What is the difference between Term Loan A and Term Loan B in terms of buyer base, amortization, and covenant package?
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The answer
Term Loan A and Term Loan B are both first-lien senior secured debt, but they differ in three key ways. TLA is sold primarily to commercial banks, it amortizes meaningfully at roughly 5 to 10 percent per year over 5 to 7 years, and it typically carries maintenance covenants, so banks actively monitor the credit in exchange for a lower coupon.
TLB is sold to institutional investors like CLOs and credit funds, it amortizes minimally at just 1 percent per year, has a longer tenor around 7 years, and is usually covenant-lite with incurrence covenants only, tested when the company takes an action like an acquisition or dividend.
The institutional buyer base prefers minimal amortization and looser covenants, but that combination means more principal stays outstanding longer with less lender protection, which is why TLB prices at a higher coupon than TLA. For a sponsor, TLB costs more but provides the flexibility to avoid ongoing maintenance tests, making it the backbone of most modern large-cap LBOs.
Sources & uses
| Term Loan B | 400 |
| Senior notes | 250 |
| Sponsor equity | 370 |
| Total sources | 1,020 |
| Purchase of equity | 900 |
| Refinance existing debt | 100 |
| Financing & advisory fees | 20 |
| Total uses | 1,020 |
Also asked as
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- Why is the revolver typically undrawn at close, and what type of covenant does it usually carry that the rest of a cov-lite stack does not?
- What is an equity kicker on a mezzanine tranche, and why would a lender accept one instead of demanding a higher pure cash coupon?
- Explain the difference between maintenance covenants and incurrence covenants, and why covenant-lite structures have become dominant in leveraged loan markets.
- A debt stack has $100mm TLA at 5.5%, $180mm TLB at 7.75%, and $120mm high yield notes at 10.0%. Compute the blended cost of debt.
- Explain what a PIK toggle is, why a company might elect to PIK interest during a downturn, and what it costs the company to do so even though no cash interest is paid in the near term.
- A term loan structure has TLA of $120mm amortizing at 8%/year mandatory and TLB of $250mm amortizing at 1%/year mandatory. Free cash flow available for sweep after mandatory amortization is $55mm at a 75% sweep rate, applied to TLA first per the credit agreement waterfall. Compute total TLA and TLB paydown in the year.
- A company has $150mm of mezzanine debt with an 11% cash coupon or 13% PIK coupon. It elects to PIK for two years before returning to cash-pay. Compute the mezz balance after the two PIK years, the cash interest paid in year 3, and compare cumulative cash interest paid over 3 years to a counterfactual where the company paid cash throughout. Quantify the incremental principal owed at exit due to the PIK election.
- Two debt stacks raise the same $600mm at 5.0x EBITDA of $120mm. Structure A: $300mm TLA at 5.5%, $200mm TLB at 7.5%, $100mm HY at 9.5%. Structure B: $100mm TLA at 5.5%, $200mm TLB at 7.5%, $300mm HY at 9.5%. Compute the blended cost of each and the dollar difference in annual interest expense, and explain what this difference implies for each structure's debt paydown return driver over a 5-year hold.
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- Why must total sources equal total uses in an LBO, and is this an accounting identity or a real economic constraint? Explain the difference.
- Describe the mechanical flow of an LBO operating model from revenue down to levered free cash flow, naming each line item in order.
- Explain why debt paydown is a real source of equity value creation even when it requires no operational improvement to the business at all.
- Walk me through a debt schedule from free cash flow to ending debt balances. Name each step in order.
- Guide: Leveraged finance terms study guide
The rest of this topic
Leveraged loans and high yield: structure and pricing