SAPWG adopts INT 20-10 – Reporting Nonconforming Credit Tenant Loans

So, what’s the Rub?

What is a credit tenant loan (CTL)? You might assume “they don’t apply to me,” so I don’t need to read this sermon. Not so fast. Your group may own some; you may not. But even if you don’t own them, some consider them an attractive alternative investment in the current environment of low yields, so you might want to learn and understand their properties.

There are many features for a CTL; the following is a high-level perspective. It is an exclusive investment vehicle intended to finance real property leased to an investment-grade single tenant. This is a niche investment providing a high-quality alternative to the traditional commercial mortgage market. It is fundamentally a mortgage loan on real property structured to rely principally on an investment-grade single tenant’s credit standing. The general vehicle profile appears like a hybrid between a public bond and a commercial mortgage loan. The lease payments from the tenant are paid directly to the lender to repay the principal and interest on the loan. The investor’s benefit is a predictable and steady cash flow stream, similar to the payment stream on an investment-grade bond. A well-structured credit tenant loan generally provides the investor with a higher yield without forfeiting quality. A loan of this nature is designed to be intrinsically safer than an unsecured bond with a similar credit rating or a traditional commercial mortgage. The CTL benefits from both the tenant’s investment-grade credit profile and the collateral associated with the real estate.

Background and SAPWG Adoptions:

Some entities have been reporting CTLs on Schedule D-1 – Long-Term Bonds that do not qualify as “conforming” CTLs. CTLs that do not qualify within the structural requirements of the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) are to be recorded as “nonconforming” CTLs. To confirm that nonconforming CTLs are not provided more favorable treatment than conforming CTLs, SAPWG confirmed that only CTLs filed with the NAIC SVO by February 15, 2021, are to be reported on Schedule D-1.

For this particular limited situation, the INT only requires that a reporting company submit the nonconforming security with the SVO by February 15, 2021. It does not necessarily require the reporting entity to actually receive the SVO-assigned designation before submitting the 2020 annual statutory statements. Consequently, if the security is not submitted to the SVO by February 15, 2021, the investment should be reported on Schedule BA – Other Invested Assets. CTLs carried on Schedule BA are to be reported with a credit-rating provider (CRP) selected NAIC designation. For nonconforming CTLs that have been submitted to the SVO and retained on Schedule D-1, the reporting company is required to disclose the total amount of nonconforming CTLs reported on Schedule D-1 on Note 1 as if it were a permitted practice. The reporting entity should also complete the permitted practice disclosures required by SSAP No. 1—Accounting Policies, Risks & Uncertainties, and Other Disclosures. Two separate line items should detail the nonconforming CTLs that were reported on D-1 on one line, and the nonconforming CTLs that were not reported on Schedule BA on a separate line within the disclosure.

Finally, those nonconforming CTLs previously reported on another reporting schedule (e.g., Schedule B or Schedule BA) should be kept on that same reporting schedule. This INT does not change that prior reporting, and there is no requirement for reporting companies to submit SVO-assigned designations for CTLs or disclose these particular nonconforming CTLs in Note 1. Moreover, reporting entities that have previously reported nonconforming CTLs on Schedule D-1 that do not want to file with the SVO or do not want to disclose in Note 1 are permitted to reclassify these CTLs to Schedule B or Schedule BA without an NAIC designation.

The INT concessions are only applicable for the year-end 2020 statutory financial statement. Nonconforming CTLs that have been submitted to the SVO and are reported on Schedule D-1 should continue the Note 1 reporting for the 2021 quarterly statutory statements until an SVO-assigned designation has been obtained. The INT provides limited-time exceptions and will expire on October 1, 2021.