Dana Gas bondholders have taken a hard line in response to the company in what is turning into a testy dispute over a US$700 million sukuk coming due this year.
Dana Gas, the Abu Dhabi Securities Exchange-listed company which is 19 per cent owned by the Jafar family’s Sharjah-based Crescent Petroleum, this week took the unprecedented step of having its sukuk declared to be not compliant with Sharia law.
The company also secured an injunction from the court in Sharjah to bar the bondholders from taking legal action, including declaring the company in default, and yesterday sought an additional injunction in the British Virgin Islands to protect the Egyptian assets pledged as collateral on one of its sukuk.
“From the perspective of Dana bondholders and capital markets investors generally, it seems regrettable that the company has decided to refute a structure the company itself endorsed as Sharia law-complaint, ignore the English law provisions which govern the claims of bondholders, and embark upon costly multi-jurisdictional litigation which poses a serious threat to the entire sukuk market,” said Andrew Wilkinson, a lawyer with Weil, Gotshal and Manges in London, which is representing the bondholders.
“Sitting in a room and negotiating a solution to the October maturity problem would have been simpler and cheaper,” he added.
Dana Gas, which is short of cash because of a build-up in arrears from the governments in Egypt and the Kurdish region of Iraq, where its main gasfield operations are located, has informed bondholders that it will not be able to make payments scheduled in July and October for its two outstanding sukuk, each for $350m and carrying interest rates of 7 per cent and 9 per cent.
The company has subsequently proposed that creditors swap the sukuk for new instruments with four-year maturities and profit distributions paying less than half the rate of the current sukuk.
The legal moves by Dana Gas management are being interpreted as a tactic to stave off a declaration of technical default by bondholders, as occurred in 2013 when it had to agree expensive terms to restructure its debt.
“Dana Gas is effectively attempting to reduce its finance costs by issuing lower yielding sukuk with fresh stamps of Sharia approval,” said Hasnain Malik, an analyst at Exotix Capital in Dubai. He said the outcome of this dispute will set a precedent for sukuk, which is a relatively new form of finance and evolving legally.
“We are in uncharted territory in terms of overlapping legal jurisdictions,” he said.
A statement yesterday from the ad hoc bondholders committee, which is also represented by investment bank Moelis & Company, declared: “At this time, the ad hoc committee is not proposing to tender its sukuks for new instruments on materially less favourable terms.”
It also made the point that Dana Gas’ legal manoeuvre “ appears to be a repudiation of the English law governed, amended and restated declaration of trust relating to the sukuks dated 8 May 2013 (the Declaration of Trust) and other transaction documents (as defined in the Declaration of Trust).”
The company’s management maintains that the move is not a repudiation of the English law, and insisted that the legal point is about deficiencies in the sukuk al mudarabah transaction – the specific structure of the sukuk – which management claims must be settled in UAE courts.
Updated: June 15, 2017 04:00 AM