Analysis of DG Restructured Sukuk Terms - Amended

Lasciate ogne speranza, voi ch’intrate

It's a lot more than just a forum non conveniens 

at least for some folks

In this post we’ll take a look at how investors in DG’s restructured sukuk (the “Nile Delta Sukuk”) fared in the restructuring.

Are they better off?

Our primary source is the Nile Delta Listing Particulars.   Details on the previous sukuk “Dana Gas Sukuk” are here.

This post should be read in conjunction with the post on “DG Sukuk Restructuring - Lessons for Other Investors” (hereinafter “Lessons”) for a more extensive analysis of the replacement sukuk.

First, let’s go back almost two years when AA in his capacity as (الفاضي يعمل قاضي ) gave some sage advice to sukuk holders about elements they should incorporate in the restructured sukuk, if possible.

To wit:

1. Recast the legal agreements to reduce exposure to Abu Yusuf-y legal maneuvering by the obligor/issuer.
2. Get more collateral and take possession now rather than relying on the obligor to deliver it later.
3. Increase amortization via interim payments and a cash sweep.
4. Shorten up the tenor to keep pressure on the borrower.

Recast the Agreements

1. Well, agreements were recast.
2. As described ad nauseam in Lessons the sukuk holders’ legal position hasn’t really improved. 
3. In fact they may be worse off because the Listing Particulars state that the if the Trust Assets (Ijara assets) have not  been transferred and legally registered in the name of the Trustee, then the learned courts of Sharjah may characterize the sukuk not as a financing transaction but a Sale and Purchase agreement.
4. In which case, DG will be obliged to take possession of the assets and return for any monies paid, including interest payments (so-called Periodic Distributions).  This as you will recall is one of the bogus arguments that DG raised with the previous sukuk.  Now the sukuk holders appear to have signed on to this interpretation.
5. AA hopes if this situation comes to pass, the learned courts of Sharjah will NOT opine that the sukuks are a single transaction and include the interest from the year dot in their calculation.
6. As noted in Lessons, the Listing Particulars highlight the risk (lay out a legal strategy?) that this new “ijara” structure may be subject to challenge on what are simply technical matters and not changes in interpretation of Shari’ah compliance principles though the latter remain a risk.
7. As also outlined in that post, the risk of Abu Yusuf-ery remains, the sad result of a confluence of factors associated with so-called Shari’ah compliant transactions, exacerbated by the risk of having to litigate in the eminent courts of Sharjah.
8. Hint:  If you’re looking for Shari’ah compliant structures, AA suggests equity in a firm that does not engage in transactions contrary to Shari’ah. Or you might want to consider sovereign sukuk issuers who are expected to be less prone to employing Abu Yusuf or his “tricks”.

Obtain More Collateral and Take Possession

1. More described “security” was ostensibly obtained, including some promises of  future security arising from what might charitably be described as high unlikely events, e.g., sale of DG’s fine Egyptian assets or payment of an arbitration award by Iran.   
2. One would need an electron microscope to assess the practical impact on the sukuk holders’ security position of the additional collateral, including the (  في المشمش ) type.
3. AA recommended taking possession of security now rather than waiting to attempt to exercise rights after default.  That didn’t happen.  One sad example: the Ijara assets apparently have not been registered in the name of the Trustee. As noted in Lessons and above, that opens a potential loophole big enough for Donald Trump’s ego to pass through comfortably.

