(Repeats May 18 story to add codes)
* Bonds trading at cash price of high 60s
* Dana hires advisers, seeks “consensual” agreement
* Full repayment on time increasingly unlikely
* Restructuring scenario may appeal
By Mala Pancholia and Rachna Uppal
DUBAI, May 17 (Reuters) - Dana Gas could become the first company in the United Arab Emirates to restructure a bond as concerns rise that it will not have enough cash to repay a $1 billion convertible sukuk, or Islamic bond, at maturity in October.
The Abu Dhabi-listed firm said this week it had hired advisers to help it weigh options for repayment of $920 million still outstanding on the out-of-the-money convertible and was committed to finding a consensual solution.
Dana’s shares have been battered by concerns over how it will find funds to repay the bond, and limited communication from the company on the matter. The stock has dropped 40 percent in the past year, to 0.39 dirhams at Wednesday’s close - just one-fifth of the bond’s conversion price of 1.926 dirhams.
The 7.5 percent sukuk was bid at 68 cents on the dollar on Wednesday, according to Thomson Reuters data, having fallen from around 75.50 at the beginning of the week.
“The credit is definitely distressed. The company’s lack of definitive repayment announcements has pushed this further drop,” said Thomas Christie, fixed income sales trader at Rasmala investment bank.
Natural gas producer Dana, which has operations in the UAE, Egypt and Iraq’s Kurdistan region, says its cashflow has been affected by global economic conditions and regional events, including Egyptian unrest last year which delayed payments.
Below are some possible scenarios the company will be weighing as it tries to thrash out an agreement with holders of the sukuk, thought to be mostly global investment funds.
Dana has hired Blackstone Group, Deutsche Bank and law firm Latham & Watkins as advisers, while investors have hired law firm Linklaters, one source told Reuters.
A repayment in full and on time is seen as highly unlikely because the company has indicated it does not have cash reserves that would enable it to meet its obligations at maturity.
In its latest financial statements, the Gulf region’s only listed natural gas company said its cash balance was 524 million UAE dirhams ($142.66 million) at March 31.
Refinancing the sukuk could also be a challenge.
European banks have already pulled back from non-core lending activities and the cost of funding is high, especially for unrated and non-government-related entities.
Despite relatively higher liquidity in the local banking sector, credit growth among most UAE banks remains weak. Tapping debt markets to refinance the sukuk would result in significant premiums, given scrutiny of the existing bond.
Extending full repayment on renegotiated terms may require Dana to provide a significant “sweetener” in addition to the current 7.5 percent coupon. It could finance that by selling assets but will be wary of doing so under pressure.
”Trying to sell assets in such a situation can be a painful experience,“ said Chavan Bhogaita, head of markets strategy unit at National Bank of Abu Dhabi. ”If the world knows that the company is facing severe financial distress, fire-sale type pricing can be expected for any major assets.
“It may be better to buy some time to allow the company to undertake any divestments over a longer timeframe, at more reasonable prices.”
Dana Gas has a 3 percent stake in Hungarian group MOL which was worth about $214 million at Wednesday’s closing prices.
Several syndicated loans which UAE borrowers have been unable to repay on time have simply been rolled over, or, as in the high-profile case of state-owned conglomerate Dubai World , restructured.
There is little or no precedent for such alterations to bonds in the UAE, but assuming Dana does not find way at the last minute to repay the sukuk, analysts increasingly view some sort of restructuring as the most likely solution.
HSBC said in a recent research note that a restructuring would be in the interest of all parties, as a default could result in low recovery, with debtholders able to claim only Egyptian assets and the non-operational Iran-UAE gas project.
One option is a part repayment up front and an extension of the remainder at renegotiated terms.
“One of the potential restructuring options proposed could be that Dana pays 20-30 percent of the sukuk balance to lenders at maturity, and seeks an extension of about five years on the outstanding sukuk portion, wherein it continues to service a renegotiated coupon,” said Ghassan Chehayeb, director for MENA credit research at Exotix Limited.
Under a negotiated restructuring, another option on the table could be a debt-to-equity swap, but Dana would need to provide significant clarity on future cashflows and a credible long-term business plan.
Regionally, such deals are rare and can be complex. The relatively small, retail-focused equity markets provide little incentive for creditors to switch to a more risky asset class.
Last year, a 1 billion dinar ($3.58 billion) deal to restructure the Islamic debt of Kuwait’s Investment Dar , owner of half of luxury carmaker Aston Martin, included giving creditors a 10-percent stake in the firm. [ID : nLDE75E0SZ]
Various other options are also likely to be tabled by restructuring negotiators on both sides, and one key element all stakeholders will be aware of is the sharia-compliance of any eventual proposals.
“Restructuring a sukuk is absolutely more complex than a conventional bond restructuring. In a conventional financing, such as a bond, all that is needed is for a borrower to ask for more time in exchange for the lender getting more money,” said Sheikh Muddassir Siddiqui, Islamic scholar and lawyer.
“In Islamic finance contracts, the main thing you have to watch is that the obligation to bear doesn’t become a debt.”
A default scenario would be the least desirable outcome for both the company and sukukholders.
Exotix estimates a recovery rate on the sukuk of 52 cents to the dollar in the best case scenario, while securing recourse to company assets backing the sukuk won’t be easy.
Bankruptcy legislation is in its infancy in the UAE and courts remain untested in such circumstances.
From a reputational perspective, the first high profile default on a sukuk from the UAE could also be damaging for the country, the company, and the corporate sukuk space.
Flanked by hard-hitting advisers on both sides, and sophisticated distressed credit investors willing to fight tooth and nail for an acceptable resolution, Dana should submit the “consensual” agreement plan it desires soon.
“Bottom line - does the company have access to any significant amount of cash with which to overcome its current predicament?” NBAD’s Bhogaita said. “If not, its options are clearly somewhat limited.” (Additional reporting by Shaheen Pasha at The Brief; Editing by Catherine Evans)