Bond traders are betting that the United Arab Emirates may soon see the country’s first public restructuring of an Islamic bond.
The yield on the $920m sukuk from Dana Gas, the Sharjah-based energy company, has soared this week as the price sunk, highlighting investors’ concern over Dana’s ability to repay the debt.
Although companies in the UAE have extended the maturities on tens of billions of dollars in bank loans since the onset of the financial crisis, no sharia-compliant bonds have been restructured so far. Saudi Arabia and Kuwait have seen companies default on Islamic bonds, prompting complex debt negotiations.
“The market is pricing in that the bond terms will change and there will be a restructuring,” says Gus Chehayeb, head of regional credit research at Exotix, the frontier markets investment bank.
Dana said this week that it had hired Blackstone, Latham Watkins and Deutsche Bank to advise on the various options for repaying the sukuk. The company is “committed to finding a consensual solution that is equitable to all stakeholders”, it said in a statement to the stock exchange.
Long-running investor concerns over Dana mounted this week after Crescent Petroleum, Dana’s biggest shareholder, told Bloomberg that it is not planning to provide cash to support repayment of the debt. The price on the sukuk fell to 68.5 cents on the dollar on Wednesday from 72.5 cents at the start of the week, traders said.
Any “speculation around Crescent injecting further capital to support the Dana Gas sukuk is incorrect”, Majid Jafar, Sharjah-based chief executive of Crescent said.
Analysts say the complexity of sharia-compliant structures and the damaging impact of default have meant companies have been forced to pay off maturing Islamic bonds at whatever cost. For Nakheel, the Dubai government-owned property company, it meant a taking a loan from Abu Dhabi, the UAE capital.
Saudi Arabia’s Saad Group and Kuwait’s The Investment Dar both defaulted on sharia-compliant bonds during the financial crisis. The companies have faced difficulties bringing creditors on side as part of their restructuring discussions.
Investment Dar reached a deal last year after months of wrangling, while questions regarding Saad Group debt remain unresolved amid complex international legal proceedings.
Abdul Kadir Hussain, chief executive of Mashreq Capital in Dubai, says Islamic restructurings are more complicated because of the need for approval from Islamic clerics who specialise in sharia-compliant financing, adding another party to the negotiating table.
“The biggest challenge is that there is just not enough restructuring history to accurately estimate what the process should be and what the recoveries may be,” he added.
Dana’s debt woes came to the fore after the company’s receivables mounted in Egypt and Iraq. The company reported strong earnings in the first quarter; net income more than doubled to Dh206m ($56m) from the same quarter last year.
“We expect Dana’s restructuring to be a hard-fought battle,” Exotix wrote in a recent research note. “However, we think this fight ultimately ends badly for sukuk-holders.”
Exotix are forecasting a recovery of 52 per cent of par under a liquidation scenario, while a restructuring could involve a full principal extension for no less than five years. It reiterated its sell recommendation on the note.