Increase Amortization, Add a Cash Sweep

1. The sukuk holders had a partial victory here.  The sukuk has been reduced to just under USD 400 million.
2. But only the down payment was mandatory.  The additional payment got DG a reduction in rate.  DG made both.
3. But as of now DG have no further obligations to make principal repayments until final maturity of the sukuk in October 2020.
4. To add insult to injury, DG won the right to pay dividends of 5.5% of paid in capital (roughly USD 95 million) a year with the only requirement that after payment of dividends DG maintain USD 100 million in cash and equivalents.
5. To spell it out, it doesn’t matter what DG’s cash flow or income is.  If DG has money in the bank, it can pay dividends of roughly USD 100 million a year as long as after payment it still has USD 100 million in the bank.  
6. A very key point: DG prepares "consolidated" financials that include assets and liabilities of investee companies, including Pearl Petroleum.  Legally, DG does not own these amounts and cannot use them.  
7. In the past I've focused on the Pearl Receivables.  Now it's time to look at Cash and Banks.  Note 15 to DG's FYE 2018 AR page 89 contains information on Current Assets of Pearl appearing on DG's balance sheet - some USD 131 million which would include Pearl cash and A/R.  
8. From the MD&A (page 36) we know that DG's share of Pearl A/R was some USD 18 million.  A rough estimate (note the double caveat here) then is that about USD 100 million of Cash on DG's balance sheet is likely to really be Pearl's cash.  Unless Pearl dividends this money to DG, DG cannot use it for sukuk repayment or other purposes.  
9. The key issue here is whether the dividends restriction is based on the cash appearing on DG's consolidated financials or its parent only financials (not disclosed in the AR).  
10. By AA’s calculation USD 100 million is 25% of the amount due at final maturity.  Of course DG cannot reduce its cash to zero if it is to remain a going concern. Equally it cannot use Pearl's cash for its operations or for debt service.  
11. DG's cash is USD 400 million in bank as per consolidated financials. And on a parent only basis, perhaps USD 300 million.  In either case, DG can pay away just under USD 200 million before final maturity.   
12. Leaving USD 200 million (consoldiated) or USD 100 million (estimated parent only).   50% of the final principal repayment, ignoring cash it must retain for operations. Or in the worst case 25% of the final payment.
13. That appears to leave sukuk holders in the position of hoping that DG can generate aggregate net cash of about USD 300 million during 2019 and the first 10 months of 2020 (consolidated basis) or USD 400 (million parent only).  That’s based on the assumption that DG would not reduce its cash to zero to make the final payment and probably needs to retain at least USD 100 million to assure ongoing operations.
14. If it does not generate that cash, then there will be another restructuring.  As outlined above, the sukuk holders have scant legal leverage.

Shorten the Tenor

1. Tenor was kept reasonably short.
2. While the sukuk holders’ legal and collateral position is weak, the short tenor does keep some pressure on DG.  The threat of another messy restructuring and resultant worsening of banking and public relations may provide some leverage on DG.
3. Perhaps, the sukuk holders just trod the path of a typical commercial bank restructuring.  The lenders know that the proposed terms are not economically based.  That is, the borrower will be unable to make the payments in the time frame given.  But the terms will “sell” back in the head office.  And when the maturity is missed, someone else will be charged with restructuring.
4. In any case the sukuk holders may be in for the financial equivalent of a “Zeno’s dichotomy paradox” restructuring.  Each time they restructure they’ll get half way to full repayment.  At some point, I suppose, the amount will be such that a write-off will be less costly than the professional fees associated with another restructuring.
5. AA gives sound advice or so he imagines.  But, clearly,  (اليد في الميّة مش زي اليد في لنار ). 
6. Sukuk holders probably did as well as they could.  In the desert any water will do.
7. The lesson is to avoid the desert if possible.  Sound advice as usual from AA but of little use to those already "invested" in Nile Delta.
8. A cautionary tale that shows the importance of (فكر في الخروج قبل الدخول )

Dana Gas: FYE 2018 and 1Q2019 Financial Performance - A Brighter Picture But Not by Much

A 5 Watt Bulb is Brighter than 2 Watts

Last December I made a bold prediction based on DG’s 3Q18 financials that the company would have a break-even year or at best case perhaps earn a 4.5% ROAE.  

DG’s 2018 financials  (but not its glossy annual report) have been released. 

Let’s take a look and see how prescient AA’s prediction was.  

Net income for 2018 is what might charitably be described as “disappointing”, a net loss of USD 186 million driven by impairment provisions of USD 250 million.  USD 187 million for the write-off of the Zora field and USD 59 million for certain Egyptian assets (or perhaps uncertain Egyptian assets).  

Pretty far off from AA’s less than less than "prescient" prediction a scant five months ago.  

In the MD&A section of the report DG’s Directors emphasize that the 2018 impairment provisions were “non-cash items” and that “On a like for like basis, excluding one off impairments, profit from core operations increased to USD 64 million (AED 234 million) as compared with USD 5 million (AED 18 million) in 2017".  

