Nakheel: CDG Lawsuit Will Not Delay Deal with Trade Creditors

Nakheel has issued a press release (to Reuters) stating that CDG's lawsuit will not delay its reaching a settlement with trade creditors.  It also said that it expected to prevail against CDG noting that it disputed the entire claim and had counterclaims of its own against CDG.

Nakheel said it has approximately 85 percent of acceptances, by value, for its restructuring deal and is "well on target to achieve its 95 percent acceptance of all payables and claims within the near future," according to the statement sent to Reuters late Tuesday

Dubai: More Pain to Come

Tom Arnold over at The National has an article on the pain likely to come from Nakheel and Dubai Holding restructurings.

As well as a few quotes from the ratings downgrade of ADCB.  Sounds like Brother Eiraqat already needs more than two 1000 mg Dolgit.

Kabul Bank, Mohammed Karzai, Sherkhan Farnood and Palm Jumeirah

Photograph Ivanlo  Released to the Public Domain 

How often do you hear about companies that advertise services that they really don't offer?  Where managements talk the talk but don't walk the walk?

Well, that's not the case at Kabul Bank where management takes seriously the slogan "The Easiest Way to Earn Millions" as we learn from Bradley Hope over at The National.

And what could be easier than real estate investments in Dubai, particularly in the prestigious Palm Jumeirah development.

One chap made a quick AED3 million, though he can't remember what he did with it.

And what can you say about a Chairman who's so solicitous of his bank's investments that he registers them in his and his wife's name?  No doubt in order to keep a close personal eye on them?  Sadly now, the former Chairman due to some onerous new banking regulations in Afghanistan. 

16 or so villas on Palm J and two plots of land in Business Bay reportedly worth some US$150 million.

As per KB's 31 December 2008 financials (the latest posted on its website), that amount being twice the Bank's shareholders' equity and 21% of total assets (assuming of course that the properties are reflected in the balance sheet). 

More Signs of Real Estate Woes in the UAE

According to Bradley Hope at The National, Sorouh Real Estate has introduced a "rent-to-buy" scheme for commercial tenants at its Sky Tower on Reem Island.  The plan is apparently designed to "fill out" the remaining 20,000 square meters of commercial space.  Previously, Sorouh had offered a below market rate of 4.99% to first time buyers at its Sky and Sun Towers in the Shams Gate project on Reem.

This follows the announcement earlier this week that Dubai had given Nakheel's Board control over Limitless.    I suspect this is the first step towards combining the two companies as a way of reducing costs as well as adjusting capacity to realistic prospects for demand.

As you'll notice from this article also from The National, Limitless' problems were caused by the "global" (financial) crisis.   On a personal note, I was gratified to see that TN did not use the term "Global Financial crisis" using the SAM stylebook with all lower case letters.  There are some sensitive folks up North as AA knows only too well.

DIFC Investments Reports US$562.1 Million Loss

The National carries an article today about DIFC Investments loss.  

Beyond the details, this is another sign that the economic distress in the Emirate is not limited to Nakheel and Dubai World. 

Rather the impact from the crisis is broad.  With new funding constrained, the Emirate  is now in a very difficult position.  It simply cannot devote all of its limited cash to triage. - salvaging those bits with the most commercial promise. Substantial funds have to be devoted to paying Nahkeel's creditors to prevent a complete implosion of the economy.  And to be clear, I'm not focused so much on banks and other financial creditors as much as on trade creditors and investors/purchasers in the projects.

International City Dubai

Sewage floods a road in the Russia and England area of International City yesterday.  

Paulo Vecina / The National

That is a heck of a lot of sewage.  It is hard to avoid drawing the conclusion that a few corners were cut in building the project.

Perhaps, our resident civil engineer/construction expert The Real Nick can weigh in.

Dubai Holdings Commercial Operations Group - Voluntary Suspension of MTN Listing on Nasdaq Dubai

DHOC announced that it was voluntarily suspending its listing due to failure to provide 31 December 2009 financials within the mandated time frame.  It expects to report by 16 May as reported earlier.

NasdaqDubai also announced that it had suspended IIG for failure to provide its 2009 financials as well as the continuing suspension of the following (already suspended) for failure to provide 31 December 2009 financials:

1. TID Sukuk
2. Nakheel 2
3. Nakheel 3

New Graft Case at Nakheel

As reported by the Khaleej Times.  Some rather expensive non existent pens.

