Treatment of Revolver

Suppose a bank sets up a $50MM revolver with a client and suppose that the client draws $10MM of the facility right away.

  1. What is the accounting treatment of the revolver from the client's perspective?
  2. What is the treatment of the revolver from the bank's perspective? I.e., what is the impact of the revolver on leverage ratios, capital requirements, etc.? Would the revolver be considered on balance sheet? Is it possible to set up an off-balance sheet revolver?

Comments (4)

 
Dec 31, 1969 - 7:01pm

Treatment of Drawn Portion of Revolver in FCFE DCF? (Originally Posted: 02/05/2016)

Currently doing a DCF (have to do both FCFF and FCFE) and confused on the treatment of the revolver for the FCFE calculation. I understand interest payments and principal repayments are to be subtracted from cash flows but I'm not sure on how to the treat the drawn principal amount of the revolver in the calculation. Should it be modelled that the drawn portion of the revolver is only paid down at maturity, or should a cash sweep be employed to pay it down immediately?

My thoughts are to just model it as being paid down at maturity. It wont be drawn upon further (from the op model forecasts) between now and maturity. What is best practice in this case? Should I just include a cash sweep toggle to show different scenarios?

Thanks in advance.

 
Dec 31, 1969 - 7:03pm

Once you have calculated available cash to pay down the drawn portion, you can just throw in a % toggle of how much of that you want to use to pay it down.

It really depends. A lot of people will model it being paid down for PE/LBO purposes, but in the real world there are hopefully higher/better uses of cash than repaying a 4-6% revolver...

 
Dec 31, 1969 - 7:04pm
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