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. 

3 comments:

Arkad said...

Should this be phrased the other way round?

"Apparently, some dollars (Sukuk ones) are worth more than others (loans to local banks) –roughly 2.4x as valuable"

Abu 'Arqala said...

Arkad

Thanks for the comment.

Here's my logic.

DG has stated that it is imperative that it husband cash.

It has chosen to prepay the Zora loan in an amount of USD 33 million. It has chosen not to pay the USD 14 million contractually owed next month on the Sukuk.

Thus the Sukuk dollars seem to be worth 2.4 x the Zora dollars in terms of husbanding cash.

Of course, one can't put a price tag on adhering to one's religion.

For a pious entity like DG, paying even 1 fil in a non halal transaction is no doubt worse than paying a much larger sum in a halal one - even if cash needs to be husbanded, though I'm not sure that Zora is structured as an "Islamic" transaction.

I'll have more to say on DG's feigned piety in a later post. But according to my current plan for a series of posts on DG, that will be down the line a bit.

Cheers

Abu 'Arqala said...

Arkad

I've amended my post to make it clearer as on re-reading it I see that the original formulation was مبهم.