Dana Gas, a UAE-based oil and gas exploration firm, has set the terms for the restructuring of $700m Islamic bonds maturing in October this year, slashing the profit rates by more than 50 per cent as sharia compliance of the papers become questionable.

The firm, which had initiated the restructuring in May this year is proposing to exchange $350m ordinary certificates offering 9 per cent profit rate and $350m exchangeable certificates with 7 per cent coupon with a new four-year security, it said in a bourse filing to Abu Dhabi Securities Exchange, where its shares are trading.

Dana Gas has received legal advice that the Islamic bonds in their current form were not sharia-compliant due to the evolution of Islamic financial instruments and their interpretations, and were unlawful under the UAE law.

“The company therefore proposes to exchange the Sukuk with a new enforceable, sharia-compliant instrument, which would have a tenor of four years, confer rights to profit distributions at less than half of the current profit rates and without a conversion feature. Such new profit payments will comprise a cash and payment-in-kind element,” it said in the statement.

The new instrument would represent a fundamental improvement to the current situation for holders as it would be enforceable and would provide repayment to holders over time. The next two distributions of profit scheduled for 31 July and 31 October this year, however will cannot be paid now as the existing Sukuk is “deemed unlawful but will be accounted for as part of the new Sukuk instrument”, the company explained.

The latest proposals are being presented to bondholders, who have been asked to form ad hoc committees to continue negotiations. The company in May had appointed Houlihan Lokey as financial adviser and Squire Patton Boggs as legal counsel.

Dana Gas said that the proposed exchange offer, was in the interest of all parties and it is seeking a consensual agreement with bondholders. It takes into account the firm’s need to focus on short-to-medium term cash preservation as its continues to faces challenges around its receivables from Kurdistan Regional Government (KRG) and Egypt.

“The proposed offer will allow the company time to collect on over $900m of total receivables due from the KRG and Egyptian government and also obtain awards for damages from the arbitration cases with the KRG and National Iranian Oil Company

Dana Gas and its investment partners in Iraq are seeking damages of at least $26.5bn from the self-governing KRG for unpaid invoices and delays in oil and gas projects. the company and its partners in the Iraqi ventures, called Pearl Petroleum, have already filed a petition in a US federal court seeking recognition and enforcement of awards made in litigation in the London Court of International Arbitration (LCIA) against the KRG. The filing is part of long-running legal proceedings between the two parties, which could result in the seizure of KRG and oil and gas assets. 

Dana Gas and Crescent Petroleum, another UAE-based oil and gas exploration firm, owns a 70 per cent stake in Pearl Petroleum while Austria’s OMV, Hungarian energy group MOL, and Germany’s RWE each have a 10 per cent shareholding in the company, according to its website.

The dispute centres on the Khor Mor and Chemchemal gas fields in southeast Kurdistan, which Dana Gas and Crescent Petroleum have been developing since 2007. The creation of Pearl Petroleum as an investment vehicle with international partners in 2009 resulted in a rift with the KRG and subsequent delays to projects and payments to Pearl Petroleum.