Leveraged Loans Flashcards
What are loans used for?
1) M&A
2) recapitalize company’s balance sheet
3) refinance debt
4) fund general corporate purposes
Mergers and acquisitions
Lifeblood of leveraged finance. These transactions are the primary source of new loans that require market funding.
Recapitalizations
Results in changes in the composition of an entity’s balance sheet mix between debt and equity either by 1) issuing debt to pay a dividend or repurchase stock, or 2) selling new equity, in some cases to repay debt.
Recapitalization - Dividend
A company takes on debt and uses proceeds to pay a dividend to shareholders. Bull markets inspire more dividend deals as issuers tap excess liquidity to pay out equity holders using debt. In bearish markets, dividend activity slows as lenders tighten the reins, and usually look skeptically at transactions that weaken an issuer’s balance sheet, from the credit perspective.
Recapitalization - Stock repurchase
In this form of recap deal a company uses debt proceeds to repurchase stock. The effect on the
balance sheet is the same as a dividend, with the mix shifting toward debt.
Recapitalization - Equity infusion
These transactions typically are seen in distressed situations. In some cases, the private equity owners agree to make an equity infusion in the company, in exchange for a new debt package. In others, a new investor steps in to provide fresh capital. Either way, the deal strengthens the company’s balance sheet.
Recapitalization - IPO
When an issuer lists on an exchange a portion of the equity proceeds from the listing are typically used to repay some debt, effectively deleveraging the company, usually resulting in an upgrade by ratings agencies. This, in turn, means the company often can issue new loans or bonds at more favorable terms (often called a post-IPO refinancing).
Recapitalization - Refinancing
A new loan or bond is issued to refinance existing debt.
General Corporate Purposes and Build-outs
These deals support working capital, general operations, and other business-as-usual purposes. Build-out financing
supports a particular project, such as a utility plant, a land development deal, a casino, or an energy pipeline.
Term Loans
An amortizing term loan (“A” term loans, or TLa) is a term loan with a progressive repayment schedule that typically runs six years or less. These loans are normally syndicated to banks along with revolving credits as part of a larger syndication.
An institutional term loan (“B” term loans, “C” term loans or “D” term loans) is a term loan facility carved out for nonbank, institutional accounts. These loans came into broad usage during the mid-1990s as the institutional loan investor base grew. This institutional category includes second-lien loans and covenant-lite loans.
Covenants
are a way to get the lender to the table early before other creditors. terms of a loan if the issuer fails to meet financial targets
LGD
Severity of a loss the lender is likely to incur in the event of default based on:
1) collateral (if any) backing the loan
2) the amount of junior debt and equity
3) covenants
credit statistics
credit ratios measuring leverage (debt to capitalization and debt to EBITDA)
coverage (EBITDA to interest, EBITDA to debt service, operating cash flow to fixed charges)