On that basis, DG earned an ROAE of some 2.35% using total shareholders’ equity as reported on the balance sheet.  If we adjust 2018 equity for the non-cash impairment that year (add it back) then ROAE is 2.27%. 

In the Directors’ “best” case, a dismal return.  

Certainly well below the risk-adjusted return DG should be earning given its business concentration in risky markets.  Equally well below the return it should be earning ignoring risk.  

However, the picture in 1Q19 is brighter, but only marginally in an absolute sense.  

Net income of USD 35 million, largely driven by a USD 10 million reduction in interest expense.   If this pattern continues, projected ROAE for 2019 is some 5.3% much better than 2018.  

But still subpar for the risk.  No longer pitch dark.  But a 5 watt bulb is cold comfort.  

There was other good news.  

Continued reasonably good collection of receivables from Kurdistan.  

A less favorable 70% collection rate in Egypt, including some receipts in Egyptian pounds.  A less than happy approximate USD 9 million increase in Egyptian receivables.  Both factors –accepting funny money (Egyptian) and increasing receivables --something to keep an eye on.  

DG also reported that it and Pearl had prevailed in their arbitration (LCIA) with MOL over the KRIG settlement. 

So is DG out of the woods?  

Not quite yet.  

While better than 2018, the projected ROAE is still not at a level that a company with this risk pattern should be earning.  

One quarter does not a turnaround make.   

More importantly the factor driving the turnaround is financial not operational.  The current interest charge is based on a non-market rate.  Once the company has to borrow at market rates again, this financing advantage will disappear.  And financing will be important if DG is to materially grow its business.  

With an approximate 5% ROAE, there will also be little opportunity to use financial leverage to increase shareholders returns materially.  And, if lenders demand more than the ROAE, leverage will actually diminish ROAE.

There's a real negative on the operational side: the write-off of Zora.  It was DG's one revenue stream from a creditworthy country. Admittedly small, but perhaps with a potential to grow.

There's also another cloud on the horizon.  

DG is looking at a roughly USD 400 million principal payment on the sukuk in October 2020 some 17 months from now.  

With USD 442 million in cash as of 1Q19, an almost certain USD 95.5 million dividend this year and one next year which is likely to be approved and paid prior to repayment date, there’s little margin for error. 

The sukuk lenders/investors did not or could not impose any real control on DG's payment of dividends.  They agreed that DG could pay dividends equal to 5.5% of paid-in- equity on the condition that after such payment, DG would have cash of at least USD 100 million.  And they did this knowing the repayment due in October next year was going to be a multiple of USD 100 million.  Roughly 4 times.

If DG is able to honor the repayment obligation in full, and that’s not certain, it could be left with little cash for its business.  

In such a case it’s hard to imagine investors and lenders rushing to support DG, but then they (lenders and investors) routinely demonstrate little common sense in their underwriting. 

So the future while brighter (5 watts instead of 2 watts) isn't bright enough to lift DG from the dog investment category.

Dana Gas: Three Additional "Things" to Watch Plus "Bonus" Features

The Underwriting Phase is the Best Time for Scrutiny 

Given the company’s weak financial condition and the behavior of management, those with a financial interest in the firm—creditors and equity investors— need all the help they can get in monitoring DG’s performance.  

As always AA has your back.

In addition to keeping an eye on macro financial performance, here are a few relatively quick things that sukuk holders and equity investors can do to make sure they don’t miss problems organized around three topics:  

• Current performance
• Receivables collection
• Financial liabilities 

These aren’t the only indicators. 

They certainly are not replacements for looking at the financials carefully particularly aggregate cashflow, but can be helpful in identifying performance problems.  At times information in the consolidated income statement or statement of condition can be used to trigger a deeper look.  For example, declines in overall net revenue, a sudden large write-off of exploration costs, etc. should send you looking for more information.  You’d expect to find explanations in the various management reviews in annual and interim financial reports. These tools will hopefully help you look deeper.  If management omits to highlight a problem, these tools may help you discover incipient problems as well. 

Current Performance

DG operates in three separate locations.  Looking at aggregate performance obscures what’s happening on the individual level. That could be quite important if the level is a critical "bit" in the overall business.

DG does provide some information on individual operations in its “segment reporting” note (typically note 4).  Here you'll find total assets and liabilities.  Not enough to go on.

