x Abu Dhabi, UAEFriday 21 July 2017

Bankruptcy is good for you

Liquidating companies is an essential part of the economic renewal process.

And the lion shall lie down with the lamb. KKR, the New York finance firm that made its name as one of the most aggressive corporate raiders in the business, has opened an office in the Dubai International Financial Centre. While the environment at the DIFC might not exactly be called pastoral, in terms of experience and reputation Dubai's financial centre is an ingénue compared with the hard-nosed financial engineers from Kohlberg, Kravis and Roberts.

From its 1970s origins as a spin off from the now-defunct Bear Stearns, KKR virtually pioneered the concept of the "leveraged buyout" (LBO) - raising large sums of debt for the takeover of underperforming companies. The firm's reputation as a feared raider - some say it was the model for Gordon Gekko's business in the movie Wall Street - was sealed by the 1989 assault on the US consumer giant RJR Nabisco, at that point the largest LBO in history with a price tag of US$31 billion (Dh114bn).

The RJR deal earned the firm the nickname "barbarians" after a best-selling book based on the dramatic machinations of the takeover. The image as aggressive financial warriors storming the sleepy citadels of capitalism has stuck with KKR ever since. Does the Gate in Dubai know what it has let itself in for? Heading the KKR assault team is Makram Azar, a banker with 18 years experience at Lehman Brothers who jumped from the sinking ship in September and whose regional expertise and experience was immediately noticed by KKR. His specialities at Lehman included media finance and sovereign wealth funds, but at KKR he will pursue "private equity and infrastructure transactions in the Middle East and North Africa". Mr Azar wants to use the DIFC as a base to spearhead moves into other parts of the region, especially the lucrative Saudi market where infrastructure finance is the big thing.

So no aggressive junk-bond financed takeovers then? A source close to KKR says: "That reputation was not really justified. After RJR they never did a hostile raid, and the whole climate has changed anyway. These days, and especially in the Middle East, the emphasis is all about supportive private equity investment and infrastructure finance." Maybe, but the arrival of KKR is a sign that there are still rich pickings to be had in the region and in Dubai, despite the recession. The Gate will certainly be a livelier place for their presence.

Boons of bankruptcy Bankruptcy is good for you. So says the British law firm Norton Rose, which has been expanding in the Gulf in recent years and sees no reason to slow down just because of the credit crisis. In fact, the firm thinks its business will benefit from the downturn - if regional authorities, especially in the UAE, can get their heads round the idea that going bust can be a long-term benefit for the economy.

Andrew Lewis, a Dubai-based partner of the firm, says businessmen and lawyers in the Gulf should recognise that bankruptcy is an essential part of the process of economic decay and renewal, and speeds up the process by which "distressed" assets can be bought and sold, and put back to work again. "We've seen very few bankruptcies in the Gulf region, and this is slowing the market in distressed M&A"- the process by which "bad" or even "toxic" assets are stripped out of companies, sold off or closed, and the good assets put back to work again. "Even with companies that are not meeting their liabilities and don't really have the means to continue as viable businesses can limp along for months, even years. It makes recovery much harder."

In the West, the normal process of presenting a winding-up petition, appointment of an administrator and disposal of assets can be triggered and implemented pretty quickly. In the Gulf, Mr Lewis said, it is much more difficult to demonstrate insolvency, partly because inability to pay debts is not regarded as sufficient proof. "You reach a stand-off situation, where people are not getting paid and no work is being done. If a construction project halts at 80 per cent completion because the company is unable to meet its liabilities, the chances the building will ever be completed decline the longer the stand-off continues."

So if Dubai and other parts of the UAE want to avoid the skyline of the Costa del Sol, where the skeletons of half completed buildings, never to find tenants, await premature demolition, the region's legal system must act to remove the stigma of bankruptcy. There are worse things than going bust - missing the upturn is one of them. M in town M Communications, the London PR firm recently pipped at the post in the bid to advise Dubai Inc, has not let that disappointment colour its view of the region.