Market conditions unfavorable for Arcapita (By IFN)

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BAHRAIN: Faced with a looming debt deadline on the 28th March, market players are doubtful that Arcapita Bank, the Bahrain-based Islamic private equity investment firm, will be able to meet its repayment by the due date. With US$1.1 billion in loans maturing next month, and another US$2.1 billion maturing in January 2015, Arcapita Bank whose shareholders are mainly wealthy Gulf nationals is clearly strained financially.

Despite escaping default in 2010, along with Unicorn Investment Bank, many industry players admit the bank’s current position is shaky due to unfavorable economic conditions; particularly in the private equity market. Speaking to Islamic Finance news, Khalid Howladar, regional team leader / senior credit officer for GCC financial institutions, asset-backed and Islamic finance at Moody's revealed: “Arcapita faces a very tight funding environment, and its European lenders have very low appetite for risk given their own capital needs and their high costs in providing dollar funding. Private equity investments are currently very illiquid and this makes it difficult for them to exit and raise cash without taking losses.”

The bank is already in talks with its mandated advisors ahead of the March deadline, comprising of The Royal Bank of Scotland (RBS), Rothschild, KPMG and Linklaters; as well as PwC and Clifford Chance who have been appointed by RBS.

Arcapita, which has real estate investments in Bahrain and Dubai is also actively involved in the European and American markets, owning a portfolio of groups in these countries including the UK rail company Freightliner, Irish utilities group, Viridian and US apparel retailer J Jill. However, Khalid believes that the bank’s international exposure is still too minimal to counter its weak domestic performance. He said: “While Arcapita is geographically well diversified outside of Bahrain, it still operates in a weakened difficult domestic environment.”

Arcapita’s loans have recently seen a dip in trading at 60 US cents on the dollar in the secondary market, due to growing concerns amongst investors about a potential default. Naji Nabaa, the associate director of fixed income sales at Dubai-based investment bank Exotix said: “It is trading down because people are concerned that they have waited a long time and the company hasn’t come up with anything. Now we are getting close to maturity.”
Despite this, investors and lenders are still maintaining optimism that the bank will successfully launch a restructuring exercise in time. However, some reports have revealed that hedge funds who have been buying small chunks of the bank’s debt could potentially upset the apple cart by pursuing more aggressive options, and inevitably push the bank towards liquidation.

Arcapita Bank was one of the first Shariah compliant investment boutiques to crop up in the late 90s alongside The Investment Dar and Gulf Finance House, as a result of the boom in oil prices in the GCC. At the time, private sector investments were dominated by real estate and infrastructure — highly attractive options for Islamic investors