Thereafter, investors can buy and sell shares, but may not redeem them. Acquisition/equipment lines (delayed-draw term loans) are credits that may be drawn down for a given period to purchase specified assets or equipment, or to make acquisitions. Usually, they are able to do so only when the fund is trading at a premium to NAV, howevera provision that is typical of closed-end funds regardless of the asset class. Once the pricing was set, it was set, except in the most extreme cases. Another example is the mortgage market where the primary capital providers have evolved from banks and savings and loan institutions to conduits structured by Fannie Mae, Freddie Mac, and the other mortgage securitization shops. Banks that either underwrite or hold such loans could face penalties as a result. A swingline is a small, overnight borrowing line, typically provided by the agent. In the leveraged market there are some loans that are backed by capital stock of operating units. 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This, again, is usually a feature of investment-grade loans. During the 1990s the use of league tablesand, consequently, title inflationexploded. Even without including the word define, the first result return by googling "upfront payment" says "Upfront payment" is prepayment -- money you pay before you get the goods or service. There are also accounts that are public. Repaid amounts may not be reborrowed. Under the option, borrowers may take what is outstanding under the facility and pay it off according to a predetermined repayment schedule. The total rate of return swap is the oldest way for participants to purchase loans synthetically. Incremental direct costs of loan origination incurred in transactions with independent third parties for that loan b. If the loan were undersubscribedif investor interest in the loan was less than the amount arrangers were looking to syndicatethe arrangers could very well be left above their desired hold level. Of course, the ratios investors use to judge credit risk vary by industry. In most cases, though, lenders will pass on this draconian option and instead grant a waiver in return for some combination of a fee and/or spread increase; a repayment or a structuring concenssion such as additional collateral or seniority.

Some participants use a spread cut-off: i.e., any loan with a spread of LIBOR+ 125 or LIBOR+150 or higher qualifies. In some bankruptciesLyondellBasell and Spectrum Brands are two 2009 examplesDIP providers were given the opportunity to roll up prepetition claims into junior DIPs that rank ahead of other prepetition secured lenders. The co-agent or managing agent is largely a meaningless title used mostly as an award for large commitments. As a result, smaller executionsgenerally those of $200M or lesstend to be priced at a premium to the larger loans. Upfront fee is paid to the arranging bank which may or may not be the ultimate lender depending whether the debt is syndicated. Either way, the deal strengthens the companys balance sheet. A tangible-net-worth (TNW) covenant requires that the borrower have a minimum level of TNW (net worth less intangible assets, such as goodwill, intellectual assets, excess value paid for acquired companies), often with a build-up provision, which increases the minimum by a percentage of net income or equity issuance. Leveraged loans are typically senior, secured instruments and rank highest in the capital structure. The refusal of prepetition lenders to consent to such priming, combined with the expense and uncertainty involved in a priming fight in bankruptcy court, greatly reduced third-party participation in the DIP market. Or instead of physical delivery, some buyers of protection may prefer a cash settlement in which the difference between the current market price and the delivery price is determined by polling dealers or using a third-party pricing service. As a result, liquidity was in far shorter supply, constraining availability of traditional third-party DIPs. Traditionally, best-efforts syndications were used for riskier borrowers or for complex transactions. A multicurrency line allows the borrower to borrow in one or more alternative currencies (in most agreements this option is capped). If a loan is issued at 99 cents on the dollar to pay par, the OID is said to be 100 bps, or 1 point. Generally, the loan arranger is said to be running the books, i.e., preparing documentation and syndicating and administering the loan. Finally, the reputation of the private equity backer (sponsor) also plays a role, as does market liquidity (the amount of institutional investor cash available). An inccurence covenant is tested only if an issuer takes an action, such as issuing debt or making an acquisition. As of this writing (July 2015), the primary criterion was whether an issuer is able, via normal cash flow generation, to repay either all of its senior debt or half of its total debt over seven years. For sponsor-backed leveraged issuers, the sponsors lowering its stake below a preset amount can also