As creditors continue to look across the global market for strategic opportunities, the United Arab Emirates (the "UAE") is primed to emerge as a relatively untapped well of potential for private credit providers.
We have seen an increased appetite for both international and regional private credit funds to engage, operate and (in certain circumstances) establish in the UAE and the Middle East. In this article, we provide a summary of certain key aspects of the UAE market that will be of interest to private credit providers looking towards the UAE.
A market familiar with creditor friendly terms
Historically, corporate finance transactions within the UAE (both domestic and cross-border) have been reliant upon regional senior bank debt, typically provided from the relevant borrower's relationship banks. As a result, creditors have often been able to rely on their existing relationships to push for terms that are significantly more favourable than the market terms provided to equivalent entities in other jurisdictions. While the development of creditor friendly terms has traditionally been led by the banking market, private credit providers in the UAE are now also benefitting from terms that are substantially removed from the covenant-lite terms prevalent across the UK and Europe. In particular, the majority of private credit transactions that we have seen across the UAE and the Middle East have incorporated some or all of the following characteristics:
- extensive maintenance covenants (typically leverage, debt service, interest cover and often gearing or capex, as applicable) for the benefit of all creditors, with minimal or no EBITDA adjustments;
- extensive all asset security and guarantee packages, typically without negotiated "agreed security principles", as further detailed below;
- minimal "permitted" definition carve-outs (with limited circumstances in which additional debt can be incurred beyond a single hard cap or ratio basket and typically a blanket prohibition on the incurrence of super senior debt);
- limited use of "restricted" and "unrestricted" subsidiary constructs;
- strong non-call protections; and
- borrower acceptance of significant amortisation on term facilities (where required by creditors).
Importantly, from a liability management perspective, given the standard transaction characteristics adopted in UAE and regional financings (in particular the limited debt incurrence permissions and lack of unrestricted subsidiaries), common creditor concerns that have arisen in international financings over recent years (including the so-called J. Crew, Serta and Chewy "loopholes") are not relevant or applicable for UAE based transactions.
Flexibility of conventional and Shari'a compliant transactions
One of the most common queries that we receive from international private credit providers relates to whether there are any limitations on entering into conventional based transactions within the UAE. While Shari'a compliant structures are commonly used within the UAE and the Middle East as a whole, conventional financing transactions (often featuring PIK and/or parallel warrants or convertible structures) are also frequently adopted. If a borrower or sponsor is established on a Shari'a compliant basis and is unable to enter into conventional financings, creditors are also typically easily able to provide funding on a Shari'a compliant basis, with certain structures (particularly the commodity murabaha) able to be quickly structured and documented, without any significant "learning curve".
Tested holding structures
The UAE contains an ever-growing number of "offshore" free zones (including the financial free zones of the Abu Dhabi Global Market "ADGM") and the Dubai International Financial Centre ("DIFC"). Each of the ADGM and DIFC operate under a common law framework, with dedicated insolvency and commercial regulations and independent regulators and judiciaries.
ADGM and DIFC holding company (and double holding company) structures are often preferred by UAE-based borrowers due to their familiarity with these jurisdictions. Combined with the fact that creditors can easily directly take (and enforce) registrable security over the shares in ADGM and DIFC entities, creditors comfortable with English law structures will notice substantial similarities with UK-based transactions when lending to group structures involving the ADGM or the DIFC. Accordingly, ADGM and DIFC holding structures have been increasingly adopted in transactions with private credit providers alongside or in place of holding structures from the common "friendly" jurisdictions of the Cayman Islands, Jersey, Luxembourg and the BVI.
Exhaustive security packages
Security coverage is often extensive in UAE-based financings, with all asset security packages often supported with extensive corporate guarantee structures. While UAE financial institutions have typically demanded extensive collateral packages, finance documents in the UAE do not typically include the comprehensive and carefully negotiated "agreed security principles", contained in European and UK leveraged finance transactions. While individual creditors new to the UAE and Middle East have expressed concern to us around the robustness of regional security, international private credit providers will be encouraged by recent updates to the UAE's security regime. Critically, the UAE has in recent years:
- confirmed that share pledges are able to be taken over the ownership interests in onshore UAE limited liability companies (subject to requirements of notarisation and registration); and
- created a regime whereby security over movable assets (including receivables, bank accounts with fluctuating balances, insurances, tangible goods, inventory and bills of lading) are able to be quickly taken, registered in a publicly searchable register and enforced (including through self-help remedies).
As a result of these recent changes (and coupled with the ability to take ADGM and DIFC law governed security over ADGM and DIFC based assets), private credit providers are able to benefit from comprehensive security packages over assets located within the UAE.
Regulatory updates supporting private credit
As noted in our recent article, the Financial Services Regulatory Authority of the ADGM issued its Private Credit Fund Rules in 2023, which enabled ADGM-based funds and their fund managers to originate and invest in private credit. The implementation of the Private Credit Fund Rules followed the establishment of a new regime for private credit funds operating in the DIFC, as implemented by the Dubai Financial Services Authority in 2022. These significant legislative updates provide a key indication of the overall recognition within the UAE market of the important role that private credit plays within the broader market.
A focus on insolvency proceedings
Prior to 2016, there was no single source of law governing insolvency proceedings within the UAE. This lack of a framework, coupled with a number of high-profile restructurings, highlighted a substantive shortfall in creditor protection within the UAE. In order to address this, the UAE Federal Bankruptcy Law No.9 of 2016 (the "2016 Bankruptcy Law") was implemented in December 2016 with the aim to streamline bankruptcy procedures applicable to onshore UAE entities. While the 2016 Bankruptcy Law was widely welcomed (particularly due to the removal of the need for 100% creditor approval on any restructuring), this was repealed in 2023 by Federal Law No. 51 of 2023 Promulgating the Financial and Bankruptcy Law (the "New Bankruptcy Law"), which builds on the position created under the 2016 Bankruptcy Law. While the New Bankruptcy Law remains untested within the UAE as at the date of this article (it will enter into force on 1 May 2024), the enhancements provided in the New Bankruptcy Law have been enthusiastically welcomed. In particular, the establishment of a dedicated Bankruptcy Court offers a significant shift in the approach towards bankruptcy procedures within the UAE.
Given these positive developments, the days of the "Majlis solution" appear to be behind us, as formal processes under the onshore regime through the New Bankruptcy Law, or through the offshore DIFC and ADGM administration processes, have taken centre stage. The New Bankruptcy Law, along with the potential ability to look towards the ADGM (and the DIFC) for insolvency proceedings, are a particularly welcome update for private credit providers evaluating UAE-based transactions. Indeed, we have seen a marked increase in private credit providers (particularly with a strategic focus on restructuring / litigation funding, super senior DIP financing and distressed lending) that have entered into the region.
Conclusion
The financial market within the UAE has historically been dominated by local financial institutions offering relationship-based lending to local corporate entities. However, the market terms that have evolved within the UAE as a result of regional bank market dominance have created a regime that will be of particular interest to a number of private credit providers. Given this, as banks and financial institutions continue to gain more share of the UK and European leveraged market in 2024 (as reported by us in our article here), and private credit providers continue to search for opportunities, we expect the importance of private credit to continue to grow within the UAE (and the wider Middle East) in 2024 and beyond.
