Loan Market
From Reuters Financial Glossary
Reuters Loan Pricing Corporation Financial Glossary
Co-agent. Title awarded for large commitments.
Current Ratio. The borrower must maintain a minimum ratio of current assets (cash, marketable securities, accounts receivable and inventories) to current liabilities (accounts payable, short-term debt of less than one year). Sometimes, a Quick Ratio is substituted. The only difference: inventories are not included.
Documentation Agent. The bank that handles the documents and chooses the law firm.
Facility Fee. (Annual Fee). Paid on the entire committed amount, regardless of usage. The fee is often charged on revolving credits to investment-grade borrowers, instead of a commitment fee.
Financial Covenants. Covenants that require specific financial performance from a company. These covenants become more tightly wound and extensive as a borrower?s risk increases.
General Syndication. In this stage of syndication, the agent (or agents) canvass the market for commitments. Often, co-agents are solicited, as are participant banks. Fees (if offered) decline with commitment size. After the general syndication the loan is closed. Agents then compile overall commitments and allocate the deal.
Hedge Fund. An aggressively managed fund that takes positions usually in speculative investments. Focuses on secondary opportunities and hybrids in the loan market.
Institutional Investors. Non-bank investors that purchase leveraged term loans structured specifically for them. Types include Collateralized Loan Obligations (CLOs ? vehicles structured to purchase loans and arbitrage between the assets and liabilities tranches), Prime Funds (mutual funds that purchase loans), Insurance Companies, Hedge Funds and Pension Funds.
Institutional Term Loans. Term loans structured to be sold to institutional investors. Specifically, TLBs, TLCs, TLDs, etc.
Investment Grade Market. These are loans to borrowers rated BBB-/Baa3 or higher. The loans are almost always unsecured. Pricing tends to be tied to rating.
Lead Arranger/Bookrunner. The top one or two banks in a syndication. These are the banks that underwrite, structure and syndicate the loan. Usually the Administrative or Syndication Agent.
Letter of Credit (LC). There are a number of types of LCs which are guarantees provided by the bank group to pay off debt or obligations if the borrower cannot.
Leverage. A maximum level of debt to either equity or cash flow. The debt to cash flow level is far more common.
Leveraged Market. LPC defines leveraged loans as those to non-investment grade or unrated borrowers and priced at LIBOR+150 or higher.
LIBOR. Interest on borrowings is set at a spread over LIBOR (London Interbank Offered Rate) for a period of one month to one year. The corresponding LIBOR rate is used to set pricing. Borrowings cannot be prepaid before the end of the term unless the borrower receives the consent of banks or reimburses the banks for any potential loss resulting from the decline.
LIBOR floor. Though LIBOR fluctuates, investors occasionally demand a minimum LIBOR rate. Suppose LIBOR is 1.17%, and a company has a loan that pays LIB+300, but also has a 2% LIBOR floor. The borrower would pay 5% (2% base rate +3% spread) rather than 4.17% (1.17% LIBOR + 3% spread).
Mark-to-Market. To value loans at their market price; in other words the price a buyer would pay for them.
Negative Covenants. Are usually set to a borrower?s specific condition. They can limit the type and amount of investments, new debt, liens, asset sales, acquisition and guarantees.
OID. Original issue discount. This reflects loans being issued at a discount to face value. For instance a loan may be issued at 98 cents on the dollar, as opposed to 100 cents on the dollar. This would be referred to as ?a loan has an OID of 98?.
Oversubscribe. Lenders agree to lend a larger sum than loan amount. This leads to lender allocations being reduced.
Prime Fund. Mutual fund that invests in leveraged loans.
Primary Loan Market. Market in which loan is syndicated. Used to differentiate from secondary loan market.
Participations. An agreement to shift the risk of the loan (and the income from the loan) between a lender and a participating bank. The participant pays the bank for the amount purchased.
Prepayments. The borrower is typically allowed to make optional prepayments at will.
Prime. A floating-rate pricing option. Borrowed funds are priced daily and may be repaid at any time without penalty.
Repricing. When a borrower returns to the primary loan market to reduce the spread on its loan.
Revolving Credits. Borrowers can draw down, repay and re-borrow under the facility. The facility acts much like a credit card, except that borrowers are charged a fee on unused amounts.
Secondary Loan Market. Market in which loans trade after Primary Market syndication. Loans trade at a percent of par (100 cents). Loans trade by Assignment.
Syndication Agent. In its purest form, the bank that handles the syndication of the loan. Often, however, the syndication agent has a less specific role.
Term Loans. Installment loans. The borrower may draw down the loan during a given commitment period. Then it repays the loan based on a scheduled series of repayments (or a one-time payment at maturity).
Term Loan B, C, D. Institutional term loans, or term loans that are sold to institutional investors such as Prime Funds, CLOs, Insurance companies, etc.
Term-Out. Many facilities allow the borrower to term-out borrowings at a given conversion date.
Underwritten Deal. In an underwritten deal, the agent or agents guarantee the entire commitment and then syndicate the credit. Even if the agent sells less than the committed amount, it must provide the funds.
