Saturday, July 1, 2017

Dana Gas Restructuring: Certificate Holders in a Difficult Position

A Clearly Painful Position But Nothing Like the DG Creditors

Sukuk holders are in a weak economic position even though the documents as written give them relatively strong rights.  They are also now into year 10 of their planned 5 year adventure with DG and the obligor would like another 5 years!  But there is little to suggest that another 5 years will be sufficient to repay the debt.

Obligations are repaid by cash not covenants.  DG’s cashflow is uncertain. Creditors may well strike a deal and impose their terms on DG.  But unless there is a sea change in attitude or aptitude of Egypt and the KRG, creditors face a long and uncertain path to full recovery of their funds.  They also find themselves in "bed" with an obligor whose integrity may be questionable.

The simple fact is DG’s cash flow is insufficient to repay the debt as scheduled this October. Creditor huffing and puffing no matter how extensive is not going to change that fact.  The debt needs to be rescheduled.

But how can realistic terms be set?  Given the KRG’s and Egypt’s inability/reluctance to pay and no apparent way to force them to, it is difficult to develop reasonable cashflow forecast scenarios.  How does one design a restructuring when 95% of the obligor’s cashflow is uncertain? 

But sadly there’s more.

Back in 2007, the original Sukuk holders cleverly “signed up” for what was a limited recourse type project, funding it through a bond instead of a loan.  Horses for courses:  a loan probably would have been more appropriate because in general bonds are covenant light. Or in other words:  don't saddle up a cow if you're going "jumping".

The original “security” (such as it was/is truly “security”) consisted of equity (dead last in the legal priority of payments) in companies undertaking what was a new venture for DG.  The Sukuk holders accepted a structure which limited their repayment to the proceeds from these assets (the Trust Assets).  If the “Trust Assets” are insufficient to repay the Sukuk, the creditors have no claim against DG or its other assets.  Contrast that with the security package for the Zora project (described in my last post). Not an identical transaction but instructive for how risks can be better managed. 

They also agreed to a bullet repayment structure.  With a bullet instrument of any size one is generally relying on a refinancing for repayment. If there’s no market for a refinancing from other creditors/investors, then unless collateral is sufficient and legally accessible, the “bullet” is pointed at the heads of the creditors who must reschedule – either directly or via a disguised rescheduling, i.e., a bond exchange.   

With the (first) earlier restructuring, the Sukuk holders improved their position by adding USD 300 million of Egyptian receivables to the “security” package. If we assume a scenario in which the Sukuk holders get ownership of the collateral, what’s likely to happen?  If Egypt isn’t clearing up past due receivables by paying DG, what would be their motive for scrambling to make the creditors whole?  They have an ongoing commercial relationship with DG who generate cash for them.  A relationship with creditors would be a one-sided outflow of precious hard currency.

Similarly, if the Sukuk holders manage to access the KRG receivables by realizing the collateral, i.e., acquiring shares in the operating companies in the KRG, the situation is likely to be the same as with Egypt. And here the relationship between the KRG and DG has been strained by claims and counterclaims. 

One might expect these two obligors to delay even more and perhaps inspired by DG find or invent reasons to challenge the original amounts of the receivables or to reduce them based on asserted failures to provide ongoing contractual services. 

At that point what is DG’s incentive to assist the creditors collect the receivables if it has been shorn of its two "crown" jewels?

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