US hedge fund Davidson Kempner Capital Management is part of the creditor committee for the $1.1 billion debt restructuring at Bahrain investment house Arcapita, the first time a fund has fulfilled such a role in the Gulf.
     
Previous restructurings in the region, like Dubai World's $25 billion debt deal, have been bank-only affairs, leading to long extensions as banks, concerned with provisioning, opaque legal remedies and maintaining relationships with local borrowers, adopted a conciliatory attitude.

The presence of the distressed debt investment firm on the committee, confirmed by three sources close to the matter, is expected to change the dynamic of negotiations, with the fund having the potential to drive a much harder bargain.

"I'm excited by this particular situation. I've grown old and bored of the 'extend and pretend' model of the last four years," said Ahmad Alanani, senior executive officer at Exotix, an investment firm which specialises in frontier markets.

"This will be a much-needed wake-up call for regional lenders and borrowers alike and it will test the limits of the region's legal frameworks to the max."     

'Extend and pretend' is the term coined for the practice of banks agreeing to push the maturity of obligations into the future to allow cash flow to recover and potential asset sales to take place.

The other four members of the creditor committee are Barclays, CIMB, Standard Bank and Royal Bank of Scotland, which is chairing the group, the three sources said on condition of anonymity as the negotiations are private.

PricewaterhouseCoopers and Clifford Chance are working with the creditor committee, while Rothschild, KPMG and Linklaters are advising Arcapita, two separate sources said.

Arcapita declined to comment. Davidson Kempner didn't immediately respond to a request for comment.

The Arcapita debt maturity has been regarded as one of the most challenging obligations to meet in the region in 2012. Its CEO, Atif Abdulmalik, told Reuters in June it was looking to offload assets to help part-refinance the deal.

However, the region's mergers and acquisition market has been hampered in recent months by volatile global conditions and the European sovereign debt crisis. - Reuters