High oil prices provide much-needed stability to the Kuwait economy, with the government also keen to privatise its national airline in order to keep the state out of reach of the financial crisis.

Robust government support and buoyant oil prices have kept the wolves at the door, but the stress of the financial crisis has brought activity among Kuwait’s glut of investment companies to an abrupt halt. That’s according to lawyers in the energy-rich state, who over the past 18 months have witnessed transactional work freeze up as investment houses struggle to repay or refinance debt, let alone secure fresh funds for takeovers.

The long and short of it, says Abdul Aziz Al-Yaqout, the regional managing partner of the Middle East offices of law firm DLA Piper, is that M&A work is still on the floor. “The transaction side has been extremely quiet. There are more than 100 investment companies based in Kuwait and they were the ones doing the bulk of the transactions over the past three to four years,” says Al-Yaqout. “When the financial crisis came along they were unable to secure extensions of their short-term debt. With no way of refinancing, the shopping spree ended.”

Immaterial M&A
Bankers predicted that the economic downturn would spark a number of corporate consolidations across the Gulf and regional private equity businesses would seek to take advantage of lower prices. However, apart from a few investments by large sovereign funds, such as the Kuwait Investment Authority’s (KIA) bailout  of Gulf Bank, and some restructuring, M&A advisory work hasn’t materialised.

Liquidity issues have continued to haunt Kuwaiti investment companies into 2010, leaving the majority unable or unwilling to pursue any buyout opportunities. “I’m seeing a pick up in the non-leveraged market now. There is consolidation in a number of areas and you’ll be seeing transactions arising out of that, mainly healthier non-financial companies with cash going out and making acquisitions,” Al-Yaqout says.

Al-Yaqout, based in Kuwait City, heads up DLA Piper Kuwait, a joint venture agreement with the international division of local law firm Al Wagayan, Al Awadhi & Al Saif, signed in 2008. Al-Yaqout represents corporate clients and financial investors in acquisitions, divestures and joint venture projects as well as pre- and post-merger restructurings.

Meanwhile, Freshfields, which services its Kuwait operation from other offices around the Gulf, including Dubai, Abu Dhabi and Bahrain, has traditionally been instructed on M&A and finance work involving investments in projects, local airlines and lending by banks such as The National Bank of Kuwait.

David Higgins, a corporate partner at Freshfields based in the UAE, says M&A and finance work had been the lifeblood of the firm’s Kuwait business, something the global economic downturn sought to undermine. “The brakes got put on outbound M&A work about one year ago. Kuwaitis realised that they’re overleveraged so going overseas and buying isn’t a good idea. However, KIA still loves real estate, so will be tempted by European property that’s undervalued,” Higgins explains. “The rise in oil and gas prices has boosted confidence generally, but specifically it means that someone like KIA can replenish the coffers. I just hope that after a few weeks or months of high oil prices they are they cautious with how they spend it.”

Conserving energy
Rising oil prices have saved Kuwait, although it would be hard to argue that the economy was ever on the brink. Substantial energy reserves, built up over years have meant the country has been able to bounce back quickly from the downturn.

The prudent use of these huge oil reserves meant the government had savings that could be tapped into. In April 2009, the government approved a US$5bn stimulus package to help weather the economic storm, citing troubles at several prominent investment firms, including Global Investment House and Investment Dar.

Prior to the crisis, the Kuwaiti economy was soaring on the back of surging oil prices, which famously reached a high of US$147 a barrel in June 2007. Real GDP grew at an estimated 6.4 per cent in 2008, reflecting higher oil production, up from 2.5 per cent in 2007. As the world’s fourth-largest oil exporter Kuwait benefited handsomely from all this, and between 2002 and 2008 nominal GDP saw a compound annual growth rate of 22.8 per cent. In 2007-08 the government ran a budget surplus for the eighth consecutive fiscal year.

Yet there was trouble in paradise as massive economic growth came with its downsides, notably a bubble which had formed in the country’s real estate sector and stock market. Many local investment houses had heavy exposure to these areas, which led to hefty write-downs on investments.

In the wake of this, a wave of restructuring has now engulfed the economy, with law firms on hand to help rescue and reorganise. Higgins says: “We’re now biggest on the restructuring side, which means mainly sorting out problem companies at the moment.

“It’s the same old problem of growing too quick too fast for a lot of firms, with the added headache of real estate speculation. We’re advising companies that have been exposed to and hit hard by the real estate bubble bursting.”

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