Debt Types

Question 1

Difference secured and unsecured debt?

Answer 1

Secured Loans: If a debt instrument is secured, that means the debt is backed by collateral. The assets of
the borrower were pledged as collateral to get favorable financing terms.

Unsecured Loans: For unsecured loans, pension funds, mutual funds, insurance companies, hedge funds,
and some banks are typically willing to invest in this relatively riskier type of debt for the higher yield.

Question 2

Debt Cheat Sheet

Answer 2

Question 3

Leveraged Loans?

Answer 3

RCF, Term A,B,C,D

Secured (1st or 2nd lien)
Priced floating rate (EURIBOR + spread)

Shorter maturity

Covenant heavy

Question 4

Most common leveraged Loans?

Answer 4

Priced at SOFR + spread

Sheduled principal amortization

No call protection

Most common package is an institutional (nonbank) term loan b/C/D and revolver

Question 5

Revolver

Answer 5

Secured 1st lien

sofr + spread

can be tied to borrowing base (% of collateral, usually A/R and INV)

Question 6

Term loan A

Answer 6

Provided by banks

usually 1st lien, 5y with revolver

TLAs have shorter terms (~5 years), carry higher amortization levels than other term loans, and are amortized evenly
over their tenor (i.e., “straight-lined”).

Question 7

Term Loan B/C/D

Answer 7

refers to loans sydicated to institutional investors

larger than TLA and mire prevalent

Less covenants

5-8y

1st or 2nd lien

require less principal amoritsation

Question 8

2nd lien

Answer 8

Unlike 1st lien no amortization and have longer maturity

Smaller part of LBO cap structure as riskier

Question 9

Credit rating of a company

Answer 9

Stable CF generation
Seasonality wc
Capex requirements
Current leverage
Interest cov

Size of company
Industry
Market position
Historic performance (marigns)
Growth opportunity

Question 10

Common covenants

Answer 10

Financial covenants:

Debt/EBITDA < 6x
EBITDA/Interest > 2x

Other covenants - spend limits beyonf pre-specified carve-outs,

borrower pledge to include lender in any subsequent grant of security interst (negative pledge)

Negative and positive convenants

other covenants
- Minimum Cash amount on BS
- Minimum Equity/Debt Ratio

Question 11

Maintenance Cov vs Incurrence Cov

Answer 11

Maintenance –> strictest
required compliance every quarter

senior debt

Incurrence –> less strict
only when taking a specific action

bonds

Question 12

Mezzanine

Answer 12

Structures:
Convertible debt
Bonds with warrants
convertible preferred stock

Pricing components:
Blended return of 15%-20%

1. Cash interest/dividends
2. PIK interest/dividends
3. Warrants

Hedge funds and mezz fund providers

Question 13

What is the coupon rate?

Answer 13

Annual interest rate paid based on principal of the bond

Yield = annual return + coupon payments adjusted for premium or discount

Question 14

Asset based loan vs cash flow revolver

Answer 14

• The maximum amount that can be drawn from an ABL revolver is based on the company’s liquid assets.

Usually 80% of A/R and 65% of INV

• The maximum amount that can be borrowed for cash flow revolvers is tied to the borrower’s historical and
  projected cash flow generation. Therefore, covenants are more restrictive due to the uncertainty around future
  cash flows.

Question 15

What is unitranch debt?

Answer 15

Unitranche debt financing is a blended hybrid of senior debt and subordinated debt.

The distinct characteristics of unitranche debt are that it’s just one tranche of debt instead of two (as the name suggests),
and the debt is priced at a blended interest rate

–> reduces number of lenders and shortens time (one-stop shop)

Question 16

Coupon rate vs bond current yield

Answer 16

Coupon rate –> bond annual coupon / face (par) value

current yield –> coupon payment / bond price

Question 17

What are discount bonds?

Answer 17

Unlike coupon bonds, zero-coupon bonds (discount bonds) make no payments between issuance and maturity and are priced at a discount to their face value.

Question 18

Relationship between coupon and duration

Answer 18

Lower Coupon –> Longer Duration

Higher Coupon –> Shorter Duration

Question 19

What is a commercial paper?

Answer 19

Commercial paper is issued by large corporations with high credit ratings as short-term borrowing to finance
their working capital needs. The typical commercial paper term is ~270 days, and the debt is issued at a discount (i.e., zero-coupon bond) as an unsecured promissory note

Question 20

What over risks exists besides market risk?

Answer 20

Default risk

Liquidity risk

Event risk

Refinancing risk

Question 21

What are warrants?

Answer 21

Warrants function similar to employee stock options such that the mezzanine investors have the option to exercise their options and turn them into common stock if profitable. This usually amounts to
1-2% of the total equity of the borrower

Longer than options

Not widely traded

Question 22

What is pik interest?

Answer 22

PIK interest expense is interest charged by a lender that accrues towards the ending debt balance as opposed to being paid in cash in the current period.