DUBAI: Investors in Dana Gas’s $700 million Islamic bond are likely to have to repay the company a “significant” amount as a result of legal action in the UAE, the company said on Tuesday.
In a case which has unsettled the Islamic finance industry, Dana is seeking in UAE and British courts to avoid repaying its $700 million in Islamic bonds when they mature in October, arguing that the bonds have become unlawful in the UAE because of changes to Islamic financial practice.
“The final outcome of the ongoing litigation in UAE courts would likely result in a significant liability for the sukuk holders to repay the company excess ‘on account profit payments’ based on a lawful reconciliation of the matter,” Dana said.
Dana’s statement on Tuesday, published with its quarterly earnings, did not give a specific figure for the payments which it expected to receive from sukuk holders.
The Dana case has alarmed investors and banks in the Islamic finance industry because it could set a precedent for other sukuk issuers to refuse to redeem their bonds on the grounds that they are no longer Shariah-compliant.
Dana Gas had proposed a restructuring of the $700 million in bonds in which it would exchange them for new Shariah-compliant bonds. But the new bonds would offer right to profit distributions at less than half the rate of the existing bonds and would not feature any conversion into equity.
Dana Gas’s proposal caused an outcry from bond holders.
Dana has been advised by lawyers that there could be two outcomes from court proceedings in the UAE, a source close to the company said.
Under one scenario, if the UAE court decides the whole sukuk transaction needs to be unwound, Dana Gas would repay the $700 million but also claim back the “profit payments” — equivalent to coupon payments for conventional bonds — which it made on the bonds since 2008.
These total $635 million, so creditors would recover only $65 million on a net basis, the source said.
Under the other likely outcome, the UAE court would invalidate the purchase undertaking behind the sukuk, requiring the instruments to be treated as equity.
In this case, Dana would calculate its excess payments to sukuk holders at $575 million — the total profit payments on the sukuk minus actual profits of $60 million made by Dana LNG Ventures, the asset underlying the sukuk. Dana LNG Ventures is a holding company for Dana Gas Egypt.
Dana would then subtract the value of Dana Gas Egypt, which has been valued at $425 million, to obtain a figure of $150 million which sukuk holders would be asked to repay to the company, the source said.
The bondholders, represented by Deutsche Bank, are fighting Dana’s claims. A representative for the bondholders was not immediately available for comment.
The case is scheduled to be heard at London’s High Court in late September.
Last month, the High Court ordered Dana to halt the UAE legal proceedings, but the company subsequently said obtaining the stay could take months, which would allow a UAE court hearing scheduled for December to go ahead.
The case is being fought in two countries because while the purchase undertaking for the original sukuk is governed by English law, the gas production assets behind the sukuk fall under UAE law, according to the sukuk prospectus.
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