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.

  

Dana Gas Restructuring: Full Repayment of Sukuk Threatened by Weak Cashflow

Looking for the Flow

In a previous post I looked at DG’s stale Trade Receivables, today let’s take a look at the company’s ability to generate cash. 

If the title hasn’t given away the plot, AA’s analysis is that it is likely to be insufficient to repay the Sukuk within five years absent a non-operating event. 

We’ll base the analysis on the “Consolidated Statement of Cashflows” in DG’s annual reports in lieu of developing a more formal model because the intent is to provide a directional rather than locational result.  

This is historic information.  

Why on earth is AA using past data? 

Well, there's nothing on the horizon to suggest a fundamental change in DG's existing business, collection of receivables, etc.  Zora would have to grow exponentially to make a difference.  If new business with better paying customers could be found in other countries, DG probably would be hard pressed to secure financing for a variety of reasons and such business, if finance were available, would take time to develop.

To set the stage a few words about accounting cashflow statements. 

1. There are two methods for preparing / presenting a statement of cashflows.  One (the “direct” method) is based on actual cashflows both inflows and outflows.  This provides better information for analysis. 
2. The second is (the “indirect” method) which begins with reported net income and then makes adjustments for certain non-cash items (e.g., depreciation, allowances for impairment, etc.) producing Gross Cash Flow from Operations (“GCFO” or “GO” in this post).  Then a set of further adjustments for changes in the balances of non-cash current assets and current liabilities, resulting in Net Cash Flow from Operations. (“NCFO” or “NO”).   An increase in a current account is a “use” of cash a decrease a “source” of cash.  It’s the opposite for current liabilities where an increase is a “source” of cash and a decrease is a “use” of cash.   Another issue net changes in account balances are used.  This masks actual cashflows, e.g., for receivables it’s the net of new unpaid billings and cash collections on all outstanding receivables.  It’s important to understand that GCFO does not represent cash collected by the company which it then “spends” to increase current assets (e.g., receivables).  What has happened instead is, for example, that some revenue included in accounting net income has not yet been collected.   
3. There is a way to refine the information from an indirect cashflow using notes to try and disaggregate the “net” changes in accounts.  I haven’t done that for the reason noted above.  

The chart below shows DG’s cashflow over an eight-year period.  Note the “traditional” approach to presentation has been adapted to fit the margin constraints on the blog.  That is, years are vertical rather than horizontal. 

Dana Gas Cashflow Analysis  -  Amounts USD Millions
	GCFO	WC + Tax	NCFO	Invest	Finance	Net CF		NO/GO
2016	145	-63	82	-111	-120	-149		57%
2015	345	-142	203	41	13	257		59%
2014	386	-284	102	-55	-67	-20		26%
2013	358	-233	125	56	-141	40		35%
2012	408	-231	177	-57	-67	53		43%
2011	434	-335	99	-93	-53	-47		23%
2010	285	-154	131	-126	-59	-54		46%
2009	176	-71	105	-31	-78	-4		60%
Total	2,537	-1513	1,024	-376	-572	76		40%
Average	282	-168	114	-42	-64	8		40%

Source:  DG Annual Reports

Some observations on the cashflow. 

1. Over the period 2009-2016, DG has converted only 40% of its Gross Cashflow from Operations to “cash”.  The main culprit over the period is a USD 847 million increase in Trade Receivables.
2. If the future is like the past, then NCFO is unlikely to be significantly different than the USD 114 million average over the past eight years.  Note:  NCFO does NOT include finance costs, e.g., "profit rate" (interest).  
3. So USD 570 million is a reasonable estimate of NCFO over five-years.  That's before investments and finance.  
4. If DG needs to maintain investment at average levels—USD 42 million per year—that leaves USD 360 million for debt service.    
5. Assuming annual level principal payments of USD 138 million a year at a 9% p.a. interest rate total payments are some USD 876 million over the five years.  At a 3% interest rate total payments of USD 752 million. 
6. At 9% the shortfall is USD 516 million (roughly 60% unpaid) and at 3% USD 392 million (52%).   
7. Full repayment of the USD 690 million in outstanding sukuk principal and interest therefore appears unlikely (first euphemism of this post) absent significant new developments.
8. One such development would be a fundamental change in cashflow generation from operations, e.g., Zora generating significant cash, Iranian gas sales finally occurring, highly profitable business in a new market.  
9. Another would be a non-operating event or events that change this unhappy picture.  The KRG and Egypt could pay their past due receivables.  The KRG or IRI might pay DG all or some of the USD billions they owe DG according to arbitral decisions.   DG could sell some of its assets with the proceeds directed to creditors. AA is ruling out—perhaps prematurely—DG purchasing a winning El Gordo ticket given DG’s steadfast self-proclaimed adherence to Shari’ah.  Though I suppose a providential re-interpretation of   الميْسِر  and 2:219 by the Company's modern day Abu Yusuf might occur.  An event perhaps more likely than the others outlined in this paragraph.

