Loan and revolver quantum & cost

Hi,

Say a company wants to refinance existing debt on the back of $40m EBITDA as its situation has improved over the past 3 years.
- Could a lender extend a Unitranche loan based on Ebitda leverage covenant + revolver based on A/R?
- If so: what metrics would the lender use to assess the quantum & duration of the loan, its leverage covenants, the quantum of the revolver and its cost?

Am I right assuming that adding a revolver, even based off A/Rs, would lower the amount lent on the back of the $40m EBITDA?

Thanks!

 

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Unitranche loans are similar to syndicated loans in that multiple investors/lenders provide capital into the credit facility. Where it differs is in the structure - the facility is divided into tranches where each tranche, or bucket, has different interest payments, rates, durations, and/or seniority. Usually, the more senior lenders will have the lower risk, and therefore, lower interest rate buckets. Don't feel like they are getting short changed though, they'll make boatloads on the administrative fees since unitranche deals are vastly more complex than traditional syndicated deals.

 

From the borrower's perspective: - payer higher interest rate (not so good) - speak to a single lender (good) - single set of pretty templated documents - covenants are light - pay interest only, principal bullet

Basically: opens the lending market to small-ish mid market companies, opens the lending market to troubled companies in turnaround mode, facilitates the "discovery process" (1 single lender to deal with instead of trying to find 1 for the senior tranche, and others for the junior tranches)

 

Hi,

Just to clarify: We would like to refinance our existing debt load of roughly $160m (we should generate generate around $35-$40m of EBITDA by end of FY19).

We are speaking with lenders which are considering giving us the money for the refinancing in the form of a 6 year Unitranche loan (interest payment only, principal : bullet) on 4x FY19 EBITDA and 1st lien on the assets of the company.

As this money would go to refinance the existing debt load, we could use some extra cash, say $20-$30m, to deal with our Working Capital needs.

So the questions are: 1. How can we assess our ability to borrow a term loan + revolver? 2. Would the revolver be taken into account as part of the amount lent under the Unitranche credit agreement, mechanically increasing our Debt/Ebitda ratio > 4x? 3. If the revolver provider is a the same as the term loan lender, does the revolver follow the same (EBITDA) covenants and tenor as the term loan? 4. Can the revolver provider be a separate entity from the Unitranche lender? 5. Can the revolver be "secured" if the Unitranche lender has a 1st lien on the company's assets? (using Account Receivables "ARs") 6. Is 100% of the revolver accounted for as debt on an ongoing basis or only what's drawn?

Thanks for your time and patience! (on a side note, if there are some good reading on the topic, please do feel free to let me know as I would like to gain a much better understanding of these things)

Thanks much!

 
Most Helpful

You're not getting a whole lot of response on this because, in short, it depends. It's a chicken shit answer but it's the truth. Each lender will look at the same company differently, depending on bank risk appetite in your sector, the existing and pro forma pricing structure on the debt facility, and frankly, how badly loan supervision got burned in the past.

Take none of this as absolutes, but just brainstorming points based on the little information provided. Typically, this underwriting is backed up by months of due diligence.

To tackle the revolver first: Yes, it absolutely can be secured by AR. If you're a $40MM EBITDA company, I assume you're somewhere around $1bn in top line revenue and if you're not a public company (or even a less sophisticate public company), you fit the Middle Market profile. Depending on your working capital structure, you may or may not have enough AR to fully secure a $30MM LOC. The lender may look to inventory to fill in the airball. If this is the case, you may be on a borrowing base where you'll have to calculate AR and inventory on a monthly basis. I wouldn't expect this from a $40MM EBITDA company but you never know.

Typically, only the drawn amount of the revolver will be counted towards funded debt when it comes to your covenants. Be sure to fully understand the credit agreement. There are a lot of ways to fancy up the covenant language to where you have no idea how to calculate it. The revolver and term debt will be part of the same credit agreement, ideally, and any debt will be used as part of the debt/EBITDA calculation. Keep in mind, they may specify separate funded debt and senior debt to encapsulate any subordinated debt you may have.

Although the LOC and term loan are on the same credit agreement, they will not have the same tenor and don't have to have the same covenants but will likely overlap at very least. Turns out, keeping leverage below a certain multiple is an overall good thing. You mention that you're getting terms for a 6 year term loan - find out how long the amortization is pushed out for. This is a balance, a shorter amortization means higher payments but lower bullet while the opposite is true for a longer amortization. You'll have to figure out what works best for your company - typically companies want the longest amortization possible. The revolver will likely be a 1-2 year tenor that renews pretty painlessly as long as your company is performing as expected.

To add a little more to the revolver and term loan being from the same lender (or group of lenders in a club or syndicated deal), this helps to lower your cost in the end. The lender(s) will only have to one set of underwriting for both facilities. Underwriting takes man-hours which is expensive these days.

Other ratios/metrics that lenders like to use to decide credit worthiness: debt service coverage - This can be calculated many different ways and even called many different names but is generally (Net profit + taxes + interest + D&A) / (CPLTD + interest). I know the numerator sounds like EBITDA but it's Operating EBITDA and F you, it's different! The goal here is to have a high multiple, meaning you have more than enough available cash to cover debt payments many times over. Balance Sheet Leverage - Typically calculated as (Liabilities - subordinated debt)/(book equity + subordinated debt). Inverse to debt service, you want a low number here.

This probably sparks more questions than it answers thanks to my non-sequitur line of thinking. Let me know if you need more input. At the end of the day, you should be having these conversations with your (potential) lender. A major part of their job is to be an expert for you. Obtaining money is only a small part of what a c-suite worries about on a day-to-day basis while bankers live their whole lives lending money.

 

Thanks for your reply. I really appreciate the time you spent thinking about and writing about this!

Are there any readings you would recommend on the topic so that I can educate myself quickly on the topic by any chance please? (I dont expect to become quite "the pro" on the topic but to know enough that I can discuss and question these things with some level of confidence). I know amazon should be my friend here but here must be some practical readings to bring people up to speed quickly there and in other places ;)

Thanks much again for your reply and I hope to read again from you soon! (I will "follow" you here for starters :) )

 

Tangentially related question, but all EV, Debt to ebitda, capital structure, and cost of debt calculations should take into account the principal, not the carrying value net of issuance costs/ OID correct?? Just using the carrying value would understate leverage, given the amount the firm must pay back is the total principal amount not the carrying value?? Just an incoming SA seekign help!

 

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