Monday, April 23, 2012

Arcapita bankruptcy update

In the latest week's newsletter (sign up for the newsletter on the right side of the blog; an archive is available on my website), I included a summary of some of the latest developments in the Arcapita bankruptcy case[1].

Arcapita’s bankruptcy case is ongoing and a recent objection by Standard Chartered, which provided $100 million of murabaha financing to Arcapita in 2011, presumably to finance the company through its anticipated debt restructuring of the $1.1 billion murabaha whose imminent maturity led the company into bankruptcy. 

The objection by Standard Chartered is based on the potential, according to Standard Chartered, for Arcapita to make inter-company transfers of dividends that should be held for Standard Chartered due to its mortgage on the equity of a number of Arcapita subsidiaries.  Standard Chartered, in a court filing, described that “if the value of the Subsidiary Guarantors, which is at best uncertain, is transferred to AIHL [Arcapita’s Cayman Islands holding company] or Arcapita Bank, Standard Chartered’s security interests could be rendered worthless and the Subsidiary Guarantors could impermissibly be rendered insolvent to the detriment of Standard Chartered”. 

Standard Chartered is asking the court to make the approval of any budgets the court is presented with by Arcapita require approval by Standard Chartered as well.  More concerning for the unsecured murabaha holders, the senior position of Standard Chartered means Arcapita will have to come up with more money before lower priority murabaha creditors get paid. 

In another document filed with the bankruptcy court, Barclays Bank, which is on the committee of unsecured creditors, has asked the court permission for its affiliates to trade claims on Arcapita’s debt, as long as it separates those trading activities from its position as a committee member to avoid potential conflicts of interest. 

As I mentioned in an earlier blog post, is the fact that the murabaha financing is being traded (and the trading is unlikely to occur at par).  Yet, there has been much less controversy about this than about the potential for the Goldman sukuk to be traded since it was listed on the Irish Stock Exchange (even though it was never likely to trade).  
There are a few filings so far this week including two (pdf 1, pdf 2) requesting an extension of the time Arcapita has to file its financial statements to June 21, 2012, from the previously extended deadline of May 3, 2012.  In their filings, Arcapita cite a need to consider "nuanced legal issues[...], in particular, payments and distributions to and from insiders and other affiliates".  They also cite as a source of delay, "the Shari’ah-compliant nature of the Debtors’ investments requires a thorough analysis of some of the characterizations required by the Schedules and Statements"

Another filing, this one from Commerzbank (pdf), asks the court to grant a relief from the automatic stay to allow Commerzbank to serve a notice of default on profine GmbH, a portfolio company of Arcapita that manufactures PVC window frames, on a Euro125 million murabaha line of credit (guaranteed by Arcapita), which profine defaulted on a week before Arcapita filed for bankruptcy.  Under the murabaha (the total amount outstanding is not specified in the filing, but is described as "principal plus unpaid profit"), Commerzbank could only exercise the guarantee once 14 days passed after the default.  Commerzbank argues that delivering a claim notice to Arcapita is only a ministerial act designed to perfect and crystallize Commerzbank's claim, and therefore it would fall outside of the automatic stay.  It is unclear whether the default was related to funding problems at Arcapita, but profine announced a management change on February 24, weeks before defaulting on the murabaha (followed of course by Arcapita's bankruptcy filing). 

[1] Note: I am not a lawyer, so this post represents my opinion from reading the court filings.

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