Term and Revolving Loans
Senior credit facilities in private equity deals generally include one of more term loans and a revolving credit facility. The term loan is a fixed amount that is loaned for a defined term. The loan is usually repaid in fixed installments of principal and interest so that the loan balance decreases with each payment.
The revolving credit facility is a commitment to loan funds from time to time based on the borrower’s inventory and accounts receivable. The facility will have an upper limit of availability, but the actual amount that can be borrowed will vary from month to month based on the amount of inventory and receivables. Each month the borrower has to pay interest on the outstanding balance and, if the loan balance exceeds the borrowing base, and amount of principal equal to the excess. When the facility matures, usually in a year, the entire amount becomes due and payable. If conditions are good, the facility is generally renewed.
A portion of the credit facility may be dedicated to providing letters of credit, if the borrower uses these instruments in its business. Senior credit facilities can be prepaid, thought there are often penalties associated with prepayments that occur other than at stated intervals. The facilities must be prepaid with the proceeds of assets sales, public offerings and other extraordinary transactions.
Interest rates may be computed on the basis of bank prime rates or LIBOR, with certain rights to switch back and forth between the two forms of loans as financial conditions may determine. Senior lenders also charge a number of fees on the initial borrowings and on the specific commitments that are made to provide ongoing financing.
