Arcapita Bank BSC, a manager of Islamic-compliant investments with $7 billion under management, was forced into bankruptcy by hedge funds that sought to be repaid in full, a lawyer for Arcapita said.
Restructuring talks on the company’s $1.1 billion loan due in March “were derailed when several hedge funds who bought that debt on the secondary market at a discount threatened an involuntary bankruptcy if they didn’t receive par” on their investments, attorney Michael Rosenthal told U.S. Bankruptcy Judge Sean Lane in Manhattan today. One of the hedge funds is Euroville Sarl, he said.
The company sought Chapter 11 protection in New York two days ago to “preclude preemptive action” and preserve its assets, Rosenthal said.
Euroville, which holds $88.7 million in the company’s debt, is concerned that some of its assets could be placed out of creditors’ reach in bankruptcy, its lawyer, David Friedman, told Lane today. “We’re afraid that tomorrow the assets will be sent to places where none of us will be able to repatriate them.”
Friedman said issues of concern include $96.3 million a year in payments to unidentified consultants, and the sale of an asset, Lusail, 14 days prior to its bankruptcy to Qatar Islamic bank (QIBK), which has a relationship with Arcapita.
Arcapita, formerly known as First Islamic Investment Bank, filed for Chapter 11 March 19 along with five affiliates, listing assets of $3.06 billion and liabilities of $2.55 billion. Arcapita Investment Holdings Ltd., already in U.S. bankruptcy, has also filed a bankruptcy in the Cayman Islands in aid of the Chapter 11 proceeding.
The two filings were made to avoid “an involuntary and value-destructive straight liquidation proceeding in the Cayman Islands,” Arcapita said in court papers.
The company’s investments, which have included U.S. brand names such as Caribou Coffee and Church’s Chicken, now include Irish power utility Viridian Group Ltd. (VRD), and U.S.-based Falcon Gas Storage Co. Other assets include interests in PODS, a portable moving and storage company founded in Florida, and Tensar International Corp., a provider of soil technologies based in Atlanta, Arcapita said in court papers.
Lane today granted the company’s “first-day” requests that will allow it to keep operating in bankruptcy. He approved its request for a court order specifying that foreign creditors can’t seize its assets.
He also said the company can jointly administer its units in bankruptcy, and have extra time to file reports of its financial information. Arcapita now has until May 3 to file a full list of assets and debts.
Arcapita can also continue to use its cash management system. The company said its funds invested in short term investments will be deposited with JPMorgan Chase in New York as they mature. Over the next four weeks, $100 million is expected to be deposited, Arcapita said in court papers.
Founded in 1996, the Manama, Bahrain-based company manages Shari’ah-compliant, or Islamic-compliant, investments and operates as an investment bank, according to the filing.
“This global recession has hampered the Arcapita Group’s ability to obtain liquidity from the capital markets, and has also resulted in a reduction in asset values,” lawyers for the company wrote in its first-day filings.
Arcapita had failed to reach an agreement with creditors on a $1.1 billion syndicated shari’ah-compliant loan due this month. Royal Bank of Scotland Plc had led a coordinating committee of lenders that sought to negotiate a restructuring, a person familiar with the plan said Feb. 27.
Central Bank of Bahrain was listed as the largest creditor, with a $255.1 million claim tied to a bank loan. Commerzbank AG (CBK) has a $164.7 million claim also related to a loan and National Bank of Bahrain has a $132.3 million claim. Bahrain’s central bank said it was monitoring the case.
Rosenthal said that after the company sought court protection, it didn’t have as many first-day requests as might be expected because the process was so rushed due to the demands of the hedge funds.
“The last 10 days have been extremely stressful and frenetic,” Rosenthal said.
The case is Arcapita Bank BSC, 12-11076, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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