Yes, Term Loan A (TLA) is generally more senior than Term Loan B (TLB) in a company's debt structure.
Understanding Seniority in Term Loans
Seniority in debt refers to the priority of repayment in the event of a borrower's default or liquidation. A more senior debt instrument has a higher claim on a company's assets and cash flows compared to junior debt.
Term Loan A is structured in a way that it is not subordinated to other forms of a borrower's indebtedness, and its repayment schedule dictates that it is repaid before the Term Loan B. This reflects its more senior position in the capital stack, offering lenders a higher level of security.
Key Differences Highlighting Seniority
The distinct features of TLA and TLB underscore TLA's senior position. These differences cater to various types of lenders and corporate financing needs.
| Feature | Term Loan A (TLA) | Term Loan B (TLB) |
|---|---|---|
| Seniority | More senior; repaid before TLB. | Subordinated to TLA; repaid after TLA. |
| Amortization | Significant amortization over the loan term (e.g., 5-10% of principal annually). | Minimal amortization (e.g., 1% of principal annually), with a large balloon payment at maturity. |
| Maturity | Shorter tenor (e.g., 5-7 years). | Longer tenor (e.g., 7-10 years). |
| Interest Rate | Often features lower interest rates due to lower risk and faster repayment. | Typically carries higher interest rates reflecting longer maturity and lower amortization. |
| Investor Base | Primarily attracts banks and traditional financial institutions. | Appeals more to institutional investors like collateralized loan obligations (CLOs) and hedge funds. |
| Covenants | Generally includes more restrictive financial covenants (e.g., leverage, coverage ratios) to protect lenders. | Often has fewer or looser financial covenants, sometimes referred to as "covenant-lite." |
Practical Implications of TLA's Seniority
The seniority of Term Loan A has several practical implications for both borrowers and lenders:
- Lower Risk Profile: Due to its shorter maturity, substantial amortization, and higher repayment priority, TLA carries a lower risk profile for lenders.
- Lender Preferences: Banks typically prefer TLAs because they offer a more predictable cash flow stream and lower exposure over time, aligning with their risk appetite and regulatory requirements.
- Restructuring and Liquidation: In scenarios of financial distress, default, or bankruptcy, TLA holders have a preferential claim on a company's assets and cash flows. This means they are paid back before TLB holders until their debt obligations are fully satisfied, increasing their recovery prospects.
- Corporate Financing Strategy: Companies often utilize TLAs for general corporate purposes, working capital, or as a component of their revolver facilities, leveraging the stable and amortizing nature of this debt.
Why Companies Utilize Both TLA and TLB
Companies often raise both Term Loan A and Term Loan B debt to create a diversified and flexible capital structure. TLAs provide a stable, amortizing component that appeals to traditional banks, ensuring a steady reduction of debt over time. On the other hand, TLBs offer a longer-term, less restrictive funding source, often preferred for larger-scale financing, such as leveraged buyouts, mergers and acquisitions, or significant capital expenditures, due to their extended maturity and typically less stringent covenants. This blended approach allows companies to tap into different pools of capital based on their specific needs and market conditions.
