The National reports that DW is planning meetings with local creditors - Abu Dhabi Commercial Bank and Emirates National Bank. These meetings follow ones held earlier this week in London with "international" banks.
The goal of this series of meetings is probably twofold.
The goal of this series of meetings is probably twofold.
First to test some restructuring ideas with these major banks to get feedback. Second as a way of managing the process - trying to influence future negotiations by framing the bankers' expectations.
One of the options that apparently is being considered is a low or no interest repayment of 100% of the principal over some extended period.
Let's look at some examples to see what sort of discounts one can achieve through this device.
- A bullet repayment 10 years from now of 100% of principal equals a present value of 61% of face at a 5% annual discount rate. Changing just the repayment to 5 years from now raises the present value to 78%.
- Using the same two scenarios above but applying a 10% discount rate, the 10 year bullet has a present value of 39% of face and the 5 year bullet is worth 62%.
- Amortizing the loan in 5 equal yearly installments gives present value of 87% at 5% and 76% at 10%.
- If there is unequal amortization of 0%, 10%, 15%, 25%, and 50%, then the present value of at 5% discount rate is 82% and 68% with a 10% discount rate.
What's the bottom line? One can achieve quite a hefty "haircut" through this tool.
The Nation suggests that banks might want the zero interest or low interest option as a way of avoiding taking the "hit" to income up front. I think it is highly likely that any reputable accounting firm is going to let a client who uses IFRS as the basis for financial reporting "get away" with carrying the loan at its nominal value. This is clearly a restructured loan.
The relevant Chapter and Verse are IAS #39 Paragraphs 58 and 59 which deal with impairments in value. Haircuts, no interest or below market interest rates, tenor extensions, other concessions that a lender would not normally agree to along with several other items are cited as evidence of potential "impairment" in Paragraph 59.
Paragraphs 63-65 deal with calculating impairments for assets held "at cost". Present value the projected cash flows at the original interest rate on the instrument. Any shortfall between original cost and present value is an impairment loss which must be taken immediately to the income statement.
Paragraph 66 deals with impairments on assets "held as available for sale". There the discount rate is the "market" rate for that asset at present. Since this is an impairment not a fair value adjustment, it also goes through the income statement.
The Nation suggests that banks might want the zero interest or low interest option as a way of avoiding taking the "hit" to income up front. I think it is highly likely that any reputable accounting firm is going to let a client who uses IFRS as the basis for financial reporting "get away" with carrying the loan at its nominal value. This is clearly a restructured loan.
The relevant Chapter and Verse are IAS #39 Paragraphs 58 and 59 which deal with impairments in value. Haircuts, no interest or below market interest rates, tenor extensions, other concessions that a lender would not normally agree to along with several other items are cited as evidence of potential "impairment" in Paragraph 59.
Paragraphs 63-65 deal with calculating impairments for assets held "at cost". Present value the projected cash flows at the original interest rate on the instrument. Any shortfall between original cost and present value is an impairment loss which must be taken immediately to the income statement.
Paragraph 66 deals with impairments on assets "held as available for sale". There the discount rate is the "market" rate for that asset at present. Since this is an impairment not a fair value adjustment, it also goes through the income statement.
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