Financing Costs and the Net Debt Bridge
Financing costs — accrued interest, arrangement fees, and prepayment penalties — are debt-like items that belong in the net debt bridge. Here is how they work.
The net debt bridge in financial due diligence does more than add up outstanding loan balances. It captures every item of financial obligation that a buyer effectively assumes or pays off at completion. Financing costs — including accrued interest, unamortised arrangement fees, and prepayment penalties — are frequently overlooked but can be material in leveraged transactions.
Why Financing Costs Feature in Net Debt
At deal close, the seller's existing debt is typically repaid. The buyer does not just repay the principal outstanding — they also settle all accrued obligations attached to that debt. These include:
- Accrued interest: Interest that has accrued since the last payment date but has not yet been paid
- Unamortised loan arrangement fees: Where fees paid to establish facilities have been capitalised and are being amortised, the unamortised balance on the balance sheet is an asset that will be written off on repayment
- Prepayment penalties: Many facilities (especially high-yield bonds and leveraged loans) carry prepayment premiums or break costs if repaid before maturity
- Commitment fees and unused facility charges: Amounts accrued on revolving credit facilities
Accrued Interest
When a company reports net debt, the gross financial debt figure on the balance sheet may not include interest that has accrued since the last coupon or payment date. This accrued interest sits in either:
- Trade and other payables (if accrued but not yet invoiced)
- A separate accruals line in current liabilities
In the net debt bridge, accrued interest is included as a debt-like item. The FDD team will calculate the interest accrual at the assumed completion date, not just at the analysis date, to give the buyer a forward-looking view.
Unamortised Debt Issuance Costs
Under IFRS 9, the costs of arranging a debt facility (legal fees, arrangement fees, bank fees) are deducted from the carrying value of the debt on the balance sheet — they are not shown as a separate asset. This means the balance sheet debt figure is net of these costs.
When the debt is repaid, these unamortised costs are expensed immediately (as a finance charge in the P&L). From a buyer's perspective, the cost of settling the debt is the gross principal plus accrued interest — not the net carrying value. The unamortised costs must therefore be added back in the net debt calculation to arrive at the correct repayment amount.
Prepayment Premiums
Many leveraged finance instruments carry a call premium — a percentage of principal paid as a penalty for early repayment. These are set out in the facility agreement and are often:
- Step-down over time (e.g., 3% in year one, 2% in year two, 1% in year three)
- Non-callable periods for a specified initial duration
In FDD, the prepayment premium applicable at the assumed completion date is included in the net debt bridge as a debt-like item. On a large leveraged transaction, this can amount to tens of millions of euros.
Revolving Credit Facilities
A revolving credit facility (RCF) may be drawn or undrawn at the analysis date. The net debt treatment depends on:
- Whether the RCF is drawn (drawn amounts are debt)
- Whether undrawn commitments carry commitment fees (these may be accrued but are not debt in themselves)
- Whether the RCF is considered a working capital facility or a structural credit facility (this affects where it sits in the bridge)
Presenting Financing Costs in the FDD Report
The net debt section of the FDD report typically includes a schedule showing:
- Gross debt by facility
- Accrued interest per facility
- Unamortised arrangement fee add-back
- Prepayment premiums (if applicable)
- Total repayment cost at assumed completion date
The buyer and their financial adviser use this to agree the completion accounts mechanism and the equity consideration payable at signing.
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