DANA GAS SUKUK
CONTENT
1.0
Abstract
03
2.0
Introduction
03
3.0
Dana Gas Sukuk Structure
0
4.0
Term and conditions of the Sukuk
07
4.1
Two type of certificates
4.2
Redemption
4.3
Shared security
5.0
Intention of the parties to the Sukuk
08
6.0
Is principal and profit guaranteed.
09
7.0
Form over substance
10
8.0
Why the issuer decided to declare its shariah compliance
sukuk unlawful and unenforceable
10
9.0
Conclusion
11
10.0
Bibliography
13
2
1.0
Abstract
The demand for sukuk in the Islamic Financial market has resulted in it expanding
rapidly. There are various types of sukuk offered but with different structures where
according to the Accounting and Auditing Organization for Islamic Financial Institution
(AAOIFI) there are 14 types of sukuk structures offered. Whether for the purpose of
obtaining funds, for project development and so on. However, there are issues regarding the
implementation of sukuk whether it can provide protection to investors or it can be utilized.
Thus, this paper is used to examine the issues regarding the offering of sukuk using the
mudarabah concept and understanding the possible barriers
2.0
Introduction
Sukuk is the Arabic name for financial certificates, also known as sharia compliant
bonds. Sukuk were develop as an alternative to conventional bonds which are not considered
permissible in islam as they pay interest and may finance businesses involved in non-sharia
compliant activities.
The Islamic Financial Services Board defines sukuk as below:
“certificate with each sakk representing a proportional undivided ownership right in tangible
assets, or a pool of predominantly tangible assets, or a business venture. These assets may be
in a specific project or investment activity is accordance with sharia rules and principles1”
Sukuk is one of the Islamic financial instruments which give the opportunity for
investor to invest their money in which sukuk securities are structured to comply sharia
principles. Sukuk contract can be structured in a several different form from each other based
1.
al-Amine, Muhammad al-Bashir Muhammad (2009). Global Sukuk and Islamic Securitization Market: Financial
Engineering and Product Innovation. (Pg 57)
3
on the project the sukuk is financing either by using Mudarabah Murabahah, Musharakah,
Ijara, Istisna, etc. Sukuk constitute partial ownership in a debt, asset, project, business or
investment. With the increasing demand is Islamic financial instrument, in 2013 Dana Gas
Sukuk being offered to the market with a total offering of USD850 million.
The issuance of Dana Gas Sukuk is believe to enable Dana Gas to expand their gas
exploration business mainly in Egypt, Kurdistan Region in Iraq and in UAE with the issuance
of these Sukuk is based on Mudarabah underlying structure. The issuance of this sukuk with
the maturity on 31 October 2017 (3.5years) are expected to give investor a projected 7% and
9% profit.
Dana Gas business can be classified into 3 business segment as below (Dana Gas
Prospectus 2013):
i.
Upstream business segment: Involve primarily in gas exploration and production
which contribute significantly to Dana Gas total revenue. (In Egypt through Dana
Gas Egypt, In Kurdistan Region through Iraq Dana Gas and Pearl Petroleum
Company Limited and in UAE Dana Gas Sharjah Offshore Ltd. and Dana Gas
Explorations FZE.
ii.
Midstream business segment: Involve in the transportation and processing of
natural gas and gas liquids, including liquefied natural gas (“LNG”), liquefied
petroleum gas (“LPG”) and condensates.
iii.
Downstream segment: Ivolves the sale of gas and liquids to end-user industries,
including the petrochemicals business, and captures Dana Gas’s ownership of
natural gas and petroleum resources by-products, which includes its gas resource
ownership and merchant operations in Dubai, Sharjah and the Northern Emirates.
