The slowdown in the UAE economy has resulted in a slowdown in loan growth – and some debt delinquencies – for the UAE banks, especially in the SME market, and in most cases resulted in a drop in bank profits due to increased bad debt provisions. As the slowdown has not really spared anyone, most bank customers have also been affected. While we understand that contractors, who were first to be affected, have largely already made arrangements, many bank customers are left feeling the stress of making scheduled loan repayments with their own profitability and cashflows under pressure. If it is not sufficient to grant debt rescheduling so that payments are reduced as the term of the loans are extended, then the banks and their customers will have to start considering entering into a restructuring.
The practice in the UAE has been for consensual restricting – partly as the current laws are designed for traders and not groups of companies with complex debt structures, and partly by the desire to ensure that these businesses survived as going concerns even if the interest charged and the final repayment dates in a couple of cases were non-commercial. Other reasons for pursuing a consensual process outside of court action are:
Many UAE banks learned significant lessons from the 2008/9 financial crisis, and 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 UAE Banks Federation.
Key restructuring principles:
The “mini insolvency law” referred to earlier was 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 of their banks. Instead they will enter into a 90 day standstill agreement with such a SME borrower and the bank with the biggest exposure will agree with how to manage or restructure the debt with that SME borrower.
For each restructuring there will specific points of concern or pressure – for the purposes of this article, we have focused on lessons and principles that were applicable across most restructurings in 2008/2009 and continue to apply now and in times to come.
This is a special advertising feature written by Al Tamimi & Company.
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