Dana Gas: Creditors Negotiating With Themselves?

The Chicago Way But Not Milton Friedman's Way

As reported by Bloomberg, DG’s tragically unfortunate creditors made DG an offer to restructure the approximate USD 700 million of outstanding sukuk with the following terms:

1. An upfront repayment of USD 300 million (par value) in principal.
2. A maturity extension of three years. 
3. Maintenance of the existing interest rates:  7% on the exchangeable sukuk and 9% on the ordinary sukuk. 
4. A request for a dual listing of DG shares on the London Stock Exchange. 
5. Maintenance of the existing conversion price at AED 0.75 for the exchangeable sukuk. 
6. Payment of interest amounts due last July and this October. 

DG rejected the offer and is said to be pursuing a litigation-based strategy. Bloomberg cited an unnamed party not authorized to speak on DG’s behalf.  The FT was more categorical that the company had rejected the offer.  FT article here. 

Some comments. 

AA wonders about the creditors’ negotiating strategy.  In Middle Eastern carpet stores, the seller’s initial price is a long way from the price at which he sells.  The prospective buyer needs to have a similar negotiating strategy.  Once the buyer begins negotiations and gives his first price, it's hard to go lower. 

But DG’s creditors face a more complicated situation that buying a rug from a reputable merchant.  DG has adopted an extreme position.  Its current “offer” to the creditors is (a) you owe us money or (b) in worst case we owe you no more than USD 60 million.   

That’s what Herb Cohen would describe as a “Soviet” negotiating strategy.   The appropriate response is not to make a typical counteroffer and then split the difference because the Soviet tactic moves the frame of reference way off market terms.  

Often the counterparty (the party not adopting the Soviet style tactic) proceeds as though it’s in a “normal” negotiation, replies with a counteroffer to the extreme offer, and winds up in effect negotiating with itself to its detriment. 

DG’s creditors need to be very careful not to embark on that path. 

They’ve made an offer (their first price in rug shop terms) from which they will most likely negotiate less favorable (to themselves) terms.  So what does that mean?  A five year tenor?  A USD 100 million principal payment?  An interest rate of 3%?  All of the above. 

A Jimmy Malone (pictured above) strategy seems to be more appropriate given DG’s negotiating strategy and its less than sterling behaviour.  When you’re negotiating with someone you don’t trust, the typical rules of negotiation go out the door.  There’s no “win-win” when the other party is trying to cheat you.  

One other bit of unsolicited advice for creditors: a single word “amortization”. 

No doubt some clever mind has stated that with a three year instead of a five year tenor the average life of the sukuk has been drastically reduced – 5 to 3 years.  But –a rather large but—a bullet is a bullet.  Payment is promised in one lump sum in the future. Creditors would be better off with recurring principal payments (amortization).  Money in the hand now is much more valuable than a promise of money in the future, particularly when the integrity/ethics of the party making the promise to pay are doubtful. 

AA was particularly intrigued by the creditors’ request for a dual listing on the LSE. 

Listing this mutt on the LSE is not going to turn it into a purebred. Or magically create investor demand.  The dumb money is already present.  

Is this an attempt to try and force better corporate governance on DG or somehow bind them closer to English law?   Corporate governance is fundamentally a people issue.  Listing on the LSE doesn’t by itself change that.   Unless DG reincorporates, it is a Sharjah company with all the drawbacks of UAE law. 

Is this an attempt to scare shareholders that the creditors intend to convert the sukuk and take some or all of this “gem” of an investment from their hands, thus, prompting shareholders to put pressure on DG’s board to be more accommodative?  Not bloody likely, the shareholders are a disparate group.  From ADX trading statistics, they appear to be primarily retail investors who no doubt are right now calculating how they will spend their share of the USD 1 billion they imagine will soon be in DG’s hands. The major shareholder is a related party no doubt on board with DG’s “clever socks” strategy. 

To AA’s surprise Goldmine and Blackrock are apparently holders of DG paper.  Unless they bought their stakes at a deep discount and have a reasonable prospect of turning a profit with a fractional return of nominal principal, they should not be DG investors. 

Side note: If they purchased their stakes at a discount, then “whole” dollar creditors should understand there is a fundamental conflict between their own full price interests and  creditors whose entry price is much less. 

In defense of Goldmine and Blackrock, you might be inclined to remind AA about the role of risky securities in a well-diversified portfolio. 

AA is well-schooled in how such a portfolio can tolerate some risky securities.  DG paper certainly falls into that category.  The promised return is tempting, particularly in the current low rate environment.  But there are some risks that one shouldn’t take.  Or if one mistakenly takes them, one should exit.  Despite widespread belief to the contrary, finance theory doesn’t magically protect one from unwise investment decisions. 

Some of the "red" flags on this paper.

1. This company defaulted five years ago. 
2. Since then, its performance (ROE and ROA) and cash generation are dismal -- clear signs of likely future inability to repay. 
3. The sukuk is structured as a bullet which is not appropriate for an issuer like DG nor one that operates in squirrely markets (that’s a technical finance term). 
4. If that weren’t enough, DG is based in a country whose fine legal system motivated the government of one of its constituent emirates to set up an offshore regime, including offshore laws and an offshore court system.  It doesn’t take a law degree to figure out that legal protections for creditors are uncertain (you knew I’d slip a euphemism in somewhere) in DG’s home “court”. 
5. Exacerbating that factor, the deal is highly structured with cross-jurisdictional legal issues abounding.  The fundamental (“Islamic”) structure is not well tested in courts.  Courts in more “certain” legal jurisdictions are unfamiliar with Shari’ah and likely to defer to local courts, undermining to some extent the benefits cross-jurisdictional legal structuring was designed to confer. 

