Default by Kuwaiti investment house hits Gulf's reputation as financial hub

Alistair Dawber@AlistairDawber
Monday 22 December 2008 01:00

The reputation of the Arabian Gulf as a financial hub was dealt a blow yesterday as Global Investment House (GIH), one of the region's biggest institutional investors, confirmed that it was unable to repay a $200m loan, and had appointed HSBC to renegotiate the deal, and its other debts, with international creditors.

Analysts had expected the Kuwaiti government to meet the obligation in order to save face in the international debt markets. Philip Smith, of Fitch Ratings, speaking before yesterday's announcement that the Kuwaiti government would not pay the loan, said: "The events of last week do come as a surprise because up to that point GIH had a good reputation and was very well regarded. It seems that it is very unlikely that culturally, a bank in the region would be allowed to fail, but this is slightly different as GIH is not quite in the same league as the banks. I can't imagine however, that the Kuwaiti government would allow GIH to default." Fitch cut GIH's rating from BBB, an investment grade level, to C last Monday.

Dubai and Abu Dhabi in the United Arab Emirates, Kuwait and Qatar have emerged as financial centres in recent years as easy access to foreign debt allowed them to establish themselves as rivals to traditional financial centres such as London and the US.

Initially, the Gulf was assumed to have avoided the worst of the global downturn, largely due to the high price of oil, but with western banks drastically cutting credit lines, the region has come under increased pressure.

GIH, Kuwait's sixth biggest company, is the first borrower from the region to default on a debt facility provided by western banks. The $200m, which had been provided by a syndicate of foreign and local institutions, led by the German investment bank WestLB, had been due to be repaid last Monday.

The loan agreement was signed a year ago, but was doubled from the initial $100m that GIH had asked for after WestLB received wide interest from banks keen to join the syndicate.

The credit ratings agency Standard & Poor's cut the group's rating to "speculative default" last week after previously judging the group's debt to be investment grade, or a solid investment choice.

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