IAS 39 paras 40-41, AG 62, gain on extinguishment of debt and recognition of new financial liability

Avanti Communications Group plc – Annual report – 30 June 2017
Industry: telecoms
23. Loans and other borrowings

avanti6

(i) Finance lease obligations are secured by retention of title to the related assets. The borrowings are on fixed interest rate debt with repayment periods between 3 and 13.5 years.

High yield bonds
October 2016 Coupon Capitalisation
The Company had 10% Senior Secured Notes (‘Original Notes’) with a nominal value of $645.0m in issue at the beginning of the year. On 17 October 2016, the Company announced the result of a successful consent solicitation process. The Company received consents from holders of 89.5% of its Senior Secured Notes to permit paying the interest due on 1 October 2016 in respect of consenting holders’ Senior Secured Notes in the form of additional Senior Secured Notes on the same terms as the existing Senior Secured Notes in lieu of cash. As a result, additional Senior Secured Notes with a nominal value of $40.4m were were issued in lieu of $28.9m of the cash coupon due on that date. A cash coupon of $3.4m was paid to the 10.5% of holders from whom consent was not received in October 2016.

January 2017 Senior Secured Notes Restructuring
On 23 January 2017, the Group completed a financial restructuring which, inter alia, modified the Senior Secured Notes with a nominal value of $685.4m in issue at that date into two tranches of Notes as follows:
• $203.8m of the Original Notes were converted into $203.8m of 10%/15% Senior Secured Notes (‘PIK Toggle Notes’)
• $481.6m of the Original Notes were converted into $481.6m of 12%/17.5% Senior Secured Notes (‘Amended Existing Notes’)

In addition $6.5m of additional PIK Toggle Notes were issued on completion of the restructuring to settle the accrued interest on the proportion of Original Notes that were converted into PIK Toggle Notes. The accrued interest at the restructuring date on the proportion of the Original Notes that were converted into Amended Existing Notes was settled on 1 April 2017 as described below under the heading April 2017 Coupon.

PIK Toggle Notes
The PIK Toggle Notes included the following primary modifications to the terms of the Original Notes:
• the ability to PIK the April 2017 and October 2017 coupon payments, subject to a minimum cash threshold metric
• an extension of the maturity date from 1 October 2019 to 1 October 2021
• the introduction of a Margin Increase mechanism which could see the cash coupon rate of 10% and the PIK rate of 15% increase by a maximum of 2.5% in two steps of 1.25%, dependent on the Group’s performance against EBITDA targets

The Group performed an assessment under its accounting policies and the requirements of IAS 39 as to whether the restructuring of the terms of the Original Notes into PIK Toggle Notes represented a substantial modification. As the net present value of the cash flows under the original terms and the modified terms was less than 10% different, the modification was accounted for as non-substantial.

As a result, the existing debt converted of $203.8m remained on the balance sheet at its current carrying value. The debt will be accreted up to its final redemption value over the extended term to maturity using an amended Effective Interest Rate.

Amended Existing Notes
The Amended Existing Notes included the following primary modifications to the terms of the Original Notes:
• an increase in the cash coupon from 10% to 12%
• the ability to PIK the April 2017, October 2017 and April 2018 coupon payments, subject to a minimum cash threshold metric
• an extension of the maturity date from 1 October 2019 to 1 October 2022
• the introduction of a Margin Increase mechanism which could see the cash coupon rate of 10% and the PIK rate of 15% increase by a maximum of 2.5% in two steps of 1.25%, dependent on the Group’s performance against EBITDA targets

The Group performed an assessment under its accounting policies and the requirements of IAS 39 as to whether the restructuring of the terms of the Original Notes into Amended Existing Notes represented a substantial modification. As the net present value of the cash flows under the original terms and the modified terms was greater than 10% different, the modification was accounted for as substantial.

As a result, on completion of the restructuring, the carrying value of the Original Notes converted into Amended Existing Notes of $481.6m was de-recognised and the Amended Existing Notes with a nominal value of $481.6m were recognised on the balance sheet at the date of modification at their fair value of $245.6m. The fair value at the date of modification of $0.51 per note was obtained from the price of the first trade in the Amended Existing Notes after modification. The gain arising on substantial modification of $219.2m (Note 9) comprises the $236.0m difference between the derecognised financial liability and fair value of the new financial liability in addition to $16.8m of unamortised costs of issues and discounts related to the substantially modified Original Notes.

New Money
As a part of the same restructuring completed on 23 January 2017, the Group issued new PIK Toggle Notes with a nominal value of $82.5m with a 3% discount.

April 2017 Coupon
The April 2017 coupon payments due on the PIK Toggle Notes and Amended Existing Notes were both settled through the issue of additional notes rather than the payment of cash. $7.9m of PIK Toggle Notes were issued in respect of interest due on these notes between 23 January 2017 and 1 April 2017. $30.6m of Amended Existing Notes were issued in respect of interest due on these notes between 2 October 2016 and 1 April 2017. The interest accrued as at 23 January 2017 on the portion of the Original Notes converted into PIK Toggle Notes was settled through the issue of $6.5m of additional PIK Toggle Notes on the date that the restructuring was completed.

avanti7

The high yield bonds are disclosed in non-current loans and borrowings as detailed below:

avanti8

avanti9

Advertisements