Move to re­as­sure in­vestors after Dana Gas scare over sukuk

Is­suers change lan­guage in doc­u­men­ta­tion after com­pany did not redeem ma­tur­ing sukuk

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Is­suers of Is­lamic bonds are chang­ing the lan­guage in doc­u­men­ta­tion for new is­sues to re­as­sure in­vestors after a UAE com­pany re­fused to redeem $700 mil­lion (Dh2.5 bil­lion) of ma­tur­ing sukuk.

In June, Dana Gas said it would not re­pay sukuk ma­tur­ing in Oc­to­ber be­cause changes in the in­ter­pre­ta­tion of Is­lamic fi­nance dur­ing re­cent years had made the bonds “un­law­ful” in the UAE.

Dana ar­gues that its case, which in­volves a spe­cific sukuk struc­ture known as mu­daraba, has no im­pli­ca­tion for the broad sukuk mar­ket. But its an­nounce­ment wor­ried many in­vestors be­cause of the risk that other Is­lamic bond is­suers could use the same kind of ar­gu­ment to jus­tify not pay­ing debt.

As a re­sult, some is­suers are now amend­ing their doc­u­men­ta­tion to pre­clude the use of an ar­gu­ment in­volv­ing Sharia com­pli­ance to jus­tify any re­fusal to redeem sukuk.

New clauses

For in­stance, the Saudi Ara­bia-based Is­lamic Cor­po­ra­tion for the De­vel­op­ment of the Pri­vate Sec­tor (ICD) has in­cluded new clauses in its lat­est sukuk prospec­tus that ex­plic­itly waive any right to chal­lenge the Sharia com­pli­ance of the deal.

The com­pany “shall not take any steps or bring any pro­ceed­ings Reg­u­la­tors in Bahrain and Malaysia, two ma­jor cen­tres for Is­lamic fi­nance, are work­ing on Is­lamic cor­po­rate gov­er­nance stan­dards that ad­dress the po­ten­tial for con­flict­ing Sharia rul­ings and re­quire more strin­gent mon­i­tor­ing of Sharia non­com­pli­ance risks.

How­ever, these stan­dards ap­ply to Is­lamic banks and in­sur­ance com­pa­nies, not non-fi­nan­cial firms such as Dana. in any fo­rum to chal­lenge the Sharia com­pli­ance of the Pro­gramme Doc­u­ments and the Trans­ac­tion Doc­u­ments”, reads the prospec­tus for the ICD’s sukuk pro­gramme, dated Novem­ber 20.

Sim­i­lar lan­guage ap­peared in some sukuk from In­done­sian firms pre­dat­ing the Dana case, but the ICD, a mul­ti­lat­eral in­sti­tu­tion based in Jed­dah, may in­flu­ence the in­dus­try be­cause of its role in ad­vis­ing coun­tries in Africa and cen­tral Asia on in­tro­duc­ing Is­lamic fi­nance.

Imam Qazi, part­ner and Is­lamic fi­nance lead at law firm Foot An­stey in Bri­tain, said sukuk is­suers were aware that the Dana case could have im­pli­ca­tions for a wider range of trans­ac­tions be­yond mu­daraba sukuk. “Fi­nan­cial in­sti­tu­tions will be striv­ing for clar­ity in their doc­u­ments and from their Sharia schol­ars and le­gal ad­vis­ers,” he said.

Clauses seek­ing to re­duce Sharia com­pli­ance risk in sukuk doc­u­men­ta­tion have be­come nor­mal in the global in­dus­try over re­cent months, said Mo­ham­mad Da­mak, global head of Is­lamic fi­nance at credit rat­ing agency Stan­dard & Poor’s.

But he added that the com­plex­ity of sukuk made it dif­fi­cult to re­move the risk en­tirely. “For the mar­ket to reach im­mu­nity to this type of risk, stan­dard­i­s­a­tion is needed across the in­dus­try.” So far, the Dana case does not seem to have re­duced in­vestor de­mand for sukuk or af­fected prices in the sec­ondary mar­ket.

Con­tra­dic­tory rul­ings

But the in­dus­try is also wor­ried by the way in which the Dana case has un­der­lined the pos­si­bil­ity of con­tra­dic­tory rul­ings by courts in dif­fer­ent coun­tries, said Mo­ham­mad Kh­nifer, a debt cap­i­tal mar­kets se­nior as­so­ciate at the Is­lamic De­vel­op­ment Bank Group in Riyadh.

Last month, Dana’s cred­i­tors won a vic­tory when a London High Court ruled that the com­pany’s chal­lenges to the pur­chase un­der­tak­ing be­hind the sukuk were un­founded and that the agree­ment was valid and en­force­able.

But the dis­pute is far from over be­cause in ad­di­tion to ap­peal­ing the London rul­ing, Dana is fighting its case in a UAE court; UAE law gov­erns the mu­daraba agree­ment. A UAE hear­ing is sched­uled for De­cem­ber 25.

In the wake of the Dana case, “Sukuk hold­ers and is­suers will be now more in­clined to rely heav­ily on English law and avoid local laws as much as pos­si­ble with dol­lar-de­nom­i­nated is­suance,” said Kh­nifer.

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