The following is the text from SAB Topic 11.H.2, Accounting and Disclosures by Bank Holding Companies for a \"Mexican Debt Exchange\" Transaction.
Facts: Inquiries have been made of the staff regarding certain accounting and disclosure issues raised by a proposed \"Mexican Debt Exchange\" transaction which could involve numerous bank holding companies with existing obligations of the United Mexican States (\"Mexico\") or other Mexican public sector entities (collectively, \"Existing Obligations\"). The key elements of the Mexican Debt Exchange are as follows:
Mexico will offer for sale bonds (\"Bonds\"), denominated in U.S. dollars, which will pay interest at a LIBOR-based floating rate and mature in twenty years. Mexico will undertake to list the Bonds on the Luxembourg Stock Exchange. The Bonds will be secured, as to their ultimate principal value only, by non-interest bearing securities of the U.S. Treasury (\"Zero Coupon Treasury Securities\") which will be purchased by Mexico. The Zero Coupon Treasury Securities will be pledged to holders of the Bonds and held in custody at the Federal Reserve Bank of New York and will have a maturity date and ultimate principal value which match the maturity date and principal value of the Bonds. While the Bonds will have default and acceleration provisions, the holder of a Bond will not be permitted to have access to the collateral prior to the final scheduled maturity date, at which time the proceeds of the collateral will be available to pay the full principal amount of the Bonds. As such, the holder of a Bond ultimately will be secured as to principal at maturity; however, the interest payments will not be secured. The Bonds will not be subject to future restructurings of Mexico's Existing Obligations, and Mexico has indicated that neither the Bonds nor the Existing Obligations exchanged therefor will be considered part of a base amount with respect to any future requests by Mexico for new money.
The Mexican Debt Exchange will be structured in such a way that potential purchasers of the Bonds will submit bids on a voluntary basis to the auction agent. These bids will specify the face dollar amount of existing restructured commercial bank obligations of Mexico or of other Mexican public sector entities that the potential purchaser is willing to tender and the face dollar amount of Bonds that the purchaser is willing to accept in exchange for the Existing Obligations. Following the auction date, Mexico will determine the face dollar amount of Bonds to be issued and will exchange the Bonds for Existing Obligations taking first the offer of the largest face dollar amount of Existing Obligations per face dollar amount of Bonds, and so on, until all Bonds which Mexico is willing to issue have been subscribed. It is therefore possible that a greater amount of Existing Obligations could be tendered than Mexico is willing to accept.
The lender has appropriately accounted for the transaction as a troubled debt restructuring in accordance with the provisions of Statement 15 as amended by Statement 114 [Topic 310]. Question 1: What financial statement and other disclosure issues regarding the Mexican Debt Exchange and the Bonds received should be considered by registrants?
Interpretive Response: The staff believes that disclosure of the nature of the transaction would be necessary, including:
Carrying value and terms of Existing Obligations exchanged;
Face value, carrying value, market value and terms of Bonds received;
The effect of the transaction on the allowance for loan losses and the provision for losses in the current period; and
Annual interest income on Existing Obligations exchanged and annual interest income on Bonds received.
On an ongoing basis, the staff believes that the terms, carrying value and market value of the Bonds should be disclosed, if material, due to their unique features. FN2
FN2 Registrants also are reminded that if the security received in the exchange constitutes a debt security within the scope of Statement 115 [Topic 320], the disclosures required by Statement 115 [Topic 320] also would need to be provided.
Question 2: What disclosure with respect to the Bonds received would be acceptable under Industry Guide 3?
Interpretive Response: Instruction (4) to Item III.C.3. of Industry Guide 3 states: \"The value of any tangible, liquid collateral may also be netted against cross-border outstandings of a country if it is held and realizable by the lender outside of the borrower's country.\" Given the unique features of the Bonds in that the ultimate repayment of the principal amount (but not interest) at maturity is assured, the staff will not object to either of two presentations. Under the first presentation, the carrying value of the Bonds, including any accrued but unpaid interest, would be included as a \"cross-border outstanding\" to the extent it exceeds the current fair value of the Zero Coupon Treasury Securities which collateralize the bonds. Alternatively, under the second presentation, the carrying value of the Bond principal would be excluded from Mexican cross-border outstandings provided (a) disclosure is made of the exclusion, (b) for purposes of determining the 1% and.75% of total assets disclosure thresholds of Item III.C.3. of Industry Guide 3, such carrying values are not excluded, and (c) all the Guide 3 disclosures relating to cross-border outstandings continue to be made, as discussed further below.
For registrants that adopt the alternative disclosure approach and whose Mexican cross-border outstandings (excluding the carrying value of the Bond principal) exceed 1% of total assets, appropriate footnote disclosure of the exclusions should be made. Such footnote should indicate the face amount and carrying value of the Bonds excluded, the market value of such Bonds, and the face amount and current fair value of the Zero Coupon Treasury Securities which secure the Bonds.
