Amortizing Financing Fees
Do you amortize financing fees faster if you pay down the debt faster? Ex: If we have $100 of debt and $2 of financing fees with a lifespan of 10 years, but I pay down 50% of my debt in Y1, does that mean my financing fees now are $1? or are they $1.80 or (.90 - 50% of the remaining 1.80)
I would accrue principal at close by the fees amount you owe, so you start with $102 and then amortize the whole amount in the way that makes sense for your model.
Check that there aren't any specific provisions how fees should be paid - especially if there was a draining negotiation to bring fees down.
I think it’s supposed to be the other way around from an accounting standpoint - start at 98 debt balance and as you expense it via ‘amortisation’ in the income statement, the debt balance goes up towards 100 as you approach maturity
What I have come across is this:
You sound a lot more knowledgeable though!
thanks for your thoughtful response and definitely see the logic in your approach - always open to the chance that I’m wrong and I’m sure at the end of the day it won’t dramatically change the outcome (returns)!
you are almost there. there’s two things going on for your debt balance here:
1) at close, debt will be marked at 98 on balance sheet. As it approaches maturity, it should goes up towards 100. This is accounted for in the income statement where you amortise $2fees/years of debt term each year.
if you work it out, the decrease in NI from amortisation on the P&L is exactly offset by the increase in debt on the BS (leaving taxes aside)
2) At EOY, if you repay debt early, you only ‘repay’ the portion of financing fees based on the amount of debt you are paying down (as you mentioned)
however what you missed is point 1), which you have to take into account in order to calculate point 2).
this line item is usually called ‘extinguishment of financing fees upon early debt repayment’.
OID (which is different from financing fees) would be treated the exact same way from an accounting perspective
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I think the question is referring to the amortisation of financing fees, not the principal amount which I agree with you would be spelled out for a TLA.
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