Starting in 2013 DG began providing more information on Pearl's balance sheet in the note Interest in Joint Operations (note 15 in 2016 and 13 in 2014) than in note 4.  One can create a rudimentary balance sheet from this information back to 2012.  That still leaves a significant information gap on the balance sheets of Egypt and the UAE.  

But there is another more important problem with DG's segment disclosure.

The Company does not disclose net income and net comprehensive income for the UAE, Egypt, and Iraq.  It only discloses net revenues and gross profit (net revenue – depreciation and operating expenses) with some additional limited disclosure about elements of the income statement.  Sadly this falls short of what would be ideally useful to users of its financial statements.

With this limited additional information, one can try to construct a rudimentary income statement. But more than some assembly is required. Unlike IKEA not all the parts are in the box, so it’s generally hard to determine whether these entities are profitable before allocation of expenses at the holding company (DG) level or the nature of at least two of the three main operating entities' balance sheets.  

In some cases where there is an extraordinary expense, e.g., a substantial write-off of exploration expenses, it’s a bit easier.  For example, in 2009 it’s pretty clear Egypt had a net loss.  As did Zora in 2016.  One doesn’t even need a calculator to see this.   

What’s a quick but not complete fix to this lack of information?  

Tracking the top line for an indication of ability to generate earnings and cashflow and looking at the disclosed expenses is the easiest.  It's also not a bad starting point. But this is an imperfect "fix".

Revenue declines or increases can reflect changes in prices or volumes.  One would expect prices to be largely out of DG’s control.  Volume declines could reflect operating or reserve problems. 

One can also scan the disclosed expenses for surprises.  These should be visible in the consolidated income statement but looking at the segment information note (note 4) will identify which of the three businesses took the "hit". 

Here’s a starting point for the investors out there who hold DG paper.   

DG Top Line Revenues Millions of USD
	UAE	Egypt	KRG	Total
2016	23	154	78	255
2015	4	125	142	271
2014	4	225	247	476
2013	5	225	230	460
2012	5	237	258	500
2011	5	290	226	521
2010	4	264	82	350
2009	4	192	42	238

 Source:  Note 4 DG Annual Reports

Trade Receivables (“TR”)

As discussed in earlier posts, collecting TR is key to repayment of the Sukuk and to eventual cash returns to shareholders. (AA is indulging in extremely optimistic fantasies today).  The TR are “whisker-growing” stale.  Cash conversion is glacially slow.  On a present value basis, the value of TR is being eroded when one considers the appropriate risk-adjusted discount rate. 

Those with a financial interest in DG’s financial performance should be watching trends in collection or further accumulation of the TR. 

Note to DG’s auditor: Transparent disclosure of just how past due the TR would be helpful. 

Provisions for Surplus Over Entitlements

But there’s something new to watch. 

That is the above mentioned provision which is money that DG owes the KRG.

Why is this important? 

AA suggests you read Note 28 in full, but here is a sentence that caught AA’s eye and summarizes the issue: 

“Furthermore, Pearl has a right under the terms of the Authorisation to offset this Surplus, when payable, against any other outstanding payments due from the KRG.” 

Given its current cashflow generation problems, it’s likely that if the TR are settled, the amounts owed to the KRG will be offset against the TR. The KRG may have a similar right to offset.  But we don't have confirmation of that.

AA would expect that those who depend on collection of the TR for their repayment or dividends would want to track whether this offset is growing and just how fast.  Is this liability threatening to seriously diminish their source of repayment?  

Side comment:  Though none is really needed in AA’s view, perhaps this is another compelling argument that sukuk holders should reject a five-year bullet structure and insist on amortization of the sukuk in the rescheduling negotiations.  As you will recall and if you don’t, AA will repeat his earlier advice.  Principal payment should be in the form of both scheduled repayments and a cash sweep structure to hoover up prepayments if there is excess cash. 

Bonus Indicators

In addition to the operational indicators mentioned above, some "bonus" tips. 

If you missed the reference in DG’s Annual Report 2016 CEO Review, there seems to be a problem of some sort at Zora.

“In the UAE, despite full year average production of 2,744 boepd, total production from the Zora Gas Field has declined throughout the year from production start-up in February.”