Dubai World Rescheduling - Nakheel Trade Creditors Offered 10% on Settlement Bonds

There's been some commentary on the princely interest rate that Nakheel was reported to be offering its trade creditors - 10% - compared to the much smaller 1% to financial creditors.

This article from Maktoob Business outlines the rationale. 

It's all a matter of devoting resources to those parties that benefit the company and the national economy the most.

Simply put there is more bang for the buck locally in paying our trade creditors.

Something discussed in an earlier post here.

Nakheel Property Holders Seek Legal Help

The National reports that some 700 investors in Palm Jebel Ali are unhappy with the alternatives presented under Dubai World's restructuring plan and may hire a law firm to act as advisor.  

They seem to be looking to secure the following:

1. A firm schedule for completion to ensure a quick handover
2. Assurance that quality and design standards won't be compromised to save project costs
3. Recalibration of future installments to actual construction progress.  The article goes on to say that on average investors have paid in about 30% of the total purchase price.

Personally, I'd be concerned about the effects on maintaining project and building  quality in a stop-start project, particularly if there is a constraint to keep the costs within the original pricing.  Unless of course costs have come down significantly from then.

As well, it would seem natural that given the economic downturn some of the non residential attractions on the island might be scaled back or eliminated. 

Think I might be inclined to take my credit to an existing or almost built project, especially if the credit was against current market value instead of "rack rate".

Perhaps, The Real Nick could weigh in with a comment.

Dubai World Rescheduling Proposal - Just What Did the IMF Say?

Several Gulf papers have carried headlines relaying what are described as supportive IMF comments on Dubai World's proposal.

Here The National says "IMF Says Dubai World's Debt Proposal Fair".

Here Gulf News says "IMF Back Dubai Debt Proposal".

In reading these headlines one might very well come away with the perception that the IMF had reviewed Dubai's rescheduling proposal and had given that proposal its imprimatur.  In effect recommending to the banks that they accept the proposal.

Is that what the IMF did?

I'm not sure that's the case.

We'll have to wait for the IMF to release its official statement. As of close Monday, I didn't find this on the IMF website.

Right now the only comprehensive quote I've seen is from the Gulf News (in the article cited above).

"Today's announcement by the Chairman of the Dubai Supreme Fiscal Committee for the restructuring of liabilities of Dubai World and Nakheel is a welcome step further in the debt restructuring process. We support the authorities intention to find a fair and equitable solution for all stakeholders," the IMF said in a statement issued on Thursday evening, a copy of which was obtained by Gulf News.

"A satisfactory conclusion of this process will pave the way for improving overall credit conditions, the investment climate, and economic activity in Dubai and the UAE in general.

"We encourage all parties to build on the momentum and work together in satisfactorily concluding Dubai World's debt restructuring."

What I see are the following:

1. IMF praise for the Emirate's intention to find a fair solution.  As I read this, the IMF is not saying that a fair solution has been found.  Or that the proposal just made is fair.  Equally, it is not saying that a fair solution has not. Nor that the proposal is not fair.   
2. The proposal is a step forward.  But the IMF does not say the end of the journey has been reached.
3. A call for the parties to work together to satisfactorily conclude DW's debt restructuring.  If it's a matter of the creditors' approving the fair solution, it's unclear what DW would have to do.  Wouldn't it just sit back and tally the acceptances?  Not much work in that. 
4. One might read the IMF statement to imply that the Emirate has made a positive step but that further negotiations on the details of the proposal are in order and both sides should work hard to craft a mutually acceptable deal. 

Dubai World Restructuring - Creditor Push Bank

Frank Kane and Asa Fitch have an article over at Abu Dhabi's The National "Dubai Government hits back at critics of $24.8bn debt plan".  

