Burning debt questions

Hey Sovuti,

To your first question, term loans are terms loans. They're funded debt that may require some sort of amortization (principal repayment) prior to maturity. A term loan a&b can be one naming method for a 1st/2nd lien structure, so it could be the same thing. At the same time, there are important differences given by the name. Collateral being the obvious in a 1st/2nd structure.

Term Loan A - Specifically means a term loan marketed towards and funded by commercial banks (deposit taking institutions). Pricing is more attractive on these loans as structures are not as aggressive. Unless it's in the investment grade space, a term loan in the bank market will amortize roughly 30 to 50% over a 5-year term. Secondary trading is rare in these "pro rata" term loans.

Term Loan B - General term used to describe a loan marketed towards and funded by institutional investors (think debt-sponsored funds, CLO's, etc.). The lead arrangers (typically a commercial bank, but now large asset managers are moving into the lead position) will usually keep a portion of the issuance to support secondary trading among investors.

Pricing is less attractive on these "institutional loans" because they're owned by yield-oriented investors. Term Loan B's typically don't amortize or amortize a nominal amount (1.0%) per year and can often have terms of 6 or 7 years. These investors will also support more leveraged capital structures. Sometimes Term Loan B's will not include any financial covenants (interest coverage or maximum leverage) unless certain financial ratios or funding levels are tripped. This is called "covenant-lite."

Another important difference is an A/B structure generally shares in the same collateral pool and has the same payment priority in the event of default. In a 1st lien/2nd lien structure, the 2nd lien lenders are specifically second in line for repayment in the event the company goes into financial hardship.

As it relates to LIBOR

Most credit agreements actually give borrowers the option to borrow at 1, 3, or 6 month LIBOR and most borrowers actually keep their fundings based on 1-month LIBOR because it is a lower rate. I think the most common reason 3-month LIBOR is quoted is because there are so many financial contracts tied to the index (benchmark interest rate swaps, floating rate mortgages, etc.). You have to realize that since the financial crisis, banks typically aren't getting their funding from each other on the unsecured interbank market. This is one of the reasons the FCA is trying to replace LIBOR by 2021. There is a lot of great reading material on LIBOR's disappearance, but WSO won't let me post the links because I'm not a frequent poster. DM me if interested.

Happy to answer any other questions you have on the topic.