Friday, June 23, 2017

Dana Gas: Why Did They Do It?

It's More Than Just Hot Air

I promised in my first post to write again on the winners and losers from Dana Gas’s maneuver.  A post from Arkad has temporarily derailed that plan.
What I’d like to offer today is some hopefully intelligent speculation on DG’s motive for declaring the outstanding certificates as “illegal under Shari’ah and thus unenforceable” and obtaining court injunctions against payment, particularly because these two steps are almost certainly going to poison the relationship with creditors which is critical in a restructuring.
Dana’s 13 June 2017 press release offers two potential explanations: 
  • An outflowing of piety perhaps triggered by prayerful meditation during the holy month of Ramadan.  As a result, a restructuring of the current Sukuk is necessary to ensure that it conforms to the relevant laws for the benefit of all stakeholders.”
  • A desire to avoid repeat alleged damage to the company because “During the 2012 restructuring, representatives of Holders unnecessarily declared a Technical Default while negotiations were still ongoing, causing lasting harm.” 
The press seems to share AA’s view that piety is not the motive and has seized upon the second: prevention of a Technical Default. 
AA thinks there’s more to the story.    
Simply put this is a maneuver to stop the creditors from exercising their rights under the security agreement to gain time and increase DG’s negotiating leverage in the restructuring.  
According to Reuters, last Sunday Dana advised that it has obtained an injunction from the High Court of Justice Commercial Division in British Virgin Islands (BVI) and a restraining order from the High Court of Justice in England blocking creditors from taking “hostile” action in addition to the Sharjah Court injunction. 
Why were these steps taken and why are they significant?
  • The BVI is “home” to DG’s affiliates who conduct business in Iraq in territory of the so-called Kurdistan Regional Government and in Egypt and whose shares are “security” for the Sukuk.  USD 300 million of Egyptian receivables owed to Dana Egypt also part of the security package.   A BVI injunction complicates an already difficult road for creditors to realize the collateral whose enforcement (but only the first step) is subject to the jurisdiction of the BVI. 
  • The laws of England and Wales apply to key transaction documents as I pointed out in my earlier post in particular those documents under which certificate holders would quite justifiably call a default.  
Another sign that protecting assets is a key concern are the steps Dana Gas has taken to minimize its exposure to potential actions by other creditors acting under cross default clauses.  This limits potential collateral (secondary) damage (pun intended).  It also lessens Sukuk holders’ negotiating leverage by reducing/eliminating this threat.
The step also prefers UAE creditors.  A step not likely to be received well by Sukuk holders. 
Let’s let DG make this case by using quotes from the Directors’ Report in its 1Q2017 interim unaudited financials.  As customary, red boldface to distinguish AA’s “distinguished” comments. Black boldface to highlight particularly relevant statements by DG. 

“Subsequent to quarter end, in early May, the Company prepaid the Zora outstanding loan amounting to USD 60 million (AED 220 million) plus applicable interests/costs.”    DG’s 1Q2107 financials were signed 11 May by the auditors which means that the prepayment took place before that date.  AA would hope that creditors would ask if that was before or after the 3 May announcement that the Sukuk was going to be rescheduled. 
But it gets even better.
After announcing the prepayment, in the very next sentence DG states: 

“On 3 May 2017 the Company announced that, due to continued challenges it faces around cash collections and the resulting need to focus on short to medium term cash preservation, it will commence restructuring discussions with the holders of both its Sukuk dated 8 May 2013.”
According to DG’s 1Q2017 interim report note 11, as per contractual terms, USD 33 million of the Zora facility was not due for repayment until 2018.  Zora is located in the UAE and the lending syndicate is composed of UAE banks.      
As a side note, interest due on the Sukuk next month would be approximately USD 14 million.  Apparently, the USD 14 million are worth more than the USD 33 million prepayment to local banks –roughly 2.4x as valuable – when it comes to cash “preservation”.    
Zora was secured by a very robust security package as is typical project finance structure.  Lots of tripwires and potential pain for DG. 