trip this clause. This is often the case, too, for unsecured investment-grade loans. In this structure the assets of the issuer tend to be at the operating-company level and are unencumbered by liens, but the holding company pledges the stock of the operating companies to the lenders. Loans, by their nature, are flexible documents that can be revised and amended from time to time. In some cases, operating cash flow is used as the divisor. An amend-to-extend transaction allows an issuer to push out part of its loan maturities through an amendment, rather than a full-out refinancing. Most often, bifurcated collateral refers to cases where the issuer divides collateral pledge between asset-based loans and funded term loans. The risk to lenders in this situation, simply put, is that a bankruptcy court collapses the holding company with the operating companies and effectively renders the stock worthless. Traders. Typically, the amendment sets a range for the amount that can be tendered via the new facility, as well as the spread at which the longer-dated paper will pay interest. They are mutual funds that invest in leveraged loans. In the early 1990s a broad market for third-party DIP loans emerged. In general, there are five types of financial covenantscoverage, leverage, current ratio, tangible net worth, and maximum capital expenditures: Leveraged loans usually require a borrower to prepay with proceeds of excess cash flow, asset sales, debt issuance, or equity issuance. The syndication agent is the bank that handles, in purest form, the syndication of the loan. In accounting, upfront payments are "unearned fees" and must be entered as liabilities on the balance sheet. Standard & Poors defines a default for the purposes of calculating default rates as a loan that is either (1) rated D by Standard & Poors, (2) to an issuer that has filed for bankruptcy, or (3) in payment default on interest or principal. These include both instruments that are yet to come to market and those that are actively being sold but have yet to be circled. When this occurs, the lenders can accelerate the loan and force the issuer into bankruptcy. Therefore, a private equity firm will want these provisions, which, if they think its worth it, allows them to cure a violation without going through an amendment process, during which lenders will often ask for wider spreads and/or fees, in exchange for waiving the violation, even with an infusion of new equity. The second phase is the conversion, in which lenders can exchange existing loans for new loans. Some loans have provisions stipulating that borrowers sitting on the cusp of investment-grade and speculative-grade must either attach collateral or release it if the issuers rating changes. One good example was courtesy Harrahs Entertainment. Debt as a share of total sources of funding for the LBO can range from 50% to upwards of 75%. After that, the lenders can choose to either provide a forbearance agreement that gives the issuer some breathing room or take appropriate action, up to and including accelerating, or calling, the loan. Loan mutual funds are how retail investors can access the loan market. Webup-front fee meaning: an amount of money paid before a particular piece of work or a particular service is done or. For bonds issued after 1984, the OID is treated as interest. The three primary types of loan covenants are affirmative, negative, and financial. Because the staple financing provides guidelines on both structure and leverage, it typically forms the basis for the eventual financing that is negotiated by the auction winner, and the staple provider will usually serve as one of the arrangers of the financing, along with the lenders that were backing the buyer. As a result, loss-given-default may be no different from risk incurred by other senior unsecured creditors. Just what is a leveraged loan is a discussion of long standing. WebSum on the closing date, legal fees, legal fees, printing costs upfront fee vs oid etc Excellent! The original-issue discount (OID), or the discount from par at which the loan is offered for sale to investors, is used in the new issue market as a spread enhancement. Some practitioners express loss as a nominal percentage of principal or a percentage of principal plus accrued interest. That effectively gives the borrower the ability to issue up to $100M of new debt at a market clearing rate whether or not leverage exceeds 4x. The tide turned in late February 2022, however, as Russia invaded Ukraine and fears regarding inflation injected volatility to the markets. A participant buys via TRS a $10M position in a loan paying L+250. Most loan agreements have three levels of approval: required-lender level, full vote, and supermajority: The required-lendxers level, usually just a simple majority, is used for approval of non-material amendments and waivers or changes affecting one facility within a deal. Some participants use a spread cut-off. The new debt is pari passu with the existing loan. For lenders, clearly, maintenance tests are preferable because