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Litigation funders eyeing UAE NPL portfolios for asset recovery opportunities

The 2009 financial crisis may have been global, but its effects in each country had a distinctly local flavour. None more so, perhaps, than the United Arab  Emirates, where a highly mobile population of expats faced potential jail time over bounced cheques or defaults on loans.

Financially troubled foreign workers fled the country, leaving in their wake a fleet of abandoned luxury cars in the airport carpark – keys still dangling in the ignition – as reported by numerous news agencies at the time.

Where most observers saw a crisis, litigation funders spotted an opening.

“After the US crisis more than a decade ago, we felt there was an opportunity in the [Middle East],” says Dubai-based litigation funder Dilip Massand, managing director at SAS Asset Recovery. “We initially went out there in 2010 to pursue the outward-bound litigation and asset recovery for institutional investors.”

While bad debt recovery is, of course, a concern for banks around the world, the UAE faced a specific set of longer-term problems as Non-Performing Loan (NPL) ratios rose considerably due to rapidly rising Small and Medium Sized Enterprise (SME) and personal loan defaults. NPLs are loans that are more than 90 days past due, or otherwise unlikely to be repaid in full.

Hop, skip and a jump

“What I see is that Dubai has grown enormously within the last decade and part of the NPL exposure is caused by the situation, or as we say, the ‘skip cases’ – where a defaulter absconds the country – form a significant part of the overall NPL book in the UAE, according to Daniel Hall, director at London-based litigation fund Burford Capital.

“People who are mainly from India, Pakistan and Bangladesh moved to Dubai and were granted […] significant sums of money and they […] provided personal guarantees in return. Afterwards, they fled the country,” he said.

At the end of 2015, local press reported the total amount of unpaid debt owed by UAE-based SME owners who had ‘skipped’ the country that year  was around USD 1.4bn.

As a result, banks in the UAE started showing rising NPL ratios on their balance sheets in 2016. As debtors fled the country and post-dated cheques — which serve as collateral — were bouncing, banks were unable to collect, said Massand.

From 2015 to 2018, NPL ratios rose from 6% to 7%. Households and SMEs led the increase in 2017, according to a recently released IMF report on the subject.

The issue is arising from both non-performing syndicated loans and bilateral loans, noted Hall, who added that many corporate loans carry personal guarantees.

“It is fair to say that the banks located within the UAE and Persian Gulf Area are concerned about their NPL portfolios and there is an increasing consolidation in this respect,” he said.

Catch me if you can

While the UAE garners the interest of many litigation funders looking at asset recovery, it is important to distinguish between traditional litigation funding and funding of asset recovery, said Hall.

Traditional litigation funding is financing based on the merits of a claim, whereas asset recovery is not an assessment of the claim, but finding the money and getting it back on a multijurisdictional basis, he continued.

“When it comes to the UAE, there is certainly demand for debt recovery”, said Robert Hannah, managing director at London-based litigation fund Augusta Ventures. “On a case-by-case basis, recovery can be relatively straightforward. We investigate cases individually in terms of required resources.”

The initial step a bank takes when a cheque bounces is to make a criminal filing, and then to file a civil complaint. It is at this point that the litigation funders get involved, Massand noted.

“When it comes to civil cases, we fund the collections or enforcements to help the [lenders] recover [funds]. There are many litigation funders who travel to Dubai seeking opportunities, and who have now discovered this sector,” he continued.

With respect to bank NPL funding opportunities, Indian borrowers are probably the biggest segment, according to Massand. “As a funder, one looks for an opportunity to settle these issues,” he said.

“From a litigation funding perspective, it is a risky investment opportunity: when it comes to debt recovery, asset tracing is a problem,” said Hall. “A question for the banks at this point is ‘What is their level of exposure?’”.

“In this case, the question that the litigation funders ask in terms of risk assessment is ‘How does one go and recover in these jurisdictions?’. In some cases, it may require lots of funding in order to recover. On a case-by-case basis, some situations may be worth funding, and some may not,” he continued.

“If you want to trace the assets for asset recovery, the origin of the expat [and where their assets are located] is very important. After tracing the asset, the domestic jurisdiction comes into play,” said Massand. The big question for the banks is, if the asset is traced, can the bank go there and pursue the situation for recovery? This is where the litigation funders come to the stage, he continued.

“We approach these cases with two questions on which we price the risk: first, how hard it is to find the assets, and second, if we can trace them, can we recover? It is a risky opportunity for litigation funders - the first level is tracing the location of the assets, then finding out if the jurisdiction that the assets are located has the necessary litigation proceedings for the recovery of the assets. It is a niche area of expertise,” said Hall.

Toss the bouquet

Litigation funders are not approaching these cases in a manner similar to the classic portfolio funding arrangement – where the main idea is to mitigate the risk of losing the investment by compensating a possible loss from one case with a possible win in another.

“So far, it has not been traditional portfolio funding, it is at our discretion which parts of the portfolio to choose. We are being selective in choosing the ones that we would like to fund from the portfolio of cases,” said Massand.

Augusta Ventures has a similar approach when it comes to NPL portfolios and has been selective in its support for portfolio funding.

“Our review process is pretty sophisticated and generally, the view is, that funding a bundle of NPL cases that can include weaker along with stronger cases (like a classic portfolio funding scenario) is not the way to go in the UAE. We have, however, been able to offer portfolio funding in the construction sector, where we have particularly deep expertise”, Hannah noted.

Buying a bargain

“At the end of the day, both parties – the banks and the defaulted parties – want to settle these situations. From the defaulted party’s perspective, the UAE is often their adopted home, they have family here. On the other hand, the banks also want to work these issues out for themselves,” noted Massand.

“It is a young country, these are hard lessons, but this is how the market matures. The new bankruptcy laws are now in place to facilitate restructurings and workouts. We [funders] bring a considerable value to EMEA, and [are] helping the market evolve,” concluded Massand, who noted that certain credit funds are now sufficiently confident to be looking at acquiring distressed credit portfolios.

Asli Orbay Reporter, Arbitration and Litigation Debtwire CEEMEA

Asli Orbay is a reporter working for Debtwire CEEMEA, with a focus on arbitration, litigation and distressed situations. Prior to joining Debtwire, Asli worked as a banking and finance lawyer for Clifford Chance in Istanbul. Asli holds an LLM in international economic and trade law and a she is currently a PhD candidate studying at Brunel University.

Asli Orbay Reporter, Arbitration and Litigation Debtwire CEEMEA

Asli Orbay is a reporter working for Debtwire CEEMEA, with a focus on arbitration, litigation and distressed situations. Prior to joining Debtwire, Asli worked as a banking and finance lawyer for Clifford Chance in Istanbul. Asli holds an LLM in international economic and trade law and a she is currently a PhD candidate studying at Brunel University.

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