Consolidated Sec. 108(b) attribute reduction–post-United Dominion.(troubled-company debt restructuring): An article from: The Tax Adviser

by Jill H West on Monday, May 7th, 2012 | No Comments

Company Debt

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company debt question by Benny: What does it mean when a company “writes down debt”?

company debt best answer:

Answer by Blah Blah
You hear this a lot recently regarding subprime and other loans. Loans that are on the books have become increasingly more delinquent as the economy weakens. If a loan is on the books as an asset, and it becomes “non-performing”, then the company may choose to write that loan off as a loss.

A write down can also just be any valuation that is a discount from “par”, or full value. For example, if you had ten thimbles that were all purchased for $ 1, you’d have $ 10 worth of thimbles. If the market for thimbles changed and nobody paid more than .50 cents for a thimble, you would then only have $ 5 in value. If you were a company, in order to accurately represent the value of your firm, you would have to “write down” the thimble asset to $ 5 from $ 10. This is what has happened with many loans. They aren’t completely worthless, but the market for the loans has desintegrated and nobody will pay the “intrinsic value” for the loan. So banks and other firms must “write down” the loans to the market value. Some time in the future, however, if the market price improves, they can reverse the write down and have a windfall.

This is likely what will happen with many of the losses you hear about today, such as with Citicorp and the investment banking firms. They are writing down the assets today to take the pain… or as some say, to lance the boil. But in the future, when they reverse some of the losses, there will be a great windfall. This is very likely, which makes many bank stocks valuable in this market … you can get them cheaply and there is some silver lining down the road.

Make sense?