Trade Alert - December 2017, Issue 48


Kuwait is one of the world’s richest countries per capita owing its success to oil production and exportation. The oil and gas sector accounts for 60% of the country’s GDP and 95% of its export revenue. The Economist anticipates that real GDP growth is expected to rise from around 1.3% in 2018, to 3.5% by 2022, in tandem with recovering oil outputs.

The Kuwaiti government released the ‘New Kuwait 2035 Strategic Plan’ at the beginning of 2017 with the aim of transforming the country into a regional, financial and commercial hub. In line with this strategy, Reuters reports that the Kuwaiti government is likely to approve a law extending the country’s borrowing limits, enabling the issuance of debt instruments with maturities of up to 30 years (the current limit is 10 years).

Kuwait is part of the Cooperation Council for the Arab States of the Gulf, originally known as the Gulf Cooperation Council or “GCC”. Its member states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (“UAE”). The GCC was formally established in May 1981 with the aim of, amongst other things, creating a common market, monetary union and customs union.

On 5 June 2017, Saudi Arabia, Bahrain and the UAE cut ties with Qatar after accusing it of supporting terrorism (which is strongly denied by Qatar). On 5 December 2017, Kuwait held a summit of the GCC where Sheikh Sabah al-Ahmad Al Sabah said that its structure may have to change in the future to face upcoming challenges. The annual summit, planned to be a two-day event, in the end lasted only a few hours. Saudi Arabia and the UAE used the occasion to announce the formation of a new economic and military cooperation separate to the GCC, leaving the GCC’s long term outlook uncertain.

The Kuwaiti Investment Authority (“KIA”) is the 5th largest sovereign wealth fund in the world and operates as a wealth management firm investing in real estate, private equity, public equity, fixed income and alternative investment markets. It is divided into the General Reserves Fund and the Future Generations Fund with approximately USD 202.8bn in assets under management. The source of money for the KIA is derived primarily from the excess proceeds from Kuwait’s oil reserves.

Kuwait’s legal system is based on Sharia law, Egyptian practice, English law and elements of the Ottomon system.

Sharia-compliant financing is growing among many banks and investment houses in part due to investors being keen to work with the Middle East as oil prices increase.

As a predominantly Islamic country, Kuwait is one of the foremost financial districts offering Islamic financing. Islamic finance is a form of financing based on the principles of Sharia law. In particular, Islamic financing prohibits the charging of interest and the reliance on chance or speculation. As such, Islamic financial institutions have developed a number of techniques to allow both religious values and legal principles to be upheld – the most common constructs include (i) Murabaha, (ii) Mudarabah, (iii) Musharakah, and (iv) Sukuk.

Sukuks, commonly referred to as Islamic bonds, are most closely aligned with bonds issued in western finance. The structure involves the issuer selling investors an investment certificate evidencing a prorated ownership or beneficial interest in an asset or enterprise (which the proceeds of sale were used to purchase). Amongst other things, the issuer makes a contractual promise to buy back the bond at a future date at par value.

Britain became the first western country to issue a sukuk bond in 2014 and the Bank of England, earlier this year, outlined details of a new Sharia-compliant liquidity facility that it will offer to Islamic Banks.

In October 2017, Reuters reported that, Warba Bank (“Warba”) (a Kuwaiti Sharia-compliant lender) syndicated a USD 250m debt facility. The facility is Warba’s first in the syndicated loan market, as the bank seeks to boost its capital ratios and increase liquidity buffers. It followed an issue of USD 250m of Tier 1 Sukuk bonds in March 2017.

This alert highlights some of the key considerations for investors in Kuwaiti loans in the secondary market.


"Banking activities" conducted in Kuwait (i.e., on an onshore basis) require that the appropriate licenses be obtained from the relevant regulators, such as the Central Bank of Kuwait (the “CBK”) (which supervises all local banks and investment companies engaged in financing activities in Kuwait) and, where applicable, the Kuwait Capital Markets Authority (the “CMA”) (which supervises all persons engaged in “Securities Activities” in Kuwait).

Only institutions registered in the Register of Banks held at the CBK are permitted to engage in banking business or to use in their business addresses, publications or advertise the terms “bank”, “banker”, “bank owner” or any other wording which has the potential to mislead the public as to the nature of the institution.

Conducting banking activities in Kuwait without a licence may result in penalties under Kuwait’s Banking Law (Law No. 32 of 1968) (the “Banking Law”). The sanctions are criminal in nature and include a term of imprisonment not exceeding two years, and/or the payment of a fine not exceeding KD 100,000.