“Project Security covers, commercial mortgage over mortgage-able Zora gas field project assets (onshore & offshore), assignment of rights under Gas Sales Purchase Agreements, assignment of all Dana Gas Exploration FZE bank accounts, assignment of Zora Project Insurance proceeds, Project performance Guarantees from Contractors & Irrevocable Letter of Credits from Sharjah Petroleum Council. Dana Gas PJSC has pledged the shares of Dana Gas Explorations FZE in favour of security agent. Dana Gas PJSC is also a Guarantor for the entire tenure of the term facility”
As noted elsewhere in the note there was also a cash sweep mechanism. 
Prepayment neatly resolves the issue of cross default for an income earning project in the UAE albeit small “beer” earnings compared to its Iraqi and Egyptian operations. 
Dana also repaid roughly 84% of the FYE 2016 USD 12.5 million outstanding murabaha facility from Mashrekbank Egypt again as per note 11 1Q2017 financials.  This facility was cash collateralized. 
UAE banks’ exposure to Dana is eliminated or reduced.  Dana has clearly “preferred” UAE creditors over the Sukuk holders, though one might argue that these are relatively small amounts when compared to the approximate USD 700 million outstanding on the Sukuk and removing these makes the restructuring less complicated. 
Some USD 25 million of debt remains for two sale/lease back transactions for DG Egypt (DGE):  (a) a building in Egypt and (b) spare parts/equipment acquired some years ago that have yet to be used as per note 25 c.  Perhaps DGE would welcome returning the latter to the lessor. 
In following posts I’ll pick up the promised discussion of winners and losers, well mostly losers, from DG’s "clever boots" maneuver. 

Friday, June 16, 2017

Dana Gas Sukuk: The Providential Detection

Violation of Shariah Caught Just in Time
You’ve probably been reading articles-such as this, or this or this-- on Dana Gas’s 13 June announcement that its existing U.S.$425,040,000 Exchangeable Certificates and U.S.$425,040,000 Ordinary Certificates due October 2017 (together the “Sukuk”) are no longer Shari’ah compliant and therefore “illegal” under U.A.E. law, requiring their restructuring. 

As a consequence, the company announced it will not make the July “profit” payment or the October principal repayment.  This discovery appears to have been made during Ramadan.  Perhaps (but not likely) as a result of the company’s prayerful reflections during the holy month grounded in its fastidious adherence to both Shari’ah and UAE law.  

That this providential “detection” was made one month before payments are required under the allegedly “illegal” agreement is no doubt one of those “remarkable coincidences” that occur from time to time in the finance.

Apparently further compelled by its probity and piety, the company sought and obtained an injunction from the Sharjah courts that prohibits payment.  The courts will hear arguments on the case 25 December, that is roughly two months after the October principal due date.

Just coincidentally this will allow the company to conduct restructuring discussions with the certificate holders which Dana Gas asked for on 3 May 2017 before it seems it became aware of the “violation” of Shari’ah.  Then its only stated concern focused on more mundane cashflow related problems. 

Note that it gave its “solemn” word to proceed not only in a “practical” and “sensible” manner but to “balance the interests of all stakeholders”.  This probably does not apply.

“Dana Gas PJSC (the "Company"), the Middle East's largest regional independent natural gas company today announces that, due to continued challenges it faces around cash collections and resulting need to focus on short to medium term cash preservation, it will commence restructuring discussions with holders of its Sukuk dated 8th May 2013.  The Company will be addressing the way forward on the Sukuk, which has a maturity date of 31st October 2017 in a practical manner that balances the interests of all stakeholders. The remaining profit payments will be addressed sensibly as part of the solution.”
As near as AA can tell, the detection occurred sometime after that date and 13 June.  It wasn’t mentioned in the June 5 2017 press release announcing the appointment of Houlihan Lokey as financial advisors and Squire Patton Boggs as legal advisors.

AA sincerely hopes that neither of these firms advocated this transparent bit of Abu Yusuf-efry.  “Abu Yusuf” Yacub Ibn Ibrahim Ibn Habib Ibn Saad Al-Ansari for those who don’t immediately recognize the reference.
In a 13 June 2017 press release Dana broke the news about Shari’ah non-compliance.  AA comments in red boldface.  We’ll step through the press release one paragraph at a time.