This may be a technically solvable problem or it may not. 

Those with a financial interest are likely to have an interest in knowing, though Zora is a rather small fish in DG’s operations.  It clearly is not showing a profit based on DG’s Annual Reports Note 4.

This information may also temper optimism about Zora as additional collateral until the cause of the decline is known. 

For Pearl there are other sources of information (more on that point in a post to come) in the financial reports of three of DG’s partners in the joint operations. 

Here are some examples from MOL Hungary’s 2016 annual report.

• MOL took provisions equal to its share of 2016 net income in Pearl Petroleum (note 6).
  

  “Given the current economic situation impacting the Group’s associate in the Kurdistan Region of Iraq a provision has been made in 2016 against the Group’s share of profit.”

• MOL also announced that it has changed its revenue recognition for sales in the KRG from an accrual to a cash basis.  That’s generally not a sign of robust credit standing of the buyers.  (AA’s first understatement of the post). And may be related to the 2016 provisioning against MOL's profit in Pearl.

Note 3:  “Having assessed the probability of receiving economic benefits from sales activities in Group’s operations in Kurdistan the management decided to recognise revenue on a cash basis on sales in Kurdistan Region of Iraq.”

• MOL has also taken some additional steps in the KRG which appear to reflect a serious concern about economic conditions.  You can easily find them by searching MOL’s 2016 annual report using the search term “Iraq”.  Pearl isn’t MOL’s only KRG asset so some of these steps relate to other companies. But the message seems pretty clear.  MOL is concerned about KRG ability to repay. 

AA Rant

If you read this blog on a semi-regular basis, you’re familiar—perhaps more than you’d like—with AA’s frequent complaints about "shortcomings" financial reporting. 

This rant is about the quality of DG’s segmental information. I’ve noted the deficiencies above. In short DG isn't providing enough information to understand it's underlying business.

Why isn’t DG providing more detailed information?

Others do.  The nearest I can find to an “explanation” is in DG’s 2016 annual report notes 2 and 4.  The below quotes basically repeat what they’ve said in previous years.

“Note 2: Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating decision-maker.  The Chief Operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer who makes strategic decisions.”  

“Note 4:  Management has determined the operating segments based on the reports reviewed by the Chief Executive Officer (CEO) that are used to make strategic decisions. The CEO considers the business from a geographic perspective which is divided into three geographical units.  The Group’s financing and investments are managed on a Group basis and not allocated to segment.” 

This might be charitably described as manifest garbage.   

DG’s segments are independent companies that prepare their own financials.

What this means is that DG has this information.

Preparation of the segmental information would be a simple matter of reproducing summaries of the income statement and balance sheet.

AA wonders if the CEO really does not look at these reports or condensed versions of them to make decisions. How can he run the business and make investment decisions if he isn't tracking the profitability of major lines of business based on an allocation--imperfect as it is likely to be--of all expenses?  How does one track risks?

If indeed the CEO is not using a methodology similar to this, then perhaps DG needs a new CEO. 

AA also wonders DG’s auditor’s apparent acceptance of this explanation. Some uncharitable souls might say questions about auditor credulity have already been conclusively answered: the auditor has accepted DG’s decision to carry the Trade Receivables as “current assets”.

When important information is missing from financials or other statements by a firm's management, one should wonder why.  Is it that they don't have the information (which is a troubling question in its own right)?  Or that they don't want to release the information (an  even more troubling question)?  That leads to AA's golden rule of providing capital.  If the firm doesn't trust you with information, why should you trust them with your money?

Dana Gas Restructuring: Creditors, What Then Is To Be Done?

As outlined in previous posts, the creditors face two key issues with the restructuring:

1. Obligor Attitude:  If there are not already serious concerns about the obligor’s integrity and willingness to pay, then there should be.  The situation is similar to that of The Investment Dar Kuwait.  Back when it became evident that TID was headed for a restructuring, if not the shoals, its creditors petitioned the Central Bank of Kuwait to appoint an official “minder” to keep an eye on—or more accurately to “control”— TID’s management.  CBK did not.  By contrast creditors did not ask for one in the Global Investment House (Kuwait) restructuring a similarly uncertain large ticket exercise.  As DG is a commercial company and not a financial institution, there’s not even the extremely slim possibility of CBUAE intervention.  Creditors are “on their own”.  That has important consequences for what they should do.
2. Obligor Aptitude: Glacially slow collection of receivables and an apparent chronic weakness in operating cashflow indicate that the obligor is unlikely to repay principal and interest within the proposed five-year tenor. Factors largely outside DG’s control.  The path was cast when DG embarked on its business in Iraq and Egypt.  Given these facts, creditors are likely to find themselves in another restructuring “adventure” with DG in five years’ time.  Therefore, minimizing that future exposure should be a key goal. 

