Bullet Repayment

With bullet repayment, a loan is not repaid continuously, but in full at the end of its term in one lump sum. During the term, usually only interest is paid. This temporarily relieves the borrower, but leads to a large one-time repayment at the end. The economic advantage lies in free cash flow: with no mandatory amortisation, the cash generated is available for investment, acquisitions or distributions, which strengthens the equity leverage of a debt-funded buyout. Bullet structures are therefore common in high yield bonds, for example. A term loan B often has a large final payment but may also require modest ongoing amortisation, in which case it is not a pure bullet loan.

The price is refinancing risk: at maturity the entire amount must be met from a sale, from new financing or from accumulated cash, and whether that works depends on market conditions at exactly that moment. If rates rise or credit quality deteriorates, refinancing can become far more expensive or unavailable. The structure is therefore regularly combined with a cash sweep applying surplus cash to early repayment, and with staggered maturities and refinancing prepared well in advance.

In assessing a borrower, the maturity profile therefore matters as much as leverage itself, since high leverage with distant maturities is more manageable than moderate leverage with a large repayment due next year. A maturity schedule for the coming years is therefore indispensable in assessing a borrower, showing which amounts fall due when and whether maturities cluster. Staggering several tranches across different years is customary, so that not everything has to be refinanced at once. The maturity profile also matters to the seller of a company, because an imminent bullet maturity can dictate the timetable of a sale process and weaken the negotiating position.