Three key points: 1) Kuwait was one of the first countries to introduce a stimulus package after the 2008 credit crunch, allocating $14 billion, but there has been limited success with only one case admitted under the bailout scheme and workouts being held up by regulatory hurdles. 2) Investment companies (ICs) in Kuwait, many of which were overleveraged, have struggled amid falling asset values and tightening regulations, with most ICs now headed towards default and in need of restructuring. 3) Restructurings have faced challenges due to reluctance among fragmented lenders to coordinate, cultural preferences for rescheduling over restructuring, and lack of specialized re

2. Kuwait was one of the first countries in the world to
come up with a stimulus package soon after the credit
crunch.The Financial Stability Law (FSL) was passed in
March 2009 and ratified by the parliament about a year
later, allocating a sizeable US$14bn
1
to help distressed
but potentially solvent companies with genuine
businesses and adequate assets ride out the crisis.
However, four years on, there have hardly been any
takers, as most borrowers and lenders have felt
discouraged by the stringent qualifying criteria and
onerous compliance requirements. Meanwhile,
companies continued to struggle to keep afloat as the
value of their assets eroded.
During the three-year period starting August 2008,
the market capitalisation of listed investment
companies (the worst affected sector) in Kuwait
declined by almost 80%.
2
Several companies applied to their lenders for a
roll over, while a handful sought protection through
the courts. A select few were able to work out
consensual solutions, although various regulatory
hurdles are still holding up the implementation of
these already agreed schemes. As per currently
available information, no major restructuring has yet
entered the implementation phase and there are no
successful completed transactions from where one
could draw lessons. Restructurings that involve
international sukuks have presented further
complications as there is no separate regulatory
framework for non-conventional financing, rendering
potential break-up or enforcement more complex.
The existing bankruptcy laws and regulations in
Kuwait were drawn up several decades ago and do
not support consensual restructurings without a nod
from each of the lenders, irrespective of the quantum,
unless applied for and approved by a Special Court
under the FSL.This has caused companies to look
overseas, e.g. to the English courts, to effect a cram
down (This is not uncommon in the region, though,
where restructuring is a relatively new concept.
Recently, a Bahrain-based Islamic investment bank filed
for Chapter 11 bankruptcy protection in the US, after
it failed to convince one of its lenders to participate in
the scheme).The circumstances that merit creditor
protection are also not clearly defined, and
interpretations vary from case to case.The current
regulations do not specifically provide for any waiver
for acquisition of shares pursuant to a restructuring,
thus requiring the stakeholders of a listed company to
go through a normal open offer process, which
conflicts with the fundamental rationale of a
consensual restructuring.
While the Kuwaiti experience is not dissimilar to
other economies in the region that are grappling with
widespread default for the first time, some typical
characteristics have emerged.
The lending landscape
Kuwait’s non-oil GDP accounts for less than 40%
3
; the
oil sector is predominantly state-owned and cash rich
and does not rely on bank financing. Lending avenues
for banks and non-bank financial institutions are further
constrained by Kuwait’s low degree of industrialisation
and manufacturing activities. Consequently, a majority of
the lending was directed towards the real estate and
construction sector, which took a severe beating post
credit crunch, followed by lending to investment
companies and trade finance.The investment
companies (ICs), in turn, were overleveraged, and
during times of easy credit, used borrowed funds to
make speculative investments in the capital market, in
real estate or in risky or long gestation start-up
ventures, thereby increasing the concentration risk for
the banks.
While asset values fell below their collaterised
amounts, the Central Bank of Kuwait (the CBK)
Kuwait – One size does not fit all:
The Kuwait experience
by Anindya Roychowdhury, KPMG in Kuwait
Three high profile financial restructurings involving international lenders, with
an aggregate debt of around US$7bn under negotiation, put Kuwait on the
global restructuring map four years ago. However, despite some early
proactive action by the government to support the investment and banking
sector, there has been limited success in terms of completed transactions.