However, issues pertaining Dana Gas Sukuk arise when in June 2017, it applied to a
court in Sharjah, UAE to declare that its debt is unlawful and unenforceable due to non
4
syariah compliance issues thus they later offering to restructuring the USD700 million sukuk
payment due in October 2017. This announcement being seen in the market as a way for the
Dana Gas to deferred their payment due to investor since Dana Gas also have records in 2012
in defaulted on their payment due to investor for their USD 1 billion Exchangeable Trust
Certificates (Dana Gas Prospectus pg 31). It is interesting to note that this USD850 million
sukuk actually originated from their Original Mudarabah Agreement in 2007 in which has
been converted into this new sukuk. (Dana Gas Sukuk Prospectus pg 5)
3.0
Dana Gas Sukuk structure
Dana Gas Sukuk issuance is using a Mudarabah contract structure. Mudarabah
contract is a form of partnership where one party provides the funds while the other party
provides expertise. In Mudarabah contract it involve two (2) parties which is Rab-ul-Maal or
the people who bring in the money and Mudarib the people who are responsible in managing
and work for the project/purpose. It is should be note that in mudarabah contract, profit
sharing ratio should be agreed at the beginning of the contract. In the issuance of Dana Gas
Sukuk, the profit sharing ratio has been clearly stated in the Dana Gas Sukuk portfolio which
is 99% to the Rab-ul-Maal and 1% to the Mudarib.
In mudarabah sukuk structure, establishment of Special Purpose Vehicle (SPV) to
manage and as trustee to the sukuk is needed. In this scenario, Dana Gas Sukuk Limited was
establish in Jersey to manage and as trustee the sukuk issuance.
The structure of this offering can be shown in table 1 below (Dana Gas Sukuk
Prospectus pg 5):
5
Table 1: Dana Gas Sukuk Structure.
Notes:
(1) The relevant Exercise Price shall be equal to the amount required to redeem the Certificates on the relevant Redemption
Date. In the event of a voluntary early redemption by an Exchangeable Certificate holder, the relevant Exercise Price
shall be payable, subject to obtaining the applicable consents and approvals, by Physical Settlement (as defined herein)
or, at the option of the Trustee, by Cash Settlement (as defined herein).
(2) The Shared Security is granted over certain assets owned by Dana Gas, see “Summary of the Transaction Documents –
Shared Security”. The Shared Security secures the obligations of the Obligor under the Purchase Undertaking.
(3) References to the payment of “Proceeds” in the above diagram refer to the payment of the proceeds of the issue of the
Existing Certificates (as defined below) in October 2007 in connection with their original issue. No further proceeds will
be payable in connection with the issue of the Certificates. See “Dana Gas – Business Description – Restructuring of the
Existing Certificates” for further details of the restructuring of the Existing Certificates.
Overview of structure:
1. The SPV issues sukuk, which represent and undivided ownership interest in an
underlying asset. They also represent a right on payment of the expected periodic
return.
2. Certificate holder (Rab-ul-Maal) will subscribe for the sukuk and pay the
proceeds. The SPV declares a trust over the proceeds and thereby act as trustee on
behalf of the investors.
3. Mudarib agrees to contribute it expertise and management skill with responsibility
for managing the cash in accordance the specific parameters.
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On maturity of the sukuk al mudarabah, the mudarabah enterprise will be
dissolved in accordance with the term of the mudarabah agreement and the trustee will
exercise a purchase undertaking to call on Originator or Mudarib to buy the mudarabah
interest from trustee at market value so that proceeds can be used to service the outstanding
amount due to investor or Rab-ul-Maal.
4.0
Term and conditions of the sukuk.
4.1 Two type of certificates
The offering of Dana Gas Sukuk of USD850 million can be divided into two (2)
which is USD425 million in the form of Exchangeable Certificates at a rate of 7.00% per
annum and another USD425 in the form of Ordinary Certificates at a rate of 9.00% per
annum.
4.2 Redemption
Redemption of Exchangeable Certificate and Ordinary Certificates can be made either
in cash. However, for Exchangeable certificates, investors may choose to convert to Dana
Gas Shares. Each certificates carries a scheduled redemption date on 31 October 2017 or 3.5
years from the closing date of issuance. The Certificates shall be redeemed in full by the
Trustee on the Scheduled Redemption Date in cash for an amount equal to the Standard
Redemption Amount as at such date. The Trust shall be dissolved only following such
payment in full in respect of both the Exchangeable Certificates and the Ordinary
Certificates.
