Reuters: Bankruptcy News: UPDATE 3-Bahrain's Arcapita files for Chap.11 after hedge fund pressure

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UPDATE 3-Bahrain's Arcapita files for Chap.11 after hedge fund pressure Mar 19th 2012, 16:41 Mon Mar 19, 2012 12:41pm EDT * Files for Chap.11 ahead of $1.1 bln March 28 maturity * Blames non-bank creditors for failure of debt talks * Fortelus Capital Mgt legal threats forced filing - sources * Aims to complete restructuring as soon as possible * Still manages $7.4 bln of assets; no immediate sale plans By David French and Dinesh Nair DUBAI, March 19 (Reuters) - Bahrain investment house Arcapita became the first Gulf entity to file for Chapter 11 bankruptcy protection in the United States, after it was threatened with legal action if it did not repay a hedge fund in full, three sources told Reuters. Fortelus Capital Management, which holds 6 percent of a $1.1 billion facility which matures on March 28 and is at the centre of the filing, had been pressing for the past month for a timely repayment, the sources confirmed, along with the three other funds involved, two of them said. "Fortelus was trying to get themselves paid out but it completely backfired on them," said one source working on the restructuring, speaking on condition of anonymity. "They thought their pressure could get them paid out but it got us Chapter 11. It is a big mistake by Fortelus and they will now be waiting years for their money." Fortelus, a distressed debt investment fund, declined to comment when contacted by Reuters. Monday's filing, at the U.S. Bankruptcy Court for the southern district of New York, shows the increased presence of hedge funds in Gulf restructurings and comes days after U.S.-based Monarch Alternative Capital won a $45.5 million legal claim against Dubai's Drydocks World. Funds are said to hold around 18 percent of Arcapita's $1.1 billion murabaha facility, according to a London-based source. A murabaha is a cost-plus-profit arrangement which complies with Islamic law. This exposure was reflected in the presence of U.S.-based fund Davidson Kempner Capital Management on the creditor committee, the first time a hedge fund has fulfilled the role on a Middle Eastern debt restructuring. While most restructurings in the Gulf region, such as Dubai World's $25 billion debt deal, have been bank-only affairs which granted long extensions to maturities, hedge funds have fewer concerns about maintaining relationships for the longer term. "They had no interest in a consensual process or extending the maturity of the loan and were demanding a full repayment," a third source involved in the talks said. The threat of legal action by hedge funds has worked before in the region - Abu Dhabi provided cash to Nakheel, at the time a property arm of Dubai World, to fully repay a $3.52 billion Islamic bond to avoid default and circling creditors. The Chapter 11 filing could end up having a negative impact for Arcapita as banks sell off their exposure to avoid the likely long legal process - sources estimated proceedings could take anywhere from one to three years to complete. "Now it has gone to Chapter 11, the banks will sell and the hedge funds will buy and they will push for liquidation," the London-based source said. "It might be 18 percent now but it may go up to 50 percent as they (the banks) will be more willing to sell." Arcapita's debt maturity had been regarded as one of the most challenging liabilities facing the region in 2012, given its poor cash position and the difficulty of selling assets to raise cash in a global market pounded by Europe's debt crisis. The investment firm had $19.1 million in cash at the end of September, according to the firm's last set of accounts. The bankruptcy filing pushed up the cost of insuring five-year Bahraini sovereign debt against default to 370 basis points, up 12 bps from Friday's close, according to data monitor Markit. FUNDS CAUSED TALKS BREAKDOWN Announcing its filing, Arcapita blamed "non-bank creditors" for its inability to agree a three-year repayment extension. "The actions have precluded Arcapita from reaching such a consensual resolution before the March 28 maturity date, jeopardizing Arcapita's ability to satisfy its fiduciary duties to its stakeholders," Chief Executive Atif Abdulmalik said. The filing, covering Arcapita Bank and five affiliates but none of its operating subsidiaries or portfolio companies, will allow for a comprehensive restructuring to take place, the firm said, adding no immediate asset sales were planned. A proposal is due before the Manhattan court by July 17, a court document said. Most of its portfolio companies are based in the U.S., according to its website, hence its Chapter 11 filing. The case is bankruptcy petition 12-11076-shl. Bahrain's central bank, listed as Arcapita's largest overall creditor with $255.1 million of exposure to the firm, said in a separate statement it had supported the previous debt talks and "desires to see an outcome which best preserves the interests of the bank and its creditors." The other four members of the creditor committee are Barclays, CIMB, Standard Bank and Royal Bank of Scotland, sources told Reuters last week. There are 50 creditors involved in the restructuring, according to the court document. Arcapita's legal advisors are Gibson Dunn & Crutcher and Linklaters, while its financial advisor is Rothschild, its statement said. PricewaterhouseCoopers and Clifford Chance are working with the creditor committee, sources previously said. Like most investment firms in the region, Arcapita was hit by the financial crisis as it struggled to exit its investments and its fee income from raising fresh funds in the Gulf Arab region collapsed. Link this Share this Digg this Email Reprints

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