Only one case was admitted under the much vaunted bailout scheme and
workouts have been held up due to regulatory hurdles. Borrowers, lenders
and regulators alike are experiencing a steep learning curve but a governance
framework for the future appears to be emerging.
1

3. and to retain flexibility around information shared
with various lenders, some ICs felt it beneficial to
negotiate with lenders on a one-on-one basis, rather
than as a group.This practice was sometimes
encouraged by the lenders too, as they too were
keen not to reveal any issues with their loan
portfolios and also felt that that they might be able to
secure a superior position over other lenders.
However, it was soon apparent that this process
was unsustainable, exceptionally time consuming,
usually with very little chance of success, and often
resulted in alienating various lenders.To further
compound matters, shareholders were rarely willing
to bring in fresh money even if they possessed the
apparent wherewithal, or refused to liquidate viable
assets to at least partially square off the debt under
default. At the same time, shareholders sought large
haircuts from the lenders – causing the latter to
question the commitment of the owners. In some
cases, this led to a complete breakdown in
communication, resulting in messy lawsuits which
brought restructuring activities to a standstill.
A shakeout seems inevitable now. The process of
natural selection should ensure that the smarter ICs
which have built sustainable, viable businesses with real
assets, products and services, and are willing to accept
reality, will be the ones that will survive in the new
order.
Lenders
The immediate preference of, local and regional
lenders, being largely unfamiliar with insolvency
situations, was usually to reschedule rather than
restructure, hoping that the problem was temporary
and that the borrower would be in a position to repay
at a later date.
In many cases, there was a general reluctance
among lenders to group themselves into a co-
ordinating committee (CoCom), due to an
apprehension that their interests could be
undermined in the collective bargaining process. In
cases where the company had issued international
bonds or sukuks, the bondholders were fragmented
across geographies with differing degrees of priority.
Many lenders had their finite management bandwidth
focused on larger exposures in other countries and
did not find the risk reward trade-off of a lengthy
negotiation process, in a geography that they had little
understanding of, to be worthwhile.There was also a
general scepticism about the outcome of legal battles
against powerful and well-connected local groups. As a
result, these fringe lenders adopted a do-nothing
policy, hoping that the others with larger amounts at
stake would do the hard work to find a solution for
everyone’s benefit.
2
introduced further prudential measures by asking ICs
to bring down their debt-equity ratios to 2:1, maintain
minimum liquidity and reduce foreign debt exposure
within a two-year period ending June 2012.Though
the CBK subsequently marginally relaxed these norms
in January 2012, these well-intentioned regulations
further compounded the troubles of ICs by limiting
their options. Mounting losses had eroded the net
worth of ICs and the inability of shareholders to
either generate sufficient liquidity to reduce the debt
or to inject fresh capital meant that many companies
were now headed towards default, necessitating a
restructuring.
The experience so far is analysed below from the
perspective of the three key stakeholders – the
borrower (typically, an investment company), the
lender (typically, a commercial bank, an Islamic finance
institution, or a bond or sukuk holder) and the
regulator (the Central Bank of Kuwait, Capital Markets
Authority).
Investment companies
The Capital Markets Authority (CMA) was established
in 2010 to regulate securities’ activities in Kuwait. Prior
to this, the CBK governed both banks and investment
companies (ICs).Though the CBK closely monitored
the 22 banks operating in the country, it did not have
the bandwidth to fully oversee the hundred or so
investment companies, approximately half of which
were listed.
Many ICs did not fully appreciate the extent of
their financial difficulties until it was too late to remedy
the situation.These ICs typically operated through a
holding company structure without generating any
direct cash from business activities.Their financial
problems were usually worse than that which was
reported, as a result of complex shareholding
structures and on-lending between related parties,
which did not necessarily show up in the consolidated
accounts. In short, ICs operated like a bank or a
private equity fund to their subsidiaries and associates,
but often without imposing the necessary fiscal
discipline. In several instances, the borrowed funds
were used to acquire minority stakes in assets spread
across the region, including in countries that later
became conflict zones following the Arab Spring. ICs
sought to upstream cash from investee companies but
had limited management influence to enforce any
disposal decisions.