it allows them to take action earlier if an issuer experiences financial distress. This limits borrowings to a certain percentage of specified collateral, most often receivables and inventory (see Asset-based loan section below for a full discussion of this topic). Vendors of loan data, news, and prices also face many challenges in managing the flow of public and private information. Leveraged (borrowers rated BB+ or lower). These vehicles allow managers greater flexibility than more tightly structured arbitrage deals. LCDS enables participants to synthetically buy a loan by going short the LCDS or sell the loan by going long the LCDS. The products are similar in that an investor would establish a collateral account equal to some percent of the overall TRS program and borrow the balance from a dealer. In addition, the borrowing base may be further divided into subcategoriesfor instance, 50% of work-in-process inventory and 65% of finished goods inventory. US loan investors found themselves sitting on a record pile of cash as the first half of 2018 came to close, as assets under management at US loan funds totaled a record $176B, according to LCD and Lipper. A supermajority is typically 67-80% of lenders. Needless to say, this is a hot-market product. Dividend financing is straightforward. The LIBOR (or Eurodollar) option is so called because, with this option, the interest on borrowings is fixed for a period of one month to one year. These institutions are said to be on the right.. And even in cases where prepayment fees apply, they are rarely more than 2% in year one and 1% in year two. Because loans are not securities, this will be a confidential offering made only to qualified banks and accredited investors. Among institutional investors, weight is given to an individual deal sponsors track record in fixing its own impaired deals by stepping up with additional equity or replacing a management team that is failing. L+250 on the amount in the collateral account of $1M, plus 200 bps (L+250 minus the borrowing cost of L+50) on the remaining amount of $9M. Calculating loan yields or spreads is not straightforward. The buyer of the protection can then buy the loan at 80 and deliver it to the counterparty at 100, a 20-point pickup. Under this definition, a loan rated BB+ that has a spread of LIBOR+75 would qualify as leveraged, but a nonrated loan with the same spread would not. Typically, the funds are capitalized by an initial public offering.

In the bond market, the common definition is a spread of 1,000 bps or more. In the asset-based market, for instance, that typically takes the form of inventories and receivables, with the maximum amount of the loan that the issuer may draw down capped by a formula based off of these assets. These statistics include a broad array of financial data, including credit ratios measuring leverage (debt to capitalization and debt to EBITDA) and coverage (EBITDA to interest, EBITDA to debt service, operating cash flow to fixed charges). Maintenance covenants are far more restrictive. These covenants are usually boilerplate and require a borrower to pay the bank interest and fees, for instance, or to provide audited financial statements, maintain insurance, pay taxes, and so forth. For example, any loan with a spread of at least LIBOR+125, or maybe LIBOR+150, would qualify as leveraged.. When a loan or bond is fully subscribed at a given price it is said to be circled. Once this intelligence has been gathered the agent will formally market the deal to potential investors. Borrowings cannot be prepaid without penalty. Conversely, if it is undersubscribed, even at LIBOR+275, then the arranger may be forced to raise the spread to bring more money to the table. Typically, the issuer will agree to increasing interest rates if the loan is not repaid as expected. Debtor-in-possession (DIP) loans are made to bankrupt entities. Once the loan is closed, the final terms are then documented in detailed credit and security agreements. There are a number of options that can be offered within a revolving credit line: A term loan is simply an installment loan, such as a loan youd use to buy a car. Default risk is simply the likelihood of a borrower being unable to pay interest or principal on time. If the company is not worth saving, however, because its primary business has cratered, then the issuer and lenders may agree to a Chapter 7 liquidation, under which the assets of the business are sold, and the proceeds dispensed to the creditors. Recovery is the opposite of loss-given-defaultit is the amount a creditor recovers, rather than loses, in a given default. In pricing loans to institutional investors, its a matter of the spread of the loan, relative to credit quality and market-based factors. A BBB or BBB- issuer may be able to convince lenders to provide unsecured financing, but lenders may demand springing liens in the event the issuers credit quality deteriorates. Initially, arrangers invoked flex language to make loans more attractive to investors by hiking the spread or lowering