3.6 Loan syndication and participation

Many financing arrangements involve multiple lenders that are members of a loan syndicate or loan participation. The accounting for a modification of a loan syndication differs from that of a loan participation.

The lead lender has a loan with the borrower; participating lenders have an interest represented by a certificate of participation

The accounting for each lender in a term loan syndicate can be different; one lender’s loan may be considered modified, while another’s may be considered extinguished. Similarly, under ASC 470-50-40-21, issuance costs may be written off for one member of a line-of-credit syndicate but not another.

As discussed in ASC 470-50-55-2, if an exchange or modification offer is made to all members of a loan syndicate and only some of the lenders agree to the offer, the 10% test should be applied to the debt instruments held by the lenders that accept the offer. Debt instruments held by lenders that do not agree to the exchange or modification offer are not affected unless they are paid off, in which case they are extinguished.

If a new lender enters a loan syndicate and provides a new term loan or access to a new line of credit, it is considered a new arrangement and not a modification. Therefore, fees paid to that lender and allocated third-party costs should be accounted for in the same way as for a new loan or line of credit (i.e., deferred as debt issuance costs and amortized over the life of the new term loan or line of credit).

The modification of a loan syndication will typically be arranged by an investment bank; oftentimes, that investment bank is also a lender in the loan syndication. A reporting entity should assess whether fees paid to the investment bank arranging the restructuring are being paid for third-party services or as a lender fee. If the investment bank is being compensated to perform services that could be performed by a third party, the fee should generally be accounted for as a third-party cost.

Question FG 3-3
A reporting entity issues debt to a loan syndicate, which includes two funds managed by FG Group, FG Fund 1 and FG Fund 2. The reporting entity later replaces this debt with new debt issued to a loan syndicate which includes FG Fund 1 and FG Fund 5, which is also managed by FG Group.

Should the reporting entity treat the funds as one lender or separate lenders for purposes of determining whether its debt has been modified or extinguished?

It depends on how the funds are structured and managed. If FG Group’s funds are effectively operated as separate funds, they should be treated as such in the analysis. Conversely, if the funds are effectively operated as one fund, they should be treated as a single lender. For example, if the FG Funds are (1) separate legal entities, (2) not consolidated by FG Group, and (3) FG Group has a fiduciary responsibility to manage each fund for the best interest of the holders of each particular fund, then each FG Group fund should be treated as a separate lender for purposes of determining whether its debt has been modified or extinguished. The debt held by FG Fund 2 should be extinguished because it is not participating in the new loan syndication. The debt issued to FG Fund 5 should be accounted for as new debt because it did not hold debt in the original syndicate. The debt held by FG Fund 1 should be assessed under the guidance in ASC 470-50-40 to determine whether the transaction should be accounted for as a modification or an extinguishment.

3.6.1 Cost allocation for multiple instruments with multiple lenders

In practice, a reporting entity may modify non-revolving (i.e., term debt) and revolving-debt arrangements at the same time. When this occurs, the reporting entity should allocate the new lender fees and third-party costs to the individual instruments using a reasonable and rational approach. These new fees and costs should be first allocated to each instrument; then further allocated to each lender. Once this allocation is complete, the reporting entity should determine (1) whether the non-revolving debt has been modified or extinguished under the guidance in ASC 470-50-40, and (2) the appropriate accounting for the revolving-debt arrangement under the guidance in ASC 470-50-40-21.

Question FG 3-4
A reporting entity has a $5,000,000 term loan that is prepayable without penalty. Two years prior to the maturity of the term loan, the reporting entity repays the term loan and concurrently enters into a revolving-debt arrangement with the same lender. The revolving-debt arrangement has a maximum amount available of $5,000,000 for five years. The reporting entity immediately draws $5,000,000 on the revolving-debt arrangement.

How should the reporting entity determine whether the term loan has been modified or extinguished for accounting purposes?

Although there is no guidance on how to account for a term loan that is replaced with a revolving-debt arrangement, ASC 470-50-55-10 through ASC 470-50-55-13 discusses the accounting for a modification of a revolving-debt arrangement with a term loan. This guidance respects the initial form of the debt instrument and states that a modification of a revolving-debt arrangement with a term loan should be assessed under the revolving debt guidance in ASC 470-50-40-21. We believe it is appropriate to analogize to that guidance and respect the initial form of the debt instrument. Therefore, when a term loan is replaced with a revolving-debt arrangement, we believe the 10% test should be used to determine whether a term loan has been modified or extinguished for accounting purposes given the terms of the amount borrowed under the new revolving-debt arrangement.

FG Corp has a term loan syndication. Its credit rating has improved, and interest rates have declined since the original loan syndication was entered into, so FG Corp has decided to modify its loan syndication to lower its borrowing costs.

The existing loans in the loan syndication are prepayable at any time without penalty; therefore, the fees paid by FG Corp are related to the borrowing of additional funds. The terms of the original loan syndication and the new loan syndication at the modification date are summarized in the following table.