Both shareholders and management at many ICs
were in denial and instead of pro-actively discussing
long-term solutions with lenders, opted to simply put
off the problem by securing successive periodic short-
term deferments in the hope that things would
somehow improve. In order to avoid wider publicity

4. 3
Local lenders on the other hand were familiar with
the lay of the land and tended to believe that moving
the matter to the court was a more practical solution,
considering the amount of time and effort a workout
would require as lenders often did not have dedicated
or specialised teams to oversee this process.
Traditional tenets of a workout, like haircuts, debt-
for-equity swaps, etc., were relatively new and frowned
upon by the more conservative local lenders. Lenders
were also sometimes reluctant to look at solutions
involving new money, or leaving cash in the business to
help meet critical operating expenses and for retaining
and attracting management talent.These measures are
often key to ensuring the continued viability of the
business post-restructuring. On the other hand, a
forced sale of assets in a depressed market rarely
benefits anyone and, least of all, the lenders.
The experience so far suggests that, in the
instances where a CoCom was set up, and where
there was a general willingness of the borrower and
the lender groups to meet each other half-way, the
process was more effective. On the other hand, the
inability of all lenders to speak in ‘one voice’ more
often than not resulted in a stalemate.
The aftermath of the past four years, during which
the profit margins of local banks more than halved, has
caused a virtual clampdown on lending, except to
existing blue-chip clients who offer a very low credit
risk. As a result, the economy is hurting and many
genuine businesses are suffering.
Given the lack of diversity in the economy, the
borrower mix is unlikely to change in the near future.
Once the banks restart lending operations on a full
scale, they will once again need to lend to investment
companies and to real estate.Therefore, it is imperative
that a governance framework is worked out, within the
constraints and imperfections of the market, in order
to reduce the impact of the next crisis.
Regulators
To combat the crisis, the government and the CBK
introduced a combination of facilitative and preventive
measures – the FSL, the guaranteeing of consumer
deposits of banks, the tightening of ratios and a squeeze
on mortgage loans. Side by side, the government also
pushed through a couple of long pending reforms, the
establishment of the CMA (2010) and the new
Companies Law (Dec 2012) which dwells on
corporate governance at length and, among others,
prescribes a framework for dealing with non-
conventional debt instruments like bonds and sukuks.
To stimulate the economy, the government also
allocated over US$100bn for infrastructure projects,
and is reportedly finalising a new Foreign Direct
Investment (FDI) law which will streamline the existing
process and ease the limits in certain hitherto
restricted sectors. The first few mega projects under
an ambitious Public Private Partnership scheme, which
has generated considerable interest among the
international developer community, are approaching
financial closure.
Together, these initiatives are expected to both
diversify lending avenues into more sustainable and
long-term products like project finance and
infrastructure finance, as well as improve controls and
introduce global best practices. Access to financing for
good assets is expected to pick up in the near future,
while raising funds for mediocre assets could become
more difficult.
Unfortunately, despite best intentions, there was
limited follow-through on approved schemes such as
the FSL due to a number of practical issues with the
Figure 1: Kuwaiti banks’ performance was severely impacted by the marked decline in asset quality
Source: Published Annual Reports of 10 Kuwaiti banks
2,468
1,866
2,195
936
59.4%
46.2%
50.8%
37.0%
0
10%
20%
30%
40%
50%
60%
70%
2009 2010 2011 September
2012
US$m
Impairments and
provisions
as a % net profit
before impairments
and provisions
Note:
(1) Data relates to 10 Kuwaiti banks, and excludes the newly constituted Warba Bank.
(2) Kuwait’s banking sector comprises 22 banks , of which 11 are local; and the remaining 11 are branches
of international and regional banks. Of the 11 local banks, five are Islamic and one is a specialised bank for industrial lending.