Just one or two of these factors should disqualify this paper. But all of these? One can surely find other high yield securities with less risk baggage.   

One further point for those who read the FT article cited above.  To get more insight into the KRG settlement take a look at my earlier post. And don't miss the posts in reply.  Despite a comment in the FT article about the settlement removing DG’s “ability to pay” defense, cash is not about to rain down on DG.    

Wall Street Titan "Baffled" by Government Form

Steven T. Mnuchin, Nominee for Secretary US Treasury

When asked to explain how he left $100 million in assets and some "other" information off a required government disclosure form, Steven T. Mnuchin, President Trump's nominee for US Treasury Secretary, stated: “I think as you all can appreciate, filling out these government forms is quite complicated.” 

Once again it's the fault of "Big Government" overreach burdening a self-reliant and hard-working job creator.

Now some or you out there might think that a guy who was a partner at Goldman Sachs and a supremo at several hedge funds would have little problem with the mechanics (note that limitation) of filling out a Federal ethics disclosure form.  But apparently you would be wrong.    

Luckily, the position of Secretary of the Treasury doesn't require a sharp mind or attention to detail --at least in the incoming Administration. 

On a positive note, continued lack of such characteristics could result in a dramatic reduction in the Federal Debt if ten trillion or so was "left out" of the complicated Federal form for reporting national debt.

Danced With the Stars, Still Struggling as an "Apprentice"

The Apprentice appeared to have higher standards, but then all TV is not "reality" TV.

Paging John Kenney Toole.

Department of Manifest Absurdity: Big US Banks Launch Ad Campaign to Demonstrate Their Worth to Society

If You Can't See the Obvious Link to Big Banks, Take as Many Looks as You Need Until You Can.

The New York Times reports (and when the NYT reports AA pays more than his useful careful attention even when the  reporting doesn’t cover metals) that big US banks are engaged in a major advertising campaign to demonstrate their societal worth and why they should be more loved

Not one to usually share the spotlight AA will uncharacteristically let the NYT speak for itself.  The Grey Lady’s comments are in quotation marks.  AA’s thoughts are indented and in italics.

“At both the Democratic and Republican conventions, the nation’s biggest banks were again cast as the bad guys, criticized as being too big and too risky.”

AA:  Note the charge “too big” and” too risky”.   How will the banks prove that they’re not reckless and a danger to national economies?   Glad you asked.

“This week, as the Olympic Games begin in Brazil, one of the big banks, Citigroup, is offering a rebuttal with a series of prime-time television and digital ads featuring images of sweaty athletes, the Space Shuttle and an early A.T.M.

[AA: Heartwarming video here, but be warned if you're a sensitive sort, you might break down crying.]

“Our business is helping Americans make progress,” the ad’s narrator says, as a runner with a prosthetic leg sprints down a track.

AA:  Impeccable logic. .Show hard working folks at their tasks which no doubt have something to do with banking.  What precisely isn’t clear.  Used an ATM? Have a credit card?  In any case a powerful rebuttal against "recklessness" and "riskiness". And one which shows big banks’ virtue.  Smart move as I believe there were some no doubt unfounded allegations about big banks’ ethics and morality.

AA understands from thoroughly unreliable sources that JPMorgan is preparing its own commercials.  Jamie Dimon, known for his no nonsense suffer no fools approach, is reportedly going to appear in a series of ads featuring animals.  Among the ads planned, one features Jamie with whales off the coast of London or Washington state (location yet to be finalized).   Another with cuddly puppies, ice cream, and adorable children.   Tag line:  “Banking making a kinder gentler future for all of us”.

As a banker, AA knows the value of getting a fee for advice, but in a spirit of reckless (I am a banker after all) generosity (here the analogy breaks down), some ways this “geometric logic” could be applied to other cases. 

Goldman is reportedly assisting the US authorities with inquiries into its conduct and fees (a cool half a billion) for the US$6.5 billion in notes (bonds to the layman) it arranged for 1MDB in 2012 and 2013.   Two of the note issues were to fund-–well at least partially—1MDB’s acquisition of power generation assets.  AA sees a compelling ad featuring Malaysian farmers toiling alongside their water buffaloes.  Sweaty and tired after a hard day’s work, they settle back to listen to one of the fireside chats given by Malaysia’s prime minister.  One old chap speaks up.  “I remember when we didn’t have power”.  Tears in his eyes, he turns to the camera, “Thank you, Lloyd”.

Several Malaysian businessmen—LOW, TAN, AZIZ--have been charged with misappropriating 1MDB funds (to use the US Department of Justice’s happy turn of phrase).  Some of the funds are alleged to have been used to acquire works of art as well as fund a Hollywood blockbuster.  Key the camera.  The Parthenon, the Coliseum (Rome), Hagia Sophia, the Pyramids.  Voice over by an actor with an appropriately sonorous voice (Morgan Freeman?)  “Culture is what defines a civilization.”  Pictures of The Rjiks Museum, Museuminsel, The Louvre, The Tate, The Metropolitan Museum of Art.  “Reflected in great art that is still accessible to us today.”   Pictures of the three gentlemen named earlier.  “Art patrons before they are businessmen.  Supporting culture in all its forms”.

And then there is the Islamic Republic of Iran.  Perhaps a harder case with some audiences.  I see a testimonial by Candy Charms who recently visited for some cosmetic surgery.  Nose, if you're interested. According to the Mirror, she said.  "Loved Tehran. The people are so kind and generous.  "Really overwhelmed by the whole trip. The people are so amazing.  Tag Line: “Amazing Iran.  Friendly people.  The most advanced medical care at a reasonable cost”.    Let’s go local with the link on this story from Gulf News as the Mirror article is accompanied by some unsuitable pictures.