Lending and Investing in the Gulf Cooperation Council Region in 2010
Compared to the relaxed attitude many investors had prior to the onset of the global recession and then the shock of the Dubai World crisis, there is understandably a palpable degree of caution amongst those doing business in the GCC region (comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates). Financial institutions and corporates are increasingly realising the need for more thorough due diligence before they finance or invest in projects in the region and are devoting more time on assessing the merits of projects before injecting funds.
The debt markets
Even then, the strong feeling on the ground is that banks in the region remain nervous about lending. International banks dominate the debt finance market but, during this extended period of nervousness, the prospect of a more active bond market in the region has attracted some focus. Bond issuance has become an attractive option for funding and the ratings agency, Fitch, recently predicted that corporate bond issues in the region will increase in the next 12 - 18 months.
There is little doubt that it is the consensus between the banks and authorities that developing the local bond market is necessary to ensure less volatile, long term access to finance for the entire Gulf region. In itiatives to expand local bond markets in the GCC are developing. Following the proposed listing of DEWA and DP World in the London Stock Exchange, it is expected that a number of quasi-sovereign corporate and financial bond issuers from the Gulf region will come to the market also in 2010.
The economies
It is worth mentioning that states with rich oil and gas resources, such as Saudi Arabia, Qatar and Abu Dhabi in the UAE, have recovered much faster than expected. Their markets have less liquidity issues and hence funding for projects in those states generally face less pressure and difficulties compared to others in the region.
With regard to Dubai, its problems go way beyond the Dubai World crisis, serious enough as that is. It is considered by many financial institutions that Dubai government entities as a whole have between USD80 billion and USD150 billion of debts on their balance sheets, although among them Dubai World is the most pressing problem to be addressed. For this reason, an administrator has been appointed to restructure Dubai World's operations and to conduct negotiations with the group's financial and trade creditors for the repayment of its debts on a discounted basis.
HH Ruler of Dubai, through Decree No. 57 of 2009 (the "Decree"), has established a tibunal and a reorganization code to decide disputes relating to the settlement of the financial issues affecting Dubai World and its subsidiaries. Dubai World is a decree corporation, and consequently does not have the ability to seek protection under the provisions of the UAE Commercial Code that govern bankruptcy and insolvency. The Government of Dubai's intention in issuing the Decree was to develop a law that would permit a restructuring of the obligations of Dubai World and its subsidiaries in accordance with international best practices following a fair, equitable and transparent legal process.
The legal landscape
There are reasons to be positive about doing business in the GCC region and the upturn in the corporate bond markets suggests optimism for the region economically. However, to really exploit these opportunities there needs to be some adjustment to the legal landscape. Debt recovery and enforcement of contractual rights is still a problem as most countries within the region still have substantial shortcomings in their insolvency regimes and legislation affecting creditors' rights. Cases take too long to be heard by the courts and there is insufficient consistency in the judgments being handed down, due in large part to the lack of a doctrine of precedent. It is acknowledged in the market that there is an urgent necessity to strengthen the legislative, regulatory and judicial frameworks and to ensure that carefully drafted insolvency laws are properly implemented throughout the region. Professionals and financial institutions have urged the reform of insolvency and creditor-debtor regimes in this region to improve economic efficiencies and strengthen market resilience in times of crisis.
In January 2010, Barclays Bank in the UAE won the first foreclosure order on properties in the UAE. While the market welcomed this order as a milestone to demonstrate that the security over real estate taken by banks is enforceable in the UAE, we are aware that another international bank's foreclosure application, which was submitted not long after such first order, was rejected by the Dubai Courts. The lack of predictability in how laws will be enforced underlines need for reform - many want a form of common law and all want greater consistency in the application of the laws and regulations.
