Dana Gas - Mashreq Bank Rides to the Rescue Sukuk to be Repaid

 

An Essay on Criticism Seems a Valid Citation

Dana Gas announced on 15 October that it had secured a USD 90 million loan from the UAE's Mashreq Bank priced at Libor plus 3 percent. 

The loan matures in one year, but is extendable at DG's option for another four years.

As per the press release, the loan "will be repaid" when DG's Egyptian assets are sold.

Some thoughts.

First, the 3% margin is described as "initial".  That certainly sounds like it is subject to change.  AA for one would expect that as the loan is extended the margin is increased. 

Second, DG's Chairman asserted that this loan is a testament to DG's "financial and operational strength".  

That is a bit of a howler.

It reminds me of the repeated assertions of Damas' "proven business model" made some years back by the Abdullah Brothers.

DG is borrowing one year money at a 3% margin.

That is a rather large spread.

And more likely evidence of financial and operational weakness than strength.

In any case the long ordeal of the Sukuk holders is over.

Perhaps one man's gain will be another man's loss?

 

Goldilocks and the 3 Bears - A Financial Fairy Tale - Part III Dana Gas

Almost Golden Once More

Links to earlier posts in this series Post 1 and Post 2 

On 20 June 2017 Dana Gas announced that Goldilocks’ shareholding had reached 5% based on information it received from the ADX.

At the same time local press reported Goldilocks’ announcement that it had purchased 350 million shares in Dana Gas giving it a 5% stake.

Looking over trading on the DFM, there was a spike in volumes concentrated in the period 5 June through 18 June.

Why stop at 18 June?

As per its regulations, the ADX had to notify Dana when trades caused a shareholder’s shareholding to reach 5%. Presumably this notice to GFH came late on 18 June or 19 June. Dana then had to prepare its announcement and send it in. 

Also trading in Dana shares was relatively light on 19 June..

What we do know is that Goldilocks reached the 5% reporting threshold sometime around 18 June.

But we don’t know if this is because it bought 5% during this period.

Or if it held a position previously and only a modest amount of purchases took it over the threshold.

I think it’s likely that Goldilocks purchased the 5% around this period. This would be in line with their “constructionist” philosophy, i.e., an active investor. They don’t seem to be the type of investor who would accumulate a passive position.

But who knows.

If you remember this is during the early stages of DG’s restructuring of its previously restructured sukuk. So there was a “dip” in price.

What better time for a savvy investor like Goldilocks to buy?

Some details on DG stock transactions.

From 5 June to 18 June the volume of trades in DG stock increased dramatically. Some 84% of trading volume between 1 May 2017 and 18 June 2017 incurred during this period.

For the full period 5 June to 18 June, 1,548,351,688 DG shares were traded with a total value of AED 921,047,016.63. Average price AED 0.60.

For the period 12 June to 18 June, 1,020,149,231 DG shares were traded with a total value of AED 698,149,961.05. Average price AED 0.68.

For the period 14 June to 18 June 632,217,208.00 DG shares were trade with total value of AED 449,382,287.83. Average price AED 0.71.

Note the above are value weighted averages based on volume and value of shares traded not closing prices only. However, the closing price averages are almost the same.

That gives us three plausible entry costs: AED 0.60, AED 0.68 and AED 0.71 per share.

One wrinkle.

According to page 181 of the Listing Particulars for the Nile Delta Sukuk as of 31 December 2017, Goldilocks owned 4.68% of DG’s shares.

I have not been able to find an explanation for the decline from 5%.

Selling 0.32% of its holdings seems a strange thing to do, particularly because just a short while later it increased its holdings to 5.21%.

Since Goldilocks announced its 5% holding, it would seem that this wasn’t a maneuver to disguise its status as a “major” shareholder.

For those with an interest in which "fish" may be in the same "school", among other shareholders mentioned in the Listing Particulars are Ajman Bank, Bank of Sharjah, Shuaa etc. 

Whether other members of the ADFG/IC are the UBOs of these shares or not is not determinable from the information at hand (at least AA’s hand).

On 6 February 2018 The National reported that Goldilocks had increased its share to 5.21% and that ADFG/IC owned roughly another 3.79% for a total of 9% of the company.

Goldilocks announcement was made the day prior.

I’m going to ignore the information in the Nile Delta Sukuk Listing Particulars and assume that prior to this increase Goldilocks held 5%.

As FYE 2017, DG had 6,976,623,442 shares of stock. 0.21% is equivalent to 14,650,909 shares.

On 6 February the day prior to the announcement, 61,978,999 DG shares were traded for AED 44,739,016.70. Average price AED 0.72.

If we assume—and AA does—Goldilocks reported shortly after buying more shares, then this is a likely day for the purchase.

Another wrinkle.

As of today, according to the ADX, Ajman Bank holds 5.59% of DG shares.

Did Goldilocks sell it shares to Ajman Bank or a customer of the bank in a “true” sale?

Or did it “sell” the shares to Ajman to “perfect” Ajman’s collateral for a loan to finance the shares?

If Goldilocks is still the “owner” of the shares, then it appears there is a less rigorous concept of major shareholders and related party groups than for example on the Bahrain Stock Exchange. 

There the UBOs for GFH shares registered in Bank AlHilal’s name are disclosed. On the DFM they are not.

It would appear, and I hope I’m wrong, that in the UAE if the shares are registered in the Name of X, never mind if Y is the UBO. If X is related to Y and Z, never mind considering them a group.

So how did Goldilocks make out on this investment?

The market price of a share of DG stock on 13 February 2020 was AED 0.92.

In 2018 and 2019 it received cash dividends of AED 0.05 and 0.055 per share.

Ignoring the time value of money that means the exit price is AED 1.025.