What I think is the interesting story within that story is that:

1. Apparently unsecured creditors are to receive their interest in pay-in-kind ("PIKs") which means instead of cash they get a note for the amount of interest. It appears the interest notes may be set to the final maturity of the loan. 
2. And, yes, if the unsecured lenders' interest rate is below market and then don't get paid until final maturity their discount is even bigger than just a below market interest rate.  As I've posted before IAS #39 is very very clear a restructured debt that carries an interest rate below the original interest rate gets marked down to the net present value of the estimated cash flow using the original rate on the unrestructured loan (if the asset were held at cost).    The estimated cash flow includes the timing of the receipt of the interest payments.
3. This raises an even more intriguing question about the principal repayment schedule.  If interest is being deferred in PIK securities, it would seem the company has a weak cashflow.  Logically, that would seem to imply that principal repayments might also be paid in PIKs as well.  I still haven't seen a detailed discussion of the amortization schedule.    
4. The unsecured creditors represent US$14.2 billion out of the US$24.8 billion in debt - or roughly 57%.  If they as a group are unhappy, DW has an issue.

What's also a bit puzzling is that with a seasoned chap like Aidan on DW's Team, there should be little surprise in Dubai that there is some criticism now.  The initial euphoria was based on a few big picture headlines - key details were missing from the announcement - the exact tenors, the interest rate, the repayment schedule.  Perhaps, what was interpreted as joy was just  relief that DW was not asking for an explicit "haircut".  But as always the devil is in the details.  As the details are released, there is bound to be some negative reaction.  And if there is still a lack of clarity in the details, then the situation is even more complicated.  It seems from this FT article that perhaps this is the case.

As well, since the Nakheel Sukuk holders are going to waltz home free - not troubled in the least by the rescheduling, only the most optimistic person could believe that this would not cause an objection or two.  While arguments may be made that this was necessary because it will be impossible to get the certificateholders to agree, regular lenders (especially those feeling potential cold winds against their unprotected backsides) have to be expected to protest.  

I posted long ago that despite wishes for a speedy conclusion that this process was going to take a while.   

The next stage is for DW to address concerns.  And perhaps tweak some terms.

The news about Dubai Holdings is going to complicate things particularly as DW's restructuring is dependent on a non inconsiderable cash infusion from the Emirate.  And having set a template with DW, the Emirate will find it difficult to negotiate a less favorable deal for Dubai Holding, if indeed a restructuring is in the cards there.

Dubai World Restructuring - Banks Need Details Before Deciding to Accept

Sometimes I think that newspapers and bankers have a soft spot for Suq Al Mal.  How else to explain this article from The National.

And in particular these absolutely "brilliant" 'quotes.

The bank creditors of Dubai World will seek further details on the US$23.5 billion (Dh86.31bn) debt restructuring plan before deciding whether to accept.

While the banks’ initial response has been positive, they will ask this week for greater clarity on certain points, such as the interest rates that will be paid to the creditors of the Dubai Government-controlled conglomerate.

There is certainly something to be said for checking the details.  As I've posted before, the more useful employment of that skill is during the decision process as to whether to grant the original or loan or not. If underwriting is properly done, one can avoid many - but not all - later "disappointments" with one's loan or investment.

“We are hoping to learn more details this week as we still don’t know exactly what the offer is on the table,” said a banker, who asked to remain anonymous.

 AA certainly hopes that this unnamed banker's hope becomes a reality before his bank makes a decision.

Dubai World Debt Rescheduling Proposal: US$9.5 Bn Govt Cash & "100%" Repayment

DW has finally released its debt restructuring proposal.  The creditors have the details.  We have  somewhat less in the form of press releases and media commentary.

Here is the WAM press release.  And  Nakheel's announcement.  Here are accounts from  The National and Gulf News.

At this point, several key questions are unanswered.   Is there a margin on the financial creditors' debt?  What is the tenor of the maturity pushout? What are the principal and interest repayment terms?  

So what follows is a preliminary assessment.

Certainly, at first glance this looks less onerous that some of the earlier proposals which  were floating around in the media.  But in part that may have been the plan. Often creditors "float" harsh plans which are designed to frame the expectation of creditors.  Then the desired "final offer" can look quite good.   Also  a well timed leak or two is a way to informally test creditor and market reaction.  There's plausible deniability if the market reacts negatively, because a formal offer wasn't made.   And sometimes such reports are result from misinformed sources.

No doubt there was some of the former at play, though I suspect that the final offer was shaped by outside pressure.  Plenty has been applied particularly from the UK.  And so I suspect Dubai was "moved' off its  own plan to something more favorable to creditors.    

The first dramatic headline is about support from the Emirate - contrary to its earlier assertion that these were commercial companies and lenders had to look to the companies themselves for repayment.

