Debt: OID vs. Upfront Fee?
Curious what the real difference is between an OID and netting an upfront fee from the borrower's proceeds? Don't they function the same way?
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Functionally they’re the same thing. In theory, an upfront fee is a separate payment from the borrower to the lender(s), but like you said, in reality it’s just netted out of the wires like an OID would be.
The only other difference I could see is if the upfront fee is paid to an arranging bank rather than the ultimate lenders, but that’s usually called an “arrangement fee” or something like that.
Thanks! I saw this one firm simply net the fee from the proceeds so I was like ah, okay it's basically an OID. Do groups charge an arrangement fee AND an OID or is usually just one or the other?
Arrangement fees are more common on broadly syndicated deals. The investment bank will receive a fee for marketing / syndicating the transaction that the lenders don’t get.
In private credit, occasionally you’ll see the lead arranger get a separate fee, but usually will only happen if it’s a complex deal / bigger lender group. For a standard “club” deal (think 3-7 lenders), everyone just receives the OID/upfront based on their hold size.
Very helpful. Thank you.
It’s been a while since I’ve been in private credit but I believe there’s a very practical consideration as to whether a credit fund recognizes an upfront fee or an OID.
With an upfront fee — and the rationale for the fee can be anything (eg for structuring the debt, for arranging the debt) — the fund can recognize all of the fee as current income and take their incentive fee (eg 20% of the upfront fee). With an OID, the credit fund (I believe) will have to recognize the the income over the life of the loan and thus can only recognize a portion of the total incentive fee each year.
From the equity side of things, arrangement fees, structuring fees, OIDs — they all just represent leakage from the debt financing
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