With this as backdrop, AA is preparing a “What Then Is to Be Done?” post for the creditors chock full of "sage" advice. 

Because AA suspects that the probability of fundamental changes in operations or the occurrence of a non-operating event is low, AA is reaching out for readers' assistance.. 

Readers who know of an Islamic equivalent to St. Jude Thaddeus Patron Saint of Lost Causes or suitable دُعَاء‎‎ are invited to post details.  All five mathhabs are welcome. 

This could be an important pillar of the creditors’ recovery plan.  It would be shame if it was not included.

Dana Gas Restructuring: Friendly Fire - Sharjah and the UAE

DG has placed the courts of Sharjah in a difficult place.  But the uncomfortable situation won’t stop there. Creditors are almost certain to appeal any Sharjah ruling in favor of DG in UAE Federal courts. 

The Sharjah courts are in a proverbial “pickle”.  The Sharjah ruler is Honorary Chairman of DG.  His son sits on the Board.  DG is also a “home-town” company.    

Do they rule with these considerations in mind?  Or do they rule in view of the impact on the UAE, “Islamic” finance?  Or do they rule in DG’s favor and kick the can to the Federal level?

Hard to tell.  Perhaps, though, there’s an indication:  the 25 December date for the hearing on the injunction granted earlier this month. 

AA would think that a highly visible case involving a USD 700 million restructuring and touching on the fundamental validity of “Islamic” finance would warrant a higher priority waiting six months. 

Perhaps, Sharjah Courts are occupied with even larger and more significant cases.  Who would have thought?  Not AA.

If local courts including the Federal Courts uphold DG’s assertion, the reputation of these courts and the UAE’s system of law will suffer, though as an Emirati banker once said to AA.  “By creating the DIFC and the DFSA the Government of Dubai have expressed their opinion on the state of our onshore laws and courts.” 

An assessment shared as well by other parties, I might note.  I'd end by noting that DG is not the only UAE entity to have issued Murabaha based Sukuk

Dana Gas Restructuring: Collateral Damage - "Islamic" Finance

By asserting that changing Shari’ah interpretations can void a borrower’s existing legal obligation to pay principal and “profit” as well as adhere to covenants, DG’s strategy strikes directly at the heart of “Islamic” finance by creating fundamental uncertainty about the legal validity of “Islamic” transactions. 

Simply put, the result of a DG victory is that “Islamic” legal documentation couldnot  be relied on.

Who is affected? 

Here are three potential key affected parties along with some idea of potential injuries. 

• Existing investors whose Sukuk become subject to fundamental uncertainty.  If the market in general were to mark down these transactions due to the uncertainty, investors (including financial institutions that hold Sukuk as investments) could suddenly lose substantial amounts.  For those investors unlucky enough to be holding the Sukuk of DG or a copycat obligor, value loss could be more substantial as debts and interest are repudiated. 
• Existing and potential borrowers who prefer or depend on this form of financing could well find it much more expensive (higher required profit rates, additional collateral, etc.), assuming that finance were available at all.   In some cases skittish investors may decide to exercise rights to accelerate repayment rather than forebear to avoid being caught by a surprise alleged re-interpretation of Shari’ah.  
• Shari’ah experts, commercial and investment banks, legal firms, and other entities who structure and place “Islamic” finance transactions could well see a significant drop in business.

All of the above have a strong motive to oppose DG’s maneuver as well as individuals and entities with primarily religious and not economic reasons for promoting “Islamic” finance. 

At least three parties have already spoken out.

• Shari’ah law experts have begun to challenge DG’s position.  Sheikh Yusuf Talal DeLorenzo (USA) and Mohamad Akram Laldin (Malaysia) as per Reuters both not based in the GCC.  For those who don’t know, there is no central Shari’ah authority.  There is no Rome or Pope in Islam. 
• In a 22 June press release Fitch Ratings have in effect stated that they do not accept DG’s interpretation/assertion: “We believe our current assumption that sharia compliance typically does not have credit implications for Fitch-rated sukuk remains appropriate”.  More importantly Fitch have noted the results if DG’s position is legally upheld: “For this reason, if non-compliance had credit implications and such implications cannot be quantified under our criteria for rating sukuk, instruments may not be rateable”.  If instruments are not rateable, the impact is twofold: (1) higher pricing and (2) less demand.  
• On 27 June Moody’s issued a statement (because this is paywalled, I’m using a press report) which quoted it as follows:  “Although Dana Gas is a small issuer in the UAE market, the credit implications of a court decision in its favour would test Sukuk regulatory and legal frameworks beyond Dana Gas as an issuer or the UAE as a jurisdiction.”  And “The implications [of “illegality” voiding responsibility to repay] include concerns about the legality of existing Sukuk and the effect on their issuers, the role and authority of Shari'ah boards, the responsibilities of the lead arrangers’ due diligence on the issuances, our approach to analysing Sukuk structures, and the liquidity of Sukuk markets.

