Finance Glossary

A lending structure where credit is extended based on the value of a borrower's assets—typically accounts receivable, inventory, machinery, or real estate—rather than cash flow or earnings. ABL facilities feature borrowing base calculations that determine availability based on eligible collateral values.

The percentage of an asset's value that a lender will finance in an asset-based lending structure. Typical advance rates include 75-90% for accounts receivable, 50-65% for inventory, and 70-80% for equipment. Rates vary based on asset quality, liquidation value, and lender risk appetite.

The lender (typically the lead arranger) that handles day-to-day administration of a syndicated facility: processing borrowing requests, calculating interest, distributing payments to lenders, monitoring compliance, and coordinating amendments. The agent acts as intermediary between borrower and syndicate.

European regulation governing managers of alternative investment funds, including private credit funds. AIFMD requires authorization, capital requirements, disclosure obligations, and operational standards for fund managers operating in the EU.

A provision in credit agreements allowing borrowers to increase facility size (typically by 25-100% of original commitments) without renegotiating terms, subject to lender consent and satisfaction of conditions. Also called an incremental facility or upsize option. Provides flexibility for growth capital needs or M&A financing without full refinancing.

A covenant requiring the borrower to take specific actions: maintain insurance, provide financial statements, preserve corporate existence, comply with laws, pay taxes, maintain properties, and allow lender inspections. Contrasts with negative covenants that restrict actions.

A transaction where lenders agree to extend loan maturity in exchange for improved economics (higher pricing, fees, or enhanced terms). Common alternative to refinancing when market conditions are unfavorable. Contrasts with 'amend and pretend' where lenders extend troubled credits without adequate compensation.

The lead financial institution(s) that structure, underwrite, and syndicate a financing transaction. Arrangers negotiate terms with borrowers, prepare marketing materials, coordinate due diligence, form lender syndicates, and allocate commitments. Also called bookrunners, lead arrangers, or mandated lead arrangers (MLAs).

A capital structure with separate senior and junior debt facilities, each with distinct documentation, pricing, and lender groups. Contrast with unitranche financing, where senior and subordinated debt are combined in a single facility.

The maximum amount available under an asset-based lending facility, calculated by applying advance rates to eligible collateral (receivables, inventory, equipment) after deducting reserves and ineligible amounts. Borrowers submit regular borrowing base certificates to document availability.

A periodic reporting document (weekly, bi-weekly, or monthly) where borrowers detail eligible collateral and calculate available capacity under an ABL facility. Certificates include aging schedules, concentration reports, and reserve calculations.

A large final payment due at loan maturity, representing a substantial portion of the original principal. Common in amortizing term loans where principal payments during the term are minimal, with the bulk repaid at maturity. Requires refinancing or asset sale to repay.

A permitted exception to negative covenants allowing specified actions up to defined thresholds. Baskets can be fixed dollar amounts, percentage tests, or ratio-based. Common baskets include permitted debt, permitted liens, permitted investments, and restricted payments. Build-up baskets grow over time based on retained earnings or cash flow.

A loan agreement between a single borrower and single lender, as opposed to syndicated facilities with multiple lenders. Bilateral facilities feature simpler documentation, faster execution, closer lender relationships, and more flexible terms, but are limited by single-lender hold capacity.

Short-term financing (typically 6-18 months) providing interim funding until permanent financing is arranged. Common in M&A transactions where acquisition financing is needed before divesting assets or refinancing. Bridge loans typically carry higher pricing and may include 'exploding' features (step-ups) incentivizing takeout.

A loan structure where the entire principal amount is due in a single payment at maturity, with no scheduled amortization during the facility term. Common in revolving credit facilities and certain term loans. Requires refinancing or significant cash generation to repay at maturity.

A securitization vehicle that purchases a portfolio of leveraged loans and issues multiple tranches of notes backed by loan cash flows. CLOs use waterfalls to allocate payments across tranches with different risk profiles and returns.

An event triggering lender rights when ownership or control of the borrower changes, typically defined as acquisition of 50%+ equity, change in board majority, or sale of substantially all assets. May trigger mandatory prepayment, consent requirements, or put rights allowing lenders to exit at par or premium.

