Guide to sukuk default and restructuring: The Dana Gas case study

In-Depth Analysis

The Dana Gas case represents the most significant and controversial Sukuk default in the history of Islamic finance. Its implications for Sukuk structuring, documentation, and investor protection continue to reverberate through the market years after its resolution. Any study of Sukuk must grapple with this landmark case and its lessons. Dana Gas, a UAE-based natural gas company, issued a $700 million Mudarabah Sukuk in 2007, with a five-year tenor maturing in 2012. The Sukuk was exchanged for a new $850 million Mudarabah Sukuk in 2013, maturing in October 2017. As the 2017 maturity approached, Dana Gas announced that it was unable to redeem the Sukuk at face value due to financial difficulties stemming from reduced gas revenue and receivables issues in Egypt and Iraq (Kurdistan). In June 2017, Dana Gas took the extraordinary step of declaring its own Sukuk to be non-Shariah-compliant. The company filed a petition in the Sharjah courts arguing that the Sukuk's payment mechanisms — specifically the purchase undertaking and the use of commodity Murabahah for periodic distributions — were not compliant with UAE Shariah standards, and that therefore the Sukuk was unlawful under UAE law. This was an unprecedented move: an issuer using a Shariah non-compliance argument to avoid its payment obligations. The Sukuk holders, represented by a committee led by major institutional investors including BlackRock and Goldman Sachs Asset Management, rejected Dana Gas's argument and pursued legal action in both the UAE courts and the English courts (as the Sukuk documentation was governed by English law with a UAE law Shariah compliance clause). The English High Court initially granted an injunction preventing Dana Gas from restructuring the Sukuk without the committee's consent. The case raised fundamental questions about Sukuk market infrastructure. If an issuer could unilaterally declare its own Sukuk to be non-Shariah-compliant to avoid payment, the entire Sukuk market's credibility would be undermined. The Shariah compliance opinion had been provided by reputable scholars at the time of issuance, and the structure had been widely accepted in the market. After protracted legal proceedings and negotiations, the dispute was resolved in 2018 through a restructuring that saw the existing Sukuk exchanged for new $530 million Sukuk and $400 million in conventional bonds. The resolution, while pragmatic, left many unanswered questions about the legal enforceability of Sukuk, the role of Shariah compliance opinions, and the conflict-of-law issues that arise when Sukuk documentation is governed by multiple legal systems.