* Dana Gas' $920 mln convertible Islamic bond matures Oct. 31
* Non-payment on maturity will be first ever for a UAE bond
* Dana reached standstill agreement in Oct - source
* Shares drop 8.5 pct before recovering, bond price slides (Adds share, bond price, details on bond holders, background)
By Dinesh Nair and Amran Abocar
DUBAI, Oct 30 Dana Gas is set to become the first United Arab Emirates (UAE) company to fail to pay an Islamic bond on maturity, three sources familiar with the matter said on Tuesday, sending its stock and bond prices sharply lower.
The UAE's largest listed natural gas firm, hit by payment delays from Egypt and Iraq's Kurdistan region, will not repay a $920 million convertible Islamic bond, or sukuk, when it matures on Wednesday, the sources said.
However, Sharjah-based Dana has won more time to hammer out a deal with bondholders, they added.
Dana Gas declined to comment.
Although indebted firms in the Gulf Arab state have extended maturities on billions of dollars in bank loans since the onset of the financial crisis in 2008-09, no sukuk have been restructured or unpaid on maturity.
Saudi and Kuwaiti companies have defaulted on Islamic bonds in the past, leading to complex debt negotiations which have dragged on for years. Kuwait's Investment Dar, which co-owns luxury carmaker Aston Martin, defaulted on a $100 million Islamic debt issue in 2009.
Dana has a $1 billion sukuk maturing on Oct. 31. It repurchased about $80 million of the sukuk in 2008, leaving $920 million outstanding.
The five-year sukuk, which was issued with a 7.5 percent coupon, has gained international interest as a majority of the debt is said to be owned by large investment firms including BlackRock Inc and Ashmore Group.
A source said that London-based Spinnaker Capital was among large holders. An executive at Spinnaker in London said it does not own Dana Gas bonds currently and has not held them before. BlackRock owns about 30 percent of the outstanding sukuk, according to two separate market sources.
There is "absolutely no chance" of a white knight swooping in to repay the bond by the due date, a source close to the talks said.
In 2009, the Abu Dhabi government stepped in at the eleventh hour to help Dubai repay developer Nakheel's $4.1 billion Islamic bond.
The sources said Dana, in which Crescent Petroleum owns a 20-percent stake, reached a standstill a greement with creditors in early October giving it six months to repay the bond.
Some creditors are preparing for a potential "post-default scenario", one source familiar with the discussions said, in which no deal would be reached at all.
STOCKS AND BONDS SINK
Shares in Dana fell 8.5 percent to 0.43 dirhams on the Abu Dhabi bourse after the Reuters report before closing down 4.26 percent.
The shares have been battered by concerns over how Dana will find funds to repay the bond and limited communication from the company on the matter. The sukuk has a conversion price of 1.926 dirhams.
The sukuk, which is lightly traded, was quoted at a bid price of 68 cents on the dollar on Tuesday, down from 78 cents on the dollar on Monday, according to prices quoted by Nomura.
Dana is to issue a statement on Wednesday or early Thursday detailing its plans to restructure the bond, said two sources, who spoke on condition of anonymity as the matter is not public.
There was a "high probability" the Dana sukuk will be restructured, London-based investment firm Exotix said in a report earlier this year, adding its restructuring valuation on the privately-owned firm was 61.5 percent of par value.
Dana, which also has a 3-percent stake in Hungarian group MOL, is not seen as a strategic entity for the UAE and so any government support is unlikely.
In May, Dana said it wanted to find a consensual deal with sukukholders to repay the bond, and said it had hired Blackstone Group, Deutsche Bank and law firm Latham & Watkins as advisers.
Investors have hired Moelis and law firm Linklaters as advisers.
Dana, which has operations in the UAE, Egypt and Iraq's Kurdistan region, says its cash flow has been affected by global economic conditions and regional events, including Egyptian unrest last year which delayed payments.
The company had a cash balance of 601 million dirhams ($164 million) as of June 30, 2012. Outstanding receivables on Egypt gas deliveries stood at 729 million dirhams and 1.2 billion dirhams in the Kurdistan region at that time.
In a recent interview, Dana board member and Crescent Chief Executive Majid Jafar said Egypt was paying the company for all fuel it was receiving from its operations and was optimistic outstanding payments would be settled.
Jafar said last week talks between the company and creditors were still ongoing, and have been "amicable and friendly." (Additional reporting by Mirna Sleiman, Rachna Uppal, David French and Daniel Fineren; Editing by Andrew Torchia and Mark Potter and David Cowell)