the price (as in original-issue discount). The reason is simple: Syndicated loans are less expensive and more efficient to administer than traditional bilateralone company, one lendercredit lines. Much of this information may be material to the financial health of the issuer, and may be out of the public domain until the issuer formally issues a press release, or files an 8-K or some other document with the SEC. Likewise, with the severe economic conditions eating away at debtors collateralnot to mention reducing enterprise valuesprepetition lenders were more wary of relying solely on the super-priority status of DIPs and were more likely to ask for priming liens to secure facilities. Once the mandate is awarded, the syndication process starts. Most loans are floating-rate instruments that are periodically reset to a spread over a base rate, typically LIBOR. The borrower may draw on the loan during a short commitment period (during which lenders usual charge a ticking fee, akin to a commitment fee on a revolver), and repay it based on either a scheduled series of repayments or a one-time lump-sum payment at maturity (bullet payment). These deals often require time-intensive collateral monitoring. Calculating loss given default is tricky business. During more parsimonious late-2000s a $1B credit was considered a stretch. or one-on-one meetings with potential investors.). These are revolving credits that have a maximum borrowing limit, perhaps $100M, but also have a cap based on the value of an issuers pledged receivables and inventories. This institutional category includes second-lien loans and covenant-lite loans. On term loans, this fee is usually referred to as a ticking fee. Amend-to-extend transactions have two phases, as the name implies. The formula is similar. WebAn upfront fee is a fee paid by the issuer at close. Accounts that operate on the private side receive all confidential materials and agree not to trade in public securities of the issuers in question. Since the mid-1990s, public loan ratings have become a de facto requirement for issuers that wish to do business with a wide group of institutional investors. The issuer pays the arranger a fee for this service and, naturally, this fee increases with the complexity and riskiness of the loan. Price-flex language, in a single stroke, pushed the loan syndication process, at least in the leveraged arena, across the Rubicon to a full-fledged capital markets exercise. Generally, bridge loans are provided by arrangers as part of an overall financing package. In rare cases, however, this protection is limited to a certain period of time by what is known as an MFN sunset. In a traditional loan agreement, as a borrowers risk increases, financial covenants become more tightly wound and extensive. Heres how the economics of a TRS work, in simple terms. Prominent fees associated with syndicated loans: An upfront fee is a fee paid by the issuer at close. Performing paper fell to a price not seen before in the loan marketwith many names trading south of 70. As a result, for adequate protection to be paid the collateral must cover both the claims of the first- and second-lien lenders. Under maintenance covenants, issuers must pass agreed-to tests of financial performance such as minimum levels of cash flow coverage and maximum levels of leverage. Bull markets inspire more dividend deals as issuers tap excess liquidity to pay out equity holders (though 2018 has been a hot market, with relatively limited dividend deals in the US). More recently, the evolution of covenant-lite loans (see above) has blurred the line. OID is a sweetener to potential investors which increases the chances of a successful fundraise for the client. Whatever the format, management uses the bank meeting to provide its vision for the transaction and, most important, tell why and how the lenders will be repaid on or ahead of schedule. In many loan agreements the issuer loses its right to consent in the event of default. Whats more, the lenders may be able to wrest some concessions from an issuer that is in violation of covenants (a fee, incremental spread, or additional collateral) in exchange for a waiver.
Traders and investors will often speak of loan spreads, therefore, as a spread to a theoretical call. Amend-to-extend transactions came into widespread use in 2009 as borrowers struggled to push out maturities in the face of difficult lending conditions that made refinancing prohibitively expensive. Webtypes of fees consist of (1) upfront fees (fees paid from a borrower to a lender at or before issuance), (2) facility fees (fees paid based on the total amount of the commitment of a Like LCDS, the LCDX Index is an over-the-counter product. Sponsorship is a factor too. In the end, the issuer is left with two tranches: (1) the legacy paper at the initial spread and maturity and (2) the new longer-dated facility at a wider spread. Therefore, banks can offer issuers 364-day facilities at a lower unused fee than a multiyear revolving credit. Descriptions of the major risk factors follow.

