A dispute over the legality of $700 million of sukuk issued by a UAE-based gas company threatens to usher in a crisis in Islamic finance.
Dana Gas, which claims to have discovered the sukuk are not compliant with Islamic law, proposes to stop upcoming coupon payments and exchange the sukuk with new securities. The company has won an injunction in a UK court to stop investors from taking action against its move. It now seeks to have its petitions upheld in a court in Sharjah, where it is based.
“Although most investors regard the company’s announcement as a tactical move in its debt negotiations with lenders, a ruling in favour of Dana Gas would potentially send shock waves among Islamic finance and sukuk investors,” said Ashraf Madani, a senior analyst at ratings agency Moody’s.
According to Bloomberg, there are nearly $411 billion of outstanding sukuk, which are sometimes described as Islamic bonds because they mimic the payments of conventional bonds while complying, in theory, with Islamic law. More than a quarter (27%) are issued by entities in the Gulf Cooperation Council.
“Although Dana Gas is a small issuer in the UAE market, the credit implications of a court decision in its favour would test sukuk regulatory and legal frameworks beyond Dana Gas as an issuer or the UAE as a jurisdiction,” said Madani.
Moody’s said the case was “credit negative for Islamic finance in general” as it was likely to diminish liquidity and slow the growth of the sukuk market.
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