There are two legal systems operating side by side in the UAE, firstly the federal laws of the UAE, combined with a limited number of additional decrees and orders which are specific to Dubai, which apply to all persons and entities operating in "onshore" Dubai, and the laws of the Dubai International Financial Centre ("DIFC"), which started being issued about seven years ago and which apply to entities operating with the DIFC Zone, a large demarcated area in the Financial District of Dubai.
There are two statutes governing insolvency matters in onshore Dubai and the UAE: the bankruptcy provisions of Federal Law No. 11 of 1992 ("Commercial Transactions Law") and the winding-up provisions of Federal Law No.8 of 1984 ("Commercial Companies Law"). The Commercial Transactions Law sets out the rules and procedures in relation to insolvency of traders (individuals and companies who engage in commercial activities) as well as the mechanisms of protective compositions. The Commercial Companies Law provides general principles that are to be followed for the dissolution of a company. However, those provisions are widely considered inadequate for a modern economy with corporates with complex capital structures. Consequently they are relatively untested, causing companies facing insolvency to favour informal restructurings outside a legislative framework. There is increasing clamour for a comprehensive new insolvency law to be implemented which would provide a proper framework for dealing with bankruptcies and insolvencies.
The DIFC, has its own much more developed insolvency law which is mainly based on English law and is simi lar to insolvency systems in other jurisdictions. The DIFC Courts have only been applying the DIFC Insolvency Law for a short time, but in the few cases where trustees or liquidators have been appointed by the DIFC Courts for insolvent DIFC companies, the winding up has gone smoothly.
The DIFC has its own court system, the DIFC Courts, to adjudicate disputes relating to DIFC-licensed firms and contracts relating to the DIFC jurisdiction. The Dubai government decided to base the law of the Decree on the insolvency laws, rules and regulations of the DIFC because it considered that such laws, rules and regulations were comprehensive and reflected international standards. In addition, such laws, rules and regulations are in English rather than Arabic, which the Government concluded would facilitate a complex financial reorganization involving investors and professionals from all over the world.
According to the Commercial Transaction Law and Commercial Companies Law, directors, managers and liquidators of a company could be subject to imprisonment and a fine for certain offences connected with the insolvency of the company. Also, it is a criminal offence in the UAE, again punishable by imprisonment, for a person to write a cheque which is dishonoured for lack of funds, whether it is a company or personal cheque. There has been international criticism about the impact this may have on the image of the UAE.
However, cheques are commonly demanded by banks in the UAE as collateral due to the lack of other security and the strong sanctions available if the cheque is dishonoured. It is common for banks to require a borrower not only to provide post-dated cheques but also a signed but undated cheque as additional security. This enables the bank to date the undated cheque for the outstanding amount in the event of default, which then enables the bank to prevent the borrower from leaving the country and cause him to be jailed. There are instances of owners of companies or individuals trying to flee the country rather than remain in the UAE to be declared insolvent because of a lack of confidence in the insolvency system and the danger of being jailed if they have signed a cheque which bounces. It is hoped that any new insolvency legislation in the UAE decriminialises the law relating to bounced cheques and the travel restraints associated with the offence in order to assist in bringing the UAE into line with the approach in Western jurisdictions.
One reform which appears to be on the cards is that most of the countries in the region are actively considering relaxing the current restrictions affecting foreign investment, such as the requirement for local nationals to hold a minimum 51% shareholding in local companies which is imposed by most countries in the region. This is clearly a welcome development.
Conclusion
There are many reasons to be positive. The region has taken some knocks and has legal and regulatory challenges ahead of it. However, it is worth reflecting on some fundamentals - why, in global terms, the region attracts investors:
- the liquidity of the oil and gas countries in the region, which has meant that most local economies have been less affected by the recession than those in the West,
- the fact that little or no tax is imposed by most of the countries,
- a business-friendly environment with flexible labour policies (as compared with most Western European countries).
Lawyers Nick Moser
This article was written by Nick Moser, with assistance from Colleen Wen-Ling Tsai, and was originally published in the Third Quarter 2010 issue of INSOL World.
