Can you call bank debt?
Have a technical interview in 6 hours, and just one technical thing I need help on. Anyone with knowledge of bank debt, particularly in context of LBOs please chip in.
Anyhow, my question is, I know that call provisions are usually not common place when it comes to bank debt, but I'm assuming a bank could write in a call provision into the term sheet if it wanted, right? Just wondering if maybe there's some legal reason it couldn't?
Also, if there was a call provision, could the issuer call on just part of the debt? I know this is possible with bonds as they are divided into smaller pieces, but not sure if this is possible with bank debt?
Yes you can have callable bank debt
I don't know why a bank would call a note. It's the issuer who typically wants to call the note, not the investor. If anything the bank would have a call premium included.
I'm sure you could have some weird structure where part of the debt is callable. Pretty much anything is possible structure-wise in finance.
You are correct, most bank debt does not have call protection (RC, TLA, etc). You would usually see call protection in the institutional market (HY, TLB). If you think from a credit standpoint, banks wouldn't want their debt to have call protection as they are most concerned about repayment.
Lenders can demand early payment if the borrower is in breach of loan covenants. Otherwise there is usually no reason for them to do. Banks are happy to continue receiving interest payments on the loans for as long as possible. If anything, it is usually the borrowers who want to repay early and there is often a prepayment penalty clause for that.
Wait wait wait. Call feature from a bond perspective usually means that the issuer has the right but not the obligation to repay if interest rates go down. This has been somewhat meaningless over the past couple years with near zero interest rates, although my understanding is that issuers are now trying make-whole calls where they can call the bond at the treasury rate or a double digit basis point spread over treasuries if they suddenly become a lot more creditworthy.
From a bond perspective, if the bondholder can demand repayment of the bond for any reason at certain times, that's called a put feature. They are fairly rare but exist on about 100 bonds in the Lehman Aggregate Index. We had to price them, too.
There are a lot of ways to do bank debt, and I admit that I'm a little bit less familiar with it than I am with corporate bonds. Often banks get better terms than the bond market in terms of bond seniority, collateral, covenants, and interest rate features. If you have time, I believe there's a couple hundred or so securitized publicly traded bank loan issues out there for which you can dig up prospectii on. If you need a place to start, look at the CDX Loan index and find the reference obligations on them. You can then check the prospectus/ indenture agreement in EDGAR, or better yet, pull up the ISIN or CUSIP if you have access to a Bloomberg window somewhere.
You don't have to be an expert on this. If you know what "call feature" means in the context of corporate bonds, you're doing better than 75% of candidates. But if it makes you feel more confident going it, pull up an indenture agreement on a loan- or whatever the loan equivalent term is. If you find a callable bond or loan, it will be relatively clear from the first two or three pages, and there will often being a table listing call dates and prices, or perhaps there will be a spread that references a treasury rate on one of these newfangled make-whole calls that didn't exist back in the higher-rate days of 2007-2009. It's been a long time since I worked on a corporate bond pricing system and someone else who issues these things for a living may know more details.
Relax. The fact that you're thinking about call features tells me that you're probably going to be just all right on the technicals. Take a deep breath and remember to smile.
Sounds like OP is confused about puts and calls?
Speaking from experience, all institutional bank debt (TLBs) has at least soft call protection. The borrower can thus repay it anytime they want, generally, as long as they pay the call premium (say, 101).
OP might be referring to puts, where the lender can demand repayment. Thats what covenants are for. There are some putable bonds, but they are very rare to see in the modern capital markets.
Prospectus is a 4th declension noun, not second declension. So the plural is prospectus (in Latin) and in English should follow the convention of adding "es" ie "prospectuses". Or you can keep it "prospectus". But not "prospectii".
(/Latin nerdery)
(edit) This should have been a response to IlliniProgrammer. I must have clicked the wrong reply button.
Usually soft call for first lien term loans ranging from 6 to 18 months. Second lien increasingly popular these days and prop a little more call protection (noncall 1 with hard calls) than first lien
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