Global Loan Revolvers - an introduction for Investment Accounting

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John Read at Prodktr wrote this primer to help firms booking Global Loan Revolver products:

Think of a revolver as a credit facility. When a fund ‘goes long’ on a revolver it is selling the ‘right to borrow’ to a counterparty. This paper outlines the concept within the framework of traditional bonds and how you would treat the facility and ensuing term loan using standard accounting functionality for bonds.

It addresses the fundamental challenge with Global Loan Revolvers. Most systems do not directly support Global Loans so a typical solution is to set up the facility as two separate security lines and transfer the book cost from revolver to Term Loan as it is drawn down.

Example of a typical Global Loan/Bond booking to an ABOR/IBOR system.

  • Asset Type: Term Loan/Bond
  • General ledger Lines: Balance Sheet – Book Cost Debt; Cash; Unrealised Gain; P&L – Market Gain

 

Scenario 1

Buy 10,000,000 nominal @ par and then value on first day at price of 101

  • Transaction: Buy 10,000,000 for settlement amount $10,000,000
  • Accounting entry: Debit Book Cost $10,000,000; Credit Cash $10,000,000
  • Position: Secured Term Loan: 10,000,000; Market Price 101; Market Value 10,100,000
  • Accounting Entry: Debit Unrealised Gain (Balance Sheet) 100,000; Credit Market Gain (P&L) 100,000

 

Revolver Scenario 2

‘Open Long’ 10,000,000 nominal of Revolver @ 2.5% (counterparty is paying a 2.5% premium for right to Loan facility) and price at same

  • Transaction: Buy 10,000,000 nominal on Revolver, market price 2.5, settlement amount $250,000 received.
  • Accounting entry: Credit Book Cost $250,000; Debit Cash $250,000
  • Position: Revolver: 10,000,000 Market Price 2.5; Market Value -$250,000; Book Cost -$250,000 Unrealised Gain $0

 

Revolver Drawdown Scenario 3:

Counterparty draws down 8,000,000 of facility at par.

Fund lends 8,000,000 Term Loan to the counterparty, but needs to incorporate the original cash receipt for the revolver pro rata into the long, Term Loan position

Transactions:  

  1. Sell Revolver 8,000,000 nominal @ 2.5, settlement amount $200,000
  2. Buy Term Loan 8,000,000 nominal @ 100, settlement amount $8,000,000

Accounting Entry:

  1. Debit Revolver Book Cost 200,000; Credit Term Loan Book Cost 200,000
  2. Debit Term Loan Book Cost 8,000,000; Credit Cash 8,000,000

Positions:         

  1. Revolver nominal 2,000,000; market price 2.5; market value -$50,000
  2. Term Loan 8,000,000; market price 100; market value 8,000,000; book cost $7,800,000

 

Issues to consider

  1. System parameterisation
  2. Linking of Revolver with subsequent Term Loan
  3. Coherence between systems (Different organisations with different work-arounds)
  4. Transaction messaging & data representation (Different organisations with different work-arounds)

 

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