Most of Kuwait’s multibillion- dollar investment company industry could be wiped out by debt repayments on the finance houses’ leveraged investments made before the recession, senior international and local bankers have warned.
Spurred by cheap credit, abundant liquidity and few other opportunities in the government-dominated economy, Kuwaitis have set up scores of investment houses to bet on international and regional real estate, private equity and stocks. At its peak, the industry had assets of more than $50bn.
However, much of the spree was financed by short-term loans, and the financial crisis hit the local investment houses like a tsunami, said one analyst.
While bankers say the investment company woes are largely contained in Kuwait and should not spread, they could lead to distressed sales of overseas assets and are weighing on the exposed local banking sector.
Two of the largest investment companies defaulted on international loans last year. While no other finance house has publicly collapsed, bankers and analysts say almost all are struggling to meet debt repayments in the face of crippling losses – some of them on investments in Dubai, the troubled Gulf emirate. There are 100 investment houses in Kuwait but “you will not see half of them still operating in 2011”, said Jasem Al-Sadoun, chairman of Alshall Investment.
Many investment companies are in effect insolvent but are allowed to totter on by local banks reluctant to push them into bankruptcy – preferring to reschedule or renegotiate loans to avoid writedowns, say international bankers.
Furthermore, while international banks such as HSBC, Credit Suisse and UBS are helping restructure some houses, consolidation is not on the cards as most shareholders are unwilling to sell out to “rival” merchant families or companies.
The industry’s woes are having knock-on effects on Kuwaiti banks, which are reluctant to lend while they are facing delayed payments or losses on loans to investment companies.
Kuwait’s economy is dominated by the government, which does not need financing, so bank lending has been primarily to consumers, real estate, construction and investment companies, according to Moody’s, which has a negative outlook for the country’s bank sector