Hi Monkeys,
Annual recurring revenue based lending seems to be getting more focus. Maybe as investors try to move to profitability, affecting growth rates and so leverage can help.
What has been your experience with ARR based lending? Lenders? Terms? Covenants?
ARR based lending is quickly going out of vogue in lockstep with how infatuation with speculative growth software companies has dwindled to tolerance and then intolerance.
ARR-based loans are here to stay - as MM and UMM PE firms (Thoma, Vista, Advent, etc.) increasingly target smaller / higher-growth tech names that are either not yet profitable or currently generate
See lots of flips to cash flow based after X # of years
Obviously higher than average rates and often have a PIK option
Lots of private lenders and some banks are active
2x ARR is kind of the low end, seen it up to ~4x
"Flip" is becoming increasing uncommon
Rates are slightly higher than regular way 1L/Uni, all depends on credit quality though
PIK option for part of it is a common ask
What is flip?
Flip to EBITDA based loan after a while, once company improves margins
They all start with an ARR based covenant (eg. funded debt to ARR of no more than 3.5x) but historically always "fipped" to EBITDA based covenant (eg. funded debt to EBITDA of no more than 8x). This "flip" has become less of a requirement.
How big does the ARR need to be to consider an ARR lend?
Maybe $10MM? A bank maybe goes smaller / lower multiple
Depends on situation, quality of Company, sponsor, use of proceeds, etc
I don’t think it’s about the size of ARR but the doc. Covenant will be based on ARR instead of EBITDA
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