Senior Term Facility Agreement
In the repayment structure, priority bank loans, which are generally classified as the first and second pledges, are unsecured debt securities, followed by equity. Priority bank loans generally have variable interest rates that fluctuate above the London Interbank Offer Rate (LIBOR) or other common benchmarks. For example, if a bank`s interest rate is libor – 5% and LIBOR 3%, the interest rate on the loan is 8%. Because loan interest rates are often monthly or quarterly, interest rates on a priority bank loan can rise or fall at regular intervals. This interest rate is also the return that investors will get on their investment. The variable rate aspect of a priority bank loan provides investors with protection against rising short-term interest rates as a protection against inflation. Companies that take out priority bank loans often have lower credit ratings than their counterparts, so the credit risk to the lender is generally higher than most corporate bonds would. In addition, valuations of priority bank loans often vary and can be volatile. This is especially true during the 2008 financial crisis. Historically, the majority of companies with priority bank loans, which were eventually able to go bankrupt, have been able to cover all loans, meaning that lenders/investors have been repaid. Since priority bank loans are a priority in the repayment structure, they are relatively safe, although they are still considered non-investment level assets, since business loans are most often granted in the package to non-investment-grade companies. Since it is considered senior for all other claims on the borrower, this will be, in the event of bankruptcy, the first loan repaid before other creditors, preferred shareholders or common shareholders receive repayment.
Priority bank loans are generally guaranteed by a pledge to the borrower`s assets. Because priority bank loans are at the top of a company`s capital structure, secured assets are generally sold and the proceeds are distributed to priority loan holders before any other type of lender is repaid. Investors can also rest assured that the average default rate on priority bank loans is historically relatively modest at 3%. Investments in investment funds or exchange traded funds (ETFs) specializing in priority bank loans can be useful for some investors who are looking for a steady income and who are willing to assume additional risk and volatility. Therefore, a priority bank loan is a debt financing obligation granted to a business by a similar bank or financial institution, then repackaged and sold to investors. The reconditioned debt commitment consists of several loans. Priority bank loans have a permanent right to the borrower`s estate over all other obligations. Subject to the provisions of this agreement, the borrower may use a senior device as part of an agreement on a higher facility of which he is a member under the terms of the existing priority facility agreement. Because of their inherent risk and volatility, priority bank loans generally pay the lender a higher return than investment-level corporate bonds.
However, since lenders are assured of recovering at least some of their money from other creditors in the event of insolvency, loans are less profitable than high-yield bonds that do not contain such a promise. No financial party is required to monitor or verify the application of an amount borrowed under this agreement and an agreement on a high-level facility.