Dana Gas PJSC (DANA)’s Islamic bond was the best-performing dollar sukuk in the world last month as the energy company’s rising stock price prompted investors to exchange their debt into shares at a profit.
The fuel producer’s $425 million convertible bond due October 2017 made 3.46 percent last month, compared with an average 0.41 percent return for all dollar-denominated sukuk, according to data compiled by Bloomberg. The share conversion price is 75 fils, and Dana Gas gained 4.9 percent in April to 86 fils yesterday. The company received $51 million of conversion notices this year through March 15, it said last week.
“The convertible sukuk’s outperformance recently is mainly driven by the share price, less by the company’s actual performance,” Zafar Nazim, a London-based credit analyst at JPMorgan Chase & Co., said by phone yesterday. “There’s an incentive to convert and some holders have.”
Dana Gas stock soared about 70 percent in the past 12 months, helping prompt investors to buy bonds to exchange for equities, as the company boosted cash flow from Egypt and began arbitration against the government of Iraqi Kurdistan to recover more than $400 million. The bonds and shares whipsawed earlier as collection delays from the two regions led it to miss a $920 million sukuk maturity in October 2012, before creditors agreed to restructure the debt the following year.
The stock has exceeded the sukuk conversion price since Dec. 25, according to data compiled by Bloomberg. Shares lost 1.2 percent to 85 fils at 12.55 p.m. in Dubai. Dana Gas said at an April 24 shareholder meeting that it will issue about 250 million ordinary shares to holders switching their debt.
A spokesman for Dana Gas was unable to comment pending the release of first-quarter results.
Shares have rallied as Dana Gas increased receivables from Egypt by starting in September to accept some payments in Egyptian pounds to cover local costs and relieve pressure on the government’s foreign-exchange reserves. The gas producer, which is based in Sharjah, United Arab Emirates, got 491 million dirhams ($134 million) of payments from Egypt last year, its financial statements show.
Risk perceptions of the company have improved, “which feed directly into bond prices and yields,” Richard Segal, head of international credit strategy at Jefferies International Ltd. in London, said by e-mail yesterday.
Dana Gas began arbitration proceedings against the Kurdish Regional Government in the London Court of International Arbitration in October, along with its partners Crescent Petroleum Co. and Pearl Petroleum Co. The gas producer was due 1.9 billion dirhams from Kurdistan at the end of last year, and another 1 billion dirhams from Egypt, according to its data.
Full-year profit fell 5.6 percent to 571 million dirhams as sales in Iraq slowed and as Dana Gas paid more royalties to the Egyptian government.
The company’s outlook has been “generally lackluster in the past couple of years because of the Egypt exposure,” Segal said. Management efforts to shore up finances have buoyed the stock price and made the conversion more attractive, he said.
The yield on the convertible sukuk fell 86 basis points, or 0.86 of a percentage point, last month to 3.87 percent yesterday, according to data compiled by Bloomberg. That compares with a six basis-point average drop to 4.3 percent for the rate on Islamic bonds from the Middle East, JPMorgan indexes show.
“They are sitting on good assets,” Nazim of JPMorgan said. “The assets in Kurdistan and Egypt are especially valuable. But better visibility on cash flow would be beneficial.”
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