Privately-owned Bahraini investment house Arcapita is following in the footsteps of General Motors and Chrysler by filing for US Chapter 11 bankruptcy protection after non-bank creditors opposed extending a $1.1 billion loan facility due in March.

That's an important first in a region grown accustomed to "extend and pretend" debt deals. In the three years since its debt crisis began, there has been no high-profile haircuts or debt-for-equity swaps -- staple features in mature markets, writes Una Galani, Reuters Breakingviews columnist.
     
Dubai World, the region's largest restructuring, benefitted from a massive government cash injection. Bank lenders only took an effective haircut after agreeing to be repaid their principal in full over a five-to-eight year period. Optimistic assumptions have already run Kuwait's Global Investment House back into trouble on its original $1.7 billion debt deal agreed in 2009.

Arcapita isn't a willing trail blazer. It wanted to delay repayment for three years. Most of the investment firm's 50-odd creditors agreed, presumably keen to preserve local relationships. But hedge funds, thought to hold around 18 percent of the maturing security, were ready to take a tougher line. The threat of a forced liquidation prompted Arcapita, which owns assets around the world, to seek refuge.

Hedge funds may have wanted a quick pay off for loans that recently traded around 40 cents on the dollar through a capital injection. They might now need to wait longer. But at least all creditors should walk away with some certainty for full or partial repayment.

Chapter 11 is designed to help firms rebuild a sustainable balance sheet. A solution based on Arcapita's current liabilities, worth $2.6 billion, is likely to mean more upfront pain.

While that should give the Gulf its first credible debt reorganisation, it is unlikely to end the region's appetite for pushing out maturities and pledging to repay in full.

A US hedge fund won a London-claim last week against Dubai Drydocks for defaulting on a $1.7 billion loan but that might be hard to enforce. Elsewhere, hedge funds play a limited role. Still, Gulf borrowers need to learn that restructuring isn't supposed to be pain free. - Reuters