Bahrain's Arcapita exits chapter 11, plans asset sales

Reuters

By Bernardo Vizcaino

DUBAI, Sept 18 (Reuters) - Bahrain-based Islamic investmentfirm Arcapita has become the first Gulf company toemerge from U.S. bankruptcy under Chapter 11 rules, in a movethat could help clarify how Islamic finance is treated inWestern courts.

Arcapita's plan, which came into effect on Tuesday, will seeit transfer its assets into a new holding company which willdispose of them over time to pay off creditors, effectively agradual wind-down of the firm.

"We expect to have a complete exit of the portfolio over thenext four to five years," a spokesman told Reuters. "Exits sofar have been better than expected, and the reorganisation planallows exactly just that in order to maximize values."

The case could prove to be a step forward for the Islamicfinance industry by offering a degree of certainty as to howWestern courts treat contracts and disputes that make referenceto sharia, or Islamic law.

Islamic finance follows religious principles such as bans oninterest and gambling, but Islamic law is not codified in legalform and Western courts have often struggled over the treatmentof such contracts.

Arcapita's case was not straight-forward either. It filedfor bankruptcy protection in March 2012 with about $7.4 billionin assets under management spread across the globe, as a $1.1billion Islamic loan came due.

The portfolio includes holdings in 30 different investmentscovering private equity, real estate, infrastructure and a smallportfolio of venture capital investments.

The U.S. court also had to approve a rare $350 milliondebtor-in-possession financing from Goldman Sachs,arranged to fund Arcapita's wind-down operations, which waschallenged by an Arcapita investor but eventually approved.

A search of court records in the Westlaw legal databasesuggests this was the first time a question of a fatwa, orIslamic ruling, had been presented to a U.S. bankruptcy judge.

Arcapita's filing in a U.S. court was an unprecedented moveby itself, in a region where debt workouts involve consensualtalks that end in maturity extensions, as creditors have littlerecourse when dealing with insolvency.

The end to the 18 month-long proceedings, which someanalysts estimated could have stretched to three years, willallow some secured creditors to recoup most of their money,while creditors in the $1.1 billion loan are projected torecover 64 percent of their cash.

Arcapita's creditors include Barclays, CIMB, Royal Bank of Scotland, Standard Bank, Standard Chartered and the Central Bank ofBahrain - its largest creditor with $255.1 million owed.

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