Dana Gas sukuk drop as concern rises over looming maturity

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Some $700 million in Islamic bonds issued by UAE energy firm Dana Gas are falling sharply in the secondary market because of investor concern about the company’s ability to repay the bonds maturing in October.

The cash price of Dana’s convertible sukuk, issued in May 2013 with a 7 percent profit rate, has dropped about 3 cents on the dollar since the beginning of this year to 87 cents. That has boosted the yield to 26.32 percent from 18.5 percent at the beginning of January.

“The market is not assuming they’ll be able to repay in full, and the fact that the bond is yielding above 20 percent demonstrates that,” said a Dubai-based holder of the bonds, declining to be named because of commercial sensitivities.

The company had around $300 million in cash and bank balance at the end of 2016, according to its preliminary full year results - less than half the looming sukuk maturity.

Chris Hearne, chief financial officer of Dana Gas, told Reuters: “whilst we have successfully grown reserves, production and asset value, we still face significant challenges with collections from Egypt and Kurdistan, and we have a billion dollars in undisputed receivables owed to us in total.

“Until these collections are realised, we must manage cash carefully and look for a solution for the sukuk that properly
balances the interest of all stakeholders.”

Dana has exploration and production assets in Egypt, the Kurdistan region of Iraq and the UAE.

This week Dana revised its unaudited preliminary results for 2016 to a net loss of $88 million from the net profit of $33 million which it had previously reported, citing the effect of a London court judgement on its overdue receivables.

In 2012, Dana became the first UAE entity to fail to repay a bond on time. That default eventually led to a consensual bond restructuring, which some analysts described as a sign of growing sophistication in the region’s debt market.

Investors are now wondering whether a second restructuring may be on the cards.

“Are you willing to go into default and consider enforcing sharia-compliant debt secured against assets in Egypt and Kurdistan? I think the restructuring will have to be consensual again, with the company in the driving seat,” the bond holder said.

A portfolio manager at a fund focusing on underperforming securities in the region said he expects the company is increasingly likely to extend the maturity of its outstanding sukuk.

“We’re not blindly positive, but we think a sizeable payment from Egypt will come,” he said. “In this term-out scenario, Dana would likely pay down as much as they can and then extend the remaining balance.”

Expectations of a solution have kept the sukuk prices from falling to distressed levels, a bondholder said.

“Some people are comfortable in buying Dana paper at 88 because they think that’s where the risk is. That price really reveals some sort of equilibrium between bond holders’ views.”

Some investors say they are frustrated by the fact that Dana has not yet communicated its intentions toward the sukuk maturity.

But the portfolio manager said the company was waiting for more clarity on payments of the amounts it was owed before making annpouncements. “I think they’re concerned about not raising expectations too much, but at the same time they don’t want to lower them either.”

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