Applicable High Yield Discount Obligations

Summary

Rules under the Internal Revenue Code that limit a company’s ability to deduct interest on certain debt instruments issued with Original Issue Discount. If this happens, a company cannot deduct interest from its calculation of taxable income until it pays the interest in cash, and some of the interest deduction may be permanently disqualified. Debt instruments with Payment In Kind features and a maturity greater than five years are typically considered to have original issue discount. Companies can avoid these rules by making a “catch-up” payment to Lenders or issuers of high yield instruments issued with OID by the first interest payment date after the fifth anniversary of the original issuance or incurrence of the debt. Agent and Lenders will want to examine these potential payments, as they could take away from a Borrower’s cash flow during the year in which the borrower is trying to make a catch-up payment and avoid the AHYDO rules.