AA suspects that many more third parties will join the chorus.  

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?

Dana Gas Restructuring: Own Goal for Dana Gas

GOAL!!!!  (Sadly Own)

Without the Number Can't Tell If He's Management or an Advisor

DG’s maneuver—declaring the debt invalid, seeking court injunctions to restrict creditors’ rights, and apparently preferring UAE creditors with the Zora prepayment—is likely to have several effects. 

First, at the very least it will poison the initial phases of the restructuring negotiations. 

AA doesn’t understand why DG took this path. 

Unless completely somnolent, creditors were likely aware that they were not going to be repaid in full, though they were/are probably hoping for a significant “slice” of DG’s almost USD 300 million in cash to reduce outstandings. 

DG has a clearly compelling case that its ability to repay is restricted because its two main customers (95% of DG’s business) can’t or won’t honor their obligations in a timely fashion.  That allows DG to focus creditor anger away from itself to its customers.  

The creditors have limited opportunities to go on their own.  Additional security (more of those “current” receivables from the KRG and Egypt), a higher profit rate, tenor adjustments/principal amortization, etc. could probably secure a deal albeit with hard bargaining.    

Instead DG has in effect “declared war” on the Sukuk holders. 

Second, but that’s not all.  DG’s apparently half-baked strategy has caused it an even larger problem by creating more enemies who are likely allies for the creditors. 

Third parties whose interests are directly threatened by DG’s move are likely to oppose DG, providing ammunition to creditors in the courts.  Other third parties are likely to take positions that support the creditors, even if only indirectly. 

Instead of fighting battles with one adversary, DG has apparently though it wise to take on the “world”.

It’s hard to understand what DG are thinking, if indeed they are. 

A strategy like this is one that an obligor in a desperate situation adopts.  A very weak financial position, problems with ethics or legality that are about to emerge,  or an irrational set of creditors. 

If that's not the case, then the strategy is the result of some "clever boots" removing his shoes at the wrong moment during the decision process.

AA is not privy to insider information.

Third, but whatever the cause, it’s hard to see this turning out well for DG. It could "win" a pyrrhic victory or wind up on the pyre as the vanquished. 

• If DG’s Abu Yusuf legal arguments prevail, finding additional or new creditors is likely to be difficult.  Those few with an interest in providing future debt capital will probably seek to impose higher profit rates and enhanced protective terms – legal structure, collateral, etc.  That assumes that any such creditors will believe that legal structuring can create adequate defenses against an obligor who has clearly demonstrated disdain for contractual agreements.  
• If DG’s legal strategy collapses, creditors could well impose draconian terms on the company, e.g., a higher margin, additional collateral, shorter tenors, and a  requirement for a mandatory "sinking fund" or cashflow sweep. (More on this in a post to follow). Bond holders typically don't have the stomach or attention span to undertake these   In the worst case DG could wind up being managed for cashflow.  As I noted in my post about Global Investment House Kuwait, a creditor bent on principal recovery in an uncertain cashflow situation has little to no consideration for future growth of the firm. When creditors feel that an obligor cannot be trusted, that propensity is exacerbated. 

Dana Gas: Why Did They Do It?

It's More Than Just Hot Air

I promised in my first post to write again on the winners and losers from Dana Gas’s maneuver.  A post from Arkad has temporarily derailed that plan.

What I’d like to offer today is some hopefully intelligent speculation on DG’s motive for declaring the outstanding certificates as “illegal under Shari’ah and thus unenforceable” and obtaining court injunctions against payment, particularly because these two steps are almost certainly going to poison the relationship with creditors which is critical in a restructuring.

Dana’s 13 June 2017 press release offers two potential explanations: 

• An outflowing of piety perhaps triggered by prayerful meditation during the holy month of Ramadan.  “As a result, a restructuring of the current Sukuk is necessary to ensure that it conforms to the relevant laws for the benefit of all stakeholders.”
• A desire to avoid repeat alleged damage to the company because “During the 2012 restructuring, representatives of Holders unnecessarily declared a Technical Default while negotiations were still ongoing, causing lasting harm.” 

