Wednesday, 2 September 2020

Dana Gas - Restructuring of Nile Delta Sukuk on the Horizon


Full repayment of DG’s sukuk is contractually due on 31 October.

As outlined below, barring a miracle, another rescheduling is “on the cards”, continuing the second longest running "play" without a real plot.

According to DG’s 1H2020 financials (note 16), DG has reduced the principal of the sukuk USD 70.7 million to USD 309 million via buybacks that took place after 30 June. 

Its reported cash balance as of 30 June 2020 was some USD 366 million.

However, USD 58 million of that amount represents DG’s 35% share of Pearl Petroleum’s cash, meaning that amount is (a) in PPL’s account not DG’s and thus (b) not immediately available to DG. (Note 13). The “miracle” of consolidated financial statements.

On that basis DG’s 1H2020 cash is really USD 308 million. Of which it used an amount to fund the Sukuk buybacks.

How much?

On page 5 of its 1H2020 Investor Presentation (IP), DG says that the buybacks will result in “overall cost savings in profit and repayments at maturity of USD 10 million.” 

The “profit” rate on the Sukuk is 4% per annum paid quarterly (January, April, July, and October).

Let’s assume half a year of interest on USD 70 million or some USD 0.7 million.

That would mean that most of the remaining savings was discount on principal.

So very roughly a 14% discount on principal USD 70 million “retired” at the cost of USD 60 million.

Investors in the Sukuk probably rightly considered the discount a small price to pay to exit given the likelihood of another restructuring and the company’s continuing weak financial position and performance.

That likely leaves DG with a cash balance accounts lower than the principal balance of the Sukuk. If it has been lucky with cash inflows cash outflows, perhaps the amount is equal to the Sukuk.

In any case the amounts are so on the edge that it is unlikely—barring a miracle—that DG will have sufficient cash to both repay the Sukuk and maintain a minimum operating balance.

Other than the sale of its Egyptian Assets—whose value DG was trashing not so long ago—DG doesn’t seems to have have a lot of options to a rescheduling.

Perhaps the remaining Sukuk investors will take comfort in this statement from DG’s IP:

“Any proceeds from Egypt will go to paying this down. In case we don’t sell Egypt, we are considering various options”

AA will leave it to you to contemplate whether the options will be religious or financial. Or perhaps some combination of both. 

As an indication of where things are likely to be headed, DG has engaged the good folks at Houlihan Lokey to provide financial advice on the Sukuk.

If you don’t know, HL has quite a reputation in debt restructurings. Less so in “miracles”.

Turning to financial performance or perhaps more accurately financial “results”, DG had a loss of USD 19 million for the first six months of 2020 versus a USD 140 million profit for the corresponding period last year. 

As allowed by the Sukuk, DG paid a cash dividend of some USD 104 million in April. Money that might come in handy right about now.

In addition to their firm religious convictions, DG’s board is known for its financial prudence and acumen.

Despite those negative comments, DG apparently actually had a good half year as per their Chairman

The Company has demonstrated a strong and resilient financial and operational performance in the first half of 2020.We generated an operational net profit (before impairments) of $18m, which demonstrates our ability to operate successfully in low-cost environments.

I’m sure you agree that Elon Musk couldn’t have put it any better. Sadly, DG has no tax credits to sell to “manufacture” a positive bottom line.

As to the ever promising (but not necessarily delivering) future, things are apparently equally rosy.

We remain focused on strengthening our balance sheet to better position the Company for the future and we plan to press ahead with certain strategic actions regarding our asset and Sukuk which will benefit all our stakeholders alike.

DG’s shares are down some 25% over the past 12 months.

This could be the opportunity of a lifetime, but it probably isn’t.

Monday, 24 August 2020

QiXi Festival for My One and Only


AA's elder and wiser brother, expert in many things Asian, has advised that tomorrow 25 August is Double 7.

And so the fondest wishes for my own Zhinu.

Für die sogenannte "Cecily"     ....   "Ernst"

Saturday, 15 August 2020

HK CHATS USD, RMB, and Euro RTGS Funds Transfer Activity

 As a general rule, a country has a clearing system (payment system) or systems for its national currency only. That’s because payments are generally settled through accounts at the central bank or equivalent for each currency. 

In most countries there usually are separate systems dedicated to specific purposes—large value payments, small repetitive payments (whose delivery may not be as time-sensitive), check clearing, etc. 

As an example, the USA has FedWire for large domestic payments, CHIPS primarily for cross-border payments, ACH for small repetitive payments, and one Fed and one private check clearing system.

If you’re interested in a country’s payment systems, you can refer to the BIS CPMI’s Redbook which has details on the payment and settlement systems, e.g., securities of its 27 member countries

It also publishes data on volume and value of transactions in its member countries available through BIS Statistics. But note this information comes with a 1 year lag. Preliminary data for Year X is released in December Year X+1 with final figures released generally during 1Q Year X+2.

HK has four such system under CHATS (Clearing House Automated Transfer System):  
  1. HKD (launched 1996)
  2. USD (launched August 2000)
  3. Euro (April 2003) and 
  4. RMB (June 2007).
The rationale for the USD and Euro systems was to enable banks in HK and Asia to settle transactions among themselves during their (local) business hours.

