Large French groups have recently issued perpetual bond debts. In the case of debts, the traditional reflex leads us to believe that these securities issued are part of the debts on the liabilities side of the balance sheet and that the interest paid is recorded as an expense in the income statement. We will see that the analysis conducted under IFRS can lead to qualifying these debts as equity instruments with all the consequences involved.
Issuance of perpetual bond debts
Take the example of the EDF group, which in January 2013 issued several tranches of indefinite subordinated securities in dollars and pounds sterling (“hybrid” issue):
- 1,250 million dollars with a 4.25% coupon and a 7-year repayment option
- 1,250 million dollars with a 5.375% coupon and a 12-year repayment option
- £ 1,250 million with a 6% coupon and a 13-year repayment option
- 3 billion US dollars with a 5.25% coupon and a 10-year repayment option.
Indefinite subordinated notes (TSDI)
Let us recall that the subordinated securities with unlimited duration (TSDI) are subordinated issues whose duration is infinite, the repayment is carried out at the option of the issuer. Subordinated notes are bonds whose repayment, in the event of bankruptcy or liquidation of the issuer, is not a priority and is “subordinated” to that of other creditors holding higher ranking bonds. In the notes to the financial statements, the EDF group explains: “Due to their characteristics and in accordance with IAS 32, these issues were recognized in equity from the receipt of funds for an amount of 6,125 million dollars (net of transaction costs). Compensation, recorded as a reduction in equity, was paid in 2013 for an amount of 103 million dollars. “
This type of issue therefore presents an obvious interest from the point of view of the issuer, they contribute to strengthening their credit ratios since they increase equity. In addition, the remuneration paid is recorded directly as a deduction from equity, so there is no impact on the result.
In the notes to the financial statements, the EDF group justifies this accounting treatment in the following way: “The subordinated securities of indefinite duration in dollars and in foreign currencies are recognized in accordance with IAS 32 and taking into account their specific characteristics. They are recognized in equity at their historical cost when there is an unconditional right to avoid paying cash or another financial asset in the form of reimbursement or remuneration of capital. “
What distinguishes IFRS standards
The IFRS standards distinguish debt and equity instruments based on a very general definition of IAS 32: “a financial instrument is an equity instrument if and only if the issuer has no contractual obligation to deliver cash or another financial asset on terms that would be potentially unfavorable Consequently, non-redeemable perpetual bond issues, except on the initiative of the issuer and for which the payment of coupons can be deferred on the initiative of the issuer are classified as equity.
In conclusion, is this accounting treatment really in line with economic reality? it is obviously quasi equity that the rating agencies retain for half in equity. This approach is undoubtedly ultimately the most pragmatic.