(Bloomberg) -- The head of the sukuk industry's biggest underwriter says a bid by a Middle Eastern energy company to nullify $700 million of its own bonds is bound for failure.
What's more, Dana Gas PJSC's case will leave the $2 trillion global Islamic finance industry relatively unscathed.
That's the view of Mohamed Rafe Mohamed Haneef, the chief executive officer of CIMB Islamic Bank Bhd., which has underwritten more sukuk deals this year than any other company worldwide, according to data compiled by Bloomberg.
Dana Gas said last month it no longer considered its two securities due in October as compliant with Islamic principles under U.A.E. law. The claim exploits one of the weaknesses of the Shariah financing industry in the Arab world, where unlike Malaysia, most countries have no centralized Shariah boards to approve deal structures. The company has proposed restructuring the notes due in October on terms that are less advantageous to investors and plans to explain the legal action on a conference call with investors on July 6.
Given that the sukuk agreement is subject to laws in both the United Arab Emirates and the U.K., and judging by the fate of similar claims made by other companies, Dana Gas's case will probably be dismissed, he said. “What the issuer failed to realize is that under English law the U.K. court has consistently stated they will only look into the intention of the parties as set out in the legal documents.”
Dana Gas on Wednesday won an extension of a London court order blocking investors from taking action over the disputed Islamic bonds until after a trial scheduled for as soon as October.
Read More: Dana Gas Bid to Void Debt Stuns Analysts Who Question Motive
Here are highlights from Bloomberg's interview with Rafe:
Why do you think Dana Gas's legal move will fail?
- “In the 2002 case of Symphony Gems, “a similar argument was brought forward in a murabahah context saying the goods were not delivered and therefore they, as a customer, didn't have to pay. They had been paying the installments for a few months, but when they had a liquidity crunch, they invoked the illegality argument. The court rejected the argument and said it would only interpret what was agreed to in the legal document. And in the legal document, the customer had agreed to pay whether the goods were delivered or not.”
- “Similar arguments were advanced and rejected in the Beximco case. The English and U.S. courts reached similar conclusions -- that the parties are bound by the terms of the contract regardless of any subsequent Shariah interpretation issues raised by the defaulting party. That also applied to Blom Bank SAL (in the U.K.) and East Cameron (in the U.S.).”
How does the sukuk structure work?
- “The parties have intended that if there is any shortfall in the expected profit, the sukukholders can demand Dana Gas acquire their investment at the initial amount plus all profit shortfalls. This was in line with the Shariah interpretations in the U.A.E. at that time. And to the best of my knowledge, there has not been any U.A.E. legislation that has changed that interpretation since then.”
- “Some other countries or bodies may have had different interpretations on mudarabah, but that's not relevant here. It's not uncommon for countries to have different interpretations on Islamic contracts, but that doesn't impact a contract that has been validly executed.”
What will happen next?
- “Usually, in the event of a default or potential default, the issuer will go for restructuring but rarely do they invoke illegality. Here we're seeing an issuer facing a liquidity crunch trying to wriggle out using illegality or un-enforceability, which is a bit disheartening.”
- “This case will likely be thrown out by the courts. I'm quite confident this case will be decided in favor of the sukuk holders.”
- “This case is important because it will put to rest all the concerns about sukuk's legal robustness and enforceability. The Dana Gas issue will be a precedent for future defaults in sukuk.”
To contact the reporter on this story: Liau Y-Sing in Kuala Lumpur at yliau@bloomberg.net.
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Dana El Baltaji, Tomoko Yamazaki
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