Government of Dubai Support:  US$9.5 Billion in New Cash and US$10.1 Billion Debt to Equity Conversion  

1. Three introductory comments before we get into the details about DW and Nakheel.  
2. First, the funds are being sourced US$5.7 billion from those committed to by Abu Dhabi and US$3.8 billion from the Government of Dubai.  The Abu Dhabi portion is coming from the undrawn amounts on its earlier commitment.
3. Does this mean a wavering of support by Abu Dhabi for the restructuring?  After all it's not pledging new money.  I don't think so. In November when Abu Dhabi made its commitment, it did not disburse all the funds at once.  At that time I posted that it appeared Dubai had to justify future drawdowns to Abu Dhabi before the latter would fund.   If that interpretation is correct, then Abu Dhabi is committed to the rescheduling with roughly 60% of the new cash outlay.  Equally the Government of Dubai is putting significant new cash on the table now.  And,  unless Abu Dhabi forgives its previous loans, Dubai is obligated to repay Abu Dhabi for its financing, including this amount.
4. Second, the debt to equity conversion benefits creditors in two ways: cashflow preservation and balance sheet protection.  It reduces the debtor's cash outflow for interest and  principal, leaving more funds for the non governmental creditors.  It also provides an additional legal buffer  to absorb any decline in value of assets or investments held by the companies.
5. Third, given DW's past tendency to employ fuzzy math in its press releases, some of you out there might wonder if some of the numbers being bandied around this time are rock solid.  For example, does the equity conversion  of US$8.9 billion (mentioned in the WAM release) at the DW level also include the US$1.2 billion mentioned later with reference to Nakheel?  Or might  Dubai Inc inadvertently double counted again?  For this analysis, I've  assumed it is not.  That with Aidan in charge things are a bit more professional these days.      

Dubai World

1. New cash US$1.5 billion.
2. Conversion of existing US$8.9 billion of debt to equity.

Nakheel

1. US$8 billion for Nakheel 
2. The cash at Nakheel will be used to fund operations and settle certain liabilities.
3. While support is contingent upon reaching agreement with creditors, US$1.5 billion of the cash will be made available immediately to fund contractors building near term projects. More on that topic below.
4. Conversion of US$1.2 billion of government debt to equity.

Nakheel Debt Restructuring Proposal

Projects

1. It may seem a bit strange that Nakheel's press release on its restructuring gives emphasis to its projects by mentioning them first.  Why don't they lead with the proposal we're all interested in?  What happens to the creditors?  Good question.
2. Looking at Nakheel's 30 June 2009 financials, we get the answer.  Property Under Construction is some 77% of total assets.  Realization of this value is key to two things.  Nakheel's ability to pay its creditors.  Preservation of Nakheel as an ongoing business.  On the latter point, this is a restructuring not a liquidation.  Or at least that's what we're being told now.  Also the company already owes the contractors and suppliers for the work done to date.  Abandoning a  half finished project is a dead cash drag especially given the advance payments received from purchasers which would have to be refunded.  Completing as many projects as possible is therefore warranted as long as they don't result in a large cash loss.
3. Another good reason for this is on the liability side of the balance sheet.  Those AED27.9 billion (US$7.6 billion) in Advances represent client prepayments for purchases.  If the property isn't handed over, Nakheel owes the money back.  If clients lose hope that their villa is going to be built. they may walk away and stop paying their remaining commitments.  Nakheel then needs to replace that funding.  And if enough walk away a project may be uneconomical.  So it's a question of leverage.  Spend a dollar and save having to refund two or more.  Spend a dollar today and complete the project and get some additional cash.  Net net then the company is better off.  So then are its lenders.
4. The focus as you'd expect is on the near term projects.  Those projects further out are not of immediate concern in preventing a cash outflow.
5. And there is another reason to keep working:  the economy.  Continuation of these projects provides support for the entire economy in a period of stress.  The sudden stop of the property merry-go-round in Dubai is going to have some rather serious economic effects.  Better to mute them as much as possible.  And if Nakheel were to stop work, existing clients might decide to throw in the towel on their commitments.  Certainly, new clients would be hard to attract.

