Booming Gulf sukuk market brushes off Dana Gas debacle

When a natural gas producing company in the United Arab Emirates missed repaying a $920 million Islamic bond last week, it became the first UAE company to fail to redeem a bond on time. But the region's debt market barely blinked.

Yields on some firms' outstanding Islamic bonds, known as sukuk, dropped to fresh record lows as investors continued pouring money into them. Other companies laid plans for new issues of sukuk.

The incident underlined the extent to which the Gulf's Islamic debt market, which is playing an increasingly important role in funding companies, has strengthened in the past year. Not long ago, a billion-dollar payment miss would have triggered a crisis of confidence in the market; now, it is almost ignored.

The market has matured enough to appreciate that this is not a sukuk or Islamic finance issue but rather a credit issue, said Rizwan Kanji, debt capital markets partner at law firm King & Spalding in Dubai.

After the potential defaults a few years ago, the market's reaction initially was that sukuk didn't work and as a result the market reacted negatively. Fast forward three years and we're in a similar scenario but the market has reacted differently. You're not seeing the headlines screaming that Islamic finance doesn't work.

Privately owned Dana Gas, headquartered in the emirate of Sharjah, failed last Wednesday to repay its five-year sukuk on maturity. The firm has been hit by delays in recovering revenues from operations in Egypt and Iraq's Kurdistan.

Immediately after the payment miss, prices of Dana's sukuk and shares plunged because of fears that its bond holders, who include big foreign investment firms such as BlackRock and Ashmore Group, might declare it in default, letting them take legal action to liquidate assets backing the sukuk.

On Wednesday this week, Dana said it had reached an in principle agreement with creditors to restructure the sukuk; it would pay back part of the bond and issue two new sukuk to finance the remaining amount. Details of the possible deal were not revealed.

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