Dana Gas seems confused about sukuk pricing

Dana Gas’s CEO thinks his sukuk coupons are above market even though the sukuk price is below market. This is inconsistent.

I am not discussing any Sharia law issues here, just the simple dynamics of the bond (including sukuk) market. This opinion is based on an article in The National.

According to Dana Gas’s CEO the sukuk are paying an interest rate (as I call it) of 7% and 9% depending on the tranche. He says that the market yield indicates a yield below 4%. This indicates that the coupon is fixed not floating. The fact that the yield on the sukuk has not moved indicates a fixed interest rate rather than a floating interest rate. From now on when I say interest rate, I mean fixed interest.

In general if a simple bond is paying a coupon of 10% then there are three scenarious on where the price is. If market yield is 10% then the price will be 100 (as a percent of face value). If market yields are lower < 10% then price should be > 100, and vice versa.

A couple of weeks ago DG sukuk where trading at around 40, a huge discount, which meant that the market expected a yield well above the 7% and 9% coupons (before that, the price was even lower than 40). This means that the statement by DG’s CEO that market indications are that the sukuk yield for DG should be below 4% are completely contradictory to the actual market price from a couple of weeks ago.

However, in the last two weeks the sukuk price rallied miraculously to around 100. I could not find any announcements to support such a 150% price move in three weeks which would indicate the possibility of market manipulation. But if it is a real move this still contradicts Dana Gas’s CEO as a price of 100 means that the 7% and 9% coupons are the actual market yield.

From the article it seems that the original sukuk had a convertible element which would make it a valuable option for sukuk holders. This would mean that if this element is removed, as the CEO indicates, then the actual yield in market would have to increase from 7% and 9% to compensate sukuk holders.

Dana Gas’s CEO seems to be confused about two things. The first is if a company issues a bond at a fixed coupon and later market yields drop, this does not give the company the right to destroy the bonds and replace them with something cheaper. They are a commitment, one which needs to be honoured.

The second confusion stems from  the following in the article “[The CEO of Dana Gas said] traders in the previous structure [the sukuk with the convertible element] had arbitraged and dumped the shares, depressing the shares in a manner that is unfair to existing shareholders.” This statement indicates a misunderstanding of a basic point of finance – arbitrage is good as it keeps markets efficient and in sync. The idea that market movements are unfair to shareholders because convertible sukuk holders acted legally in the market holds no water. If anything happens untoward in the market then shareholders should seek justice from the regulator, the Securities and Commodities Authority. To have the company punish sukuk holders in favour of shareholders is wrong.