VRC Sheds Light On How Private Lenders Handle OIDs

Survey of BDCs, other credit funds reveals most loan discounts are amortized, but in some cases are treated as fees and booked as income

New York (Nov. 7, 2023) – Valuation Research Corporation (VRC), a leading global provider of independent valuation support and advisory services, today announced findings from a survey of leading private debt funds that showed variation in how lenders handle loans that are issued below par. The poll of 41 BDCs and other private debt funds found that original issue discounts on more than two-thirds of deals are amortized over a long period, while the OID is booked as immediate income about 15% of the time. In the remainder of cases, respondents employed a combination of the two approaches.

It is relatively common for private loans to be issued at a discount of anywhere from one- to four or even five percent below par or 100. In some cases, the OID primarily serves to entice investors, especially when market conditions change after the loan’s coupon is set. In other instances, it is viewed more as fee-like compensation to the lenders for originating and structuring the deal. However, there is no formal accounting or regulatory guidance on how market participants should reflect OIDs.

“We work with dozens of the leading private credit funds, and they often ask us what their peers do with OIDs, so we decided to conduct a study,” said VRC Chairman John Czapla, who leads the firm’s Portfolio Valuation Group. “What we found confirmed our experience. There was a preference for amortizing—gradually recognizing the difference between the discount and par over a period of anywhere from six months to several years. But also, in a lot of cases, some lenders elect to immediately mark the loans up to par and book the difference as immediate income, especially when they are the sole lender or led the origination.

The study also revealed the prevalence and size of OIDs and market practices around the period of amortization. More findings are available HERE.

About VRC

Valuation Research Corporation is a full-service, independent, global valuation firm. Since 1975, our network of nearly 1,500 valuation professionals, which includes VRC’s 275+ U.S.-based colleagues, has provided objective, supportable conclusions of value to domestic and international clients. VRC has locations in Atlanta, Boston, Chicago, Cincinnati, Dallas, Los Angeles, Milwaukee, New York, Princeton, San Francisco, and Tampa; as well as international member firms operating as VRG in Argentina, Australia, Brazil, Canada, China, Colombia, Germany, India, Israel, Japan, Luxembourg, Mexico, Singapore, Spain, and the United Kingdom.