Financially vulnerable Gulf companies are facing a new headache as hedge funds and other investors in distressed debt acquire the loan books of big lenders at knock-down prices.
Such investors are changing the equation for companies entering restructuring talks because they tend to be more opportunistic and aggressive than banks.
Lenders in the Gulf have so far been content to push out repayment deadlines to allow asset values to recover - in theory allowing businesses to return to health and for them to collect money owed.
But European banks aiming to raise capital buffers in anticipation of Greece's sovereign default and regional banks looking to minimise the cost of covering bad debts have sold loan books at significant writedowns to distressed-debt specialists.
What had been a traditional feature of developed markets was quickly coming home to roost in the region, said Jahangir Aka, the senior executive officer at SEI Investments, a financial services firm specialising in asset management.
"It's not the Middle East's problem, but it's becoming the Middle East's problem as these banks start pulling back."
Distressed-debt investors have been blamed for Arcapita's failure to reach a US$1.1 billion (Dh4.04bn) debt agreement, which led to the bank filing for bankruptcy protection in the United States last week.
Three hedge fund managers - Euroville, Midtown Acquisitions and VR Global Partners - are among the Bahraini investment bank's largest creditors, and are owed a total of $213.7 million.
Elsewhere, Monarch Alternative Capital, a US hedge fund, successfully sued Drydocks World, a unit of Dubai World, after a default on its debts last year and an attempt to restructure a $2.2bn debt facility. The case marked the first time that one of the emirate's government-related companies had been sued overseas since the onset of the financial crisis.
The Middle East was one of the last "pockets" where distressed debts could still be found after the financial crisis, said Ahmad Alanani, a senior executive officer at Exotix, a specialist investor in illiquid instruments.
"For most of 2011, there were a lot of European banks selling. We started to see local banks getting involved in the second half of 2011 and exiting some positions," he said.
"With the level of provisioning being more and more in line with what the market was paying at the time, the willingness and the ability to sell improved."
Distressed-debt funds had hoped Dubai World's restructuring would provide rich pickings in what was at the time regarded as a nascent market, only to find difficulties in pursuing assets through legal channels and lower levels of disclosure than in other markets. Distressed-debt investors in restructuring talks have a "completely different mindset" to banks, particularly concerning the time that restructuring talks can take to resolve in the Gulf, said Tim Plews, a partner at Clifford Chance, a law firm.
The result was a rift between banks trying to recover the full value of debts and specialist investors trying to capture any improvement in value on debts bought at knock-down prices, said Mr Aka.
"They've bought so cheap that a below-par settlement is still very generous for them," he said.
"You create quite a conflict."
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