Tuesday, December 11, 2012

Dana Gas restructures sukuk

Dana Gas released the final terms on its restructuring of the $1 billion sukuk that matured on October 31st, and they were within the terms expected.  The $1 billion sukuk (of which $80 million was bought back, and will be cancelled) had $70 million in cash paid to sukuk holders with the remainder split between a convertible and non-convertible sukuk, with an average coupon of 8%, due in 5 years.  This is not much higher than the 7.5% coupon the original sukuk had, but the conversion price which is not fixed as I understand it, but will come in at between Dh0.75 and 1.00 (the stock is currently trading in the low Dh0.40 range).

Using a back of the envelope calculation with a 20% discount rate, that amounts to about a 30% haircut in present value terms for sukuk holders (excluding the value of the conversion feature for the convertible tranche of the sukuk), which is probably a good deal for sukuk holders if the company can collect on its receivables from Egypt and Iraq (a small portion of which from the latter were received by Dana Gas shortly before the restructuring agreement was made public). 

Sukuk holders could have enforced the guarantee on the assets that were put up to secure the sukuk which amounted to the company's assets in Egypt (the company asserted that these gas concessions could be cancelled if sukuk holders enforced on the collateral) and a built but not yet operational natural gas import terminal and processing plant in Sharjah.  The latter asset was probably not of much value since it would be time consuming and costly to go through the UAE court system (not to mention not guaranteed to be successful) to take possession of the asset.  Not to mention that it has been entangled in a dispute with Iran's national oil company over the agreement to import gas .

There are likely other terms included in the final restructuring agreement that are not yet known, which may include rights (just speculating here) to Dana Gas' 3% interest in MOL, the Hungarian company with which it is operating its assets in Kurdistan, which were not a part of the collateral of the original sukuk (or perhaps a covenant that Dana Gas cannot sell that asset without using a portion of the proceeds to repay creditors).  But that is just a guess on my part and I don't have any information about whether it was included (if you know, please email me).

The bigger story here is that there is now precedent set for a restructuring of a UAE-based private sector sukuk.  That doesn't carry any weight in the local court system, but it might for future cases where a private sector corporate sukuk issuer runs into trouble.  There is now at least one situation that can be used as a point of reference. 

The legal environment in the UAE and the limitations on foreign ownership, not to mention the lack of a bankruptcy regime will continue to introduce uncertainty for creditors (even where the sukuk is subject to English law, since English law judgments are not enforceable in the UAE).  However, the bankruptcy law being developed has continued to face delays.  That is not necessarily problematic if the delays are done in a way that produces something something that is able to translate from law to practice.  One can only hope that the delays are due to a desire to 'get it right' and not just dragging of feet or bureaucratic intertia that favors the status quo. 

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