar and has seen several special situations and private credit and hedge funds open operations in the region.
The market opportunity in the region is significant. In the NPL space alone, listed banks in the Gulf Cooperation Council (GCC) are reportedly sitting on approximately US$50 billion worth of NPLs, which represents on average around 2% of the total bank assets in the region.
International firms that have recently entered the market to take advantage, or are preparing to launch, include SC Lowy, Balyasny Asset Management, Millennium Management, ExodusPoint Capital Management and BlueCrest Capital Management.
Other new entrants, including several private credit players, are expected to follow suit in the coming months. Indeed, figures from the Global Private Capital Association (GPCA) show that momentum behind private credit is already strong, with the Middle East recording a 30% increase in private capital investment in 2022 to almost US$20 billion.
The entrance of global players has brought valuable expertise and capital into Middle East restructurings, with new entrants noting that there are more pathways available to lenders to source liquidity and trade out of positions. Maridive & Oil Services and KBBO Group are recent examples of borrowers with special situations debt that has been made available for trading in secondary markets.
Reforms boost confidence
Investors, banks and borrowers in stressed and distressed situations are undoubtedly benefitting from the wide range of restructuring reforms in the Middle East.
Financial centers in the UAE, Saudi Arabia, Kuwait and Oman have overhauled their restructuring frameworks in recent years, aligning their regimes with international best practice and procedures.
These changes have allowed for more dynamic restructurings and solutions, as seen in Saudi Arabia where creditors of construction company Azmeel Contracting have worked with the company to convert its bank debt into a perpetual sukuk facility that can be treated as equity and traded.
Meanwhile, changes to the laws governing the security of movable assets in various Middle East jurisdictions have broadened the scope of assets that can be used to secure borrowings and provided more certainty around the priority and enforcement of such security. We have seen these laws implemented and relied upon, which have led to successful enforcement actions and have provided inbound investors greater comfort and certainty of the lending landscape.
Active period ahead
Looking ahead to the next 12 to 18 months, it is hoped that the restructuring frameworks in the Middle East will encourage companies across the region to proactively address any areas of potential distress and navigate the wider global macroeconomic headwinds.
Strong oil prices and government spending mean the Middle East is in a relatively favorable position when compared to other regions, although inflation and rising interest rates will track US trends, tightening credit availability and pushing up debt servicing costs.
As the credit cycle turns and company balance sheets are squeezed, the Middle East is in a significantly stronger position to deal with any fallout.
A maturing market and an enhanced distressed debt toolbox have aligned the region with global best practices and have created unprecedented opportunities for international special situations, private credit and distressed investors to support business recovery across the region.