To the extent that "banking activities" take place outside of Kuwait (i.e., on an offshore/cross-border basis), there should be no requirement for foreign banks to obtain any prior approvals/licenses from local regulators. The rendering of such financial services by a foreign financial institution are subject to the applicable laws of the jurisdiction where such foreign financial institution is incorporated. In the context of secondary loan trading, the aforementioned rules apply to acquiring both simple term loans and revolving credit facilities.

It is important therefore that an analysis of whether the loan purchase constitutes “onshore banking activity” is undertaken prior to engaging in any secondary trade to confirm whether or not a Kuwaiti licence is required.


Similarly to English law, loans made to a Kuwaiti borrower can be transferred by assignment or novation. The method of transfer under Kuwaiti law depends on whether what is sought to be transferred are rights only or rights and obligations.

If only rights are to be transferred, the Kuwait Civil Code No. 67 of 1980 (the “Civil Code”) provides for assignment to a third party without the consent of the underlying debtor unless there is a restriction; (a) in the law, e.g. certain laws such as the Public Private Partnership Law (Law 116 of 2014) restricting assignments, (b) in the underlying contract between the parties, or (c) if the nature of the obligation restricts assignments (e.g. obligations of a personal nature which cannot be assigned).

According to the Civil Code, an assignment will only be effective against the underlying debtor if either:

  1. the underlying debtor’s consent is date stamped by the Notary Public (typically this involves the Notary Public affixing his stamp confirming the date on which the relevant document has been signed by the parties before him); or
  2. a notice of the assignment was served on the debtor by an official Court process server. However, this approach is not effective if the assignor’s right to assign is restricted.Typically, a novation is implemented by a tripartite novation agreement being signed by the original parties to the contract and the new party seeking to take over the rights and obligations under the original contract.Where an interest in a loan is novated, there is a risk that this could have the effect of resetting the “hardening period” in respect of the original security. This means that during the “suspect period” [1] of a bankrupt debtor, the security granted in respect of the lender to which the rights and obligations are novated, could be set aside in respect of that lender.Participation structures are commonly used in Kuwait.
  3. It is therefore recommended that assignment is used when transferring loans in Kuwait to avoid resetting the hardening period.
  4. The Civil Code provides that the re-creation of obligations extinguishes the original obligation. It further provides that the security which guaranteed performance of the original obligation shall not pass to the new obligation, unless required under the law or to effect the intention of the parties to transfer the security. As discussed further below, it should be noted that most syndicated loans employ a security trustee/agent, security held under such construct will ordinarily remain with the security agent and should not require any further action by the parties in order to transfer the security.
  5. If rights and obligations are to be transferred, the consent of the underlying debtor is required. Under Kuwaiti law, this arrangement is considered to be a novation and not an assignment.


Kuwaiti law does not generally recognise the concept of trusts; however, there is a concept of a regulated custodian which is similar to an English law trust.

The current practice is that the security agent is a regulated person (e.g. a custodian regulated by the CMA). The Executive Bylaws to Law No.7 of 2010 Regarding the Establishment of the Capital Markets Authority and Regulating Securities Activities (the “CMA Bylaws”) expressly prescribe that the lenders of a licensed person (such as a custodian) shall not have recourse to clients’ funds or assets held by such licensed person.

The CMA Bylaws include other protections, such as requiring that the custodian should not apply clients’ assets to its own purposes, and that the custodian is required to segregate its own transactions from those transactions conducted on behalf of clients. The custodian is also required to maintain clear records segregating its own assets from those of its clients.

Parallel debt structures are on occasion adopted under security agency arrangements, but their efficacy is generally untested before the Kuwaiti courts.

Where a security agent is acting on behalf of the lenders, no further action should be required by a new lender taking the benefit of existing security. However, if security is directly held by the lender, then the existing security arrangements may require amendment or such security may need to be released and re-taken.


Under the Executive Bylaws of Law No. 2 of 2008 concerning the amendment of certain provisions of Kuwait Income Tax Decree No. 3 of 1955 (the "Bylaws"), a party making a payment to a taxpayer is obliged to deduct 5% of the amount thereof until such time as the Department of Income Tax (“DIT”) issues a valid tax clearance certificate for the relevant fiscal year.

The term “payment” is widely interpreted to capture any payments of interest or proceeds of guarantees. For the avoidance of doubt, this obligation does not per se amount to a withholding obligation, but rather a retention obligation.

