OID / Interest Expense / Amort


I have a question with a few parts to it. Assume you are issuing a piece of debt, lets say $100mm Term Loan that matures in 5 years at 98, and just to make the numbers easy lets say rather than L+something the interest rate is 5%.

In terms of modeling and how investors think about this, please correct me if I'm wrong. The Company only gets $98mm of this TL. The $2 million discount is expensed as the note accretes to face value over the life of the note. This accretion 2/5=.4 would be a non-cash interest expense each year, and the 5% on the $100mm (assuming no pay down, otherwise avg. balance) would be the cash interest expense, thus total interest expense on the note is $5.4mm in year 1.

Imagine you pay down a large portion of the TL in a later year. Would you accrete more of the discount in that year? How does this work. Related to this, assuming you pay down the entire Term Loan, wouldn't you have to expense whatever discount is remaining in that period? Should the discount be accreted as some kind of weighted percentage of the paydown to avoid a potentially lumpy expense schedule unrelated to when the actual note was paid down?

Finally, how do investors think about a yield on this kind of instrument. Thanks so much.

Comments (3)

Jul 27, 2010

What you're talking about is the accounting and accrual system for the OID that the company performs. In my experience, purchasing secondary debt is always done on face value, irrespective of OID / Fees.

Jul 27, 2010

Rough calculation of yield would be interest rate + OID/4. In your example, yield would be something around 5.5%.

I agree with MezzKet. That's just accounting/accrual. OID is usually only given on new issuances (hence "original" issue discount). From a buyside perspective, when we look at OID, we just assume those are 2 points we're paying to the market and for which we are receiving no benefit. However, we would still have to pay interest/amort off of the full TL amount.

Jan 31, 2018