Trade minister flies to Saudi Arabia to persuade defaulters to treat foreign creditors equally

Lord Davies of Abersoch, the Trade Minister, flew to Saudi Arabia last night to try to defuse a growing dispute that bankers say could do as much damage to the Gulf’s bruised financial reputation as the Dubai shock of ten days ago.

Bankers are furious that two defaulting Saudi conglomerates that owe $20 billion (£12.2 billion) appear to be favouring local banks over foreign creditors. State-owned Royal Bank of Scotland, HSBC and Standard Chartered are all understood to have exposure to Saad Group and Ahmad Hamad Algosaibi & Bros (Ahab). Dozens of other Western banks are also owed money, including Citigroup and BHP Paribas.

Bankers suspect that the two family-owned businesses, which defaulted over the summer, have privately reached agreement with local Saudi banks over restructuring their loans while leaving foreign banks in the cold. One senior banker told The Times yesterday: “Local banks appear to have been given preference.”

The dispute, unless resolved soon, is certain to trigger fresh concern about doing business in the Gulf in the wake of the Dubai calamity. Dubai World, a Government-owned conglomerate, stunned global financial markets last month by announcing a standstill on paying interest, sending bond markets into a tailspin.

Lord Davies is embarking on a trade mission with 40 senior British business figures, visiting Jedda and Riyadh. The trip was planned months ago, but the Saad row adds urgency.

Lord Davies, a former Standard Chartered chairman, is scheduled to meet Ibrahim Abdulaziz al-Assaf, the Saudi Finance Minister, tomorrow and is expected to spell out the concerns of British banks. He will also meet the Saudi Arabian Monetary Authority, which triggered the dispute when it revealed that Saad had reached agreement with local banks in September, a claim that Saad has denied. There are also unconfirmed reports of Saudi banks seizing Saad assets as security. It is a fundamental principle of international banking that all creditors holding similar debt securities be treated equally in the event of a collapse.

The dispute is diplomatically sensitive, coming after allegations of corruption involving British Aerospace and Saudi officials. An investigation by the Serious Fraud Office was dropped in December 2006 on the ground of national security.

A further complication is that Saad and Ahab are at daggers drawn. Ahab has accused Maan al-Sanea, the Saad chairman, of a fraud that could amount to $10 billion, an allegation that Mr al-Sanea rejects.

Angela Knight, head of the British Bankers’ Association, said yesterday: “This is an important issue for our members and one we would like to see resolved as calmly and quietly as possible.” A leaked letter from the association to Lord Davies two weeks ago asserted that the handling of the affair by the Saudi authorities was doing “enormous damage to the reputation” of Saudi Arabia. The dispute between the businesses was bringing the Saudi system of corporate governance into disrepute, it said.

Bankers are hoping that the potential damage to the reputation of Saudi Arabia will convince ministers there to put pressure on the companies to treat all creditors equally.

December 7, 2009
Patrick Hosking

Source: The Times

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