Under the Bylaws, an entity which conducts business in the State of Kuwait and realises income during the taxable period shall be subject to tax in Kuwait. It should be noted that, the term “entity” includes a partnership. The term “entity” would not in practice include companies established in one of the Gulf Cooperation Council (“GCC”) countries whose shareholders are comprised only of nationals of the GCC states.

"Taxable income" shall be considered as realised in the State of Kuwait when it is generated from any activity or work carried out wholly or partially in the State of Kuwait and irrespective of whether the relevant contract is concluded inside or outside of Kuwait and shall also include income resulting from the supply or sale of goods or provision of services. The Bylaws may be interpreted as providing that income generated from the lending of funds inside Kuwait may be considered to be income realised from the conducting of business in Kuwait, and should therefore be subject to income tax. The provisions are wide enough to cover cross border lending whether directly or through the secondary loan market. However, there is uncertainty regarding how the DIT will seek to enforce these provisions in practice.

There is a legal requirement for companies subject to corporate tax law in Kuwait (including foreign companies deemed to be earning an income in Kuwait) to obtain tax cards from the DIT. All government and public bodies, private companies and institutions are forbidden from dealing with any incorporated body that does not have a valid tax card.

Entities deemed to be conducting business in the State of Kuwait will require both a tax number and tax card, which can be obtained by way of application to the DIT.

It should be noted that there is a lack of precedent in the Kuwaiti courts with respect to the application of the Bylaws and the DIT has not always been consistent in its ruling with respect to Kuwaiti tax matters more generally. It is therefore recommended that a reputable accounting firm is consulted for detailed practical taxation advice.


It is the general practice in Kuwait to notarise security documents. Where security in favour of foreign parties is to be taken through notarised documents, the current practice of the Kuwait notary public is to require that a Kuwaiti entity is appointed as a security agent to hold the security on behalf of the lenders from time to time.

Special Note

With special thanks to Ezekil Tuma and Brenda Ntambirweki at ASAR – Al Ruwayeh & Partners who assisted us with this Trade Alert.


Adam Colman
Associate, London
T.+44 (0) 20 7170 8633

Adam Colman is an Associate in the Financial Restructuring Group and the Debt & Claims Trading practice in Cadwalader's London office.

Adam specialises in advising bank and fund clients on UK and cross-border loan and claims trading transactions and also has a wide range of experience working on other finance and corporate matters, including, private acquisitions, primary lending, credit reviews, bespoke options and warehouse facilities.

[1]     The suspect period is fixed by the courts and is for a period of up to two years. Any transactions undertaken by the debtor in this period may be declared void.




At the time of going to print, Steinhoff is facing liquidity concerns and being referred to as ‘South Africa’s version of Enron by Bloomberg. Shares in the furniture retailer crashed 80% in two days (losing around EUR 12bn in market value) after the company reported accounting irregularities relating to the viability of around EUR 6bn of assets on the balance sheet of its operations in Europe.

The company owns retail chains including Conforama in France, Poundland in the U.K. and Mattress Firm in the U.S. and is listed in Frankfurt (primary) and Johannesburg.

The crisis has prompted the resignations of Chief Executive Officer Markus Jooste and billionaire Chairman Christo Wiese, the company’s largest shareholder.

In a meeting with its creditors on Tuesday 19 December 2017, the company stated that its credit facilities were “increasingly being suspended or withdrawn by lenders” and asked for continued support from its creditors and shareholders to “maintain stability”.

The company is reported as owing more than EUR 1bn under a revolving credit facility and USD 8.5bn in other debt payments due over the next five years.

The South African Financial Services Board, backed by the Minister of Finance, Malusi Gigab is conducting an independent investigation into Steinhoff’s possible false and misleading statements under s.81 of the South African Financial Markets Act, in addition to the Johannesburg Stock Exchange probe into the accounting irregularities. South Africa’s Independent Regulatory Board for Auditors and a Dutch auditing regulator are also reviewing Deloitte LLP’s role (who signed off on the 2016 results).

A class action shareholder law suit was filed in Frankfurt district court on 19 December 2017 by German law firm TILP, for purchasers of shares between 7 December 2015 and 5 December 2017. This is likely to be the first of many.

Steinhoff has hired PwC to investigate the accounts and according to a Reuters report, the company will consider selling stakes worth a combined USD 1.4bn in South African companies PSG Group and KAP Industrial.

Click here for Steinhoff Bank Presentation 19 December 2017.

Click here for Steinhoff Group Structure.

Click here for South African Trade Alert.


