Senior Loans – Western Europe UK and Nordics

Companies have varying objectives for using senior debt loans.  Senior term debts are used to raise capital for specific, and often temporary objectives such as acquisitions, buyouts, refinancing, recapitalization’s or fixed asset purchases, which will require a huge lump sum. Senior term debt will spread these expenses, which are fairly large, over several years and will be matched by the cash flows the company will generate, so the company can make timely payments. Some senior loans only require paying the interest, where the initial principal is paid as a balloon payment at the end of the loan term. The difference is that in a bullet payment, the repayment may contain both interest and principal amounts. Senior lending products are products provided mainly by non bank lenders and are secured as a first charge against the commercial property owned by the company or individual. The senior loan strategy seeks to achieve an attractive total return while maintaining a focus on preserving principal and avoiding defaults.

Our senior loan lending focus on the senior secured debt of issuers in Western Europe, the United Kingdom and the Nordics and a majority of portfolio’s consists of floating-rate obligations. European debt finance lenders may also invest opportunistically in senior secured, fixed-rate bonds in which they see the potential for enhanced returns relative to floating-rate loans. The strategy benefits from the experience and expertise of  European Senior Loan Credit teams.

How Senior Term Debt is Structured

A senior term debt has an amortization schedule, where the borrowing company will have to pay the fixed installments of interest and principal. What makes senior term debt different than a regular debt is that it can have a bullet payment at the maturity date. This means paying the remaining value of the debt that is owed to the lender.

Some term debts only require paying the interest, where the initial principal is paid as a balloon payment at the end of the loan term. The difference is that in a bullet payment, the repayment may contain both interest and principal amounts.

The “interest only” arrangement with a balloon payment at the end allows the company to keep more of the cash flow in the business for most of the time, when the company needs it the most. Therefore, the payment at the end will be far greater than the regular payments made. The maturity of a term debt is determined based on multiple factors, including the ability of a company to repay the debt, the useful life of the financed asset, and the purpose of the debt.

Senior Debt Straight-line or Accelerated Amortization

When there is principal amortization along with interest payment, the amortization can either be a straight line or accelerated. The straight line method is considered a simple method of debt repayment. It divides the principal into an equal number of payments, so the payments remain constant throughout the period. This is also known as a fixed payment loan.

With the accelerated method, the borrower is allowed to make extra payments that will be added to the regular principal payments. The benefit to this is a faster reduction of the amount owed, saving the borrower money on interest payments. This is due to a reduction in the principal amount, meaning a reduced interest expense. This form is also known as a fixed principal loan.

Why use senior loan debt?

Companies have varying objectives for using debt. When they structure their financing, it is common to see a full suite of debt products that includes senior term debt, as well as senior revolving debt, where the former is sometimes combined or even subordinate to the latter. Senior term debts are used to raise capital for specific, and often temporary objectives such as acquisitions, buyouts, refinancing, recapitalizations or fixed asset purchases, which will require a huge lump sum. Senior term debt will spread these expenses, which are fairly large, over several years and will be matched by the cash flows the company will generate, so the company can make timely payments.

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Senior Loans – Western Europe UK and Nordics January 31, 2020