Term Loan B: a Worked Example

A buyout or a large refinancing can need more term debt than the arranging banks want to hold. Banks fund loans with deposits, hold capital against them and prefer exposures that shorten as they are repaid. Institutional investors want something else: a floating-rate asset they can buy, hold and sell, with a margin high enough to pay for a longer wait. The arrangers therefore cut the term debt in two. An amortising term loan A goes to banks, alongside the revolving credit facility. An institutional tranche, labelled B, with C and D for any later ones, is sold to collateralised loan obligation funds, loan mutual funds, insurers and credit funds. The Financial Stability Board estimated in 2019 that CLOs held about half of all institutional leveraged loans.

The letter matters less than what follows from who holds the loan. A TLB is a tradable claim, priced in the secondary market as a percentage of par. The borrower's lender group changes as the loan trades, and an amendment or a waiver goes to whoever holds it that week, counted under the majority lenders definition like any other facility.

Five moving parts set it apart. Amortisation is nominal: in the US market commonly 1% of the original amount a year, paid quarterly, while European and UK deals often have none at all, leaving a full bullet repayment. Maturity is longer than the term loan A's and the revolver's, so the institutional tranche is the last senior debt to fall due. Pricing is a benchmark rate plus a margin, often with an interest rate floor, and the loan may be sold at a small discount to par to clear the market. Investors usually ask for soft call protection: a premium, commonly 1%, if the borrower reprices the loan within the first six months or so. And the covenants are commonly covenant-lite, restricting new debt, dividends and security when the borrower acts, without a ratio tested every quarter.

Two further features follow from the investor base. Many TLBs carry an excess cash flow sweep, a mandatory prepayment of part of each year's surplus cash that steps down as leverage falls. And many leave room for the borrower to add debt later on the same terms, through an incremental facility, which, when its terms match the existing loan's, can join it as one fungible term loan.

A sponsor-backed group of veterinary clinics, constructed for this page like every figure in it, is bought with US$240m of senior debt against EBITDA of US$50m. After interest, tax and capital spending, the business has about US$22m a year to repay debt. The arrangers offer US$60m of term loan A, repaid in equal instalments over five years, and US$180m of TLB amortising at 1% a year with the balance at the end of year seven. The levels belong to the example and are not offered as a market norm.

The split structure works only because most of the debt is not being repaid. The banks' US$60m is gone in five years; the investors' US$180m barely moves.

Over five years the group pays down US$69m, and its leverage falls mainly if EBITDA grows. The US$8.2m a year not needed for instalments can be swept to prepay the TLB, held, or paid out within the dividend restrictions. Whichever happens, about US$169m falls due on one date, and the group repays it by refinancing, not from that year's cash.

The nearest neighbour is the term loan A in the same deal. The A tranche is shorter, amortises in earnest and usually carries maintenance covenants tested each quarter, because a bank holding it expects to see trouble early and to be repaid from cash flow. The B tranche is longer, amortises little, and is priced higher for the wait. A bank lends on the business's ability to shrink its debt. A TLB investor lends on the business's value at maturity and on its ability to refinance.

It also differs from a unitranche loan from a private credit fund, often the route for borrowers too small for the syndicated market. That loan is held by one fund or a small club, not traded, and more often keeps a maintenance covenant. The comparison sits on the bank loan versus private credit page.

DEFINED IN ONE PARAGRAPH → · BANK LOAN VS PRIVATE CREDIT → · COVENANT-LITE →

A bank in a TLB deal is usually the revolver lender, and three things change its reading. The first is the maturity wall. The revolver commonly falls due before the TLB, so the bank must decide whether to extend a facility whose repayment depends on investors refinancing a much larger loan behind it. The second is the early warning. With a covenant-lite term loan, the revolver's springing covenant, tested only once the facility is drawn past a stated level, may be the only ratio anyone tests. The third is the room at the table. In a restructuring, the bank negotiates with funds, some of whom bought the loan below par and want different outcomes.

Across the three markets, the TLB is a product of the largest deals. UK and European sponsor buyouts use it widely, usually with no amortisation. Australian sponsor-backed borrowers raise TLBs in US dollars and, in recent years, in Australian dollars. A New Zealand mid-market borrower is unlikely to meet one unless it is part of a larger group whose debt is sold offshore. For most borrowers in these files, the bank term loan and its repayment schedule remain the instrument a lender reads.

THE BULLET, DEFINED → · SYNDICATED LOANS → · REFINANCING RISK →