Sukuk documents seek to reassure investors after Dana Gas scare

Updated 06 December 2017
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Sukuk documents seek to reassure investors after Dana Gas scare

SYDNEY: Issuers of Islamic bonds are changing the language in documentation for new issues to reassure investors after a UAE company refused to redeem $700 million of maturing sukuk.
In June, Dana Gas said it would not repay sukuk maturing in October because changes in the interpretation of Islamic finance during recent years had made the bonds “unlawful” in the UAE.
Dana argues that its case, which involves a specific sukuk structure known as mudaraba, has no implication for the broad sukuk market. But its announcement worried many investors because of the risk that other Islamic bond issuers could use the same kind of argument to justify not paying debt.
As a result, some issuers are now amending their documentation to preclude the use of an argument involving Shariah compliance to justify any refusal to redeem sukuk.
For instance, the Saudi Arabia-based Islamic Corporation for the Development of the Private Sector (ICD) has included new clauses in its latest sukuk prospectus that explicitly waive any right to challenge the Shariah compliance of the deal.
The company “shall not take any steps or bring any proceedings in any forum to challenge the Shariah compliance of the Programme Documents and the Transaction Documents,” reads the prospectus for the ICD’s sukuk program, dated Nov. 20.
Similar language appeared in some sukuk from Indonesian firms predating the Dana case, but the ICD, a multilateral institution based in Jeddah, may influence the industry because of its role in advising countries in Africa and central Asia on introducing Islamic finance.
Imam Qazi, partner and Islamic finance lead at law firm Foot Anstey in Britain, said sukuk issuers were aware that the Dana case could have implications for a wider range of transactions beyond mudaraba sukuk.
“Financial institutions will be striving for clarity in their documents and from their Shariah scholars and legal advisers,” he said.
Clauses seeking to reduce Shariah compliance risk in sukuk documentation have become normal in the global industry over recent months, said Mohamed Damak, global head of Islamic finance at credit rating agency Standard & Poor’s.
But he added that the complexity of sukuk made it difficult to remove the risk entirely. “For the market to reach immunity to this type of risk, standardization is needed across the industry.”
So far, the Dana case does not seem to have reduced investor demand for sukuk or affected prices in the secondary market.
But the industry is also worried by the way in which the Dana case has underlined the possibility of contradictory rulings by courts in different countries, said Mohammed Khnifer, a debt capital markets senior associate at the Islamic Development Bank Group in Riyadh.
Last month, Dana’s creditors won a victory when a London High Court ruled that the company’s challenges to the purchase undertaking behind the sukuk were unfounded and that the agreement was valid and enforceable.
But the dispute is far from over because in addition to appealing the London ruling, Dana is fighting its case in a UAE court; UAE law governs the mudaraba agreement. A UAE hearing is scheduled for Dec. 25.
In the wake of the Dana case, “sukuk holders and issuers will be now more inclined to rely heavily on English law and avoid local laws as much as possible with dollar-denominated issuance,” said Khnifer.
Regulators in Bahrain and Malaysia, two major centers for Islamic finance, are working on Islamic corporate governance standards that address the potential for conflicting Shariah rulings and require more stringent monitoring of Shariah non-compliance risks.
However, these standards apply to Islamic banks and insurance companies, not non-financial firms such as Dana.


UAE property developers’ earnings give Gulf markets a boost

Updated 17 February 2019
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UAE property developers’ earnings give Gulf markets a boost

  • Real estate sector gets confidence boost
  • DAMAC gains despite 87 pct drop in Q4 net profits

DUBAI: Most stock markets in the Middle East closed higher on Sunday, reflecting a rally in global stock markets on Friday, and were also boosted by better-than-expected company results, particularly in real estate.

The Abu Dhabi index gained 0.7 percent and the Dubai index 0.6 percent, as two of the largest property developers in the United Arab Emirates posted positive fourth-quarter financial results last week that beat market expectations.

“The market is starting to rebuild confidence in earnings as a driver for sentiment,” said Arqaam Capital in a research note. “Sentiment on the UAE was very weak in 2018, specifically for real estate, on concerns over oversupply risk, pricing pressure that is leading to extended payment plans, and a rental yield compression that is continuing to fall,” Arqaam said.

“But Q4 numbers provided evidence that a few developers have emerged as winners (Emaar Co’s, Aldar) out of market consolidation.” Emaar Properties, Dubai’s largest listed developer, reported a 27 percent rise in fourth-quarter profit.

The stock rose 2 percent on Sunday. DAMAC Properties closed up 0.8 percent, despite having reported a nearly 60 percent fall in full-year profit and an 87 percent drop in fourth-quarter net profits.

In Abu Dhabi, Aldar Properties gained 3.6 percent. Last week, the developer reported a rise in fourth-quarter earnings and higher dividends for 2018. In other sectors, Abu Dhabi Islamic Bank rose 0.5 percent after saying it had no merger and acquisition plans. This was in response to a Bloomberg report last week which said the bank was considering such options.

The Saudi index closed 0.4 percent down, in contrast to the rest of the region’s markets. Arab National Bank reported an increase in full- year net profit to 3.13 billion riyals ($834.62 million) from 3.03 billion riyals one year earlier.

The stock remained unchanged and this failed to give support to the banking sector. Alinma Bank < 1150.SE> and Al Rajhi Banking & Investment Corp. lost 0.3 percent and 0.6 percent, respectively.

In Egypt, where the main index gained 1.4 percent, Orascom Investment Holding, up 3.2 percent, was among the stocks attracting the highest trading volume. Shares in the company jumped last week after its chairman, Egyptian billionaire businessman Naguib Sawiris, said he saw possible investment opportunities in North Korea if a summit between its leader Kim Jong Un and US President Donald Trump later this month was successful.

SAUDI The index lost 0.4 pct to 8,592 points ARABIA DUBAI The index rose 0.6 pct to 2,550 points ABU DHABI The index rose 0.7 pct to 5,070 points QATAR The index gained 0.7 pct to 10,011 points EGYPT The index rose 1.4 pct to 15,199 points KUWAIT The index gainedd 0.1 pct to 5,427 points OMAN The index was down 0.8 pct at 4,077 points BAHRAIN

The index went up 0.6 pct to 1,381 points ($1 = 3.7502 riyals)