Long term debt - Amortisation on a on par debt issue


So the above debt was issued on 27 Apr 2011 by ORIG a subsidiary of DRYS and in their annual report of 2011 in the footnotes the following statement is made:

“The total interest expense and debt amortization cost related to the notes in the Company’s consolidated statement of operations for the year ended December 31, 2011 was $32,327 and $2,235 , respectively. The contractual semi-annual coupon interest rate is 9.5% per year”

In the following years this statement is no longer there.

I am confused, since it was issued on par what is there to amortise in the first place? I also tried to reverse engineer the numbers but couldn’t get things to match, ie tried to assume some kind of Liability + equity component, worked a number for the liability component using an effective interest rate, and other parameters. I used goal seek on the effective interest rate until the first year interest expense matched that reportted, when I did that the amortisation didn’t match though.

Any thoughts?

Thank you!

Underwriter costs. It isn’t cheap to borrow money.

Thank you for the answer, but I’m still confused. Indeed they state that they only received 487500 from the issuance (so 12500 in fees) but I thought I should just expense the fees and add as a liability 500000 under the long term debt account.

Each year the interest expense will be identical to the cash payout and there is nothing to amortise. Where have I gone wrong? If you could point me in another direction or if you want more information let me know!

Thank you once again!

The underwriting fees are amortized over the life of the notes. The amount on the balance sheet (LT and current portion combined) should be 500,000 less any principal repayments that have been made.

i tried two ways:

  1. Assume a straight line depreciation of the 12500 fees incurred resulting in 438.36 + 1250 for the first year in amortisation
  2. Calculate an effective interest rate given a liability of 487500 (ie subtracting the initial fees) this gives an effective interest rate of 10.15% and a first year amortisation of 1355.26

Both are not consistent with what they reported in their financial statements… :s

Could it be that they are simply wrong?

Also, I don’t see any principal payments being made, they report a book value / carrying value of 500000

^ Sorry, that’s all I’ve got.

No worries you have been of tremendous help!!

Maybe someone else has any ideas.

In any case I’ll play around a bit more and report here if I find anything!