Term Loan B

A Term Loan B is a loan with most principal due at maturity, mainly held by institutional investors. During the term, only little principal is repaid, with most of it repaid at the end. Such loans are frequently used in leveraged buyouts.

The typical structure provides a tenor of roughly six to seven years, ongoing amortisation often of one percent of nominal per year, and a floating rate of reference rate plus a margin above the level of classic bank loans. Such loans are held by credit funds, securitisation vehicles and other institutional investors that trade the paper rather than maintain a lasting lending relationship. From this follows the proximity to bond conventions with incurrence-based rather than maintenance covenants. The economic advantage for the borrower lies in the light mandatory amortisation, because cash generated is available for acquisitions, investment and distributions rather than repayment. This raises return on equity and makes the structure attractive for buy-and-build strategies. The price is a higher margin and refinancing risk at maturity.

The tranche should be distinguished from a classic amortising bank loan and from the revolving working capital facility usually provided alongside. It is characterised by few maintenance covenants, frequently limited to a single ratio tested only when the revolving facility is drawn. Because it is actively traded, its secondary market prices serve as an indicator of market conditions.