New Zealand Gazette – 2006 – No. 112

Page 3308

✨ Financial Arrangement Determinations

3308

NEW ZEALAND GAZETTE, No. 112

28 SEPTEMBER 2006

This amount may be ignored for the purposes of calculating income or expenditure under the financial arrangement rules.
In order to calculate financial arrangement income or expenditure, the yield to maturity (YTM) method has been applied. This
may be done in accordance with Determination G3: Yield to Maturity Method, G11A: Present Value Based Yield to Maturity
Method or any other determination that may apply, or an alternative method producing not materially different results.
The yield to maturity for the financial arrangement is 6.04973318% or 3.024867% per semi-annual period.
Notwithstanding the methods available which have been described above, the YTM rate is most easily calculated by calculating
the net present value (NPV) of the cash flows arising under the bond component of the optional convertible notes by iterating the
discount rate used until a result of zero is achieved.
Using Determination G3, the following table can be constructed (taking into account the deduction of $1 million of fees paid
by ABC Ltd):

Critical dates	Amount of principal outstanding at start of period	YTM calc F.A. expenditure at end of period	Actual coupon interest at end of period	Amount of principal outstanding at end of period
1 Apr 07	95,528,457.95	2,889,608.41	2,500,000.00	95,918,066.36
1 Oct 07	95,918,066.36	2,901,393.54	2,500,000.00	96,319,459.90
1 Apr 08	96,319,459.90	2,913,535.16	2,500,000.00	96,732,995.08
1 Oct 08	96,732,995.08	2,926,044.05	2,500,000.00	97,159,039.11
1 Apr 09	97,159,039.11	2,938,931.31	2,500,000.00	97,597,970.42
1 Oct 09	97,597,970.42	2,952,208.40	2,500,000.00	98,050,178.82
1 Apr 10	98,050,178.82	2,965,887.10	2,500,000.00	98,516,065.92
1 Oct 10	98,516,065.92	2,979,979.56	2,500,000.00	98,996,045.48
1 Apr 11	98,996,045.48	2,994,498.30	2,500,000.00	99,490,543.78
1 Oct 11	99,490,543.78	3,009,456.22	2,500,000.00	100,000,000.00
1 Apr 12	0
Totals		29,471,542.05	25,000,000.00

The difference between financial arrangement expenditure and coupon interest paid by ABC Ltd is $4,471,542.05 and is equal
to the difference between the FV of the bond component and its price calculated using the specified rate of 5.81% per annum
semi-annual plus the $1 million in fees paid by ABC Ltd.
Financial arrangement expenditure is spread between income years, in accordance with Determination G1A, on a daily basis.
So, for example, in the 2008 income year, ABC Ltd would return financial arrangement expenditure of $5,791,001.95 in
relation to this financial arrangement. The sum of $5,839,579.21 would be returned in the 2009 income year.
A base price adjustment (BPA) is required in the final year of the optional convertible notes’ term.
The formula for a BPA is:
Consideration – income + expenditure + amount remitted.
Consideration in relation to the financial arrangement is:
96,528,457.95 + (25,000,000) + (1,000,000) + (100,000,000) = (29,471,542.05)
Income is zero.
Expenditure is $23,467,587.53 and is the amount of financial arrangement expenditure calculated and deducted up to and
including 31 March 2011.
There is no remission.
The BPA amount is therefore:
(29,471,542.05) – 0.00 + 23,467,587.53 + 0.00 = (6,003,954.52).
As this is a negative amount, it is financial arrangement expenditure for ABC Ltd.
As no amount is remitted, the amount of the BPA is exactly equal to the amount of financial arrangement expenditure
calculated in the final year of the financial arrangement under the YTM method.
A similar calculation must be undertaken to calculate the holder’s position if the holder is subject to the financial arrangements
rules.

Example B: From the perspective of the issuer
On 1 April 2007, XYZ Ltd, a non-listed company and a wholly owned subsidiary of another company (“Parent”) raised $100
million through the issue of 100 million $1 optional convertible notes with a five-year term to Parent. The optional convertible
notes had an aggregate face value (FV) of $100 million and paid no coupons.
At the time of the optional convertible notes issue, XYZ Ltd had 100 shares which were issued for $1.00 each. The terms of
the optional convertible notes provided that the holder could at any time over the term of the optional convertible notes elect to
redeem the optional convertible notes for cash or for one share per note held. The exercise price on the American-style warrant
component of the optional convertible notes is $1.00 per share. The total consideration paid by Parent for the optional
convertible notes was $100 million. XYZ Ltd paid no fees to issue of the optional convertible notes.
The five-year New Zealand government bond rate at the time of issue was 5.81%.
XYZ Ltd has a 31 March balance date.
This determination requires that a bifurcation process be applied in order to calculate an amount that is solely attributable to
the warrant component of the optional convertible notes. The warrant is an excepted financial arrangement and is excluded
from calculation of financial arrangement income or expenditure under the financial arrangement rules.