A fee paid on the undrawn portion of a committed facility (typically 30-50% of the margin), compensating lenders for holding capital available. Common in revolving credit facilities and delayed draw term loans where borrowers may not draw the full commitment immediately.

A preliminary financing commitment from lenders outlining key terms (amount, pricing, structure, conditions) before definitive documentation. Common in M&A transactions providing financing certainty. Commitment letters may be 'certain funds' (limited conditionality) or subject to due diligence and documentation.

A periodic certificate (typically quarterly) from the borrower's CFO certifying compliance with financial covenants, absence of defaults, accuracy of representations, and satisfaction of ongoing obligations. Includes covenant calculations and supporting financial data.

Loan facilities that eliminate or significantly reduce financial maintenance covenants (leverage ratios, coverage tests), relying instead on incurrence covenants that restrict specific actions. This provides borrowers operational flexibility but reduces lender control and early warning signals of financial deterioration. Cov-lite has become standard in sponsor-backed transactions and represents 80%+ of new institutional loan volume.

A provision making it a default under one facility if the borrower defaults under another credit agreement. Cross-default provisions protect lenders by ensuring coordinated action when borrowers face financial distress across multiple facilities.

A higher interest rate (typically 2% above the normal rate) charged after an event of default occurs, compensating lenders for increased risk and incentivizing borrowers to cure defaults quickly. Continues to accrue until the default is cured or waived.

A committed term loan that can be drawn in multiple takedowns over a specified period (typically 6-18 months), rather than in a single upfront drawing. Common for acquisition financing, capex programs, or phased construction. Borrowers pay commitment fees on undrawn amounts.

Private credit provided directly by non-bank lenders (debt funds, private equity-affiliated credit arms) rather than through syndicated markets. Direct lending typically involves bilateral or small club deals with bespoke structures and relationship-based underwriting.

Debt securities or loans of companies facing financial difficulty, typically trading significantly below par value. Distressed debt investors seek returns through debt-to-equity conversions, restructurings, or recovery in bankruptcy proceedings.

The investigative process lenders conduct before committing to a financing, examining financial statements, business operations, compliance, management quality, market position, and material contracts. Due diligence covers corporate structure, litigation, regulatory compliance, intellectual property, and material agreements.

Earnings Before Interest, Taxes, Depreciation, and Amortization - a measure of operating profitability used in leverage ratios and coverage tests. Loan agreements typically define 'Adjusted EBITDA' with permitted add-backs for non-recurring expenses, restructuring costs, and synergies. Adjustments are heavily negotiated as they directly impact covenant headroom.

A mechanism allowing borrowers to cure covenant breaches by injecting equity capital, which is treated as EBITDA for covenant calculation purposes. Typically limited to 2-3 uses during the facility term and capped at a percentage of the required metric. Cannot cure payment defaults or certain other non-financial breaches.

Specified events triggering lender acceleration rights and termination of commitments: payment defaults, covenant breaches, cross-defaults, bankruptcy, material misrepresentations, change of control, or material adverse effects. Events of default typically include cure periods and materiality thresholds, with payment defaults and bankruptcy being immediate.

A calculation measuring cash available for debt prepayment after deducting operating expenses, taxes, debt service, capex, and permitted payments from operating cash flow. Borrowers typically prepay a percentage (25-75%) of annual excess cash flow in cov-lite term loans, with step-downs based on leverage.

A detailed audit of a borrower's collateral conducted by the ABL lender (typically annually or semi-annually) to verify borrowing base certificate accuracy, assess collateral quality, and evaluate operational controls. Field exams involve on-site inspection of receivables, inventory, and systems.

A debt structure where a lender has a first-priority lien on certain collateral but subordinated payment rights relative to other debt. FILO is common when ABL lenders take first-priority liens on working capital assets but agree to subordinate payments to term loan lenders.

A covenant that restricts specific actions (acquisitions, asset sales, dividends) unless certain financial tests are met at the time of the action. Contrast with maintenance covenants that require ongoing compliance regardless of borrower actions.

An accordion feature allowing borrowers to add new term loans or increase revolving commitments after closing, subject to lender consent and satisfaction of conditions. Typically capped at a multiple of EBITDA or fixed dollar amount. Also called accordion or upsize provisions.