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4.3 Shared security
To ensure Dana Gas obligation under this agreement. These asset based security has
been pledge towards the purchase agreement entered by Dana Gas towards its Trustees and
their investor. Details as below: (Dana Gas Prospectus pg 25):
(a) a first ranking pledge in respect of 100 per cent. of the registered shares in Dana
LNG Ventures Ltd. (the “Security Agreement”);
(b) a first ranking pledge in respect of the share capital of Sajaa Gas Private
Limited Company held by Dana Gas (the “SajGas Share Pledge”);
(c) a first ranking pledge in respect of the share capital of United Gas
Transmissions Company Limited held by Dana Gas (the “UGTC Share
Pledge” and, together with the SajGas Share Pledge, the “UAE Share
Pledges”);
(d) a first ranking mortgage over a plot of land in Sharjah adjacent to the Sajaa Gas
facilities owned by Sajaa Gas Private Limited Company (the “UAE
Mortgage”);
(e) a first ranking pledge in respect of 66 per cent. of the share capital of Danagaz
W.L.L. (the “Bahrain Share
5.0
Intention of the parties to the sukuk
The offering of this sukuk in 2013 by Dana Gas is to enable it to undertake a
restructuring process of the original sukuk fund of USD 1 billion which being offered in
2007. The latest Dana Gas Sukuk of USD 850 million is to enable the company to restructure
its debt. It also allows Dana Gas to use these funds for investment purposes in the MENA
region as their intention is to be the largest private- independent gas producer in the Middle
East and North Africa with main business is in Egypt, the Kurdistan Region of Iraq and the
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UAE. They face problems in getting receivables or cash due in their joint venture projects
such as the Egypt and Kurdistan Region. As for the investor, their main intention is to have
their return as being offered by Dana Gas Sukuk at 7% (Exchangeable Certificate) and 9%
(Ordinary Certificate). The New Sukuk will expected to enhanced by USD 300 million of
value comprising security over receivables of the Company’s Egyptian assets, and certain
Egyptian assets and UAE assets. Investor who holds Exchangeable Certificates also have the
opportunity to obtain Dana Gas Shares by exercising the conversion of the sukuk.
6.0
Is principal and profit guaranteed.
Dana Gas Sukuk is offering a return of 7% per annum (Ordinary Certificate) and 9%
per annum (Exchangeable Certificate) (Dana Gas Prospectus pg F144) which is a guaranteed
return regardless of the company performance. As in Mudarabah concept, the Rab-ul-Maal
or investor is not liable for losses beyond the capital he has contributed and the mudarib does
not share in the losses except in terms of the loss of his time and effort. In the prospectus, it
has been mention under Limited Recourse (Dana Gas Sukuk Prospectus pg 27) as below
which means that all principal is not guaranteed:
“ If, following distribution of the net proceeds of the realisation of, or enforcement
with respect to, the Trust Assets, there remains a shortfall in payments and/or
deliveries due under the Certificates, no Certificateholder will be able to petition for,
or join any other person in instituting proceedings for, the re-organisation, liquidation,
winding up or receivership of any of the Trustee, the Obligor and the Mudarib (to the
extent that each fulfils all of its obligations under the relevant Transaction Documents
to which it is a party), or any of the Trustee, the Trust, the Delegate, the Agents or any
of their affiliates as a consequence of such shortfall or otherwise. See Condition 3.2
(Limited Recourse)”
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7.0
Form over Substance
Sukuk is structured in a way to generate returns to investor. They are issued and
traded in compliance with the principles of shariah. A sukuk holder is entitled to all rights,
which have been determined by shariah upon his ownership of the Mudarabah sukuk in
matters of sale, gift, mortgage, succession and the like. On the expiry of the specified time
period of the subscription, the sukuk holders are given the right to transfer the ownership by
sale or trade in the securities market at his discretion.
The major issues with Dana Gas Sukuk include that it guarantees a fixed rate of return
to certificate holders, it makes the Company responsible for any loss of capital, and it does
not contain a mechanism to reconcile the fixed amounts paid to the certificate holders over
time against the actual profit generated by the Mudarabah Assets, and finally any capital loss
is not reflected in a reduction in value of the Mudarabah Assets.2
8.0
Why the issuer decided to declare its shariah compliant sukuk unlawful and
unenforceable
The surprise announcement by Dana Gas on 13 June 2017 and that the company itself
apply in Sharjah Court, UAE to declare it’s debt as “unlawful and unenforceable” that it’s
sukuk is not shariah compliant seen by many as a means of delaying payments to investors.
