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Dana Gas defaults on $1 billion loan

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Egypt’s political instability pushes the UAE natural gas producer to default; restructuring talks underway

By Noah Chasek-Macfoy

Dana Gas, a natural gas extraction and production corporation based in the emirate of Sharjah in the UAE, failed to repay a $1 billion Islamic Shari’a-compliant Sukuk bond when the bond’s maturity date came and passed on 31 October. $920 million was due after Dana Gas repurchased $80 million of the bond issue in 2008. Additionally, the gas producer failed to pay $18.75 million of accrued profit from the Sukuk-holders ownership stake due on 30 October.

The company released a statement on 1 November stating that it was in talks with bondholders to amend the terms of the Sukuk and extend re-payment. Despite Dana Gas’s statement, Reuters reported that an unnamed source indicated bondholders would leverage their stake in the company as collateral, stating “bondholders will now pursue an enforcement of Egyptian assets and pursue their unlimited recourse $1 billion claim against Dana Gas PJSC.” Bondholders have yet to issue a formal statement.

Dana Gas had previously negotiated a “standstill” agreement with its creditors in early October under which efforts to collect would be held off for six months after the Sukuk bond matured. While other companies have restructured Sukuk bonds or been bailed out by the government, Dana Gas is the first UAE company to default on a Sukuk bond.

The bond that matured on the 31 October was a five-year Sukuk Al-Mudarabah agreement with a 7.5 per cent “coupon,” a $75 million annual dividend. A Sukuk Al-Mudarabah certificate provides the purchaser with a small percentage share in the issuer’s profits for the agreed time period in addition to re-payment of the initial value of the bond itself. Dana Gas confirmed that so far it has met its entire bond servicing obligations. “To date, $356 million has been paid to Sukuk holders over the last 5 years” according to the company’s statement.

According to Reuters, the Abu Dhabi stock exchange suspended Dana Gas shares on Thursday, pending clarification on the Islamic bond.

Wednesday’s default was caused by what Dana Gas emphasised are short-term cash flow problems. Dana Gas’s exploration and production projects are primarily based in Egypt and Iraqi Kurdistan, two areas which have seen political instability over the last two years. In its statement, Dana Gas explained payments delays from the Egyptian government in the aftermath of the 25 January Revolution are largely to blame for the current cash crunch.

“We cannot deny that the revolution affected everybody including Dana Gas. We have noticed for example that the issue of receivables has become much more complicated as well as much more severe. This limited our ability to execute a full work program in 2011, and partly in 2012… our reserve replacement factor and our production were both lower in 2011 and 2012 than in previous years” described Dana Gas Chairman Dr. Hany El-Sharkawy in an interview with Egypt Oil and Gas magazine.

According to Gulf News, the Egyptian government owed $198.5 million as of 30 June.  El-Sharkawy was quick to praise Egypt’s government for its efforts to solve its payment problems. “We have entered into agreements with the authorities, and they have honoured these agreements” he stated.

Net revenue has fallen two quarters in a row, including a drop of 12 per cent from the previous year to $107.6 million in the third quarter.

According to Bloomberg, the Sukuk bonds include Dana Gas’s Egyptian assets, as well as two smaller UAE based projects, as a collateral guarantee. Dana Gas is heavily invested in Egypt. According to the company’s website it is currently the 6th highest gas producer in Egypt. It operates 100 per cent of production, exploration, and development in the Nile Delta and 50 per cent in Upper Egypt. It is in the process of building a new extraction plant, and just last month made a new gas discovery in the Nile Delta.

“In Sukuk, if a bond issuer does not pay, the bondholders can take control of a portion of the company as laid out in the initial bond,” a representative of Egyptian Islamic Finance Association, Ahmed Ramzy, told the Daily News Egypt.  While it is highly unusual for a Sukuk to go unpaid Ramzy said, Dana Gas’s creditors could gain control of the company’s Egyptian assets if no deal is reached.


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