TLA vs. TLB Maturity and Leverage
Could someone explain to me why TLAs often have a maturity of 6 years whereas TLBs are at 8? TLBs are often perceived as riskier which is reflected in the higher margins (due to the bullet repayment) which should result in a lower tenure, no?
Another question is how far you can leverage with a loan vs. high yield bond. Let's assume a company is acquired for 9.0x LTM EBITDA. Is it fair to assume that 3.0x TLB and 2.0x SUN (Senior Unsecured Notes) would be feasible or how high can you go with the senior loan?
i assume you are talking EURO market deals? I can help w this. US market is RC TLA 5yr 1L TLB 7yr 2L TLB 8yr
US RCs and TLAs don’t go 6yr that’s a euro specific tenor.
1) TLA vs. TLB tenor (5yr / 7yr) and amortization (~5% vs. 1%/annum) comes down to investor: bank vs. institutional banks are comfortable w/ 5yr. institutional is more flexible, and focused on return on the loan (say L+400), therefore want less amort (TLA 5% vs. TLB 1%/annum), and are more flexible on tenor - 7yr. a) **ICLG 2020: Loan Syndications and Trading: An Overview of the Syndicated Loan Market (Loan Syndications and Trading Association) ** heres a tidbit from that helps explain more
Although banks continued to dominate both the primary market (where loans are originated) and the secondary market (where loans are traded), the influx of the new lender groups in the mid-1990s saw an inevitable change in market dynamics within the syndicated loan market. In response to the demands of this new investor class, the banks, which arranged syndicated loans, began modifying traditional deal structures, and, in particular, the features of the institutional tranche or term loan B, that portion of the deal which would typically be acquired by the institutional or non-bank lenders. The size of these tranches was increased to meet (or create) demand, their maturity dates were extended to suit the lenders’ investment goals, and their amortisation schedules tailored to provide for only small or nominal instalments to be made until the final year when a large bullet payment was scheduled to be made by the borrower. In return, term loan B lenders were paid a higher rate of interest. All these structural changes contributed to a more aggressive risk-return profile, which was necessary in order to still attract more liquidity to the asset class.
2) leverage 9x deal? Loan vs. HY Bond? depends. 1st - RC/TLA - bank investors typically dont go above 3x senior / 4x total (lev lending guidance) TLB will typically go to 4.0x-4.5x, even for a software deal, 5.0x+ (5.0x/7.0x deals typical for software) Senior Unsecured Notes -- not necessarily - depends on deal size. also 3.0x / 5.0x is less common, you see more like 4.0x / 5.0x, 4.5x/6.0x, may be 2L TLB not Notes Notes are for larger mega deals. 2L TLB tho has a ceiling in terms of size, like you wont see a 2L above $500, but theres some..
so say its 4.0x thru the 1L TLB maybe you get another 1.5x through the 2L TLB, so 4.0x / 5.5x. depends on industry, comps, and cash flows
heres a copy paste of TLA vs. TLB
TLA
“Pro rata” tranche that is packaged with a revolver and cannot be sold separately • Typically provided by banks, who are looking for other revenue opportunities • Typically no private equity sponsor for broadly-syndicated deals, but sponsors do sometimes use this product in the lower middle market • Floating interest rate (virtually always at a lower spread than Term B Loans) • LIBOR floor: Varies (typically 0% floor if provided by banks) • Upfront Fees to lenders: 25-50 bps • Tenor: 5–6 years, shorter tenor than Term B Loans • Amortization: Yes, typically 5% - 10% per year • Secured: Yes, all-asset blanket lien • Financial Maintenance Covenants: Yes, typically both leverage and debt service Easier to amend due to relationships with bank lenders so don’t need baked-in flexibility for company’s strategic initiatives, growth and solutions in times of distress More limited EBITDA adjustments (e.g., rarely see uncapped pro forma adjustments for synergies, cost reductions and aspirational future performance based on prior “run rate”) Terms: more varied, less “market” driven Limited debt buybacks Prohibitions on transfers to Disqualified Lender provisions becoming more common, but not universal as for Term B Loans Soft Call Protection: Rarely MFN Protection: Rarely
TLB
Typically arranged and sold to institutional investors (CLOs, prime rate funds, private credit/debt funds, hedge funds and asset managers) or direct lenders Floating interest rate (typically higher than Term A Loans) Upfront fees to investors: typically 50 – 100 bps Tenor: 6 – 7 years Amortization: Nominal (1% per year), bullet maturity Lenders typically have the ability to decline prepayments Secured: Yes, but carve-outs from blanket lien (no control agreements, often no mortgages, other carve-outs) Covenants: Single maintenance covenant or “Covenant Lite” (incurrence covenants only) Call Protection: Virtually always MFN Protection: Typically 50 bps, often with a 12 or 18 month sunset, but 75 bps with 6-month sunset is clearing
Hey Loanboy - great info. I had a quick question on leveraged loan math:
Let's say you have a loan at L+250 and is trading at 98 and 3m LIBOR is at 1%. My understanding is that the simple yield, assuming a 4-year average life, is 1% + 2.50% + (2*0.25%) = 4.0%
My question is WHY is each point of OID equal to 25 bps? And also why do we assume a 4-year avg. life? Just because it'll likely get refinanced in ~4 yrs?
Bonus question: when taking a loan to market, lets say you have 100 bps of flex for OID - you multiply by 4 so you can issue at 96. Again, why do you multiply by 4? Know this is convention but feel like I'm missing 1 or 2 pieces to make it click, thanks!
correct 1) All-in Yield calc: L+250 1.00% floor 98.0 = 250 +100 + (200 / 4 = 50) + 50 = 400 = 400 bps = 4.00% All-in yield
**2) OID - why 4-year average life convention? **
-its just one of those things. its like a tax rule or convention. in europe, its sometimes 3-year average life. Yes - I believe bc they get refinanced by then. 2a) OID calc - response to "Bonus Question..why do you multiply by 4"
this is always so confusing to me every time I do it lol. its basically just to do the opposite. just go with it. send me your email I have a nice visual slide on it. see below flex terms, and then we'll break it down
3) Market Flex 125 bps flex (50 OID) = 75 margin / 50 OID so assume L+400, 99.0 Flex: L+400 + 75 = L+475 OID flex = 99.0 - (50 x 4 = 200 bps or 2.0 OID) - 2.0 = 97.0 L+475, 97.0
4) Example: Fee Letter: Market Flex
The Lead Arrangers shall be entitled...shall have the option and right to make such changes if they can reasonably determine that such changes are necessary or reasonably advisable to ensure a Successful Syndication: 125 bps flex (50 OID) (i) increase the interest rate margins under the Term Loan Facility by up to 125 basis points (of which up to 50 basis points of such increased interest margins permitted under this clause (i) may, at the election of the Majority Lead Arrangers, take the form of OID or upfront fees (which will be deemed to constitute a like amount of OID), with OID being equated to such interest rate margins based on an assumed four-year average life (i.e., 0.25% of interest margin equals 1.00% in OID or upfront fees);
by the way im creating an outline course in this space that covers these topics. gonna be efficient and hard hitting and gives users job skills to hit the ground running day 1 IMO in this space. stay tuned. happy to send stuff in the meantime to get the learning going in this space tho.
Thanks a lot. Very helpful. All the best with the course (which is an amazing idea btw given that credit stuff is rare to find) and let us know once finished and how to acccess! :)
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