Weeks of talks fail to resolve Dana Gas sukuk dispute, say sources

Weeks of talks between UAE energy firm Dana Gas and some local holders of a disputed $700m sukuk have failed to reach an agreement, sources told Reuters, leaving a potentially protracted legal battle as the only available option for now.

Last year, Dana refused to redeem $700m of maturing Islamic bonds, arguing they were no longer valid under UAE law because of changes in Islamic financial practice over the last several years.

The move shocked the global Islamic finance industry, as some investors worried it could set a precedent for other sukuk issuers who might refuse to repay their obligations on the grounds of religious permissibility.

Dana proposed in June last year to swap its sukuk, held by international investors such as BlackRock as well as UAE investors, with new sharia-compliant bonds, but creditors rejected the proposal, saying the terms were unfavourable.

The case moved to UAE and British courts. Legal proceedings in both countries are continuing, but in November a British court ruled in favour of Dana’s creditors.

In the past few weeks Dana’s financial adviser in the dispute, US firm Houlihan Lokey, has been in talks with some of Dana’s UAE creditors to seek a potential out-of-court solution, several sources familiar with the matter said.

The UAE creditors, represented by Dubai-based Arqaam Capital, include National Bonds Corp, an investment company specialising in sharia-compliant financial products. National Bonds is owned by Investment Corp of Dubai, an investment arm of the Dubai government.

National Bonds did not respond to a request for comment. Dana and a committee representing major international sukuk holders declined to comment.

Arun Reddy, a managing director at Houlihan Lokey, said: “Dana Gas’ financial adviser has been approached by various local and international creditors over this process. It’s clear from those discussions that creditors, including local creditors, prefer a consensual against a litigation-driven outcome.”

A legal source familiar with the matter said Dana held talks with UAE creditors because “there has always been the view that local creditors were more open than their international counterparts” to a settlement.

Moelis, the firm advising the creditors’ committee, was made aware of the discussions, the sources said.

The talks revolved around Dana’s original restructuring proposal from last June and no new, formal proposal was advanced, which is why they have not led to any meaningful result, the sources said, declining to be named because of commercial sensitivities.

“Discussions were about interest rates, amortisations, conversion rates, but Houlihan didn’t appear to have a mandate to negotiate on these sticky points conclusively,” said one of the sources.

According to two sources, since the talks were not leading anywhere, Moelis decided last week not to engage in them. A third source said, however, that local creditors were not aware of such a decision. Moelis declined to comment.

The lack of a resolution means that going through the courts – which could take many more months or even years, people familiar with the matter have said – may be the only option available, at least for the time being.

New proceedings are scheduled to take place in a British court this month to address issues such as injunctions, obtained in previous phases of the case, that prevent creditors from enforcing claims and limit Dana’s ability to pursue legal action in a court in Sharjah, where the company is headquartered.

“There are still legal mechanisms that the company can use, so the company is still acting as if they have legal ground to put themselves in a better negotiating position,” one creditor said.