What is the difference between Term Loan A and Term Loan B in terms of buyer base, amortization, and covenant package?

What the interviewer is actually testing

The debt stack is tested as a fluency check on capital structure logic, not rote memorization of tranche names. The interviewer wants to see that you understand why the stack is ordered and priced the way it is, and can apply that logic to instruments you haven't specifically memorized.

Core signals of mastery:

1. You can order the stack correctly and explain why, citing security, covenant tightness, and priority of repayment as the three things that move together and explain the coupon differences - not just reciting "revolver, TLA, TLB, high yield, mezz" as a memorized list.

2. You understand the TLA vs. TLB distinction precisely - who buys each (banks vs. institutional investors), amortization schedule (meaningful vs. minimal), and covenant package (maintenance vs. incurrence) - this specific comparison is one of the single most common technical questions in leveraged finance and private equity interviewing.

3. You can explain covenant-lite structures and why sponsors prefer them - flexibility to make acquisitions, pay dividends, or incur additional debt without a lender veto, at the cost of a higher coupon; this connects directly to Lesson 34's credit stats material.

4. You understand mezzanine's equity kicker and PIK toggle as risk-compensation mechanisms, not arbitrary features - each exists specifically to let a junior, unsecured lender get paid for the risk it's taking without demanding an even higher unsustainable cash coupon.

5. You can connect the stack to the return drivers. A candidate who volunteers "a cheaper, more senior-heavy stack preserves more free cash flow for the debt paydown driver, but might not raise enough total leverage to hit the sponsor's target equity check" is demonstrating the kind of cross-lesson synthesis elite interviewers are specifically listening for.

Weak candidates recite tranche names without being able to explain the coupon ordering from first principles (why does mezz cost more than TLB) or connect the stack's structure to anything that happens later in the model.

Common traps

Trap 1: Reversing the seniority order, or not knowing it cold. Placing high yield above the term loans, or being unable to state the order without hesitation.

Say it out loud: "From most senior and cheapest to most junior and most expensive: revolver, then term loan A, then term loan B - both first-lien secured - then high yield notes, typically unsecured or second-lien, then mezzanine at the bottom, just ahead of equity."

Trap 2: Confusing TLA and TLB on amortization and buyer base. Saying TLB amortizes heavily, or that banks are the primary buyers of TLB.

Say it out loud: "TLA is bank-held and amortizes meaningfully, often 5-10% a year - banks want to see steady paydown. TLB is held mostly by institutional investors like CLOs, amortizes minimally, often just 1% a year, and is priced higher precisely because more principal stays outstanding longer with looser, incurrence-only covenants."

Trap 3: Saying covenant-lite means 'no covenants.' Cov-lite structures still have covenants - they're just incurrence-based (tested only when the company takes a specific action) rather than maintenance-based (tested every quarter regardless of what the company does).

Say it out loud: "Covenant-lite doesn't mean no covenants - it means incurrence covenants only, tested when the company does something like take on more debt or pay a dividend, rather than maintenance covenants tested every quarter regardless of company actions."

Trap 4: Assuming higher coupon automatically means worse for the sponsor. Junior debt's higher cost is often worth it for the flexibility (fewer covenants, no amortization) it buys, and for enabling a bigger total debt raise than senior lenders alone would support.

Say it out loud: "A more expensive junior tranche isn't necessarily a mistake - it can be the right trade-off if it lets the sponsor raise more total leverage than the senior lenders alone would provide, or if the incurrence-only covenant package is worth the extra coupon in flexibility."

Trap 5: Not knowing what an equity kicker or PIK toggle actually does or why it exists. Treating these as arbitrary jargon rather than explaining the risk-compensation logic.

Say it out loud: "An equity kicker - warrants or a conversion right - lets a junior, unsecured mezz lender share in the equity upside instead of demanding an even higher pure cash coupon, and a PIK toggle lets the company defer cash interest by accruing it to principal, preserving cash for the more senior debt service when liquidity is tight, at the cost of a growing principal balance."

Trap 6: Forgetting the revolver is meant to be undrawn. Modeling the revolver as fully drawn at close as if it were a term source of permanent financing.

Say it out loud: "The revolver is sized and available, but it's meant to be largely undrawn at close - it's a working capital backstop, not a permanent funding source, and drawing it heavily can trigger a maintenance covenant test the rest of the cov-lite stack doesn't otherwise have."