The RMB service was set up to facilitate the volume of transactions between the HKSAR and Mainland China and later to facilitate cross-border RMB payments because the Mainland’s national payment system (CNAPS) (AKA “HVPS” in the BIS CPMI reports) only accepts Chinese characters. That makes it difficult for foreign banks' payments to be processed because they must first be translated into Chinese.

Each of HK’s four RTGS systems have a settlement institution (SI):
  1. HKD – Hong Kong Monetary Authority
  2. USD - Hong Kong Shanghai Bank HK
  3. Euro - Standard Chartered Bank HK 
  4. RMB – Bank of China HK
Each of three banks listed is a HK incorporated subsidiary of their parent. They also act as the issuers of HKD currency notes.

Similar to other systems—CHIPS or CIPS—there are two classes of participants/members for CHATS HKD, USD, and Euros. RMB is handled differently as will be discussed.
  1. Direct Participants (DP) that hold accounts with the SI and are the only institutions that can input payment orders directly into the system and that receive credits from the system. 
  2. Indirect Participants (IDPs) work through a DP with whom they have a correspondent account which the DP debits or credits. They do not have accounts with the SIs.
Hong Kong Interbank Clearing Limited (HKICL) runs the computer infrastructure for each system. It does not make payments. It performs the processing of information on payments and sends that information to the SI’s who then debit or credit the DP’s accounts on their books.

If the DPs are acting on behalf of IDPs, they in turn debit or credit the correspondent accounts they hold for the IDPs for transactions in CHATS.

All communications between the DPs, HKICL, and the SIs are transmitted via SWIFT as is currently the case with CIPS.

Banks outside of HK participate in CHATS HKD, USD, and Euro systems but as IDPs, subject to approval of the relevant SI and HKMA, except of course for HKD where the HKMA is the SI.

Banks outside of HK may participate directly in CHATS RMB by opening an account with the SI, BoC HK, subject to approval by the SI and the HKMA. Note that difference.

You can find a list of participants for each system here.

Or a master list here for all four currencies sorted by membership status and country. This is quite useful as it shows the status of an individual bank’s participation in each of the four currency CHATS as well as breaking out banks by country.

There are also other lists for HKICL's cross border services with the Mainland here.

Now to the volume statistics.

I’ve prepared two charts.
  1. One for the USD and RMB.
  2. And a second for Euros. 
The second chart is necessary because the Euro volume is a fraction of the other two currencies.

Note the charts start in 2007 the year CHATS RMB began service.

OECD Statistics were used for conversion of RMB and Euro clearing into USD equivalents. 

Source of the actual clearing data is the HKMA's Table T031201 from its Monthly Statistical Bulletin. 

If you’re interested in value of transactions from the year “dot”, you can refer to T031201.

One further word of introduction.  Well OK, more than one word.  But that's what you'd expect from AA.

Typically, there are two types of payments reflected in such statistics:
  1. Interbank Transactions – Settlement of FX and deposit placement transactions
  2. Customer Transactions – Commercial and personal payments
Generally interbank transactions are the much larger amount. 

That’s almost certainly the case here.


CLS International Bank which is the primary global service for netting FX transactions do not currently handle transactions denominated in RMB. As per the HK CHATS participants list, CLSIB only appears to for HKD CHATS. It does not appear as a member of the other CHATS currency clearing arrangements.

If you’re wondering why netting FX transactions and thus netting FX settlement risk is a “big deal”, take a look at this article on Herrstatt Bank which brought this risk to the fore with a “crash”.

As is clear from the above, RMB payments dwarf those in the USD.

For the first four years after RMB CHATS was founded its volumes compared to USD CHATS were small.  So small they don't show up in the chart above.

The USD equivalent of RMB payments was USD 5 billion, USD 22 billion, USD 14 billion, and USD 138 billion respectively during those years.

In 2012 and 2015 RMB CHATS service extended its operating hours and cutoff times to accommodate those Clearing Members not in Hong Kong.

Of note is the fact that of the 209 RMB Clearing Members 65 are banks outside of HK, mostly--but not all--branches of PRC banks.

RMB CHATS also handles RMB check clearing and some securities settlement services. 

As for USD CHATS, yearly volumes seemed to have reached a plateau at about USD 10 trillion. Compare that to the USD 1.5+ trillion processed by NY CHIPS each business day to get a sense of the relative HK CHATS position in global USD clearing.

Another important point to note: USD clearing transactions in HK take place on the books of HKSB Hong Kong. A USD CHATS participant can use those funds to make a payment in USD CHATS. 

However, if it wants to use its USD funds for a payment to a bank in Europe or the USA, it’s very likely that that payment would transmit NYC via CHIPS.

One other interesting factoid is that USD denominated credit card transactions for (China) Union Pay International transit USD CHATS.

As mentioned above, Euro CHATS are not included in the above chart because the volumes are relatively small and really wouldn’t show up.  

So here's a separate chart.

In 2007 the USD equivalent of Euro clearing was some USD 383 billion. Since then volumes have decreased to around USD 100 billion. 

Part of the explanation is the number of participants as the chart below shows. 


DIRECT 161 111 209 37

TOTAL 161 197 209 54

There just doesn’t seem to be much interest in Euros among HK and other Asian banks.

Clearly, there is strong interest from around the world in CHATS RMB clearing with 209 Clearing Members (DPs), 65 of which are banks outside of HK. That strong interest is reflected in the annual clearing volumes of RMB through HK which currently dwarf those handled by CIPS.