Dana Gas Said to See Creditors Turn Debtors as Showdown Deepens

  • Company said to see two dispute outcomes, both in its favor
  • Attempts to engage with investors are not working: lawyer

The standoff between Dana Gas PJSC and its bondholders took a fresh twist after the Middle Eastern energy explorer that’s trying to void $700 million of its own debt was said to believe investors may even have to pay the company.

The Sharjah-based gas producer says that in one scenario the court battle with holders of the Islamic securities, or sukuk, may see it having to return less than 10 percent of the amount it borrowed, according to a person familiar with Dana Gas’s own analysis. In a second scenario, it believes creditors may have to pay it as much as $150 million, the person said, adding that the case may last more than 10 years.

Dana Gas, which announced plans to restructure the debt in May, this week retracted an offer to replace the bonds and is pursuing a resolution in court. The company said in June the debt was no longer Shariah-compliant. Investors questioned the validity of the claim since neither sukuk regulations nor United Arab Emirates laws governing the matter have changed since they were issued in 2013.

“You cannot in any circumstance, in whatever structure, borrow money and then say something changed and what I issued is no longer a debt obligation, therefore I don’t owe you money,” said Abdul Kadir Hussain, the head of fixed-income asset management in Dubai at Arqaam Capital Ltd., which holds some of the securities. “It doesn’t work that way. If any courts decided that, it would do significant damage to the Islamic capital markets.”

Dana Gas declined to comment.

The Irony

Shariah law prohibits interest-based financial products and forbids investments in companies involved in activities considered unethical, such as gambling, prostitution and alcohol- and pork-related businesses. In the absence of a centralized national Shariah board, such as the regulatory body in Malaysia, Islamic borrowers seek the advice of trained scholars to approve contracts.

These are the two likely outcomes of the case as seen by Dana Gas:

  • The Islamic bonds will be unwound, and the company would return the principal amount of $700 million to investors. But it would claim back the profit payments made since 2008, which total $635 million.
  • The sukuk will be treated as equity. A so-called mudarabah contract was used to structure the debt, which stipulates that the capital providers agree to share the profits with the entrepreneur at an agreed ratio or percentage.
    • Since Dana Gas Egypt, the asset underlying the sukuk, has generated a profit of just $60 million, the company has claims over the profit payments made to creditors, the person said.
    • To calculate the $150 million bondholders may owe Dana Gas, the company subtracted the $425 million value of Dana Gas Egypt and the profit it generated from the total payments made to sukukholders.

“I find it ironic that they are trying to hide behind Shariah law when the fundamental guiding principles of all Shariah is that your intentions guide your actions,” Hussain said. “Their intention was to borrow money, and now they’re unwilling to pay the money back.”

Missed Payment

The two mudarabah Islamic bonds are each $350 million in size and mature on Oct. 31, with one paying 9 percent and the other, which includes a conversion clause, 7 percent. The company on Monday missed a profit payment after claiming it’s not bound by the commitment since the securities no longer comply with local laws, an issue U.K. courts will rule on later this year.

The debt revamp is the company’s second in five years as $1 billion of overdue payments from Egypt and Iraq’s Kurdish region leave it grappling for funds. As of the end of March, Dana Gas had about $298 million of cash on hand.

“We have seen corporates go through difficulties previously and have managed the challenges,” said Rizwan Kanji, a Dubai-based partner at law firm King & Spalding LLP who specializes in Islamic finance. “Some have done this by applying a more discussion-based approach and others less so.”

— With assistance by Anthony Dipaola, and Claudia Maedler

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