Что делать? 

In framing this post, AA looked to inspiration from other authors who wrote similarly titled pieces, though hopefully this post is free from excessive utopianism.  As you'll notice one such author is missing.  I believe he was in heated exchange on call-in program with the Governor of New Jersey when I called.

In any case, here's are potential steps that AA believes creditors need to take based on the assessment that protection of creditor interests requires measures beyond the usual ones in a restructuring. 

1. Legal steps –recast the deal or elements of the deal to reduce/eliminate exposure to Abu Yusuf-ery legal maneuvering by the obligor.  While this is an important step, it will not be sufficient to protect creditors’ interests.
2. Collateral – get more and to the extent possible, take possession now rather than relying on the exercise of legal rights to deliver it later when Abu Yusuf may have come up with even more clever arguments.
3. Amortization – use interim scheduled principal repayments plus a cash sweep to achieve reductions.  With DG’s weak/uncertain cashflow getting dollars now is wiser than waiting five-years as the past ten years unequivocally demonstrate. 
4. Tenors – Shorten to keep DG’s and your minds focused on repayment.  A five year bullet moves the payment far enough into the future that focus is lost: repayment is a lower priority, particularly for DG.

Legal

Transaction documents are meant not only to set forth the obligations and rights of both parties so there is no ambiguity, but also to provide protection by providing recourse through court ordered enforcement of the agreement if one party cannot fulfill its contractual obligations or decides not to.  DG’s maneuver in Sharjah and other courts to declare the Sukuk contract “illegal and unenforceable” shows the practical limits of that strategy. 

One response would be to change the form of the replacement contract.  If “Islamic” transactions are uncertain, then a conventional (non-Shari’ah) transaction would seem preferable.  If a starving Muslim may eat a ham sandwich in order to avoid death, then it seems to me that if confronted with an obligor that may not be trustworthy as originally assumed and uncertain protection from the courts, a Muslim creditor could legitimately change the form of contract to a non-halal one.  This is important because as shown with the English and BVI courts actions, non-GCC courts are likely to show deference at least initially to areas beyond their competence, e.g., the Shari’ah.

A less severe approach would be to recast the debt obligation into another form of “Islamic” transaction as discussed below.  Perhaps, the transaction could be split into two?  One tranche for only principal repayments in which case Shari’ah or non-Shari’ah distinctions might not apply. Or in other words, the first tranche would be both.  The second an Islamic structure for "profit" (interest), hopefully limiting opportunities for future Abu Yusuf-ery.  Dealing with default interest could be difficult, but creditors are going to have to make some hard tradeoffs following their initial and unfortunate underwriting decision. The ability to ensure cross default would be another key consideration with this no doubt utopian strategy. 

Other actions would be to ensure that entities critical to the success of repayment were incorporated and active in jurisdictions believed to be more likely to give the creditors a fair shake rather than relying on the uncertain existence of a  fair shakyh in local GCC jurisdictions.  Reducing as much as possible the impact of local law on the transaction would be ideal. 

Alternatively, could the DIFC be the jurisdiction for the restructuring suitably structured as an offshore transaction?

But such steps are unlikely to be definitive, even if they are theoretically possible. 

In particular, Argentina’s or the Arab Bank’s recent unhappy experiences in US courts should suggest more than abundance of caution is warranted with reliance on legal jurisdictions as providing a “fair shake”. 

Collateral

On the theory that the “old” deal is dead, then a new deal needs to be struck.  So the door is potentially open to new terms. 

It’s often said that possession is nine tenths of the law.  This should be a guiding principal for the creditors.

A wise move would be what is in effect a pre-emptive exercise of collateral/security rights. That argues for the creditors getting possession/ownership of collateral now to be returned upon full repayment. Transfers of ownership would take place at the inception of the transaction not after a default occurs and potentially lengthy and uncertain legal proceedings are concluded.

