Term loan

A term loan finances a clearly identified medium-term investment, such as an acquisition, a capital expenditure programme or the refinancing of existing debt. It differs from the revolving credit facility (RCF) in its lower flexibility. The borrower draws the amount when the loan is put in place or during a short availability period. It repays the loan in instalments as set in the agreement. Amounts repaid, including prepayments, cannot be reborrowed. Repayment follows an amortisation schedule or takes place in a single payment at maturity (bullet). In a syndicated or unitranche financing, the term loan forms the main tranche, alongside an RCF that covers working capital needs. The covenants of the term tranche and of the RCF differ in leveraged financings. In 2017, at least half of European leveraged loans were covenant-lite for their term tranche. The RCF in these transactions kept a net leverage covenant tested above a drawing threshold. Term tranche lenders declare a cross default only after action by the majority of RCF lenders. For the borrower, the amortisation profile of the term loan determines the cash available each year after debt service.

A contract catering company signs a six-year €90m term loan, together with a €20m RCF. The term loan finances the purchase of a competitor. It amortises by €5m a year for five years and the remaining €65m is due at maturity. In year 3, the company prepays €10m and this amount leaves the loan facility for good.

• The availability period during which the loan is drawn
• The repayment profile: amortising, bullet or mixed
• The conditions and cost of early repayment
• The covenants applicable to the term tranche and to the RCF