Hi Kitty, You are more than welcome to voice your opinion but I...

Hi Kitty,

You are more than welcome to voice your opinion but I never said WOW, WES, JBH, PMV or TRS would go bankrupt because of the change?

I said the classification of operating leases will change and will have a material impact for Myer.

This change will mostly affect retailers and airlines with some transport and logistics companies also affected. Almost $3trillion in off balance sheet commitments will be brought onto the balance. You could think of them as Collateralized Debt Obligations (CDOs). No-one really knew how much was off the balance sheet. Yes, this is a drastic comparison but it’s to emphasize you shouldn’t just dismiss what you can’t see.

In regards to HVN, they own a number of commercial properties and lease some too (almost 50/50 split). This accounting classification will affect them too but not as hard as MYR. Harvey Norman have diversified their property holdings and also their revenue stream (international sales). We are not comparing apples for apples here but I do accept this as a proxy comparison.

Operating Leases were considered a part of operating expenses i.e. an expense like admin, marketing, electricity etc. However, after this reclassification it will now be considered a Financial Lease (akin to debt). Leases will be capitalised and brought onto the balance sheet as liabilities with an asset component. This could have a material impact on leverage ratios (debt/ebitda) and also borrowing costs due higher ‘debt’ levels. It could have a credit rating impact which affects the firms cost of capital and bond rating (from aaa grade to bbb grade).

Leverage ratios will be mostly affected by this change. We can use Myer as an example.
Debt of $100m and EBITDA of $160m
Leverage would be $100/160m = 0.625x
What if $2.7b of leases are brought on?
Leverage would be $2.8b/160m = 17.5x

Mind you there would be some uplift in EBITDA due to depreciation and interest deducted for ‘operating leases’ but would not offset the material increase in debt.

Hence, a leverage ratio of 17.5x makes the company more riskier, which could potentially deter private equity. Lenders and financiers may decide to exclude these liabilities from ratios but I believe that is not the point of IFRS16. Otherwise they would remain off balance sheet.

I respect most people’s comments even when I don’t agree with them. I listen to what was said with an open mind. The only point I made with Myer was this change in accounting classification will affect them more than a lot of other companies on the ASX.