An agreement between different classes of lenders (senior, second-lien, mezzanine) that governs lien priorities, payment waterfalls, voting rights, enforcement restrictions, and standstill provisions. Intercreditor agreements are critical in multi-tranche financings and become especially important in default scenarios.

A financial covenant measuring EBITDA relative to interest expense, typically tested quarterly. Common thresholds range from 2.0x to 4.0x depending on industry and credit quality. Breaches trigger defaults unless cured through equity injections or waivers.

An acquisition of a company using significant debt financing, typically structured by private equity sponsors. LBO financing often includes senior bank debt, institutional term loans, high-yield bonds, or mezzanine financing, with equity comprising 30-40% of the purchase price.

A financial covenant measuring total debt relative to EBITDA or cash flow. Common leverage ratios include Total Debt / EBITDA (typically capped at 4-6x depending on industry and structure) and Senior Debt / EBITDA. Ratios may be tested quarterly or only at incurrence of new debt.

London Interbank Offered Rate - the former benchmark interest rate for floating-rate loans, now largely replaced by SOFR (Secured Overnight Financing Rate). Historical LIBOR-based loans have been amended to reference SOFR or other risk-free rates plus credit adjustment spreads.

A security interest in assets granted to lenders as collateral for debt obligations. Liens can be first-priority (senior) or junior (second-lien, third-lien), with priority determining payment order upon enforcement. Perfection requirements vary by asset type and jurisdiction (UCC filings, mortgages, control agreements).

A financial covenant tested regularly (typically quarterly) requiring ongoing compliance with leverage ratios, coverage tests, or minimum liquidity requirements. Failure triggers default regardless of whether borrower takes specific actions. Common in bank facilities; less common in institutional term loans.

Required debt repayments triggered by specific events: asset sales, insurance proceeds, debt issuances, or excess cash flow. Prepayments typically apply pro rata across tranches, though some structures provide borrower choice. Proceeds may be subject to reinvestment rights or materiality thresholds before triggering prepayment obligations.

A provision in commitment letters giving arrangers the right to modify pricing, structure, or terms if market conditions change between signing and syndication. Typical flex includes 50-75 basis points of pricing adjustment, changes to amortization schedules, covenant modifications, and original issue discount (OID) adjustments. Borrowers negotiate flex caps to limit potential changes.

A condition or covenant allowing lenders to refuse funding or declare default if there's a material adverse change in the borrower's business, financial condition, or prospects. MAC clauses are heavily negotiated and typically require significant deterioration to trigger. Often carved out for known risks, market conditions, and regulatory changes.

The date when principal becomes due and payable. Term loans typically mature 5-8 years after closing; revolving facilities may have shorter maturities with extension options. Bullet maturities require full repayment at maturity; amortizing loans have scheduled principal payments before final maturity.

Subordinated debt that sits below senior and second-lien facilities in the capital structure, typically unsecured or with junior liens. Mezzanine debt usually includes PIK interest, equity participation (warrants, co-investment rights), and prices at 10-14% returns with 12-24 month standstill periods.

A covenant restricting borrower actions without lender consent: limitations on debt incurrence, liens, asset sales, investments, dividends, affiliate transactions, and fundamental changes. Negative covenants typically include carve-outs (baskets) for permitted activities up to specified thresholds.

The difference between a loan's par value and the lower price at which it's initially sold (e.g., selling a €100M loan for €98M, creating 2% OID). OID provides additional yield to lenders and reduces net proceeds to borrowers. Common in stressed syndications or as part of market flex provisions.

Interest that accretes to principal rather than being paid in cash. PIK allows borrowers to preserve liquidity while compensating lenders through increased principal balances. Common in mezzanine debt, venture debt, and distressed situations.

Latin for 'equal footing' - describes debt ranking equally in right of payment and lien priority. Pari passu provisions ensure borrowers don't grant superior rights to other creditors. Common in intercreditor arrangements where multiple lenders share the same collateral priority.

