Reuters logo
Fitch: Dana Gas Case Highlights Sukuk Legal Uncertainties
June 22, 2017 / 2:25 PM / 3 months ago

Fitch: Dana Gas Case Highlights Sukuk Legal Uncertainties

(The following statement was released by the rating agency) DUBAI/LONDON, June 22 (Fitch) Any potential credit rating implications for sukuk arising from Dana Gas's attempt to have its mudaraba sukuk declared unlawful will take time to emerge, and their scope and impact are likely to remain unclear until all relevant proceedings are resolved, if they ever are, Fitch Ratings says. We believe our current assumption that sharia compliance typically does not have credit implications for Fitch-rated sukuk remains appropriate. Resolving the relevant issues could be a complex and drawn-out process with uncertain implications and the potential for a market or regulatory response. Fitch does not rate Dana Gas or its sukuk. Dana Gas publicly stated on 13 June 2017 that it had "received legal advice that the sukuk in its present form is not sharia compliant and is therefore unlawful under UAE law" and that it had started court proceedings in the UAE to have the sukuk declared unlawful and unenforceable. It has proposed restructuring the sukuk "to ensure that it conforms to the relevant laws" and also to take into account "the Company's need to focus on short to medium term cash preservation". Sukuk distributions due on 31 July and 31 October "cannot be paid now that the existing sukuk is deemed unlawful but will be accounted for" as part of the restructured instrument, Dana Gas said. Sukuk regulations have been introduced and updated in several countries in recent years, but standardisation, harmonisation and legal precedents are limited in most jurisdictions. This case could set an important precedent for the relationship between sharia compliance and credit risk, and give greater clarity on enforceability and how court interpretations of commercial law might be influenced by sharia. However, this will depend on numerous factors. Debt restructurings in the UAE have generally been informal, out-of-court arrangements, partly due to creditor perceptions that local courts have a limited track record (Dana Gas has said that it is seeking a consensual restructuring). It is not clear whether or when the case might result in a conclusive binding legal judgement, and if this would have implications for all sukuk issues in multiple jurisdictions or only for mudaraba sukuk in a limited number of jurisdictions. An initial hearing is not due until 25 December, according to Dana Gas, and proceedings may be lengthy and multi-jurisdictional (the company said on Sunday, 18 June that it had been granted an injunction by the English High Court of Justice "against any hostile action" by sukuk holders, following injunctions in the British Virgin Islands and the UAE). Our sukuk ratings are based on our assessment of credit risk and do not imply any confirmation that the sukuk are sharia compliant. This is usually the responsibility of the sharia board of the lead manager/originator and to date questions of sharia compliance have not had credit implications for Fitch-rated sukuk. But while there is broad consensus among sharia scholars and market participants on the key tenets of sharia, there are differences of interpretation that Fitch would not be in a position to anticipate or assess. For this reason, if non-compliance had credit implications and such implications cannot be quantified under our criteria for rating sukuk, instruments may not be rateable. Our criteria state that our analysis and ratings "will reflect Fitch's view that the default of senior unsecured obligations would reflect default of the entity in accordance with Fitch's rating definitions". Sukuk are unrateable when contractual commitments do not fully cover timely full payment of principal and periodical distribution unless other mechanisms indemnify the sukuk holders in the case of non-payment. Fitch will continue to monitor the evolution of sukuk structures and legal developments. Where this leads us to modify our rating approach, we will communicate the reasons and the consequences to market participants. Contact: Bashar Al Natoor Global Head of Islamic Finance +971 4 424 1242 Fitch Ratings Ltd Al Thuraya Tower 1 Office 1805 Dubai Media City Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria Criteria for Rating Sukuk (pub. 16 Aug 2016) here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below