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August 22, 2012 9:54 pm

Fal Oil debt restructuring jeopardized by missing oil

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Fal Oil Company’s attempts to restructure debts of around AED 4bn (USD 1.1bn) and raise USD 650m in new working capital have been dealt a blow by the loss of oil acting as security for Standard Chartered Bank, according to a source familiar with the situation and three creditors.

The development prompted Standard Chartered, the chair of Fal’s creditor steering committee, to tell the committee it is rejecting the company’s request for new working capital, the source and one creditor said.

The source and the second and third creditors said they believed most other lenders are also rejecting the request. The second and third creditors said their own banks will not provide new money.

“The official decision regarding the new money has yet to come from the credit committees of most banks. However, informally almost all banks have indicated they will not support it,” the source said.

The official response from most banks is expected after the Eid holiday (19 and 20 August), the source said.

The first source went on to say that the likely failure of Fal to raise new money from its lenders has led PricewaterhouseCoopers – which is advising creditors – to suggest the need for a contingency plan to the company’s advisor, KPMG, the first source said. This plan would amount to a wind-down of the company, he said.

“The suspension of [creditor] rights [under the restructuring plan] is agreeable to most banks, but that is now subject to Fal getting finance from a third party. The banks don’t believe that will happen, and based on that a wind-down is now the most likely option,” he explained.

Meanwhile, a separate source countered that a contingency plan was not something that had been discussed by the company recently. He also believed it would have been impossible for banks to discuss the matter yet as they only took the restructuring plan to their internal credit committees at the end of last month. He added that Fal was in the process of hiring a restructuring officer to handle the negotiations, and expected to have someone on board next month.

KPMG has said Fal’s owners, the Al Sari family, are against a wind-down of the company, the first source said. The steering committee is now waiting for a meeting with the company, expected this week, to discuss the situation, he said.

“At the meeting the company will be told there is no new money, and winding down is the only option on the table,” he claimed.

In a letter to the steering committee earlier this month, Fal said that some oil financed by Standard Chartered had been transferred off one of its ships without the knowledge of the company, according to the first source and second creditor. Fal blames a senior employee who has subsequently left the company for the movement of the oil, the source and the second and third creditors said.

According to the letter, the majority of the oil is now onshore in the UAE under court custody and Fal is seeking to recover it, the source and second creditor said. As yet, banks have no proof the oil is in the UAE or protected by the court, the source said.

“Banks were not positive from day one but they worked for a deal. They wanted to see support from the shareholders, but none came. Now they have made provisions and acknowledged they will lose. The wind-down is their only option to recover anything,” he said.

Any recovery is expected to be very small, he added, unless a dispute over receivables between Fal and the Sharjah Water & Electricity Authority (SEWA) is settled in Fal’s favour and lenders can claim payment from SEWA. But that case is expected to be lengthy, he said.

Any move to liquidate the company without shareholder support could see Abu Dhabi Commercial Bank (ADCB), which has been suing Fal for recovery of debts, rejoin other creditors for a single court process, the third creditor suggested.

Negotiations over Fal’s debt have been fully merged with those of Investment Group Private Limited (IGPL) the source said, in an effort to solve both companies’ situations through a single arrangement. IGPL, Fal’s parent, is restructuring around USD 300m.

The Fal steering committee comprises Standard Chartered, Emirates NBD, Commercial Bank of Dubai, First Gulf Bank, Barclays and National Bank of Abu Dhabi (NBAD). The IGPL steering committee includes Barclays, NBAD, Samba and Mashreqbank.

A spokesperson for Fal Oil and IGPL declined to comment. A spokesperson for Standard Chartered said the bank cannot comment about specific details of its exposure. “We continue to work with the company and other lenders to find the best solution,” he said.

A spokesperson for ADCB did not respond to a request for comment.

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