Bondholders push back on Dana Gas sukuk invalidation claims in London court

Sharjah-based Dana Gas sought to have US$700 million worth of Islamic bonds declared unlawful so it could avoid repaying investors next month, London’s High Court heard on Monday, a charge the company has denied.

The company’s claim that a huge 2013 financing deal was invalid owing to subsequent changes in Islamic financial practice was “absurd”, according to documents filed by bondholders with the court.

The bondholder group, led by Blackrock, the world’s largest asset manager, was in court on Monday demanding that Dana Gas repays millions of pounds, or hand over stock in a subsidiary that runs its operations in Egypt.

It also wanted the court to ban Dana Gas from issuing any new sukuk to secure further funds for the company. Dana Gas stunned the Islamic finance community in June by declaring the $700m sukuk Sharia non-compliant just four months before it was due to repay bond-holders.

The courtroom battle is notable for the absence of Dana Gas, which has been prevented from taking part because of an injunction in the UAE.

Lawyers for Blackrock claim that the injunction had been a deliberate attempt by the company to frustrate the court hearing, but a high court judge ruled last week that the trial in London would go ahead as planned.

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The complex case is being keenly watched by the Islamic finance industry, with both London and the UAE seeking to position themselves as world leaders within the sector.

“Obviously if there is an adverse judgement out of the London court it will raise a lot of questions particularly in the minds of non-Sharia investors and there are a fair amount of non-Sharia investors who invest in sukuk,” said Abdul Kadir Hussain, the head of fixed-income asset management in Dubai at Arqaam Capital, which holds some of the Dana Gas sukuk.

Any prospect of an early conclusion to the case has been disputed by Dana Gas, which has claimed that litigation could continue in the UAE whatever the ruling in London and could last up to ten years, according to court documents.

“While markets have short memories, I think this case has already negatively impacted international investor appetite for Sukuk - most likely in the corporate (Vs bank and sovereign) sector,” said Khalid Howladar, the managing director of the risk and ratings Islamic finance advisory Acreditus.

“The complexity of the sukuk industry was already an inhibitor to growth and these recent events will cause some investors to avoid the sector completely and drive up the profit rates demanded by remaining investors. Regulatory intervention is needed to restore confidence.”

Dana Gas secured $850m from international investors in May 2013 via the restructuring of an earlier $1 billion deal secured that had been due to mature in 2012. The company was unable to repay that deal because of payment delays from operations in Egypt and the Kurdish region of Iraq.

“If all had gone well, the value … would be sufficiently large that the investments would be liquidated for an amount that was at least as large” as the money invested, said Richard Handyside QC, for the BlackRock-led group of investors, which also includes investment bank Goldman Sachs.

Dana Gas made quarterly payments according to the terms of the agreement until April 2017, but announced in May that it would embark on new restructuring talks with sukuk holders because of continued cash collection problems.

The following month, it sought a court order in Sharjah arguing that it should no longer make payments because Islamic finance standards had changed making them unlawful under UAE law. The company also took legal action in the UK and the British Virgin Islands, where its Egypt subsidiary was registered, to prevent further payments to investors.

It was clear that Dana Gas’s challenge to the lawfulness of the agreement struck between the company and investors was “in order to avoid its obligations upon maturity of the sukuk” on October 31, according to court papers.

It said claims by an expert witness on UAE law for the company that the investors had deliberately sought to introduce illegal elements to the agreement was “nonsense”.

The company – which had redeemed $150m of the sukuk - outlined a new four-year plan on “materially worse” terms to the investors, according to the documents on behalf of the investors.

On an investor call in July, Dana Gas chief executive Patrick Allman-Ward said that the new terms reflect material changes in the global high yield environment since 2012, the company’s improved credit position, and increased gas production.

The complexity of the case is linked to the multiplicity of contracts signed in both UK and UAE jurisdiction before the company secured the $850m investment. The company contends that it received legal advice that made part of the sukuk illegal under the laws of the UAE, bringing down the whole deal.

The investors claimed that part of the agreement was struck under UK corporate law, to ensure that their payments would be protected in the event of a change in Islamic financial practice. It claimed that the agreement was “lawful and enforceable under UAE law” and the company had to pay up.

“Issues of UAE law… are not the central issues in this trial,” the document said. The trial, which is expected to last up to two weeks, is due to hear evidence from the former general counsel of Dana Gas.