“The Company has scheduled a call with the Committee for later today during which the Company will cover the following points and set out an initial proposal for restructuring the existing Sukuk based on these broad principles and terms: Due to the evolution and continual development of Islamic financial instruments and their interpretation, the Company has recently received legal advice that the Sukuk in its present form is not Shari'a compliant and is therefore unlawful under UAE law. As a result, a restructuring of the current Sukuk is necessary to ensure that it conforms to the relevant laws for the benefit of all stakeholders.
  • As a legal matter and AA claims no expertise in UAE law, it would seem that if Dana’s assertion is true (which AA doubts) the sukuk then would become a non-Shariah bond and that the legal concept of equity would require that Dana honor the debt as per the existing contractual terms.  There is no doubt that Dana borrowed the money (or more precisely restructured an earlier borrowing), agreed to the terms, and agreed not to challenge the legality of any of the transaction documents (more on that below).  Assuming Dana’s legal arguments are valid, one might expect Shari’ah scholars to “grandfather” this transaction which has a scant five months to run but forbid future such transactions.  But الله أعلم    
  • Dana’s assertion raises or should raise concerns among certificateholders that Dana will cite future such “continual development” and declare the replacement sukuk no longer “halal” to justify its non-payment in 2021.  See more on that below. 
  • Unlike The Investment Dar in its attempt to deny BLOM repayment, Dana has not alleged that the transaction was contrary to Shariah from inception, but has become so with the “evolution” of “interpretation” of Islamic financial instruments.  A neat way of not casting aspersions on the work of Dar al Shariah or Shaikh Hussain Hamed  Hassan  head of DAS Shariah Advisory Board.  AA hopes though that it will meet with the same stern rejection that TID did.   
"The Company therefore proposes to exchange the Sukuk with a new enforceable, Shari'a compliant instrument, which would have a tenor of four years, confer rights to profit distributions at less than half of the current profit rates and without a conversion feature.  Such new profit payments will comprise a cash and PIK element.
  • Dana does not appear to have provided details on why the existing sukuk is “illegal”. 
  • According to Reuters,  “a source with direct knowledge of the situation said the firm planned to argue the sukuk were not sharia-compliant because their repurchase price was fixed, the coupon was the result of interest-based not profit-based calculations, and the coupon paid out regardless of Dana's financial performance.”
  • The terms outlined above by Dana seem to mirror those of the existing transaction, albeit less generous than the existing sukuk as well as eliminating the conversion feature  
  • Given this is a second restructuring, credit risk has increased justifying a higher not a lower margin or profit share, absent of course of application of 2.280. 
  • But put that aside. 
  • If eating a ham sandwich is not halal, what makes eating one-half of the sandwich halal?  Or in other words, if the problem is a fixed rate, then how does a lower fixed rate solve the problem? 
  • If profit-sharing payments must be based on profit, don’t PIK (payment in kind) payments imply the company has not really realized profit?  And if so, will “evolving” legal advice in 2021 result not only in refusal to repay principal but also “invalidate” all the PIK payments.
"The new instrument would represent a fundamental improvement to the current situation for Holders as it would be enforceable and would provide repayment to Holders over time."
  • Since the courts have not ruled on this matter, this statement is an opinion by a party (Dana) which the less charitable of you out there might believe is not completely disinterested in this matter. 
  • Sharjah and the UAE still recognize conventional non-Islamic finance.   Thus, the local courts may rule that while the transaction is no longer “Islamic”, it is a debt Dana owes according to the contract signed by the parties.  
"As the Company's receivables and future damages payments may be unpredictable, Dana Gas proposes to make prepayments under the new Sukuk either in whole, or in part at par, prior to its maturity without any penalty thus providing a path for early pay-down for the Holders.
  • AA would advise the certificateholders to demand a cash sweep to make such payments mandatory and not rely on the company's good faith  of which there is scant evidence so far.  

