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loss due to valuation of issued bonds

Hello All, i am looking at these financials and there is a 64,086 million loss due to change in the value of issue bonds.

What standard requires a company to revalue issued bonds? Does this mean that the financial statement gets hit as the credit quality improves… I did not run across this back in my CFA days. Thanks!

https://www.bankofsharjah.com/public/uploads/contents/FS_Q2_2019_English.pdf

https://www.bankofsharjah.com/public/uploads/contents/MDA_Q2_2019_English.pdf

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this is what i think.

financial statements does not get hit as credit quality improves. fianncial statements have debt marked at book. 

a 100% owner of a firm. could theoretically pick up the bonds at the discounted market value. then roll it over to the firm to extinguish the debt. to massively boost the equity value at book. 

this is what distressed investing does!

I love my cheese. I got to have my cheddar.

@Nerdyblop - would you be able to show an example of how that might work? Not clear on how the equity value would be boosted. Thank you

so from a balance sheet.

you start with 100 cash. and your mkt cap is 100.

you issue 200 bonds at book. and you received 200 cash c so your total assets are now 300, liabilities at 200, with an equity value of 100. 

the bonds start trading in open market and for some reason trades at 25% of book. or 50 bucks.

distressed debt buyer sees this and buys the 200 in issued book value bonds at 50 market value.

he then buys the shares of the company that has a total market cap of 100. for a total invesment of 150.

he wipes out the debt by giving the bonds to the company he just took over.

post contribution of bonds to the co you took over.the co has 300 in cash.and no debt. and you only invested 150. doubling your money!

I love my cheese. I got to have my cheddar.

Okay that makes sense now. but from the perspective of the target company, why would he sell? 

  1. Can’t the company buy the debt themselves and retire the debt?
  2. Liquidate the company and payback all shareholders and creditors (at FV)?

usually debt sells at huge discount cuz company cannot pay back loan. the company could be losing money. or its assets could be suspect. in my example, i used cash, but the asset side could easily have been something less valuable like accounts receivable or inventory. etc.

I love my cheese. I got to have my cheddar.

familyguy1988 wrote:
What standard requires a company to revalue issued bonds?

Both IFRS and US GAAP have fair value of debt options.

It’s in (at least) the 2018 Level I curriculum.

Simplify the complicated side; don't complify the simplicated side.

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my mistake. marked at fair value when financial statements are made. but as distressed debt goes, mkt value of debt can sink fast within a quarter form when it was marked

I love my cheese. I got to have my cheddar.

I didn’t read through those financials but banks have DVA as well which is much more common than what I think you’re referencing.  I’m pretty sure both flow through OCI so shouldn’t impact tier core P&L.

If in fact loss from issued bonds, I think those bonds are probably puttable to the issuer. Assuming interest rates have changed, which drove the put being ITM, which is why they’re recognizing a loss