Wednesday, June 24, 2009

Wrangling Term Loan B Investors

According to, American Airlines is asking its lenders for a covenant waiver. A conference call was held on June 22 and responses are due by June 25. Why the rush? The covenant would be waived for the quarter ending June 30, so the company wants the amendment done before the end of the quarter.

As we have discussed in earlier entries, many companies are amending their credit agreements to reflect lower than expected operating performance driven by the recession. Airlines have been especially hard hit by the downturn, so the pressure on American's covenants is no surprise. The interesting element of this amendment is the lending group - institutional investors.

Term Loan B
A Term Loan B ("TLB") is a term loan structured for sale to institutional investors, such as collateralized debt obligations (CDOs) and prime rate mutual funds. Traditional term loans, called Term Loan A's, are typically originated by and sold to banks. Here are the main differences between the two:

Negotiating Amendments with Institutional Investors
Amendments to corporate loan agreements happen all the time. When the lenders are banks (as is typical for revolvers and TLAs), the relationship between borrower and lender often goes back many years and may include other business, such as cash management or bond underwriting. As a result, banks are often willing to work with borrowers towards a long-term solution (i.e. banks are more willing to grant waivers). TLA banks are often referred to as "relationship lenders."

Institutional investors are "transaction lenders" - their relationship with the borrower often goes no further than the individual loan. As a result, they are often less inclined than banks to grant waivers or agree to amendments.

American Airlines "Pays Up" for its Amendment
American's proposal to its TLB lenders is to waive the fixed charge covenant this quarter and cut it through the loan's maturity in 18 months. In exchange, the spread on the loan would go from 200bp over LIBOR to 400bp, and there would be a new LIBOR floor of 2.5%. This would immediately increase the interest rate on the $435 million loan by about 3.9%, increasing interest expense by over $16 million per year. In addition, the lenders would get a 75 basis point amendment fee, costing American over $3 million. These terms are not unusual in today's market for "B" rated companies like American.


Dean said...

what drives market standards in terms of loan tenor? I'm in leveraged finance where a,b,c tranche tenor went from standard 7,8,9 down to 5,6,7 and now the c tranche isnt seen much. Presumably its related to companys cash flow and banks' desire to amortise aggressively down the debt load?

Ron Carleton said...


Your read of the loan market is right on. Shorter loan maturities are just one part of the turn in the credit cycle. Other impacts include higher spread (and other return enhancements, like OID and LIBOR floors) and tighter covenants.

In general, investors are willing to accept less credit risk (which is where shorter maturities come in) and are demanding higher returns. Another impact we're seeing in leveraged finance is a move back to TLAs from TLBs (as big TLB investors like CLOs have pulled back).

All of these factors mean that leveraged finance transactions will be much harder to do, and the ones that are getting done have much lower leverage and are more conservatively structured.