Arcapita Files for Bankruptcy Protection as Debt Talks Fail

Arcapita Bank BSC, a manager of Islamic-compliant investments with $7 billion under management, filed for bankruptcy in the U.S. after failing to reach an agreement with creditors.

Arcapita, formerly known as First Islamic Investment Bank, and five affiliates sought Chapter 11 protection today in U.S. Bankruptcy Court in Manhattan, listing assets of $3.06 billion and liabilities of $2.55 billion.

“This global recession has hampered the Arcapita Group’s ability to obtain liquidity from the capital markets, and has also resulted in a reduction in asset values,” lawyers for the company wrote. Arcapita’s board approved the process “to protect their business and assets and implement a comprehensive restructuring,” the Manama, Bahrain-based private-equity firm said in an e-mailed statement today.

Founded in 1996, the company manages Shari’ah-compliant, or Islamic compliant investments and operates as an investment bank, according to the filing. It has 268 employees and along with its affiliates, has $7 billion in assets under management, according to the filing. It owns Irish power utility Viridian Group Ltd., and helped that company refinance its debt earlier this month with equity.

Arcapita failed to reach an agreement with creditors on a $1.1 billion syndicated shari’ah complaint loan due this month.

‘Logical Step’

The bankruptcy filing is a “logical step by the company to protect its foreign investments and from individual creditors going after the company’s assets in Europe, the U.S. and Asia,” Serge Lioutyi, a London-based distressed debt trader at Citigroup Global Markets Ltd. said in an e-mail today. It “will help the company focus on reaching a consensual agreement with creditors rather than worrying about individual claims.”

Arcapita is among companies in Bahrain that have sought protection to restructure liabilities after the global credit crisis cut their access to the debt market and as asset prices declined. Awal Bank BSC, a Bahrain-based wholesale bank, filed for Chapter 11 in October 2010, while Gulf Finance House BSC reached an agreement with a group of banks led by WestLB AG on a new two-year $100 million Islamic loan.

Failed Refinancing

The costs to insure Bahrain’s debt against default fell two basis points to 365 today, according to credit default swap data from CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Arcapita’s efforts to refinance the $1.1 billion loan were hurt by the euro-zone debt crisis and the bank held talks with lenders to extend the facility by three years, Arcapita said in the statement. “The actions of certain non-bank creditors have precluded Arcapita from reaching such a consensual resolution before the March 28th maturity date,” it said.

The Central Bank of Bahrain was listed as the largest creditor, with a $255.1 million claim tied to a bank loan. Commerzbank AG has a $164.7 million claim also related to a loan and National Bank of Bahrain has a $132.3 million claim. Bahrain’s central bank said it was monitoring the case.

The Chapter 11 provisions will allow Arcapita’s board and management to operate their business and “decisions related to asset disposal will also remain with Arcapita,” it said. The company manages about $7.4 billion and its investments include those in Viridian and U.S.-based Falcon Gas Storage Co.

Committee of Lenders

Royal Bank of Scotland Plc is chairing a coordinating committee of lenders that is negotiating the terms of the restructuring, a person familiar with the plan said Feb. 27. Arcapita raised the facility in April 2007 at a margin of 85 basis points over the London Interbank Offered Rate, according to data compiled by Bloomberg. Barclays Capital, Standard Chartered Plc and WestLB AG helped arrange the loan.

In its first-day pleadings, Arcapita asked the bankruptcy court for an order that specifies foreign creditors can’t seize its assets.

“The debtors have foreign operations with potentially large numbers of foreign creditors and counterparties to contracts who may be unaware of the global-reaching prohibitions and restrictions of the Bankruptcy Code,” lawyers for the company wrote.

Gibson, Dunn & Crutcher LLP and Linklaters LLP are Arcapita’s legal advisers, while NM Rothschild & Sons Ltd. is the financial adviser, according to the statement.

The case is Arcapita Bank BSC, 12-11076, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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