Offer to Clients 

1. As outlined above, complete the near term projects and give those clients updates on new completion dates.  The idea of the latter is probably to keep them "on the ranch" and reasonably quiet.  New handover dates will eliminate uncertainty.  A client might not like being pushed out but at least he's got a better idea of when his property will be ready.
2. Clients with projects further out are given options.  They can take a credit for what they've paid and  transfer it to a closer-in project.   A smart move.  This enables Nakheel to fill out those near term projects by shifting demand.  And, of course, if enough clients apply their existing payments to current projects, one can postpone, shrink or cancel future projects - as a response to "market demand" not its own financial condition.  If you're a client, do you wait for five more years for your project to be finished?  Or do you grab something being finished in the next 12 months? 
3. For those who don't want to wait or transfer, they can get their cash without interest after five years.  This is structured to give clients an incentive to either wait or take the transferable credit.  Assume that 5% is a fair rate for waiting.  This payment scheme results in a 22% discount.  Apply a 10% rate and you get a 38% discount.  Powerful incentives to take the alternative offers.

Offer to Trade Creditors and Suppliers

1. We still haven't gotten to the financial creditors yet.  Why?  Nahkeel needs these parties to continue its operations so they're mentioned next.  And showing that it is going to continue operations should have a positive effect on clients' belief that there purchases will actually be built and handed over.
2. What's on offer?  40% cash (based on agreed claims) and 60% (on estimated claims) in a publicly tradeable security at a "commercial interest rate".  Each creditor to receive up to an immediate AED500,000 cash payment or its full receivable.  Apparently, by number some 50% of contractors have amounts equal or less than this amount.  This will help out a lot of small businesses less able to cope with the terms being proposed.  Presumably, most or all of them are local companies - so another shot in the arm for the local economy.  And hopefully a way to prevent tipping these companies into distress and affecting local banks.
3. Let's dissect this a bit.  
4. Note the cash payment is on agreed claims.  If you look at Nakheel's 31 December 2008 financials, you'll see that there were some AED10.4 billion out of the AED28.6 billion in Accounts Payable and Accruals that represent billed but not yet agreed/certified claims.  While that was one year ago and there's been plenty of time to certify those claims, there is probably a significant amount of yet not agreed claims.  And some from 2009 work.  So the initial cash outlay has been muted.
5. 60% of estimated claims will be paid via a tradeable security.  Since it's tradeable, a contractor or supplier can cash out.  Of course, being tradeable does not guarantee there will be a market.  Or the price in that market, i.e., discount if any.  It does, however, make the transfer of a clear title (presumably unencumbered by any warranties for the services performed) a lot easier.  
6. The company is giving the contractor the benefit of the doubt that its yet unagreed claims will prove to be valid.   What's not clear is what happens with the unagreed claims on the cash payment.  If these are later accepted, I'm guessing that they become a new receivable from Nakheel.
7. It's also unclear what the term "commercial" interest rate means.   Does this mean a market rate of interest?  Or does it mean the sort of incentive terms that a contractor might give - which could include an element of discount from market rates?

Financial Creditors

1. Sukuk Holders get a preferential repayment:  100% of principal and periodic distribution/profit amounts ("interest") on scheduled maturity dates.  Two Sukuks.  Sukuk III AED 3.6 billion (US$981 million) due 13 May 2010.  Sukuk II US$750 million due 16 January 2011.  Presumably, being paid because it's thought too hard to get acceptance of any restructuring.  This may reflect the company's analysis of holders and which ones are likely to be hostile.  Looks like a victory for HF and distressed investors.  This is the best deal for financial creditors.
2. Secured creditors also to receive 100% of their principal and accrued interest.  And to keep their security.  Nothing remarkable here.  That's why lenders get security and register it to have priority over those who didn't.  Once they get it, they don't easily give it up - until they're repaid.  Unclear about the interest.  Does this mean at Libor/Eibor flat?  Or do the old margins stay intact? Is there a new margin?  I'm guessing (but note that word) there's no margin.  Existing facilities will be maintained and just extended or rolled over.  Two key points not disclosed:  What is the new maturity? And what are the terms of repayment of principal and interest?  These will determine the extent of the discount.  Some earlier musings on discounts via interest rate reductions.
3. Unsecured creditors a similar deal with respect to 100% receipt of principal and accrued interest/profit margin.  Note all such facilities will be rolled over into a new debt facility.  Since the structure is Ijara, I think this is necessary to keep Shari'ah boards happy that the facility  remains "Islamic". 

