Structuring Term Loan B Facilities

Structuring Term Loan B Facilities

Designs institutional term loan structures with amortization schedules, repricing protection, and soft call provisions for leveraged finance transactions.

When To Use

• Structuring a new TLB tranche for an LBO, recapitalization, or acquisition financing
• Comparing institutional term loan terms against bank loan (TLA) alternatives
• Analyzing repricing or refinancing economics on an existing TLB
• Evaluating amortization, excess cash flow sweep, and prepayment mechanics
• Advising on soft call protection windows and step-downs for a credit agreement

Inputs To Gather

• Transaction context: LBO, M&A, dividend recap, refinancing, or add-on
• Borrower profile: issuer name, sector, credit rating (corporate family / instrument), sponsor (if any)
• Facility size and tenor: target principal amount, maturity (typically 7 years), any existing first-lien debt
• Pricing indications: SOFR spread, SOFR floor, OID range from arranger/bookrunner
• Amortization requirement: standard 1% p.a. or alternative schedule
• Call protection terms: soft call premium (typically 101 for 6 months), any hard no-call period
• Excess cash flow sweep: percentage tiers, leverage-based step-downs, starter basket/threshold
• Credit agreement provisions: MFN sunset, incremental capacity, ratio debt baskets, AHYDO considerations
• Comparable transactions: recent TLB pricings in the same sector/rating tier for benchmarking

Workflow

1. Define the capital structure context

   • Map total debt stack: revolver, TLA, TLB, second lien, bonds
   • Calculate pro forma leverage (Total Debt / EBITDA, First Lien / EBITDA, Secured / EBITDA)
   • Confirm credit ratings or expected ratings; flag if split-rated [VERIFY]

2. Set pricing and floor parameters

   • Identify SOFR floor (market standard 0.00%–0.75%; confirm current convention) [VERIFY]
   • Determine spread based on rating tier and comparable deal analysis
   • Calculate OID and effective yield; convert to bond-equivalent yield for comparison
   • Assess all-in cost vs. high-yield bond alternative (crossover analysis)

3. Build amortization and repayment schedule

   • Standard: 1% annual amortization (0.25% quarterly) with bullet at maturity
   • Model mandatory prepayments from excess cash flow sweep with leverage step-downs (e.g., 50% > 4.0x, 25% > 3.5x, 0% > 3.0x) — confirm actual thresholds with credit agreement [VERIFY]
   • Model asset sale and debt incurrence sweep mechanics
   • Calculate weighted average life (WAL) under base case and downside scenarios

4. Structure repricing and call protection

   • Soft call: typically 101 premium for voluntary repricing within first 6 months post-closing [VERIFY period and premium against current market]
   • Distinguish between repricing transactions (spread reduction via amendment) and refinancing (new facility)
   • Evaluate MFN (most-favored-nation) protection on existing tranches — sunset period (typically 6–12 months), spread differential trigger (typically 50 bps)
   • Model the breakeven analysis: at what spread reduction does refinancing economics overcome soft call cost?

5. Analyze covenant and flexibility provisions

   • Springing financial covenant on revolver (typically first lien net leverage, tested only when revolver > 35% drawn) [VERIFY threshold]
   • Incremental facility capacity: ratio-based (typically inside closing date leverage) plus fixed-dollar basket
   • Permitted debt baskets, restricted payment capacity, and J. Crew / Chewy-style trapdoor provisions
   • AHYDO (applicable high-yield discount obligation) compliance if OID exceeds de minimis threshold [VERIFY: OID > 0.25% per year to maturity triggers AHYDO]

6. Benchmark against comparables

   • Pull 5–10 recent TLB transactions in same rating/sector cohort
   • Compare: spread, floor, OID, soft call period, WAL, leverage at close, ECF sweep terms
   • Identify where proposed terms sit relative to market (tight/wide/in-line)

Output

Produce a TLB Structuring Report containing:

• Executive summary: facility size, tenor, pricing (spread + floor + OID = effective yield), key structural features
• Capital structure table: pro forma debt stack with leverage multiples at each tier
• Amortization schedule: quarterly principal payments, ECF sweep projections, WAL calculation
• Repricing protection analysis: soft call mechanics, breakeven repricing spread, MFN applicability
• Comparable transaction table: benchmarking grid with 5–10 recent deals
• Key risk flags: ratings migration sensitivity, SOFR floor value at different rate environments, covenant headroom
• Open items: any inputs still pending or terms requiring negotiation, marked [VERIFY]

Quality Checks

• Confirm amortization sums to 1% p.a. (or stated alternative) and final bullet equals remaining principal
• Verify effective yield calculation accounts for OID amortization over expected life (not stated maturity)
• Check that ECF sweep step-down leverage thresholds align with credit agreement definitions of "Consolidated EBITDA" and "Net Debt"
• Ensure MFN analysis uses correct inside maturity date and spread differential trigger
• Validate AHYDO compliance math if OID is material (compare yield vs. AFR + 500 bps) [VERIFY: current AFR]
• Cross-check comparable deal data against Leveraged Commentary & Data (LCD), Pitchbook, or arranger term sheets
• Flag any covenant terms that deviate materially from LSTA market standards