UNLAWFUL SUKUK CLAIM BY DANA GAS STUNS MARKET
Company declares its US$700m debt as no longer syariah-compliant under UAE law
ADECISION by a Middle Eastern gas producer to declare its own syariah-compliant bonds unlawful has baffled investors in the US$2 trillion (RM8.56 trillion) Islamic finance industry.
Sharjah-based Dana Gas PJSC said last Tuesday it no longer considered its two Islamic bonds totalling US$700 million issued four years ago as syariah-compliant under the United Arab Emirates’ (UAE) law. A court in Sharjah has since barred bondholders from taking any action against the company’s securities until it reviews Dana Gas’s application to declare its debt “unlawful and unenforceable”.
“As creditors we understand this is a liquidity and a payment issue, not a solvency issue — but clearly the company is trying to squeeze sukuk holders to the benefit of shareholders and that is a strategy that will end up hurting everybody down the road,” said Abdul Kadir Hussain, the head of fixed-income asset management at Arqaam Capital Ltd.
Even if there were potential developments in Islamic finance that raised questions on the structure, “it is still a debt instrument and money they have borrowed”, he said.
The move comes after Dana Gas, which produces most of its energy in Egypt and Iraq, announced plans last month to restructure the debt, saying it needed to “focus on short- to medium-term cash preservation”.
The company is owed about US$1 billion from Egypt and the self-governed Kurdish region in northern Iraq. Dana Gas had about US$298 million of cash on hand at the end of March.
“This is pretty bad news for all sukuk investors as Dana Gas seeks to apply syariah non-compliance as a rationale for restructuring discussions,” said Khalid Howladar, the founder of Acreditus, a risk and ratings-advisory firm.
Dana Gas plans to replace the current sukuk with four-year bonds paying “less than half of the current profit rates and without a conversion feature”, it said last week.
The new profit payments will comprise a cash and payment-inkind element, and the sukuk may be repaid either in whole, or in part at par, prior to its maturity without any penalty, said the company.
An ad hoc committee representing holders of the US$700 million bonds said it would not exchange the sukuk for new instruments at the proposed terms, which are “materially less favourable”, according to two people with knowledge of the matter and a statement seen by Bloomberg.
Meanwhile, Dana Gas yesterday said it had also obtained an injunction from the English High Court of Justice in London restraining holders of the US$700 million sukuk from taking any hostile action against the company.