"The next two Distributions scheduled for 31 July 2017 and 31 October 2017 cannot be paid now that the existing Sukuk is deemed unlawful but will be accounted for as part of the new Sukuk instrument."
  • As the courts have not ruled and given the very real possibility of conflicting opinions on Shariah as there is no single central authority, this is a mere assertion not a legal determination. 
  • Certificateholders should treat it with the derision it so richly deserves. 
"During the 2012 restructuring, representatives of the Holders unnecessarily declared a Technical Default while negotiations were still ongoing, causing lasting harm.  The Company now assures all parties that no Dissolution Event nor Technical Default has taken place, nor indeed can take place due to the unlawful nature of the Sukuk.  While the Company is keen to reach a consensual agreement with the Holders, Dana Gas has a duty to protect the assets of the Company for the benefit of all stakeholders and will take action to fulfill this duty.”
  • Another assertion. 
  • There is a very strong case for a default that’s default with a capital “D” not a “technical” default under transaction documents which are governed by English not local law which offer creditors a presumably easier path than the courts of Sharjah to call default.  And as outlined below default need not be called for a prospective (now) or actual (July) failure to pay.
  • The Offering Memorandum  page 108 outlines  events of default.  Here are a quick three.   (a) “Non-payment”: either the Obligor or the Mudarib fails to pay any amount payable pursuant to any Transaction Document to which it is a party and/or either the Obligor or the Mudarib fails to pay any amount payable or deliver any shares pursuant to any Transaction Document to which it is a party within three days of the due date for payment or delivery thereof; or  (c) “Repudiation”: either the Obligor or the Mudarib repudiates or challenges the valid, legal, binding and enforceable nature of any or any part of a Transaction Document to which it is a party or does or causes to be done any act or thing evidencing an intention to repudiate or challenge the valid, legal, binding and enforceable nature of any Transaction Document to which it is a party; or (d) “Illegality”: at any time it is or will become unlawful for either the Obligor or the Mudarib to perform or comply with any or all of its obligations under the Transaction Documents to which it is a party, or any of the obligations of either the Obligor or the Mudarib under the Transaction Documents are not, or cease to be legal, valid, binding and enforceable;
  • Dana has advised that it will not pay and has obtained a court injunction to engineer a legal obstacle to its payment.  The default under (a) will occur at the latest next month.    
  • In refusing to pay and seeking the court injunction, it has repudiated the transaction documents (c) as of at least 13 June.  
  • If on the other hand, its assertion that the transaction is illegal, then (d) is operative. By obtaining the injunction and applying for one in the BVI, the company is directly complicit in making its compliance with its obligations illegal.  It isn’t the Sharjah or UAE courts or a Shariah board which has initiated a legal action.  It is the company itself.
  • Bond indentures generally have a lower threshold than syndicated loans for an instructing group – 25% is a typical number and that is reflected in the offering circular at least in respect of some transaction documents.  Thus, a relatively small number of certificateholders can call default.
In following post(s) I’ll take a look at the "winners" and "losers" of Dana’s “maneuver”.  The former will require much less comment than the latter, if any.

Saturday, June 3, 2017

Global FX Code of Ethics: If You Have to State the Obvious, You Obviously Have a Real Problem

Annual Manifestation of the Free Market God at the AEA

Regular readers of this blog will have noticed that AA has little faith in the myth of the “self-regulating free market”.  Just last week  AA’s scant faith was confirmed yet again.

On 25 May the central bank-led Foreign Exchange Working Group (FXWG) in partnership with the private sector Market Participants Group (MPG) released a global code of conduct for the wholesale foreign exchange (FX) market.
The first principle of six in the Code is Ethics.  
This section of the Code calls on market participants to inter alia “strive for the highest ethical standards”, “the highest professional standards”, as well as “identify and address conflicts of interest”.

But let's let the Code "speak" for itself with AA using boldface to highlight key ideas
“Market Participants should:
  • Act honestly in dealings with Clients and other Market Participants;
  • Act fairly, dealing with Clients and other Market Participants in a consistent and appropriately transparent manner; and
  • Act with integrity, particularly in avoiding and confronting questionable practices and behaviours.”
What this means in fewer words is that market participants should be honest and capable.

Two observations:

First, with reference to the “highest ethical standards” AA is at a loss to understand how being honest is an exemplar of “highest ethical standards”.  Are there ethical standards that allow one to be dishonest or act unfairly?  AA holds that being honest and acting fairly is like being pregnant.  One either is or is not.

Second, the six principles are not listed in alphabetical order.  Does the fact that ethics is placed first reflect an assessment by the FXWG and MPG (though perhaps the latter’s assessment is not as strong as the former’s) that there is a particular problem with ethics or more precisely a lack of ethics? If one has to make a point about what is self-evident, that seems to be an indication implication that practice is lacking.    

Does the need for promulgation of ethical standards refute the dogma of the self-regulating market?  If the market regulates itself, then such problems would be transitory and quickly remedied   

AA's parents and then AA himself spent a not inconsiderable sum on education, a good portion of which funded AA’s direct and indirect studies of economic dogma. 

