Module IV· Sources & UsesAdvanced
Question
What is original issue discount (OID) and how does it affect Sources and Uses?
Answer
Mechanics
OID is the discount at which a debt tranche is issued below par. Example: a TLB with $200m face, issued at 99% (1% OID) — the bank pays out $198m, but the company owes back $200m.
Deep diveShow more details
Example
| Item | Value |
|---|---|
| Face debt (S&U Sources, gross) | $200m |
| OID (1%) | $2m |
| Net cash proceeds (actually received) | $198m |
Impact on S&U
There are two modeling conventions:
- Net mode (common in Europe): Sources shows $198m net proceeds; OID does not appear separately
- Gross mode (common in US modeling): Sources shows $200m face; OID $2m as an additional Use ('financing fees')
Both arrive at the same equity check, but the table looks different.
Pitch tip
OID amortizes over the debt's life for accounting (effective-interest method, IFRS 9 §5.4) — it raises the effective yield above the stated coupon. On a 7-year TLB with a 5% coupon and 2% OID, the effective yield-to-maturity is ~5.3%. In modeling, OID amortization is modeled as an additional (non-cash) interest expense.