0
500
1,000
1,500
2,000
2,500
3,000

5. confidential court in the UK, to bypass the
bureaucratic hurdles of the kingdom, to deal with
such cases in an efficient and focused manner.
Kuwait could set up a specialised, fast-track authority
along similar lines.
• Special Situation Fund: The funds allocated under
the FSL could be used to kickstart a Special
Situation Fund which would negotiate and buy
discounted debt from banks.
• Emergence of new type of financiers: For e.g.
mezzanine, sub-debt and distressed funds set up in
the private sector, could provide alternative finance
at risk-based prices to viable businesses which may
not be able to fulfil the stringent asset cover norms
of commercial banks.
• Emergence of specialised providers: Credit rating
agencies and asset recovery companies which could
increase the comfort of lenders, and enable credible
businesses to raise cost-effective financing.
• Pre-emptive rather than reactive monitoring by
lenders: Evolution of a monitoring framework by
banks to track end-use of funds, to prevent
unpleasant surprises.
Conclusion
With the benefit of hindsight and experience, the
Kuwaiti restructuring landscape is likely to mature.
However, a fundamental shift is required in the mindset
of stakeholders before any holistic workout framework
can evolve. Regulators and lenders alike need to create
a more enabling environment for distressed companies
to seek out and receive timely assistance.
Notes:
1
The Law on Financial Stability and Enhancement of
Banks Conditions, Decree No. 2 of 2009,
www.cbk.gov.kw.
2
www.bloomberg.com.
3
IMF Country Report No. 12/150, June 2012.
Author:
Anindya Roychowdhury, Partner
Head,Transactions & Restructuring
KPMG AdvisoryW.L.L.
Al HamraTower, 25th floor
Abdul Aziz Al-Saqer Street
P.O. Box 24, Safat 13001
Kuwait
Tel: +965 2228 7000
Fax: +965 2228 7444
Email: anindyaroychowdhury@kpmg.com
Website: www.kpmg.com
4
new regulations, and this has considerably hindered
the success of restructuring in Kuwait. The allocated
corpus under FSL is virtually untouched and the
deadline to apply for a financial bailout has passed,
although other aspects of the Law, which allow a
company to seek creditor protection, are still current.
Prospective applicants could benefit if the government
considers revitalising the FSL by modifying some of
the eligibility criteria that the borrowers and lenders
found difficult to fulfil. These could include:
• relaxing the stipulation that the majority of assets
and loans have to be local.This restriction puts
companies with diversified asset and lender bases at
a disadvantage;
• reviewing the need for the mandatory annual cost
reduction clause which discriminates against
companies that have already voluntarily put through
such measures prior to the application; and
• revisiting the levy of stiff penalties, including penalties
on lenders, for even seemingly minor violations.
Outlook
Bringing restructuring practices in Kuwait closer to
mature markets will require the following:
• An enabling framework: Regulators could take on a
more mentoring stance to encourage distressed but
viable companies to work out consensual solutions.
Procedural delays need to be minimised and
conflicting laws will need to be aligned.
• Shake-out, consolidation, operational restructuring:
A merger that pools cash flows, reduces operating
costs and cures gearing is one of the most practical
ways forward to preserve distressed assets.
However, this process could be prone to delays, as it
requires a series of statutory approvals and reviews;
unsurprisingly, very few companies have opted for
this route, though, of late, there was an increased
activity in this space. Financiers are likely to insist on
higher levels of governance and disclosure, which
would necessitate ICs to unwind and simplify holding
structures, raise fiscal discipline and ensure greater
control over underlying assets. Many ICs will turn
asset-light and focus on core, fee-based business
models, and those without real assets will either be
acquired or wind down.
• Establishing a Special Court or Tribunal: Dubai
World prompted UAE to pass decree no 57 to
expeditiously deal with the situation.The scope of
the decree is reportedly being expanded into a
full-fledged bankruptcy legislation; UAE has also
invited senior judges from the UK to add depth and
experience to their judiciary. Saudi Arabia is
reportedly contemplating setting up a special