This article is the second in a series of articles dedicated to issues that arise when accounting for debt modifications. This particular issue is addressed in Sections 126.96.36.199 and 188.8.131.52 of our publication, A guide to accounting for debt modifications and restructurings (June 2023).
A delayed-draw term loan (DDTL) is a loan agreement where the borrower can draw funds incrementally over time rather than receiving a lump sum at the outset. In a DDTL, the borrower and lender agree on a maximum loan amount, but unlike traditional term loans, the borrower does not receive the full amount upfront. Instead, the borrower draws on the loan over time, up to the agreed maximum. The delayed draw option adds complexity to the accounting for debt modifications and restructurings because these loans have characteristics of both term loans and line-of-credit facilities. As a result, the accounting for modifications or restructurings of a DDTL may need to be evaluated under two different models depending on the facts and circumstances.
If the transaction does not meet the troubled debt restructuring criteria in FASB Accounting Standards Codification Topic 470-60, Debt – Troubled Debt Restructurings by Debtors, judgment is necessary in determining the appropriate accounting model to be used when evaluating changes to DDTLs. In general, we believe that changes to DDTLs that are unfunded and not expected to be funded in the near term should be evaluated using the line-of-credit model, while changes to funded DDTLs and those expected to be funded in the near term should be evaluated using the term loan model.
The proper identification of a transaction as a DDTL could impact the accounting treatment of fees incurred in connection with a debt modification or restructuring.
When entering into a DDTL transaction, a borrower will generally pay commitment fees to the lender, which are based on the size of the commitment by the lender and are generally payable based on either the undrawn commitment or the total commitment. Such fees are due regardless of whether the debt is drawn, which is consistent with fees paid on a line-of-credit arrangement. As a result, we believe these fees should be treated consistently with fees related to line-of-credit arrangements and recorded as either: (a) an asset or (b) a reduction of the carrying amount of debt, but only to the extent there is an outstanding debt balance when paid. Once the DDTL is drawn, we believe the fees (related to the drawn portion) should be treated consistent with term loan fees and reflected as a reduction of the debt balance and amortized over the life of the debt using the effective interest method. To the extent that the DDTL remains undrawn, the fees should be amortized on a straight-line basis over the life of the commitment.