Leveraged Loan — Underwritten and Held for Sale (Mark to Lower of Cost or Market)
Recording a leveraged loan underwritten by the investment bank with intent to syndicate — initially carried at cost but subject to lower-of-cost-or-market (LOCOM) write-downs if syndication market deteriorates.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Leveraged Loan — Held for Sale (At Cost) | Asset (+) | 500,000,000.00 | - |
| Cash / Unfunded Commitment Funded at Close | Asset (-) | - | 500,000,000.00 |
💡 Accountant's Note
When an investment bank 'underwrites' a leveraged loan (commits to fund the full amount, intending to sell down to a syndicate of institutional lenders), it initially carries the loan at cost (the funded amount) on its own balance sheet. If market conditions deteriorate between commitment and syndication (a 'hung deal'), the bank may be unable to sell the loan at par — creating a lower-of-cost-or-market write-down loss. This is the exact risk that materialized in 2007-2008: banks had committed to fund billions in LBO loans (Chrysler, TXU/Energy Future Holdings) when the credit crisis hit — they were forced to carry these loans at massive discounts, creating billions in write-downs. Under ASC 948, loans held for sale are initially carried at cost with any discount (below-par syndication) recognized as a loss.
Practitioner & Systems Framework
💻 ERP Architecture
Leveraged loans held for sale are carried in the 'warehouse' or 'underwriting book' — separate from both the trading book and the held-for-investment loan book. LOCOM is assessed at each reporting date: if the secondary market price for the loan falls below cost (e.g., the loan was funded at $1.00/dollar, but the market is now $0.96 on the dollar), a $20M write-down is required on the $500M loan. The write-down is recognized in 'Net revenues from principal transactions' on the income statement.
⚠️ Audit Flags
Auditors test LOCOM write-downs for all loans in the warehouse at period-end — using secondary loan market prices (from the LSTA secondary market or dealer quotes). The intent to sell must be confirmed — if the bank decides to reclassify a loan from held-for-sale to held-for-investment, the write-down becomes the new 'cost basis' for amortized cost measurement going forward.
📄 Required Documentation
Loan commitment agreement, funded loan agreement, intent-to-syndicate documentation, LSTA secondary market price at reporting date, LOCOM write-down calculation, syndication progress report, and held-for-sale vs. held-for-investment reclassification analysis.
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