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Loan transfer accounting considerations for business development

First-out, last-out arrangements raise ASC 860 and other issues


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The carving out of loans in to first-out and last-out tranches has become an increasingly common strategy among senior lenders and mezzanine lenders alike. Business development companies (BDCs), banks, insurance companies, institutional investors and others are looking to participate in these types of transactions.

BDCs, however, must keep a number of issues in mind as they consider first-out, last-out loan transfer arrangements. They must fully understand the economic nature of these transactions as well as the relevant accounting literature and related consequences including:

  • Applicability of ASC 860 and the determination of whether a transfer is a sale or secured borrowing
  • Fair value option for secured borrowings
  • Implications to asset coverage ratios

Tactful planning and long-term goal setting play a key role in employing a successful investment strategy. Key in this is recognizing that the accounting treatment for loan participations and other transfers may drastically vary depending on whether a portion of a loan or entire loan is transferred as well as certain technicalities outlined in the agreements. Management can proactively assess the long term financial reporting implications of each opportunity to ensure their investment strategy aligns with the desired financial statement presentation and maintains compliance with regulatory requirements.


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