EIB loan with an embedded derivative requiring separation
In May 2017, the company arranged a loan agreement for up to EUR 20 million with the European Investment Bank (EIB).
The loan is unsecured and guaranteed by our major subsidiaries. It is available in tranches within a two-year period. In July 2017, the company drew down the first tranche of EUR 10 million, with two further tranches of EUR 5 million each being accessible after certain milestones have been achieved. Each tranche must be paid back within five years after it has been made available. The loan contains three different interest components: 1) a variable interest component, entailing quarterly interest payments on the outstanding amounts based on 3-month EURIBOR plus a risk premium; 2) a fixed component at 6% per annum which is due at term-end; and 3) a performance component which is due at the term-end, and whose level is derived from the market capitalisation of Biofrontera AG but limited to a 4% per annum interest rate. The loan carries standard market interest.
The loan is carried forward at amortised purchase cost applying the effective interest method.
The performance component represents a separable financial instrument in the form of an embedded derivative, which is measured at fair value on each reporting date, and is to be classified to a fair value hierarchy of level 3.
The market capitalisation at maturity is the same as that of the measurement cut-off date, which is based on the 90 trade days preceding the measurement cut-off date. The performance-based interest payment for the first tranche is calculated based on a notional 0.64% participation rate in the market capitalisation. This is discounted to the measurement cut-off date applying a market interest rate.