There are generally three categories where add-on bonds or incremental loans can be fungible with the original bonds or loans.
CATEGORY 1 – ISSUED WITHIN 13 DAYS
The add-on bonds or incremental loans are issued within 13 days of the date on which the original bonds or loans were issued (counting the closing date as day one), and the new debt and existing debt have the same terms and are issued pursuant to a common plan or series of related transactions.
CATEGORY 2 – ISSUED WITHIN 6 MONTHS
The add-on bonds or incremental loans are issued within six months of the date on which the original bonds or loans were issued and either:
- The original bonds or loans are publicly traded (generally if sales prices or firm or indicative quotes are available), and on the pricing date (or, if earlier, the announcement date) of the new debt, the yield on the original bonds or loans (based on FMV) is not more than 110% of their yield on their original issue date (or the coupon, if they were issued with no more than de minimis OID); or
- The new bonds or incremental loans are issued for cash, and their yield (on the earlier of the pricing date and announcement date) is not more than 110% of the yield on the original bonds or loans on the original issue date (or the coupon, if they were issued with no more than de minimis OID).
CATEGORY 3 – ISSUED AT ANY TIME
The add-on bonds or incremental loans are publicly traded or issued for cash and either (i) they are issued with no more than de minimis OID or (ii) the yield on the add-on bonds or incremental loans (based on FMV or cash purchase price, as applicable) is not more than the yield on the original bonds or loans on their original issue date (or the coupon rate, if they were issued with no more than a de minimis OID).
What is de minimis OID?
Bonds or notes have de minimis OID if the original issue discount is less than 0.25% multiplied by the number of full years to maturity of the bonds or loans. For example, if the existing bonds were issued at 100% of par value and maturity is 6 ½ years, you would have to price the add-on bonds at more than 98.5%.
How to apply the yield tests to floating rate loans
For purposes of determining the amount of OID on most floating rate loans, replace the floating rate with a fixed rate that is equal to the value of the floating rate as of the issue date of the floating rate loan.
When asked to compare the yield of the incremental loan to the original loan, use the same fixed rate. To be safe, calculate the yield of the incremental loan and the original loan twice: (1) compare the yields based on the fixed rate at the time of the original issuance and (2) compare the yields based on the fixed rate at the time of the incremental loan issuance. Make sure both calculations satisfy the relevant yield test.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