Shares in the UK’s second largest support services and construction firm, fell by 48% earlier this month, following its third profit warning since July.

The company, which is part of a consortium building the GBP 56bn HS2 high speed rail link, announced in November 2017 that it was in discussions with financial stakeholders to defer the testing of its financial obligations. The Financial Times reports that based on its latest forecasts, the board expect the company to be in breach of its financial covenants from 31 December 2017. Carillion will therefore seek to amend the relevant agreements to enable testing of the financial covenants to take place in April 2018.

Reuters also reports that, in an effort to reduce its debts, Carillion has entered into a binding Business Purchase Agreement with Serco Group Plc for the disposal of a large part of its UK healthcare facilities management business.

Andrew Davies, Carillion’s new Chief Executive was announced to be taking over on 22 January 2018, 3 months earlier than originally planned.


The Tribunal of Milan has approved Sorgenia’s debt restructuring agreement according to a company statement on 20 December 2017. The Italian energy company is expected to repay EUR 150m in December 2017 under the deal, reducing its debt to circa. EUR 880m from EUR 1.7bn in March 2015. It is reported that Sorgenia’s lenders may try to exit their positions. Sorgenia has been subject to an investigation by Italy’s competition authority in connection with the withholding of power which created shortfalls potentially resulting in overpayment for electricity in Puglia. Sorgenia said the probe found no wrongdoing by the company.


Saudi Arabia continues to crack down on alleged corruption and was reported on 20 December 2017 to have frozen bank accounts of a further 376 individuals who are either detainees or linked to them in a “precautionary measure”.

The Saudi Arabian Monetary Authority (“SAMA) is the central bank of the Kingdom of Saudi Arabia and is responsible for maintaining monetary and financial stability in the Kingdom. It is hoping to recover as much as USD 100bn from settlement deals made with detainees who are being held in the Ritz Carlton in Riyadh as part of Crown Prince Mohammed bin Salman’santi-corruption campaign”. Some suspects are starting to make payments to settle cases in exchange for freedom. Prince Miteb bin Abdullah al-Saud, one of the most senior royals who was detained, was released at the end of November 2017 after agreeing a deal considered to exceed USD 1bn.



On 6 December 2017, Luxembourg’s Chamber of Deputies introduced two Bills of Law implementing articles 30 and 31 of the Directive (EU) 2015/849 of the European Parliament and the Council of 20 May 2015 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing (“4th Anti Money Laundering Directive”).

This directive seeks to introduce greater transparency on the beneficial ownership of legal entities and financial arrangements. Bill of Law n°7217 requires Luxembourg legal entities to hold up to date information on their beneficial owners, and to provide when requested, such information to national authorities and self-regulatory bodies monitoring compliance with anti-money laundering obligations.

Similarly, Bill of Law n°7216 requires, amongst other things, that Luxembourg trustees obtain and hold information on the beneficial ownership of trusts for which they are acting as trustee. This includes the details of any person exercising effective control over the trust.


The European Securities and Markets Authority (“ESMA”) has proposed a grace period of 6 months in connection with the requirement to obtain “legal entity identifiers” or “LEIs” for reporting requirements under the Markets in Financial Instruments Regulations (“MiFIR”). During this period, investment firms may provide a service triggering the obligation to submit a transaction report to a client without an LEI, if the investment firm obtains the necessary documentation from the client to apply for an LEI code on its behalf.

For MiFID II queries, please contact Assia Damianova.


In July of this year, the Financial Conduct Authority reported the intention to sustain LIBOR[1] until the end of 2021, when the benchmark will be transitioned out and potentially replaced with SONIA[2]. In light of recent developments surrounding LIBOR, the LMA have released, as pending, updated Terms and Conditions, Trade Confirmations and User Guides. The Terms and Conditions have been amended to include an additional fallback to the Relevant Benchmark Rate in the event of the discontinuance of LIBOR. If a Relevant Benchmark Rate for any currency is not available and it is not possible to calculate the interpolated rate, the Relevant Benchmark Rate for that currency will be as specified in the Agreed Terms.

The documentation which comes into effect on 22 December 2017 may be accessed HERE.


Louisa Watt will be speaking at the LMA Secondary Training Day, 16 January 2018. Click here for agenda and registration.

Louisa Watt
Partner, Head of Loan Portfolio and Debt and Claims Trading, London 
T.+44 (0) 20 7170 8678 








[1]     “LIBOR” means London Interbank Offered Rate.

[2]     “SONIA” means Sterling Overnight Index Average.



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