It is an article of the Free Market faith that market forces driven by intense free market competition, act to indirectly compel ethical behavior among market participants.  Those who are unethical and act unfairly are displaced because customers flock to virtuous participants who act fairly and with high ethical standards.  This occurs even though the latter's salutary behaviour is motivated solely by the pursuit of profit not of virtue.  

That's the theory but this press release seems to confirm not the practice.

Saturday, April 29, 2017

Who Knew It Was Going to Be So Complicated and/or Hard?

Apparently Not This Clueless Chap

Who knew the following were difficult, complicated, or hard?


North Korea

The Constitution

The Presidency


Taiwan and China

Walking and chewing gum

David Frum summed it up quite nicely.

All this information was cunningly concealed by being put in books and other forms of writing
So what does a chap with good genes (whose uncle was a  scientist!), who knows more than everyone else in the Government, and who doesn't trust either his  diplomats' or intelligence professionals' advice when he finally realizes something is complicated and needs answers? 

  1. Well, there's Fox News, Breitbart, or Infowars for honest unbiased journalism.
  2. A newly made Chinese "friend" could in ten minutes honestly explain North Korea without trying to advantage his own country's foreign interests.
  3. Retreat into a fantasy world.  Actually with #1, it's more of a further descent into fantasy.

Sunday, April 2, 2017

Securing the Homeland -- Extreme Vetting Part 3

On a Winning Streak with Another Great Pick

Consistency in performance is what distinguishes a great businessman or a great political leader from mediocre ones. 

Here we are in part 3 of extreme vetting and the pattern is consistent.  You be the judge of performance.

28 March AP reported.
This week, the AP revealed Manafort's secret work for a Russian billionaire to advance the interests of Russian President Vladimir Putin a decade ago. Manafort did not dispute working for Oleg Deripaska but said he had represented him only in personal and business matters. He called the focus on him a "smear campaign," and said he was ready to defend his work if investigators wish to learn more about it.
The White House said Trump had not been aware of Manafort's work on behalf of Deripaska, a close Putin ally with whom Manafort, who is 67, eventually signed a $10 million annual contract beginning in 2006. "The president was not aware of Paul's clients from the last decade," said spokesman Sean Spicer. "What else don't we know? I mean, where he went to school, what grades he got, who he played with in the sandbox?"
AA's head is spinning as promised by Candidate Trump. 

Does this mean that extreme vetting is extreme only in the past five years?  Or is it a shorter period?  And I suppose there's was no  reason to ask Paul about his work in the electoral campaign of the pro-Russian candidate for President of Ukraine Viktor Yanukovych.  Nor about the allegations raised by the current Kiev government against Mr.Manafort.  A curious lack of curiosity.

Extreme Vetting 24/7

 Sleep well, citizens, the Homeland is secure.

Saturday, April 1, 2017

The Excitement is Palpable -- New Sign-In Experience Coming to GMail

Elated Crowds Cheer the News
AA was elated when he read the announcement from the good folks at Gmail--whose parent by the way sponsors free BlogSpot--that soon Gmail will have a "cleaner, simpler look" and my sign-in experience will be faster.

Not since the announcement of  Windows 10 or the new IPhone has there been such excitement at bayt AA.  What's even more joyous is that AA can simply wait for the change to occur.  No need to stand in line at the Apple Store.

It's not only a win for AA but for America. A win that I'd point out has occurred a scant 12 weeks into the new Administration.  

Securing the Homeland: Extreme Vetting Part 2

Welcoming Mr. Giuliani to Team Trump

President Trump has correctly noted the importance of extreme vetting to protect the Homeland.

One needs to make sure that those who enter the Homeland or who serve it are not dangerous individuals or those who do not have the best interest of the United States at heart.

On March 27, the NY Times carried a disturbing report on Reza Zarrab which just goes to prove the wisdom of President Trump's statement about extreme vetting.  Zarrab has been charged with facilitating millions of dollars in illicit transactions on behalf of Iran and other sanctioned entities through the use of front companies and false documentation.  He's currently facing trial in the United States. 

