What are some of the key differences between bonds and loans? Is it primarily that bonds are tradeable on the market whereas loans aren't? Also, are there any differences in seniority (or secured / unsecured) at all? I've searched this on google but was hoping to get some better clarity from the community here. Any insight would be appreciated
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Should be a section on M&I guide on this.
But generally (may differ for certain cases):
- Bonds - fixed. Loans - floating
- Bonds - require public ratings. Loans - don't necessarily need to esp for MM companies
- HY Bonds - call protection 2/3 years (5NC2, 7NC3). Loans - Soft call protection 6-12m.
- Bonds - tradeable securities. Loans - much more illiquid (bid/ask prices on illiquid lev fin loans lol)
I may have forgotten to write up a few more
- No significant difference in seniority - mostly they are issued pari, unless indicated otherwise, and terms have converged to the point where they are more similar than different.
Thanks so much for your comment +1. Could you provide some insight into how bonds and loans fit within bank debt (revolver, term loans, etc.) and high yield debt (senior notes, sub notes, etc.)? Because of the names of the different types of debt, I was originally under the impression that bank debt was the same as loans, and high yield debt was the same as bonds. You mentioned they're issued pari passu so does that mean there are "revolver bonds" or "senior notes that are loans" - how does that work lol
Sure - although with the caveat that I'm still junior so the following may not apply in all situations. Also Europe based (US may be different).
Generally the revolver is held by banks primairly only for working capital purposes - usually you'll not expect it to be drawn (but obviously in covid companies did draw them). In Europe you'll want the RCF to be super senior ideally - this in effect means you'll get priority in enforcement (payment is pari). Generally most terms align with the senior unsecureds (whether it's bonds / loans), with the exception of a springing financial covenant (i.e. a leverage covenant applicable when you draw above a certain % of the revolver), and associated EBITDA cures.
The senior unsecured is generally either TLB / Senior notes. Both are generally held by institutional investors (AMs, pension funds, etc.), with the exception that the TLB market has a higher depedency on the CLO market and bonds on fund inflows/outflows. From experience HYBs are issued primarily for general corporate purposes, while loans are preferred for acquistions. Banks (except those that are yield-hungry) don't generally hold a portion of these and will try to seek to underwrite the majority of it but will hold on to the RCF as no investor will want to hold the RCF
The subs are generaly an extension of the above - they can be done either through an intercreditor (agreeing to be suboridnated), or just simply structural (i.e issued at the parent without guarantees). Typically because there's limitation on how mch senior debt you can issue (too much means dilution of value which makes investors uncomfortable) - you will then have a sub layer if that's not available.
To be clear - bank debt doesn't mean the same as loans as there are institutional TLBs that are held primarily by investors. High yield debt generally refers to the rating and encompasses both loans and bonds. No revolver bonds exist as most will be a bullet repayment structure, and senior notes means senior bonds.
Let's break down the difference into the major categories, before going into the specific parameters.
- Sizing
- Seniority
- Security
- Use of proceeds
- Public ratings requirement
- Tenor
- Amortization/prepayment
- Covenant structure
- Pricing
- Lender/investor base
I work in leveraged finance. Shoot me any question on specifics, and I'll address them individually.
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