Would a PE firm prefer bank debt to high yield debt and why?
I know bank debt is floating rate with maintenance covenants and principal + interest payments while high yield is interest only with higher fixed rate and lower in capital stack. In terms of returns, would bank debt or high yield debt provide a higher return for PE firm?
Also, I got a question in an interview that I believe asked me what are the pros and cons of using loans vs. bonds to finance a company. Had no idea what he meant... is this just bank debt vs. high yield.
There are several types of bank debt - revolvers, term loan A, and term loan Bs. Term loan Bs are bought by CLOs, As and revolvers are sold pro rata to bank. If you can finance with bank debt, it’s typically cheaper, but you may have a lower advance rate than you would get with HY.
Bonds provide you much more flexibility (no repayments etc) and less compliance shit (covenant testing, waivers, etc). But it comes at a cost.
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