A potential replacement structure is a sale/leaseback with DG responsible for operations, capex, insurance, third party liabilities, etc.    DG would sell these assets (by selling the stock in the companies) to the existing Sukuk holders.  The holders would then lease the assets to DG for an x-year period.  No cash would change hands as the “proceeds” of the sale/leaseback would serve to retire the existing obligation.  Sukuk repayment would come from lease payments where perhaps a fixed profit rate would pose less of a problem if Shari’ah structures were chosen.  Upon its successful retirement of the sale/leaseback transaction, DG would have a bargain purchase option to reacquire the assets.

Additional collateral.   Zora is now free from debt and generating cash. It is perhaps the most saleable of DG’s assets.  More (stale) receivables, assignments of proceeds from arbitral awards, ownership of the holding and operating companies for Egypt and the KRG. But unless Dana Gas Ventures BVI owns shares in Pearl, then the KRG operations are not part of the Trust Assets. 

Creditors can expect a robust reaction from DG based on the Trust Assets (TA) being the only security offered. So obtaining new collateral not related to the original TA will be extremely difficult.

If no new collateral can be obtained, then the creditors should take possession of the Trust Assets as outlined above.  If the lessee fails to pay, then the bargain purchase option would be invalid. The assets could be sold to third parties in whole or part.Or investment “adventure” in Egypt or the KRG. Bon chance!  Of course, DG or its shareholders could be given pre-emptive rights in any asset sales. 

Principal Reduction – Amortization

As indicated in my earlier post, the Company’s cashflow is highly unlikely to enable it to retire the debt over the mooted five-year tenor. Creditors could rely as they have over the past ten years on the Company’s promise for principal payment at the end of the next five-years bolstered by no doubt a rosy projection. 

Or they could more wisely include binding (such as one can bind DG) requirements for principal repayments.

With DG’s uncertain cashflow, it’s hard to come up with repayment scenarios.  But that doesn’t mean that the new deal cannot contain some required interim principal repayments before the final principal balloon payment at maturity.  

A key problem with this approach is that it requires faith in DG’s compliance.  Fool me once shame on you. Fool me thrice – we’ll you know the rest. 

A more prudent option would be to include a cash sweep with the required principal payment structure.  As cash came into a newly established concentration account controlled by the security agent (both account and security agent located in a more reasonable jurisdiction), the cash would be divided by the security agent according to a pre-agreed formula.  This mechanism ensures (subject to there being a cashflow) that creditors are not forgotten. Cashflow for the creditors under the sweep would be directed first to scheduled principal payments and then to prepayments.  That is, the sweep should not be limited to only the scheduled payments, but to as much as can be taken limited only by the outstanding debt amount. The point is get the cash now not later.  Creditors would be wise to eliminate prepayment penalties as debt collection is the key issue they face.   

There is another very real benefit to this arrangement.  Just as taking ownership of collateral at the inception of the deal makes it difficult for DG to frustrate creditor rights so does a cash sweep. Under the cash sweep cash would be given to creditors on an ongoing basis as soon as practical after it were received in the concentration account.  Creditors would immediately apply the cash against principal due.  It should be more difficult for DG to later clawback the cash already “swept” to the creditors compared to making some bogus assertion about the transaction becoming invalid due to changing interpretations and then not paying.  

Shorter Tenor

Restructuring at the same or a longer tenor defers the day of reckoning far into the future, particularly if an inadvisable bullet structure is used.  Far enough so that it’s not a priority for either. To avoid this unhappy outcome the maturity of the debt should be shortened.  The debt could be divided into tranches (cross default protected) with a maturity ladder, i.e., 1, 2, 3, 4, 5 years.  Or left as a single amount with 2 or 2.5 year maturity.  This would keep the pressure on DG and hopefully prevent the creditors from lapsing into unwarranted somnolescence. 

The shorter maturities would offer creditors the opportunity to reopen the debt to impose additional terms more frequently as it is highly likely that DG will require more than five years to repay the debt, absent a miracle.  And as AA was once told by a local GCC banker, the only "miracles" in Islam occur in the financial statements of Islamic financiers.