If the Mexican cross-border outstandings (excluding the carrying value of the Bond principal) are less than 1% of total assets but with the addition of the carrying value of the Bond principal would exceed 1%, the carrying value of the Mexican cross-border outstandings may be excluded from the list of countries whose cross-border outstandings exceed 1% of total assets provided that a footnote discloses the amount of Mexican cross-border outstandings (excluding the carrying value of the Bond principal) along with the footnote-type disclosure concerning the Bonds discussed in the previous paragraph. This disclosure and any other material disclosure specified by Item III.C.3. of Industry Guide 3 would continue to be made as long as Mexican exposure, including the carrying value of the Bond principal, exceeded 1%.
If the Mexican cross-border outstandings (excluding the carrying value of the Bond principal) are less than.75% of total assets but with the addition of the carrying value of the Mexican Bond principal would exceed .75% but be less than 1%, cross-border outstandings disclosed pursuant to Instruction (7) to Item III.C.3. of Industry Guide 3 may exclude Mexico provided a footnote is added to the aggregate disclosure which discloses the amount of Mexican cross-border outstandings and the fact that they have not been included. The carrying value of the Bond principal may be excluded from the amount of Mexican cross-border outstandings disclosed in the footnote provided the footnote-type disclosure discussed in the second preceding paragraph is also made.
In essence, the alternative discussed herein results in a change only in the method of presenting information, not in the total information required. FN3
FN3 The following represents proposed disclosure using the alternative method discussed above. Of course, it would be necessary to supplement this disclosure with the additional disclosures regarding foreign outstandings that are called for by Guide 3 (e. g., an analysis of the changes in aggregate outstandings), and the disclosures called for by the Interpretive Responses to Question 1.
The appropriate disclosure would depend on the level of Mexican cross-border outstandings as follows:
A. Assuming that the remaining Mexican cross-border outstandings are in excess of 1% of total assets:
Mexican cross-border outstandings (which excludes the total amount of the carrying value of Bond principal) would be disclosed in the table presenting all such outstandings in excess of 1%.
Proposed footnote disclosure -
Not included in this amount is $___ million of Mexican Government Bonds maturing in 2008, with a carrying value of $___ million [if different from face value]. These Mexican Government Bonds had a market value of $___ million on [reporting date]. The principal amount of these bonds is fully secured, at maturity, by $___ million face value of U.S. zero coupon treasury securities that mature on the same date. The current fair value of these U.S. Government securities is $___ million at [reporting date]. This collateral is pledged to holders of the bonds and held in custody at the Federal Reserve Bank of New York. The details of the transaction in which these bonds were acquired was reported in the Corporation's Form (8-K, 10-Q or 10-K) for (date). Accrued interest on the bonds, which is not secured, is included in the outstandings reported [amount to be disclosed if material]. Future interest on the bonds remains a cross-border risk.
B. Assuming that remaining Mexican cross-border outstandings are less than 1% of total assets but with the addition of the carrying value of the Mexican Bond principal would exceed 1%:
There would not be any disclosure included in any cross-border table.
The total amount of remaining cross-border Mexican outstandings would be disclosed in a footnote to the table. Such footnote would also explain that the Mexican outstandings are excluded from the table.
Additional footnote disclosure - (same disclosure in A above).
The disclosure required under this paragraph (plus any other disclosure required by Item III.C.3. of Guide 3) would continue so long as Mexican exposure, including the carrying value of the Mexican Bond principal, exceeded 1%.
C. Assuming that the remaining Mexican cross-border outstandings is less than.75% of total assets but with the addition of the carrying value of the Mexican Bond principal is greater than .75% but less than 1%:
Mexico would not be included in the list of names of countries required by Instruction 7 to Item III.C.3. of Industry Guide 3 and the amount of Mexican cross-border outstandings would not be included in the aggregate amount of outstandings attributable to all such countries.
A footnote would be added to this disclosure of aggregate outstandings which discusses the Mexican outstandings and the Mexican Bonds. An example follows:
Not included in the above aggregate outstandings are the Corporation's cross-border outstandings to Mexico which totaled $___ million at (reporting date). This amount is less than .75% of total assets. (The remaining portion of this footnote is the same disclosure in A above.)
D. Assuming that the total of the Mexican cross-border outstanding plus the carrying value of the Bond principal is less than the.75% of total assets:
No disclosure would be required.
However, same disclosure as in A above would be provided if any other aspects of the financial statements are materially affected by this transaction (such as the allowance for loan losses).
Changes in aggregate outstandings to certain countries experiencing liquidity problems are required to be presented in tabular form in compliance with Instruction (6)(b) to Item III.C.3. In this table, Existing Obligations exchanged for the Bonds would generally be included in the aggregate cross-border outstandings at the beginning of the period during which the exchange occurred. For registrants using the alternative method, the amount of Existing Obligations which were exchanged would be included as a deduction in the \"other changes\" caption in the table. In addition, a footnote will be provided to the table as follows:
Relates primarily to the exchange of unsecured Mexican outstandings for Mexican bonds. The principal amount of these bonds is secured at maturity by $___ face U.S. Zero Coupon Treasury Securities which mature on the same date and have a current fair value of $___. Future interest on the bonds remains a cross-border risk.]