Debt pricing re-set

[hubertd]

Hi Everyone,

We're about to provide lending to a really big project. Our loans will be drawn on monthly basis priced at 1 months Gilts + industry credit index value for each monthly drawdown. After 6 months the drawdowns will be 'consolidated' into a tranche repriced to 1 month Gilts + industry credit index value at that time and meant to stay fixed until maturity in 20 years. There will be a new 'consolidated' tranche every 6 months.

I don't think the repricing of monthly drawdowns after six months would constitute debt modification with a difference between the current and new gross carrying amount to be recognised as a modification gain/loss in PnL but rather the revised pricing (and so the future cashflows) will make it into the recalculation of EIR to be used. In any case, I would be interested to see what you views are.

Thank you

[Marek Muc]

As I see it, this doesn't constitute a modification since the repricing occurs under the original terms. Technically, you will need to recalculate the amortised cost using the revised cash flows and the original EIR. However, as the interest rates remain unchanged at the consolidation date, there will be no impact on P/L.

https://ifrscommunity.com/knowledge-bas ... tual-terms

[hubertd]

Thanks Marek. Let me have another question as I've never been quite sure how you would correctly handle this. Corporate and project finance loans usually have an availability period allowing the borrower to draw the loan amount in tranches. Let's say £100m loan is drawable over 1year with indicative schedule being £25m 1st working day of each quarter. This forecast cashflows will be used to calculate an initial EIR. Subsequently, the borrower draws the first tranche on the let's say 20th of the first month and indicates the rest will be drawn at initially indicated dates but split differently in terms of amounts, let's say £25m, £40m and £10m. Would such a change in the actual/expected drawdowns timing/amounts (but still within the contractual availability period) result in remeasurement of gross carrying amount and one-off PnL impact or would it effect only the EIR recalculation in your view.

P.S The changes in drawdowns are happening regularly for corporate/project finance loans.

[JakobLavrod]

Agree with Mareks proposal. The simplest way to do this is to treat each of the splits initially as a separate loans, and once they go though the consolidation, you adjust the EIR so they are all the same and can now be treated as one loan.

[Marek Muc]

@hubertd - I'd say each drawdown is subject to its own amortised cost calculation, independent of other tranches within the same loan facility.

[hubertd]

Hmm, interesting view. How would commitment fees on total facility amount however be captured in EIR in such a case? They ‘beling’ to multiple undrawn tranches.

[JRSB]

But the commitment fee is likely payable even if you don't draw anything, so it relates to the facility itself and not any drawdown.

[hubertd]

Correct, but as soon as the loan starts being drawn the commitment fees are included in EIR. The question is what EIR if each drawdown would have its own amortised cost.

[JakobLavrod]

You could allocate out the commitment fee based on what proportion is drawn and not drawn down. So if the limit is £100m and £25m is drawn down, 25 % of the fee is allocated to the £25m loan and 75 % of the fee is allocated to the remaining facility.

[hubertd]

@jakobLavrod You can do it in excel but not accounting system fed automatically.

[Marek Muc]

How do handle each tranche having distinct initial recognition dates while being accounted for as a single financial asset/liability? Does each new tranche lead to a one-off P/L adjustment to the amortised cost of earlier ones?

[hubertd]

In our system we have only one facility, one EIR and one amortised cost for these deals. Each subsequent drawdown is treated as a cashflow within a period (similar to coupon payment) and adjusts the closing balance. At the same time new EIR is calculated (assuming drawdown amounts and timings changed) and this new EIR is applied to the adjusted balance.

[hubertd]

I've just realised I have a bigger problem with this facility. Every six months where monthly drawdowns are consolidated into tranche which is fixed for 20 years the gilts benchmark used is 20 years one. So all future 6 monthly tranches are effectively re-priced every six months to 20 year benchmark. Looks like a tenor mismatch. Or does it not, given the already lent money is not re-priced and only the forecast cashflows?

[Marek Muc]

This change of a benchmark rate will result in a one-off P/L gain or loss as in https://ifrscommunity.com/knowledge-bas ... tual-terms

[hubertd]

Thanks Marek. This part makes sense.

I'm getting a bit confused about tenor mismatch. I guess you're saying it's not given the repricing only affects cash flow forecasts, right? If existing (actual) tranches get re-priced every six month to 20 year benchmark that would clearly make the mismatch the issue, agree?

[Marek Muc]

The tenor mismatch is likely to cause the loan to fail the SPPI test (IFRS 9.B4.1.9A-E).

[hubertd]

Yeap, I know this. My question is if what I described above qualifies as a tenor mismatch. Every six monthly re-price effectively affects only future (yet to be drawn) tranches. The already lent money is not affected, i.e. after six months the six monthly drawdowns are consolidated into tranche that is priced at 20 yr gilts + margin and this price/interest stays fixed until maturity. With the next six monthly drawdowns consolidation though all future tranches get repriced at current 20yr gilts + margin. And so it goes every six months. I guess this may depend on how the loan is treated. If all tranches are treated as one facility or each drawdown a separate loan for pricing/EIR/amortised cost purposes. Bit tricky to assess this case...