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Abstract
Many companies issue debt instruments that require the company to make periodic payments of principal to the extent of excess cash flow (ECF) as defined in the debt instrument (referred to herein as an "ECF Sweep Loan"). This is a very common feature in bank loans. This article provides an overview of the general issue and discusses several potential approaches for accruing discount on ECF Sweep Loans. Although the authors conclude that, as a technical matter, many ECF Sweep Loans likely could be treated as contingent payment debt instruments subject to the noncontingent bond method described in Reg. Section 1.1275-4(b), it is not clear how the noncontingent bond method should apply to ECF Sweep Loans because the noncontingent bond method regulations by their own terms do not contain rules for dealing with timing contingencies -- the type of contingency that ECF Sweep Loans present.