Dana creditors talk tough after bond miss
, November 1, 2012
The UAE's Dana Gas failed to repay a $920 million Islamic bond on maturity, prompting a source close to holders of the bond to say they will stake claim to the natural gas producer's extensive Egyptian assets.
Dana, a leading Middle East natural gas company, said on Thursday it was in talks with bondholders to amend and extend the terms of the bond, or sukuk, after it became the first firm from the UAE not to repay a bond on maturity.
But a source close to the creditors said Dana sukukholders are determined to go after the assets used to back the issue.
"Bondholders will now pursue an enforcement of Egyptian assets and pursue their unlimited recourse $1 billion claim against Dana Gas PJSC," the source said, declining to be named.
Dana has operations in Egypt and Iraq, is listed on the Abu Dhabi stock exchange and is headquartered in the emirate of Sharjah. The Abu Dhabi bourse suspended Dana shares on Thursday, pending clarification on the Islamic bond.
Although indebted firms in the Gulf Arab state have extended maturities on billions of dollars in bank loans since the onset of the world financial crisis of 2008-09, no sukuk have been restructured or unpaid on maturity.
There are very few private corporate bonds or sukuk outstanding in the UAE, as most issuance has so far been from the state, or state-linked entities, and financial institutions.
Other bonds and sukuk in the Gulf Arab region did not appear to be affected by the non-payment of Dana's sukuk.
Islamic finance, launched in its modern form in the 1970s and estimated to have global assets of over $1 trillion, offers investments that comply with Islamic law which bans interest or investing in industries that involve gambling or alcohol. Sukuk are one of Islamic finance's highest profile products.
Some in the industry claim sukuk are safer than traditional bonds because they are effectively certificates of ownership in a real asset and not pure debt.
The Dana saga is not expected to have any significant impact on sukuk issuance or prices because the firm, a relatively small one compared to other issuers, is seen as a special case not representative of Gulf economies which are growing strongly.
Dana, which is privately owned, is not seen as a strategic entity for the UAE so any government support is unlikely.
NO MAJOR CONTAGION
"We haven't seen any major contagion in the Gulf bond and sukuk markets from this news. Frankly, institutional investors appear to be taking this in their stride," Chavan Bhogaita, head of markets strategy at National Bank of Abu Dhabi, said.
Dana has a three-day grace period to make the payment but "appear unlikely to do so," the source added.
The UAE's largest listed natural gas firm, hit by payment delays from Egypt and Iraq's Kurdistan region, said it had also missed an $18.75 million accrued profit payment due Oct. 30 on the five-year sukuk, issued with a 7.5 percent coupon.
It had repurchased $80 million of the $1 billion bond in 2008. Dana said it had paid $356 million to bondholders over the last five years.
"Dana Gas is in ongoing discussions with an ad-hoc committee of sukuk holders over terms to amend and extend the sukuk," it said in a bourse statement.
Bondholders have yet to issue a formal statement.
The convertible sukuk has gained global interest as most of the debt is said to be owned by big investment firms including BlackRock Inc and Ashmore Group.
The sukuk is secured against Dana's Egyptian operations, Sajaa Gas Private Ltd, a gas processing and sweetening plant in Sharjah, and United Gas Transmissions Co, a pipeline project to supply Iranian gas which is yet to start up.
Sources told Reuters on Tuesday that Dana would not repay the sukuk on the Oct. 31 maturity. They said the two sides had entered a so-called standstill, valid for up to six months, in early October to allow talks to continue.
Dana's problems worsened in 2011 after political unrest in the region led to payment delays from Egypt and Iraq's Kurdistan region. It had outstanding receivables of 754 million dirhams ($205 million) in Egypt and 1.33 billion dirhams in Kurdistan as at Sept. 30.
Dana said liquidity challenges, mainly due to non-payments from Egypt and Kurdistan, are "short term" and it is committed to finding a consensual solution with the bondholders.
"Telling investors that they have successfully paid all coupon payments thus far and are committed to a consensual arrangement is pretty lame. Bottom line is that they (Dana) didn't pay the $920 million that was due yesterday," Bhogaita said.
In May, Dana said it had hired Blackstone Group, Deutsche Bank and law firm Latham & Watkins as advisers. Investors have hired Moelis and law firm Linklaters.
Dana's shares and sukuk have been under pressure on investor worries of non-payment of the outstanding bond.
The sukuk, which is lightly traded, was quoted at 66 cents to the dollar according to prices from Nomura Holdings, unchanged from Wednesday's close. It was quoted at 78 cents to the dollar earlier in the week but slumped after reports of non-payment.
"This was well-flagged and with the restructuring, sukuk holders will be looking at any way Dana can monetise its assets," said Amer Khan, fund manager at Shuaa Asset Management.
In a separate statement, Dana said its third-quarter net profit fell 27 percent to 104 million dirhams from 143 million dirhams a year ago. Its cash balances stood at 516 million dirhams as of Sept. 30.
Revenue for the period fell 21 percent to 512 million dirhams, due to a decline in Egypt production and lower hydrocarbon prices, Dana said. - Reuters