Based on the most favorable entry price of AED 0.60, Goldilocks had a 71% return over the period. Note that is not a per annum return.

Based on AED 0.68 entry price, the return is 51%.

Based on an AED 0.71 entry price, the return is 44%.

Note: I have not adjusted the entry price for the February 2018 purchase of 0.21% in additional shares.

That’s because we’re working with estimates. There’s really no point trying to add precision where there are so many assumptions.

Cash on cash AED 0.425 gain per per share equals AED 149 million (USD 41 million) on Goldilock’s 5.21% stake.

To sum up: GFH a loss of USD 23 million; Noble a loss of USD 38 million, DG a gain of USD 41 million. A net loss of USD 20 million over the lives of the investments.

But let’s turn to a year by year allocation to see the impact on FY2018.

As you’ll recall from Post 1 and Post 2, for FY 2108 Goldilocks had an estimated loss on GFH and Noble of between USD 55 million to USD 60 million, depending on its FYE 2018 valuation of its Noble Group Holdings shares.

As per the table below, Goldilocks estimated FY 2018 earnings on DG are AED 70 million (roughly USD 20 million). So for FY 2018, the 3 Bears represented a loss of USD 35 to USD 40 million, again depending on the FYE value of Noble.

Goldilocks Investment Returns in Dana Gas
Millions of UAE Dirhams (except share price)
			Dividends
Date	Price	MTM	Cash	Stock	TOTAL
20Jun17	0.60
31Dec17	0.81	73.50	0.00	0.00	73.50
31Dec18	0.96	52.50	17.50	0.00	70.00
31Dec19	0.96	-0.35	19.25	0.00	18.90
13Feb20	0.92	-13.65	0.00	0.00	-13.65
TOTAL		112.00	36.75	0.00	148.75

Dana Gas - Potential Negative Effects from Proposed UD 350mm Pearl Petroleum Bond

Great White Whale or Great White Tiger -- AA Stays in the Hunt Until the End

This post is an “early warning” about a potential negative impact of the proposed USD 350 million new Pearl Petroleum bond on the creditworthiness of Dana Gas’s Nile Delta Sukuk.

As the italicized words in the previous sentence indicate, we won’t know the extent of the impact until the final terms of the proposed issue are published and the deal is placed.

Reuters reported that Pearl  in the market for a USD 350 million bond and has hired Bank of America Merrill Lynch and Morgan Stanley as “joint global co-ordinators and book runners” with  Shuaa Capital as a “co-manager”.

At this point, I’d note that the term “underwriter “ has not been used which may indicate this is a “best efforts” transaction – reasonable given the preliminary subzero (non-investment grade) credit rating.

More detail—though still preliminary--on the proposed issue can be found here in a Fitch Ratings press release on its preliminary rating for this transaction. Fitch has assigned preliminary  B - rating (non-investment grade) to the proposed issue, subject to satisfactory review of the final documents.

What are the implications for the unfortunate holders of the Nile Delta Sukuk?

First, as a matter of law, debt service payments on the new bond will have priority over Pearl dividends to shareholders.  Thus, reducing the amount of cashflow to Dana Gas.

How much?  The amount of reduction will depend on Deal Terms (final maturity, the principal amortization schedule--AA hopes this isn’t a bullet--, and the coupon) which are currently unknown.  As well, it will depend on underwriting standards applied.

Second, looking at the Fitch press release a couple of additional potential problems emerge.

The issue is a senior secured facility.

Two consequences.

Pearl’s assets are going to be pledged for the new bond.  While DG’s interest in Pearl isn’t pledged as security under the Nile Delta Sukuk, these assets do provide support for DG’s creditworthiness.

Fitch estimates that in the case of a going concern reorganization or sale of Pearl, the USD 350 million bondholders are likely to have a 50% recovery.  That means nothing for DG or the other Pearl shareholders in this case. If the company goes completely bust, then the USD 350 million bondholders will have the first “cup of pain”.  Pearl’s shareholders will be no worse off unless they have provided some support on the bond.

To put this into context as of FYE 2018, some 26% of DG’s reported assets were its share of Pearl’s assets.  And that USD 818 million “share” was  some 32% of equity.

Given Pearl's dismal rating, AA would hope (but is prepared to be disappointed) that the bondholders will place solid "protective" covenants on Pearl.  A key area would be controls on cashflow. That would directly affect DG.

On that topic Fitch notes that it expects dividends starting in 2020 to be lower than this year’s projected USD 550 million (DG share roughly USD 193 million), probably because that is included in the draft documents it has seen.

How much lower isn’t specified. Presumably that will be related to the Deal Terms.   Hopefully, this bond will not repeat the Sukuk’s unfortunate failure to relate dividends to cashflow.

Pearl is a significant contributor to DG’s cashflow.  Constraints on Pearl’s dividends paid will have an impact on DG’s ability to repay the sukuk.  Keep in mind that DG has use of cash when it receives dividends from Pearl.

Note that DG’s financials show DG’s share of Pearl’s cash and receivables.  But those amounts are not directly available to DG.  See Note 15 2018 Annual Report.

According to a very rough analysis of that Note, DG may be reporting as much as USD 100 million in its “Cash and Banks” that belongs to Pearl.  Money that DG cannot use until Pearl issues dividends.  See that analysis here part of an earlier post recently amended.

Sadly there is more.

If you'll read DG's 2Q2019 Investor Presentation, you'll see that DG is considering the strategic sale of its "fine" Egyptian assets.  Potentially good news for the Nile Delta Sukuk holders as these assets are pledged to them.

But for the shareholders probably not so good.

DG appears to think it's a good strategy to focus its "portfolio" on Pearl, essentially turning DG into a Kurdish investment. I trust I don't have to spell out the risks in that strategy.  .