Thursday 15, June 2017 by Georgina Enzer

Dana Gas lawsuit to declare Sukuk unlawful commences in Sharjah court

The lawsuit brought by Dana Gas PJSC (the “Company”), the Middle East’s largest regional independent natural gas company, in the Sharjah Federal Court of First Instance (the “Court”) to declare its Sukuk as unlawful commenced on 14 May 2017.

“As requested by the Company, the Court has issued an injunction pending determination of the Company’s application to have its Sukuk dated 8 May 2013 declared unlawful and unenforceable. The injunction restrains, among other things, the Trustee, the Delegate, the Principal Security Agent and the Egyptian Security Agent under the Sukuk from taking any action, inside or outside the United Arab Emirates, to enforce against any of the securities of the Company and its affiliates under the Company’s Security Agreement until a final determination is made by the Court in the lawsuit. An initial hearing on the substantive action has been scheduled by the Court for 25 December 2017,” said a statement by Dana Gas.

On 3 May 2017, Dana Gas invited the holders (‘Holders’) of its outstanding $350 million nine per cent ordinary certificates and its $350 million seven per cent exchangeable certificates, each due October 2017 (the ‘Sukuk’) to form an ad-hoc committee (‘Committee’) in order to commence discussions relating to its Sukuk.

According to Dana Gas, due to the evolution and continual development of Islamic financial instruments and their interpretation, it recently received legal advice that the Sukuk in its present form is not Shari'ah compliant and is therefore unlawful under UAE law. 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.

Dana Gas’ solution is to propose to exchange the Sukuk with a new enforceable, Shari'ah compliant instrument, which would have a tenor of four years, confer rights to profit distributions at less than half of the current profit rates and without a conversion feature. Such new profit payments will comprise a cash and PIK element.

“The new instrument would represent a fundamental improvement to the current situation for Holders as it would be enforceable and would provide repayment to Holders over time,” read a statement from Dana Gas.

As the Company’s receivables and future damages payments may be unpredictable, Dana Gas proposes to make prepayments under the new Sukuk either in whole, or in part at par, prior to its maturity without any penalty thus providing a path for early pay-down for the Holders.

The next two Distributions scheduled for 31 July 2017 and 31 October 2017 cannot be paid now that the existing Sukuk is deemed unlawful but will be accounted for as part of the new Sukuk instrument.

Dana Gas believes that this proposed exchange offer is in the interest of all parties and is seeking a consensual agreement with Holders. This proposed offer also takes into account Dana Gas’ need to focus on short to medium term cash preservation due to the continued challenges it faces around cash collections in KRG and Egypt.

The proposed offer is designed to allow Dana Gas time to collect on over $900 million of total receivables due from the KRG and Egyptian government and also obtain awards for damages from the arbitration cases with the KRG and NIOC.

During the 2012 restructuring, representatives of the Holders unnecessarily declared a Technical Default while negotiations were still ongoing, causing lasting harm. The Company now assures all parties that no Dissolution Event nor Technical Default has taken place, nor indeed can take place due to the unlawful nature of the Sukuk. While the Company is keen to reach a consensual agreement with the Holders, Dana Gas has a duty to protect the assets of the Company for the benefit of all stakeholders and will take action to fulfil this duty, the company said in a statement.

“Since the Sukuk were put in place in May 2013, Dana Gas has been transformed. Against a backdrop of significant operational progress, the Company has had clear successes in its arbitration cases and now has approximately $900 million of undisputed receivables from two Governments. The Company’s risk profile has changed very positively and the outstanding balance of the Sukuk has been reduced from $1 billion to the current $700 million despite continued challenges around collections. The Company however still needs time to deliver fully on its potential and in the meantime must preserve its financial strength so that it can realise the full value of its assets for the benefit of all stakeholders,” said Patrick Allman-Ward, Chief Executive Officer of Dana Gas.

Features & Analyses