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Patrick Slater - Senior Associate - Banking and Finance
The slowdown in the UAE economy has resulted in a corresponding slowdown in loan growth for the UAE banks and some debt delinquencies, especially in the SME market, and that has lead in some cases to a drop in bank profits as a result of increased bad debt provisions. While we understand that contractors who were the first to be affected have largely already made arrangements, that still leaves many bank customers who are feeling the stress of making scheduled loan repayments when their own profitability and cashflows are coming under pressure. If it is not sufficient to grant a rescheduling of the debt so that payments are reduced as the tem of the loans are extended, the banks and their customers will have to start considering entering into a more formal restructuring.
The practice in the UAE has been for consensual restructuring, partly as the current laws are designed for traders rather groups of companies with complex debt structures, and partly by the desire to ensure that these businesses survived as going concerns, even if the bargain stuck through the restructuring does not reflect usual commercial terms. Other reasons for pursuing a consensual process outside of court action are that:
Many UAE banks learned significant lessons from the 2008/9 financial crisis — these lessons or principles are now being dusted off to be put to use again, which can be seen in the recent “mini insolvency law” announced by the United Arab Emirates Banks Federation.
The key restructuring lessons are:
The “mini insolvency law” referred to earlier is the United Arab Emirates Banks Federation announcement that they are to suspend action against SME borrowers if they have (i) financial distress and (ii) AED50m or more of debt with two or more banks. Instead they will enter into a 90 day standstill agreement and the bank with the biggest exposure will agree how to manage or restructure the debt with that SME borrower. This is a practical example of some of the above principles being put into action on an industry-led basis for a specific area of distress.
For each restructuring there will of course be specific points of concern or pressure. The lessons and principles set out in this article may not all be applicable to every situation. However, they do provide a foundation on which creditors can build, working with the borrower to reconstruct a sound and functioning lending relationship.
* Previously published by Bloomberg Business Week Online on 8 September .2016.