With less than a week until maturity, Dana Gas sukuks are trading at a significant discount to face value as negotiations continue on what would be the UAE’s first ever restructuring of an Islamic bond.
On Tuesday, the sukuk was trading at a 21 per cent discount, undermined by worries about the company’s cash position. In its first-half financial statements, the Sharjah-based energy company reported a cash balance of $164m, a fraction of the funds required to repay the debt.
The $920m five-year sukuk – the Shariah-compliant equivalent of a conventional bond in which certificates are issued against income-generating assets – was issued on October 31, 2007 with a 7.5 per cent coupon to be paid quarterly.
With three quarters of the company’s production in Egypt and most of the rest in Kurdistan, Dana has been vulnerable to political shocks. The revolution in Egypt and a rights dispute between the Iraqi and Kurdistani governments have disrupted revenues. Tariq Al-Rifai, director of Islamic Market Indices for S&P Dow Jones Indices, told beyondbrics: “It’s not the fault of Dana Gas. It was a properly run company and still is.”
There are now three options: default, bail-out or restructuring.
If Dana fails to repay the sukuk, some of its assets – valued at $3.39bn in June – will be seized by sukuk holders. Al-Rifai sees default as a real possibility: “If this was a quasi-government entity, the government would find a way to make it work. But it is a private company.”
One hope is that a knight in shining amour will bail the company out. Crescent Petroleum, a private energy company that is Dana’s largest shareholder with a 21 per cent stake, would be the most obvious candidate. But it said this year it would not provide any additional funds.
Although companies in the UAE have extended the maturities on tens of billions of dollars in bank loans since the onset of the financial crisis, no sharia-compliant bonds have been restructured so far. Saudi Arabia and Kuwait have seen companies default on Islamic bonds, prompting complex debt negotiations.
Even so, Ahmad Alanani, senior executive officer at Exotix, thinks restructuring is the most likely outcome: “I expect the company and its creditors to agree to waive some of the sukuk covenants allowing the negotiations to continue post the maturity.
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That promises to be difficult and drawn out, not least because of the need for Islamic clerics to vouch for the compliance with Shariah law of any changes to the sukuk’s covenants. Back in June, Dana said it had hired Deutsche Bank, Blackstone Group and law firm Latham and Watkins “to advise on various options for discussion with sukukholders”.
Alanani understands that Dana suggested a principle haircut with an extension of maturity a few months ago but that this was rejected by the two largest sukuk holders. A counter proposal involved a combination of an upfront cash payment, a debt for equity swap and an extension of maturity; but it is unclear where the talks stand today.
In any event, the outlook remains bleak for investors. Alanani forecasts a fall in the price of the sukuk as the maturity date nears; Dana’s shares were trading at 0.47 dirhams on Tuesday, less than half of their issue price of 1.01 dirhams in 2005.
(Beyondbrics / 23 Oct 2012)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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