Dubai World Presents Restructuring Proposals

According to press reports, Wednesday afternoon Aidan Birkett presented Creditors' Committee with restructuring proposals, described as incredibly complex by one unnamed participant.

Here the accounts from The National Abu Dhabi and from Gulf News Dubai.

Once again we're hearing about fairly long tenors at low or below market interest rates.   It seems  pretty clear that some sort of haircut is going to be required.  The current negotiations are no doubt about how to limit it and how to disguise it as much as possible.  

Also there's a new "wrinkle" to the story the presence of Lady Shriti Vadera, an ex UK Minister who was involved in the drafting.

Interestingly The National says that the Government of Dubai invited her to help monitor the process, while the Gulf News, a Dubai newspaper, says the UK Government sent her because UK banks who are owed US$ 5 billion had raised "questions about the process to London".  One might have expected the GN to present this as a Dubai initiative. 

Four Nakheel Employees Under Investigation for Corruption

AlQabas reports that six individuals are under investigation for corruption - four employees of Nakheel and two from a private company over the payment of bribes.    Quoting "The Emirates Today", AlQ says that the investigation is preparatory to formal charges.

They are accused of demanding bribes and forging certain documents (unclear to me what these are) and then using them.  Perhaps, sale documents for properties.

The chief accused the former Head of Marketing for Nakheel is accused of having received AED 930,000 (note the article does not state the currency) according to investigations carried out by the Public Prosecutor during his imprisonment from last June to January.

According to the article this is the fourth corruption case at Nakheel.

With all the hot money sloshing around Dubai during the boom years, it's no surprise that there was corruption of this sort.   It would have happened in almost every other place in the world.

Dubai World - Nakheel - Wall St WTF Nails the Nakheel Collateral

Here's an interesting and humorous (unless you're a lender) post from Ken over at Wall St WTF. 

Dubai World - When is a Haircut Not a Haircut? Apparently, When We Say It Isn't.

The National has an article describing the various options to be offered creditors of Dubai World which contains some real howlers:

Creditors will be offered "new debt".  

While I'll admit this is conventional "banker speak", a rescheduled loan is about as new as that recycled left over on your dinner table.  It's the same old debt in a slightly different package..  It's like the dinner from Saturday that you quite didn't finish that turns up on your plate on Sunday.  It's not a new meal even if your wife has added Hamburger Helper.  A new loan would be a voluntary extension of credit.  Trapped money is the financial equivalent of a leftover.

But the real gem is the following.

“Receiving 100 per cent of the principal and zero per cent interest is better than taking a 30 to 40 per cent haircut. On this basis, the banks involved will not have to incur a loss other than the time value of money which is not insignificant but may be better than the alternative,” said Jawad Ali, the managing partner of the Middle East offices of the law firm of King and Spalding.

If you get back less money from a debtor than you advanced after taking into consideration the time value of money, it's a haircut.  A loss is a loss.  Pretending it is something else makes as much sense as saying that Dubai World wanted to help banks have solid earning assets on their books so its extending the maturities on its loans to help them out. 

As I pointed out in an earlier post, equal amortization of a loan over five years at a 5% interest rate is equivalent to a 13% haircut and at 10% a 24% haircut if one were being paid back immediately.   

Also as I noted, reputable firms of accountants working in reasonably developed  markets would apply IFRS (or US GAAP) and require a bank to  recognize an impairment against the asset.  And guess what, the loan would be written down using present value techniques - which recognize the time value of money.

However, in this matter I will defer to learned counsel's assessment of the firms and markets he practices in.  Financial institutions from developed countries will see right through this transparent scenario.

Dubai World - Debt Rescheduling Proposal - Just A Maturity Extension?

According to Gulf News, recent discussions suggest that the rescheduling may just an extension of maturities with no haircuts or other features which would offend the sensibilities of DW's lenders or investors.

Time will tell.  Until then we're all still free to speculate.

Dubai World to Meet With Local Creditors - No or Low Interest Repayment Option?

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.

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.

1. 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%.
2. 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%.
3. Amortizing the loan in 5 equal yearly installments gives present value of 87% at 5% and 76% at 10%.
4. 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.