The press seems to share AA’s view that piety is not the motive and has seized upon the second: prevention of a Technical Default. 

AA thinks there’s more to the story.    

Simply put this is a maneuver to stop the creditors from exercising their rights under the security agreement to gain time and increase DG’s negotiating leverage in the restructuring.  

According to Reuters, last Sunday Dana advised that it has obtained an injunction from the High Court of Justice Commercial Division in British Virgin Islands (BVI) and a restraining order from the High Court of Justice in England blocking creditors from taking “hostile” action in addition to the Sharjah Court injunction. 

Why were these steps taken and why are they significant?

• The BVI is “home” to DG’s affiliates who conduct business in Iraq in territory of the so-called Kurdistan Regional Government and in Egypt and whose shares are “security” for the Sukuk.  USD 300 million of Egyptian receivables owed to Dana Egypt also part of the security package.   A BVI injunction complicates an already difficult road for creditors to realize the collateral whose enforcement (but only the first step) is subject to the jurisdiction of the BVI. 
• The laws of England and Wales apply to key transaction documents as I pointed out in my earlier post in particular those documents under which certificate holders would quite justifiably call a default.  

Another sign that protecting assets is a key concern are the steps Dana Gas has taken to minimize its exposure to potential actions by other creditors acting under cross default clauses.  This limits potential collateral (secondary) damage (pun intended).  It also lessens Sukuk holders’ negotiating leverage by reducing/eliminating this threat.

The step also prefers UAE creditors.  A step not likely to be received well by Sukuk holders. 

Let’s let DG make this case by using quotes from the Directors’ Report in its 1Q2017 interim unaudited financials.  As customary, red boldface to distinguish AA’s “distinguished” comments. Black boldface to highlight particularly relevant statements by DG. 

“Subsequent to quarter end, in early May, the Company prepaid the Zora outstanding loan amounting to USD 60 million (AED 220 million) plus applicable interests/costs.”    DG’s 1Q2107 financials were signed 11 May by the auditors which means that the prepayment took place before that date.  AA would hope that creditors would ask if that was before or after the 3 May announcement that the Sukuk was going to be rescheduled. 

But it gets even better.

After announcing the prepayment, in the very next sentence DG states: 

“On 3 May 2017 the Company announced that, due to continued challenges it faces around cash collections and the resulting need to focus on short to medium term cash preservation, it will commence restructuring discussions with the holders of both its Sukuk dated 8 May 2013.”

According to DG’s 1Q2017 interim report note 11, as per contractual terms, USD 33 million of the Zora facility was not due for repayment until 2018.  Zora is located in the UAE and the lending syndicate is composed of UAE banks.      

As a side note, interest due on the Sukuk next month would be approximately USD 14 million.  Apparently, the USD 14 million are worth more than the USD 33 million prepayment to local banks –roughly 2.4x as valuable – when it comes to cash “preservation”.    

Zora was secured by a very robust security package as is typical project finance structure.  Lots of tripwires and potential pain for DG. 

“Project Security covers, commercial mortgage over mortgage-able Zora gas field project assets (onshore & offshore), assignment of rights under Gas Sales Purchase Agreements, assignment of all Dana Gas Exploration FZE bank accounts, assignment of Zora Project Insurance proceeds, Project performance Guarantees from Contractors & Irrevocable Letter of Credits from Sharjah Petroleum Council. Dana Gas PJSC has pledged the shares of Dana Gas Explorations FZE in favour of security agent. Dana Gas PJSC is also a Guarantor for the entire tenure of the term facility”

As noted elsewhere in the note there was also a cash sweep mechanism. 

Prepayment neatly resolves the issue of cross default for an income earning project in the UAE albeit small “beer” earnings compared to its Iraqi and Egyptian operations. 

Dana also repaid roughly 84% of the FYE 2016 USD 12.5 million outstanding murabaha facility from Mashrekbank Egypt again as per note 11 1Q2017 financials.  This facility was cash collateralized. 

UAE banks’ exposure to Dana is eliminated or reduced.  Dana has clearly “preferred” UAE creditors over the Sukuk holders, though one might argue that these are relatively small amounts when compared to the approximate USD 700 million outstanding on the Sukuk and removing these makes the restructuring less complicated. 

Some USD 25 million of debt remains for two sale/lease back transactions for DG Egypt (DGE):  (a) a building in Egypt and (b) spare parts/equipment acquired some years ago that have yet to be used as per note 25 c.  Perhaps DGE would welcome returning the latter to the lessor. 

In following posts I’ll pick up the promised discussion of winners and losers, well mostly losers, from DG’s "clever boots" maneuver.