Gas firm’s sharia move baffles investors

A decision by a Middle Eastern gas producer to declare its own sharia-compliant bonds unlawful has baffled investors in the Islamic finance industry.

Sharjah-based Dana Gas said on Tuesday it no longer considered its two Islamic bonds totaling $700m issued four years ago as sharia-compliant under United Arab Emirates 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 have its debt declared “unlawful and unenforceable”.

“As creditors, we understand that this is a liquidity and a payment issue, not a solvency issue — but clearly the company is trying to squeeze sukuk [Islamic bond] holders to the benefit of shareholders and that is a strategy that will end up hurting everybody down the road,” said Abdul Kadir Hussain, head of fixed-income asset management at Arqaam Capital. 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.

Dana Gas announced plans in May to restructure the debt, saying it needed to “focus on short- to medium-term cash preservation”. The company is owed about $1bn from Egypt and the self-governed Kurdish region in northern Iraq. Dana Gas had about $298m cash on hand at the end of March.

“This is pretty bad news for all sukuk investors as Dana Gas seeks to apply sharia noncompliance as a rationale for restructuring discussions,” said Khalid Howladar, founder of Acreditus, a risk and ratings-advisory firm.

Dana Gas plans to replace the sukuk with four-year bonds paying “less than half of the current profit rates and without a conversion feature”, it said.

An ad hoc committee representing holders of the $700m Islamic bonds said it would not exchange the sukuk for new instruments at the proposed terms, which are “materially less favourable,” according to people with knowledge of the matter and a statement.

Initial hearing in the case in Sharjah has been scheduled for December 25, but the securities mature in October.