Banking Master Terms Flashcards
Traditional cash flow revolving credit facility (“revolver”)
A line of credit extended by a bank or group of banks that permits the borrower to draw varying amounts up to a specified aggregate limit for a specified period of time.
Asset-Based Lending (ABL) Facility
A type of revolving credit facility that is available to current asset-intensive companies. Secured by first priority lien on all current assets and may include second priority lien on all other assets (typically PP&E).
Borrowing base formula
85% x Eligible Accounts Receivable + 60% x Eligible inventory
Term loan
A loan with a specified maturity that requires principal repayment (“amortization”) according to a defined schedule, typically on a quarterly basis.
Term loan when non-investment grade
Leveraged loan
Amortizing term loans (“Term Loan A” or “TLA”)
Typically require substantial principal repayment throughout the life of the loan.
Institutional term loans (“Term Loan B” or “TLB”)
Typically large in size and sold to institutional investors rather than banks. Amortize at a nominal rate with a bullet payment at maturity.
Second lien term loan
A floating rate loan that is secured by a second priority security interest in the assets of the borrower. Ranks junior to the first priority security interest. Generally do not amortize.
Second lien term loans vs. high yield bonds
Second lien provide borrowers with superior repayment optionality and no ongoing public disclosure requirements. Can also be issued in smaller size than high yield bonds, which usually have a minimum issuance amount of $150+ million due to investor’s desire for trading liquidity. Second lien term loans may also provide a lower cost-of-capital.
High yield bonds
Non-investment grade debt securities that obligate the issuer to make interest payments to the bondholders at regularly defined intervals and repay principal at a stated maturity date, usually seven to ten years after issuance. As opposed to term loans, high yield bones are non-amortizing with the entire principal due as a bullet payment at maturity.
Bridge loan facility (“bridge”)
Interim, committed financing provided to the borrower to “bridge” to the issuance of permanent capital, most often high yield bonds (the “take-out” securities”).
Why are bridge loans important for LBOs
Important due to the sponsor’s need to provide certainty of funding to the seller. The bridge financing gives comfort that the purchase consideration will be funded even in the event that market conditions for the take-out securities deteriorate between signing and closing of the transaction.
Mezzanine Debt
Layer of capital that lies between traditional debt and equity. Mezzanine debt is a highly negotiated instrument between the issuer and investors that is tailored to meet the financing needs of the specific transaction and required investor returns. As such, mezzanine debt allows great flexibility in structuring terms conducive to issuer and investor alike.
‘Club Deal’
When several sponsors team up to create a consortium of buyers, thereby reducing the amount of each individual sponsor’s equity contribution (known as a ‘club deal’).
Covenants
Provisions in credit agreements and indentures intended to protect debt investors against the deterioration of the borrower/issuer’s credit quality. They govern specific actions that may or may not be taken during the term of the debt obligation.
