Orbital writes down loan

Orbital Corporation’s latest results gave investors a glimpse into its colourful past when it wrote-down the value of a $19 million interest-free loan provided by the state government.

The interest-free loan has been quietly sitting in Orbital’s books for the past 17 years and is due to be repaid in 2014.

The write-down in the value of the loan to $12.2 million was a result of the adoption of international accounting standards, which require the company to recognise ‘financial instruments’ at fair value.

This meant the company had to discount the loan to reflect its net present value.

However, WA Business News understands that Orbital has been negotiating with the state government about converting the loan to a grant or writing-off the loan completely.

The interest-free loan was advanced in 1989, when the then state government was under pressure to match enticing offers made to the company by other states and even other countries.

That was a time when Orbital technology was tipped to revolutionise the global automotive industry and the company was valued by the stock market at more than $1 billion.

The terms of the loan illustrate the ambitious expectations of the time.

It was due to be repaid after 25 years, or when annual production of Orbital Combustion Process engines exceeded five million units.

Orbital set up its manufacturing facility in the town of Tecumseh in the US, after winning concessions from the state of Michigan.

However the company failed to win the longed-for breakthrough into the automotive industry and the factory was never fully utilised, and certainly never got close to producing five million units.

Orbital CFO Keith  Halliwell emphasised that the accounting change would have no impact on Orbital’s cash flow.

The wonders of modern accounting meant the write-down equated to a reduction in accumulated losses and a substantial boost to the company’s total equity.

It will also reduce the company’s annual profit by about $625,000 as a result of the “unwinding of the discount”.