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KUWAIT ENERGY PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2017
42
23.
CONVERTIBLE LOANS (CONTINUED)
The loans carry a coupon interest of 8%-10.5%, and if there is no conversion, the outstanding loans, without additional
interest, are repaid in cash as per the repayment schedule. Should a conversion option be exercised, the outstanding
loans and an additional interest uplift will be converted into equity shares of the Company based on the fair value of
the shares on the conversion date. The additional interest uplift is 5.5%-8% if conversion is within 36 months of the
first draw down and 9.5%-10% if conversion is after this time.
These options are considered to be embedded derivatives which have been determined not to be closely related to the
loan arrangements. The Group has opted to recognise the convertible loans as financial liabilities at fair value through
the income statement based on the Group’s best estimate at the consolidated balance sheet date of relevant likelihood
of the occurrence of each conversion or prepayment option. The fair value, therefore represents the Group’s best
estimate of the discounted future cash flows payable for these loans. The change in fair value in each period arises as
a result of changes in the forecasted cash flows and the likelihood of the occurrence of each conversion or prepayment
option.
The convertible loans are classified as Level 3 in the fair value hierarchy in all the years presented. Level 3 fair value
measurements are those derived from inputs that are not based on observable market data (unobservable inputs). The
Group uses a discounted cash flow technique to determine the fair value of the loans. The significant inputs considered
in the valuation are likelihood and timing of a conversion event and the discount rate. The discount rate used was in
the range of 10-18% (2016: 10-18%). Possible changes to the likelihood and timing assumptions in the fair value
measurement could have a maximum impact of reducing the liability by US$ 28.5 million.
24.
OBLIGATIONS UNDER FINANCE LEASES
2017
2016
US$ 000’s
US$ 000’s
Minimum lease payments
Amounts payable under finance leases
Within one year
1,192
1,192
In the second to fifth years inclusive
2,086
3,277
3,278
4,469
Less: future finance charges
(195)
(363)
Present value of lease obligation
3,083
4,106
Present value of minimum lease
payments
Amounts payable under finance leases
Within one year
1,169
1,169
In the second to fifth years inclusive
1,914
2,937
Present value of lease obligation
3,083
4,106
In 2015, the Group sold its office building in Egypt, and leased back the sold building under a finance lease for a total
lease value of US$ 8.2 million which was settled by a US$ 1.5 million down payment and the remaining lease payments
to be paid over a lease term of five years. The Group has the right to buy the leased building at the end of lease period
for an agreed nominal sale price of US$ 1 only. The Group’s obligations under finance leases are secured by the lessor’s
rights over the leased asset. The lease is on a fixed repayment basis and no arrangements have been entered into for
contingent rental payments.
The fair value of the Group’s lease obligation is approximately equal to the carrying value.