Tricky call: pounce or renegotiate?

It is a pity the UAE has lost its enviable 100 per cent record on bond repayments with the technical default of Dana Gas's $920 million sukuk.

It is a pity the UAE has lost its enviable 100 per cent record on bond repayments with the technical default of Dana Gas's US$920 million sukuk (Dh3.37 billion).

But let's get some perspective on the matter.

First, this is not a moment of systemic crisis, as was the case in 2009 when Dubai World temporarily faced difficulties with a sukuk debt. Dubai World's situation was the tip of an iceberg of borrowings at the conglomerate and elsewhere in Dubai that briefly threatened the emirate's financial system.

Dubai World's trouble with a $1.4bn sukuk masked huge total borrowings of some $60bn, of which $25bn had to be painfully restructured. Dana, while important for the economy of Sharjah, is, by comparison, a minnow.

Dana actually had total net assets of some $2.3bn at the end of last year and positive cash flow, which should give the company some room for manoeuvre in the negotiations with sukuk holders.

It is still unclear what these creditors will do. The company has called a technical default, which in theory gives sukuk holders the right to seek assets in lieu of repayment.

But there are special circumstances that might persuade them otherwise. The big accessible assets Dana holds are the production licences in Egypt and Kurdistan, and it might not be so easy for sukuk holders to get their hands on these.

In any case, an attempt to seize assets could trigger the cancellation of those same licences by their partners in Egypt and Kurdistan. As tough as Dana has found it to get cash out of those two places, sukuk holders might find it much more difficult.

It's a tricky call for creditors such as BlackRock and Ashmore Investment, which are significant holders of the debt. Do they swoop in like vultures?

Or do they take the view that Dana is a regrettable victim of the instability generated in certain Middle East markets by the Arab Spring, and give it the benefit of the doubt by renegotiating the terms?