Arcapita Bank, a Bahraini entity currently under Chapter 11 protection in Manhattan, is seeking bankruptcy court approval of what is purported to be the first-ever shari’ah-compliant debtor-in-possession credit facility, a $150 million loan provided by Silver Point Finance.
Arcapita should need the DIP financing for only a short period, however. In a Sept. 25 motion filed with the court, the bank asked Judge Sean Lane for a mere 60-day extension of its exclusive right to file a reorganization plan, through Dec. 14. In an unusual move, Arcapita also specified that it would forgo its right to seek further exclusivity, and live or die based on the dual-track plan it intends to put forth.
Silver Point will provide and syndicate the so-called “Murabaha DIP,” with an agreed margin of L+105, and a LIBOR floor of 2%, which must be approved by a shari’ah advisory board. The board will then issue a “fatwa” declaring the facility is in compliance with the principles of Islamic finance, according to court documents. “Murabaha” refers to a type of loan that does not bear interest, as interest is forbidden under Islamic religious law. Instead, generally speaking, a murabaha loan is a cost-plus financing under which the lender purchases the borrower’s collateral and is repaid in installments at a prefixed profit margin.
In his declaration filed in support of the DIP, Rothschild managing director Homer Parkhill said “the proposed transaction is unique because of the complexity involving compliance with Shari’ah law, and therefore, there are aspects that are not necessarily comparable to typical debtor in possession financings.” The extent of those unique aspects remains unclear, however, as certain portions of Parkhill’s declaration – and the entirety of two accompanying exhibits filed with the court – were redacted.
Arcapita is only now seeking DIP financing, six months into its Chapter 11 proceedings, because it thus far has had sufficient funds to pay its restructuring expenses without the need for post-petition financing or the use of any secured lender’s cash collateral. At this point, however, in order to avoid being forced into the premature sale of any of the bank’s current investments, Arcapita sought DIP financing that could also be converted into an exit facility.
Under the terms of the proposed Murabaha DIP, Silver Point will be entitled to a commitment fee of 1.5%, or $2.25 million, and a breakup fee of 0.75%, or $1.125 million, should Arcapita find alternative financing. On Friday, before the identity of the lender had been revealed, Judge Lane approved financing-related expense reimbursement of up to $500,000, but Silver Point’s proposed agreement allows it expenses of up to $900,000.
The financing commitment also specifies that any unused portion of the Murabaha DIP at the time of Arcapita’s exit from Chapter 11 may be converted into an exit facility that will mature on the third anniversary of the exit, with a margin that may be increased by up to 2% each year.
Arcapita’s short extension request and promise not to seek another one came as a surprise, in large part because Arcapita filed Chapter 11 in the first place to avoid losing control of its future to two hedge funds: subsidiaries of Fortelus Capital Management and Davidson Kempner Capital Management (see “Arcapita faces scrutiny from hedge funds at first-day hearing,” LCD News, March 21, 2012). Nonetheless, Arcapita said it won’t seek further exclusivity because its management team feels that if the bank cannot propose a confirmable plan by Dec. 14, “then the creditors have just resigned themselves to eternal fighting rather than resolution through compromise. Hence, additional extensions of the exclusive filing period and the further hard work of debtors’ management will not resolve those issues.”
Arcapita made its initial Chapter 11 filing on an emergency basis, with only a few days’ notice, and as such its legal team and financial advisors said they have spent the first six months of the case getting a grasp on the bank’s complex business and capital structure. KPMG was retained in April to value Arcapita’s interest in 27 companies and other portfolio assets – including European energy company Viridian and J. Jill, a U.S.-based women’s clothing company – and eventually determined a total value of about $1.4 billion.
By Dec. 14, Arcapita said it will have filed a “toggle plan,” offering two potential paths out of Chapter 11: a “new money” plan, assuming new equity is committed and available in time for a confirmation hearing, or an alternative “standalone plan” for the distribution of Arcapita’s assets. Arcapita said it has already shared the KPMG valuation and its “new money” plan with its creditors, and expects to share its standalone plan by the end of this month.
A hearing on the exclusivity motion is scheduled for Oct. 9 in Manhattan. – John Bringardner