Abdul Kadir Hussain, head of Fixed Income asset management at Arqaam Capital Ltd during
an interview with Bloomberg has mention that the main issues on this is mostly on the
company liquidity and a payment issues. However, this claim was refuted by the company on
06 July 2017 3.
2
3
The Sukuk Handbook: A Guide to Structuring Sukuk - Latham & Watkins pg 7
Company Statement to Sukuk Bond Holder 06 July 2017
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However, to investor, if the current sukuk mudarabah is non syariah compliance, the
issues is why the company take it to long to rectify it and why the announcement of these non
syariah issues being announce near the maturity date of the sukuk.
The other reasons for the company is due to the company shareholders feared if the
exercise being done, it will diluted their stake in the company since half of the USD700
sukuk payment due is structured as Exchangeable Certificates which will swap into Dana Gas
shares since the Exchangeable Certificates being hold by international institution investors
while Ordinary Certificates hold by local investor 4.
9.0
Conclusion
Since the legitimized the use of sukuk in 1988 by OIC (Organization of Islamic
Countries) sukuk market has seen an uprising. According to IslamicFinance.com, global
sukuk issuance reached USD114.7billion in 2014. This figure is expected to climb to
USD250 billion by 20205.
Issues pertaining of non syariah complaince are based on each sukuk structure and
characteristic. In this case, Dana Gas Sukuk is using Mudarabah structure, most jurist scholar
considered it as not common because their payment to investor represent debt. 6. However,
when the issues arise, the main concern is how the investor will react to the future offering of
sukuk and if this case could undermine the entire islamic finance industry.
However, based on prominent sukuk underwriter such as Shibeer Ahmad, a Partner at
Winston & Straw LLP and Mohamed Rafe Mohamed Haneef, CEO of CIMB Islamic (The
4
Financial Times, September 13,2017 by Kate Allen and Robert Smith – London.
Thomson Reuters “Sukuk Perception and Forecast”
6
Jamaldeen, Islamic Finance for Dummies, 2012 pg 220
5
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biggest sukuk underwriter) stated that this issues should not derailed the sukuk market and in
the opinion that Dana Gas attemps to nullify its own sukuk were “bound to fail”.
There is argument in also on which jurisdiction will be applied on this case, should it
be in UAE or in London since all of the sukuk documents are governed by English Law or
Should it be govern by UAE Law since it involves the UAE Share Pledge and UAE
Mortgage. Due to loophole in the sukuk structure and jurisdiction, Dana Gas seem to use this
in their favour.
In order to establish global market trust, there is a need for each player to have the
common body to undertake a structured syariah board in approving all issuance of the sukuk
especially in the Arab world. Unlike in Malaysia, most countries does not have centralised
Shariah boards to approved deal structures. The standardization on these fatwa will provide
investor with comfort that a sukuk instrument is in fact shariah complaint.7
7
. The Sukuk Handbook: A Guide to Structuring Sukuk - Latham & Watkins pg 5
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10
Bibliography
1. The Sukuk Handbook: A Guide to Structuring Sukuk - Latham & Watkins. 2015
2. Al-Amine, Muhammad al-Bashir Muhammad (2009). Global Sukuk and Islamic
Securitization Market: Financial Engineering and Product Innovation.
3. https://www.bloomberg.com/news/articles/2017-06-15/dana-gas-s-move-to-voidsukuk-stuns-analysts-who-question-motive
4. http://www.danagas.com/en-us/Investors/Tab 006 OFFERING CIRCULAR.pdf
5. Remali Yusoff et al (2016) The Contract of Sukuk al-Musharakah dan Sukuk alMudharabah in Islamic Commercial Law : A Comparative and Application Analysis
for Waqf. . In Fuadah & Asma (Eds.). Proceedings of The Muktamar Waqf Iqlimi III
2016 (IQLIMI2016). Presented at the Ban Nua Mosque, Songkla, Thailand, 13-14
October 2016. Published in Malaysia by : Pusat Pembangunan Pembiayaan Wakaf
(PPPW), Universiti Sains Islam Malaysia (USIM).
6. https://en.m.wikipedia.org/wiki/sukuk
7. http://www.danagas.com/en-s/Investors/CompanyStatementToSukukBondholders.pdf
8. https://www.islamicfinance.com/2017/06/dana-gas-sukuk-toxic-uae-islamic-finance/
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