Bullet loan

A bullet loan (prêt in fine) is a loan whose principal is repaid in a single payment at maturity; the borrower pays only interest during the life of the loan. This profile characterises most capital markets and private debt financings. The loan template of the Euro PP Charter provides for repayment of the entire outstanding amount on the maturity date. LBO mezzanine debt, with a term of seven to ten years, is repaid as a bullet after the senior debt. The German Schuldschein is repaid in one payment at maturity. LBO senior bank debt follows amortisation by constant annual instalments over an average term of four to seven years. For the company, a bullet loan reduces annual debt service and frees cash for investment or acquisitions. The risk is concentrated at maturity: the borrower must have the principal available or refinance the debt on a single date, at the market conditions of the time. Lenders manage this risk through leverage covenants and cash sweep clauses that apply part of the excess cash flow to prepayment. The negotiation covers the maturity, any partial amortisation, the cash sweep percentage and the date from which the refinancing is prepared.

A mid-sized company borrows €80m over six years at 7% on a bullet basis. It pays €5.6m of interest a year and repays the €80m in one payment in year six. An amortising loan of the same amount would have cost it around €16.8m a year in repayments and interest.

• The maturity, aligned with the refinancing or sale horizon.
• Any partial amortisation during the life of the loan.
• The cash sweep percentage that reduces the amount due at maturity.
• The prepayment fee in the event of refinancing before maturity.