The issuer pays a fee during the commitment period (a ticking fee). Instead of seeking bids, a dealer is asked to buy a portfolio of paper and solicits potential sellers for the best offer. A leveraged loan is a commercial loan provided by a group of lenders. These are carve-outs in covenant-lite loans that allow borrowers to issue debt without triggering incurrence financial tests. In most cases, borrowers can lock in a given rate for one month to one year. Debt issuance is defined as net proceeds from debt issuance. With liquidity in short supply, new innovations in DIP lending cropped up aimed at bringing nontraditional lenders into the market.

Of course, if loans loss value, the investors losses would be magnified by the leverage of the vehicle. As the name implies, LIBOR floors put a floor under the base rate for loans. Among banks, investment factors may include whether the bank is party to the sponsors equity fund. A leverage covenant sets a maximum level of debt, relative to either equity or cash flow, with total-debt-to-EBITDA level being the most common. Exchange-traded closed-end funds (ETF): These funds, which have skyrocketed in popularity over the past few years, trade on a stock exchange. Pricing a loan for the bank market, however, is more complex. Lenders, in most cases, have most-favored-nations (MFN) protection that resets the yield of the existing loan to the rate of the new loan to make sure it remains on market.

Where an instrument ranks in priority of payment is referred to as seniority. Aside from that, there was little synthetic activity outside over-the-counter total rate of return swaps. To contend with this issue the account could either designate one person who is on the private side of the wall to sign off on amendments or empower its trustee, or the loan arranger to do so. WebUpfront fees are the one-off fees paid by borrowers to mandated lead arrangers on the total commitment amount for arranging and originating the financing, structuring the syndicate, Asset sales are defined as net proceeds of asset sales, normally excluding receivables or inventories. KKRs $25B acquisition of RJR Nabisco was the firstand remains the most (in)famousof the high-flying LBOs. Loans, on average, now assume a three- or four-year average life. Then there are ratios that are suited for evaluating loss-given-default risk. But after default rates fell precipitously in 2003 arrangers rolled out second-lien facilities to help finance issuers struggling with liquidity problems. Starting with the large leveraged buyout (LBO) loans of the mid-1980s, the leveraged/syndicated loan market has become the dominant way for corporate borrowers (issuers) to tap banks and other institutional capital providers for loans. Introduced in 2007, the LCDX is an index of 100 LCDS obligations that participants can trade. As of mid-2011, then, roughly 80% of leveraged loan volume carried a loan rating, up from 45% in 1998. In simple terms, under a TRS program a participant buys from a counterparty, usually a dealer, the income stream created by a reference asset (in this case a syndicated loan). Also known as a facility fee or an arrangement fee. So, if you buy a loan with a spread of 250 bps at a price of 101, you might assume your spread-to-expected-life as the 250 bps less the amortized 100 bps premium or LIBOR+221. After all, in both cases the lender effectively pays less than par for a loan. Often, however, the syndication agent has a less specific role. It is then sold or syndicated to other banks or institutional investors. Activity here tends to track market conditions. In addition, hedge funds, high-yield bond funds, pension funds, insurance companies, and other proprietary investors do participate opportunistically in loans focusing usually on wide-margin (or high-octane) paper. Just what qualifies as a leveraged loan is a discussion of long standing. Therefore, the information is essentially made public in a way that doesnt deliberately disadvantage any party, whether its a news story discussing the progress of an amendment or an acquisition, or a price change reported by a mark-to-market service. Leveraged loans were strictly on the private side of the line, and any information transmitted between the issuer and the lender group remained confidential. As well, if collateral value declines below a predetermined level, the investor could face a margin call, or in the worst-case scenario, the TRS could be unwound. These IMs will be distributed to accounts that are on the public side of the wall. These are typically large revolving credits that back commercial paper or general corporate purposes. As a result, the most profitable loans are those to leveraged borrowersthose whose credit ratings are speculative grade (traditionally double-B plus and lower), and who are paying spreads (premiums above LIBOR or another base rate) sufficient to attract the interest of nonbank term loan investors, (that spread typically will be LIBOR+200 or higher, though this threshold rises and falls, depending on market conditions). In others, a new investor steps in to provide fresh capital.