Reza Zarrab, a prominent Turkish gold trader who has been jailed in New York on charges of violating the United States sanctions on Iran, has added Rudolph W. Giuliani, the former New York mayor, to his legal team, adding intrigue to a case that has been steeped in international politicking between Turkey and the United States.
Just last month, Mr. Giuliani and another prominent lawyer, Michael B. Mukasey, traveled to meet with the Turkish president, Recep Tayyip Erdogan, as part of their efforts on behalf of Mr. Zarrab, according to a person briefed on the meeting who spoke on the condition of anonymity because of the sensitivity of the trip.
With vetting like this, the nation is clearly in good hands.  I suppose

BIS: GSIBs Risk IT Systems Weak

Unnamed GSIB Data Scientist /Risk Manager Demonstrates New Techology

In January 2013, the Basel Committee published the Principles for effective risk data aggregation and risk reporting (the “Principles”) to remedy deficiencies in risk management disclosed by the 2008 “Great Financial Crisis” (first euphemism of the post).  G-SIBS (Globally Systematically Important Banks) identified in 2011 and 2012 were required to fully implement the Principles by January 2016.

The BIS explained its action as follows:
“One of the most significant lessons learned from the global financial crisis that began in 2007 was that banks’ information technology (IT) and data architectures were inadequate to support the broad management of financial risks. Many banks lacked the ability to aggregate risk exposures and identify concentrations quickly and accurately at the bank group level, across business lines and between legal entities. Some banks were unable to manage their risks properly because of weak risk data aggregation capabilities and risk reporting practices. This had severe consequences to the banks themselves and to the stability of the financial system as a whole.”
In March this year, the BIS issued a progress report on implementation of the Principles.  Italics courtesy of AA.
“The latest assessments by supervisors show that banks’ level of compliance is unsatisfactory and the overall implementation progress remains a source of concern to supervisors. Based on supervisors’ assessments, only one bank fully complied with the Principles, even though the implementation deadline for global systemically important banks (G-SIBs) identified in 2011 and 2012 had lapsed in January 2016. In view of the unsatisfactory assessment results, banks are urged to step up efforts to comply with the Principles. Supervisors are expected to monitor progress and call on banks to address observed weaknesses.” 

There were some 28 G-SIBS as of November 2012. 

One out of 28 is roughly 3.6% compliance.

Not a very impressive performance from these megabanks who tout their capacity to provide state-of-the-art banking services based not only on their self-proclaimed profound intelligence but also their ability to perform complex mathematical analyses and calculations. These are also the same banks that have convinced their regulators that their internal risk models are sufficiently robust so that they should be used to determine their “true” exposure to various risks and, thus, their required capital under the Basel Framework.

The BIS progress report indicates that these self-assessments may be “overly optimistic” (second euphemism of the post). 

What’s even more disturbing is the BIS assessment of the reasons for the failure to reach compliance. You can read that in detail in Appendix 2.  Here’s the BIS’s take on “technical shortcomings”.

“Difficulties in execution and management of complex and large-scale IT and data infrastructure projects, such as resources and funding issues, deficiencies in project management, and coordination with other ongoing strategic programmes.

Overreliance on manual processes and interventions to produce risk reports, although some manual processes are unavoidable.

Incomplete integration and implementation of bank -wide data architecture and frameworks (eg data taxonomies, data dictionaries, risk data policies).

Weaknesses in data quality controls (eg reconciliation, validation checks, data quality standards).”

On a positive note, the BIS may have just supported US corporation and banks’ contention that they are incapable of determining the ratio of their CEO’s pay to the average for all other employees.

If we accept that as a working hypothesis, would you buy a product or place a deposit with a bank unable to measure its risk exposure or perform simple math (Dodd Frank)?

Friday, March 31, 2017

ICC Global Survey on Trade Finance 2016

The ICC just released an excellent report on trade finance

While the title suggests the report is about 2016, it's actually on 2015.  The report is based on a survey, input from a range of third party public and private sector entities, and SWIFT-provided data.

The report is a comprehensive analysis of trends in the global economy, international and regional trade, various trade finance instruments (including forfaiting) supported by some 95 tables.  SWIFT-provided data on letter of credit and collections messages sent, including data on average L/C size (including by regions with separate data for import and export L/Cs), proposed and rejected transactions by region and country (e.g., Russia). 

There is literally something for everyone with an interest in global trade.

Well worth a close read.