To deal with rampant corporate defaults, the kingdom’s banks need a legislative framework that ensures restructuring is worked out quickly
So far, local companies in Saudi Arabia do not have a great track record when it comes to restructuring their debts.
The biggest corporate default in the kingdom, estimated at $20bn and involving Saad Group, Ahmad Hamad al-Gosaibi & Brothers, along with more than 100 banks, is still ongoing. Bankers have no idea whether the various disputes between the parties will ever be settled.
Another restructuring involving Al-Ittefaq Steel Products Company, although agreed on, has yet to reach a final conclusion. Other debt restructurings also have outstanding issues.
Without legislation that forces a firm to tackle its debt and operating problems, many banks agree to ‘extend and pretend’, pushing out maturities in the hope that things will improve. Because of this, companies have been able to hold on in the hope that as trading improves, they can repay their debts. But as things improve, more of their cash flow goes towards buying stock to fill the increased orders. That means they are just as likely to run out of cash when things get better as when they get worse.
Fortunately, since the second wave of debt restructurings that occur may be smaller than the problems at Saad and AH Al-Gosaibi, they can be more easily settled. This is because the firms are more willing to restructure debts.
However, restructuring will continue to be a long and potentially arduous process and until legislation is put in place to govern the way debt issues are handled, that is unlikely to change.
So far, only Dubai has shown willingness to update the legislative framework for dealing with insolvency. As the region’s largest economy, Riyadh needs to take a lead in creating a legislative framework, where restructuring and insolvency can be worked out quickly. In doing so, the kingdom will be creating an environment in which the private sector can thrive and the occasional failure is not overly penalised.
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