The dealer, to win the business, may give an account a cover bid, effectively putting a floor on the auction price. An upfront fee may also be referred to by the parties as a closing fee, participation fee, or simply as OID. The growth in AUM started in mid-2016, as the long-awaited prospects of interest rate hikes by the Fed finally became reality. Buyside accounts. Under these rules, investment managers are required to retain no less than five percent of the credit risk of assets they securitized, except for pools of qualified mortgages. For instance, at the end of each year, a three-year facility would be reset to three years if the lenders and borrower agree. Loan holders, therefore, almost always are first in line among pre-petition creditors and, in many cases, are able to renegotiate with the issuer before the loan becomes severely impaired. Public-to-private (P2P)also called go-private dealsin which the private equity firm purchases a publicly traded company via a tender offer. Fees for commercial LOCs (those supporting inventory or trade) are usually lower, because in these cases actual collateral is submitted. The manager can also expand the fund via rights offerings. Another way in which participants deal with the public-versus-private issue is to ask counterparties to sign big-boy letters. In addition to restrictions on arranging banks, CLO managers were to, beginning in 2016, face risk-retention requirements under Section 941 of Dodd-Frank. The first was a more active secondary trading market, which sprung up to support (1) the entry of non-bank investors into the market (investors such as insurance companies and loan mutual funds) and (2) to help banks sell rapidly expanding portfolios of distressed and highly leveraged loans that they no longer wanted to hold.

Stronger markets usually allow for higher leverage; in weaker markets lenders want to keep leverage in check. If the arrangers cannot get investors to fully subscribe the loan, they are forced to absorb the difference, which they may later try to sell. If you refer to a loan as rich, it means it is trading at a spread that is low compared with other similarly rated loans in the same sector. Though not collateral in the strict sense of the word, most leveraged loans are backed by the guarantees of subsidiaries, so that if an issuer goes into bankruptcy all of its units are on the hook to repay the loan. Likewise, senior creditors will lose less than subordinated creditors. Build-out financing supports a particular project, such as a utility plant, a land development deal, a casino or an energy pipeline. Like all credit default swaps (CDS), an LCDS is basically an insurance policy. A usage fee is a fee paid when the utilization of a revolving credit is above, or more often, falls below a certain minimum. In the old days, a bright red line separated public and private information in the loan market. Once the loan issuer (borrower) picks an arranging bank or banks and settles on a structure of the deal, the syndications process moves to the next phase. Learn more. Then, in year two, the loan goes into default and the market price of the debt falls to 80% of par. These provisions are generally found in private equity backed deals. The LCDX is reset every six months, with participants able to trade each vintage of the index that is still active. If the evergreen is not exercised, the agreement would simply run to term. This is a negotiated tender in which classholders will swap existing paper for a new series of bonds that typically have a lower principal amount and, often, a lower yield. In many cases, moreover, these highly rated borrowers will effectively syndicate a loan themselves, using the arranger simply to craft documents and administer the process. For instance, say an account buys five-year protection for a given loan, for which it pays 250 bps a year. As the name implies, in a participation agreement, the buyer takes a participating interest in the selling lenders commitment. WebDescription: The recurring fee amortized for usage time, for partial upfront RIs and no upfront RIs. The level that a dealer agrees to essentially underwrite a BWIC or an auction. A participation can be a riskier way of purchasing a loan because, if the lender becomes insolvent or defaults, the participant does not have a direct claim on the loan.

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