#Drawdown debt full#
#Drawdown debt plus#

This layer of debt is often necessary to increase leverage levels beyond that which banks and other senior investors are willing to provide, and will likely be refinanced when the borrower can raise new debt more cheaply.

High-yield debt is so named because of its characteristic high interest rate (or large discount to par) that compensates investors for their risk in holding such debt. High-Yield Debt ('Subordinated Notes', 'Junk Bonds') Depending on the credit terms, bank debt may or may not be repaid early without penalty.

#Drawdown debt plus#

The interest rate charged on bank debt is often a floating rate equal to LIBOR plus (or minus) some premium (or discount), depending on the credit characteristics of the borrower. Term Loan B allows borrowers to defer repayment of a large portion of the loan, but is more costly to borrowers than Term Loan A. Term Loan B – This layer of debt usually involves nominal amortization (repayment) over 5 to 8 years, with a large bullet payment in the last year. Term Loan A – This layer of debt is typically amortized evenly over 5 to 7 years. Existing bank debt of a target must typically be refinanced with new bank debt due to change-of-control covenants.īank debt, other than revolving credit facilities, generally takes two forms: Bank debt also has financial maintenance covenants, which are quarterly performance tests, and is generally secured by the assets of the borrower. Covenants generally restrict a company's flexibility to make further acquisitions, raise additional debt, and make payments (e.g.

#Drawdown debt full#

Bank debt typically requires full amortization (payback) over a 5- to 8-year period. Bank Debtīank debt is a lower cost-of-capital (lower interest rates) security than subordinated debt, but it has more onerous covenants and limitations. The undrawn commitment fee compensates the bank for committing to lend up to the revolver's limit, and is usually calculated as a fixed rate multiplied by the difference between the revolver's limit and any drawn amount.

The interest rate charged on the revolver balance is usually LIBOR plus a premium that depends on the credit characteristics of the borrowing company.

There are two costs associated with revolving lines of credit: the interest rate charged on the revolver's drawn balance, and an undrawn commitment fee. The revolver offers companies flexibility with respect to their capital needs, allowing companies access to cash without having to seek additional debt or equity financing. A company will 'draw down' the revolver up to the credit limit when it needs cash, and repays the revolver when excess cash is available (there is no repayment penalty). Multiple tranches of debt are commonly used to finance LBOs, and may including any of the following tranches of capital listed in descending order of seniority: Revolving Credit Facility ('Revolver')Ī revolver is a form of senior bank debt that acts like a credit card for companies and is generally used to help fund a company's working capital needs. In a leveraged buyout (LBO), the target company's existing debt is usually refinanced (although it can be rolled over) and replaced with new debt to finance the transaction. Leveraged Buyout (LBO) Overview Value Creation in an LBO