Dana Gas Sukuk Yields Near Record on Payment Risk: Arab Credit

Dana Gas PJSC’s Islamic bonds plunged, lifting yields close to a record, after the United Arab Emirates fuel producer failed to disclose a plan for repaying the debt when it reported full-year earnings.

The $1 billion of 7.5 percent Shariah-compliant notes maturing in October fell to 68.14 on the dollar yesterday, pushing up the yield 86 basis points to 64.8 percent, the highest since Jan. 16. That day, the rate reached an all-time high of 71.8 percent. The yield was at 63.1 percent at 2:33 p.m. in Dubai. Dana Gas, which said yesterday 2011 profit more than tripled, didn’t give investors details of how it plans to pay the sukuk.

“They are running out of time,” Ahmad Alanani, the Dubai-based director for the Middle East at investment bank Exotix Ltd., which trades debt, said by phone yesterday. “The liquidity situation is very, very poor. There may be the willingness to pay, but there may not be the means.”

Dana Gas produces and explores for oil and gas in Egypt and the Kurdistan region of Iraq. In both areas, it’s seeking to boost output at the same time as it faces difficulty in getting paid. The company had cash and bank balances of 411 million dirhams ($112 million) at the end of last year, compared with 583 million dirhams a year earlier. It “continues to balance operating and necessary capital expenditure within the available finance resources,” it said yesterday.

Restructuring Debt

Dana Gas said Jan. 17 it would meet debt obligations and appointed a financial adviser, which it didn’t identify. The company hired Deutsche Bank AG for the role, according to two people with knowledge of the situation, who declined to be identified as the information isn’t public.

Rashid Al-Jarwan, an executive director at Dana Gas, declined to comment on the company’s operations or the sukuk at a conference in Dubai today. The external public relations company for Dana Gas didn’t immediately respond to questions from Bloomberg News yesterday.

Dana Gas, based in the U.A.E.’s sheikhdom of Sharjah, may restructure the bonds, Bank of America Corp. said in a Jan. 24 report, while cutting the shares to underperform. “A hybrid solution of rolling over the debt, partial cash repayment could be negotiated,” the bank said.

The company may seek to extend payments by five years, Exotix’s Alanani said. Holders would receive about 61.5 cents on the dollar for their initial investment, he said.

The sukuk lost 7.5 percent in 2011, compared with an 8 percent gain for Islamic bonds in the GCC, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows. Non-Islamic debt in developed markets returned 8.5 percent in the same period, JPMorgan Chase & Co.’s EMBI Global Composite Index shows.

Has Options

Dana Gas has options that would allow it to repay the debt, including selling some assets or seeking additional credit from lenders, Atul Gharde, a credit analyst with SJS Markets Limited in Hong Kong, said in a telephone interview on Jan. 30.

“I’m not concerned about whether they have options, I’m concerned that they haven’t announced any plans and time is running out,” Gharde said. The company risked being forced to refinance the debt on unfavorable terms if it approached the debt maturity deadline without the means to repay, he said.

Dana Gas said on Jan. 17 it “consistently paid on or before the due date the sukuk profit amount and will continue to do so pursuant with its obligations.”

Egypt’s government owes the company about $200 million related to natural-gas sales, Chief Executive Officer Ahmed al-Arbeed said in October. In Kurdistan in northern Iraq, oil and gas producers have been forced to wait for payments as a dispute over revenue from the natural resources continues between the regional administration and the central government.

Dana Gas collected $177 million in cash due from Egypt and Kurdistan last year, it said in the Jan. 17 statement.

41 Percent Drop

Net income advanced to 506 million dirhams from 158 million dirhams a year earlier. The average estimate of seven analysts on Bloomberg was for a profit of 524 million dirhams. The shares rose for a second day, climbing 5.3 percent to 40 fils, trimming their 12-month slump to 38 percent.

The company has struggled to find a clear financial strategy over the last two years. James Dewar left his role as chief financial officer at the end of 2010 and the company has not yet named a replacement. Dana Gas said in November it was in talks with banks for advice on its financial strategy and plans to list the company’s exploration and production business on the London Stock Exchange.

The company said last year it would keep all of its gas businesses in Egypt, reversing a earlier plan to sell stakes in the operations there.

“They need to put something on the table by April” if they are going to seek to restructure the debt, Alanani said.

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