Voluntary or mandatory early repayment of principal before scheduled maturity. Voluntary prepayments typically require notice and may carry premiums (call protection). Mandatory prepayments are triggered by asset sales, excess cash flow, debt issuances, or insurance proceeds.

Debt financing provided by non-bank lenders including private credit funds, debt funds, and alternative asset managers. Private credit funds aren't subject to bank capital requirements, can hold loans to maturity, and typically offer more flexible structures than banks.

A lender classification in syndicated facilities referring to banks providing revolving credit and amortizing term loans. Pro rata lenders typically receive higher voting rights than institutional term loan lenders and are more relationship-oriented.

Replacing existing debt with new financing, typically to improve terms (lower pricing, longer maturity, enhanced flexibility) or provide liquidity for dividends or acquisitions. Refinancings may be opportunistic (market-driven) or necessitated by approaching maturities.

Statements of fact made by borrowers regarding their legal status, financial condition, litigation, compliance, and material contracts. Representations are made at closing and sometimes repeated (repeating representations). Breaches trigger defaults and may void lender commitments.

The threshold of lender approval (typically >50% of commitments or outstanding amounts) needed for amendments, waivers, and enforcement actions. Required lender provisions define which actions need majority consent vs. unanimous approval, balancing lender protection with administrative efficiency.

A committed facility allowing borrowing, repayment, and re-borrowing up to a maximum amount, used for working capital and short-term liquidity needs. Borrowers pay commitment fees on undrawn amounts (typically 25-40 basis points) plus interest when drawn.

Secured debt with a second-priority lien on collateral, subordinate to first-lien senior debt. Second-lien facilities typically price at 600-900 basis points over benchmarks, include PIK options, and require intercreditor agreements governing enforcement rights and payment priorities.

The process of pooling financial assets (loans, receivables, mortgages) and issuing securities backed by those asset cash flows. Securitization involves creating special purpose vehicles (SPVs), structuring tranches with different risk profiles, and establishing waterfalls for payment allocation.

The benchmark interest rate that replaced LIBOR, based on overnight Treasury repo transactions. Most corporate and institutional loan facilities now use Term SOFR (forward-looking term rates) plus a credit spread.

A financial covenant that only applies when certain conditions are met, typically when revolving credit availability falls below a threshold (e.g., 10-15% of facility size). Springing covenants provide flexibility while protecting lenders when liquidity tightens.

A period during which subordinated lenders agree not to enforce remedies following a default, allowing senior lenders time to assess and pursue recovery. Standstill periods typically run 90-180 days for second-lien debt and 12-24 months for mezzanine debt.

Senior debt with higher advance rates or looser borrowing base mechanics than traditional ABL, sitting between traditional senior ABL and second-lien debt in the capital structure. Stretch senior typically requires higher pricing than standard ABL but less than junior debt.

The process of marketing and selling loan commitments to a group of lenders coordinated by arrangers. Syndication allows borrowers to access larger commitments than single lenders can provide and creates a liquid market for institutional investors to buy and sell loan participations.

Bank-held term debt with quarterly principal amortization (typically 5-7 years), maintenance covenants tested quarterly, and pricing at lower spreads (SOFR plus 200-350 basis points). TLA maintains banking relationships and provides lower-cost financing.

Institutional term debt with minimal amortization until maturity (7-8 years), incurrence covenants rather than maintenance tests, and pricing at higher spreads (SOFR plus 350-500 basis points). TLB provides longer runway and operational flexibility.

A debt structure combining senior and subordinated debt into a single facility with a blended interest rate and unified documentation. Unitranche simplifies execution (single negotiation, one set of documents), reduces costs, and accelerates closing timelines compared to bifurcated senior-junior structures.

The standardized set of laws governing commercial transactions in the United States, including security interests in personal property. UCC filings (financing statements) perfect security interests and establish priority among competing lenders.

Specialized growth capital provided to venture-backed companies, typically alongside equity financing rounds. Venture debt is structured as term debt (usually 3-4 years) with warrants (5-15% coverage), light financial covenants, and relies on equity backing rather than current cash flow.

Short-term financing for loan originators to fund portfolios before selling them into securitizations or permanent facilities. Warehouse lenders advance 75-85% of par against eligible loans, charge SOFR plus 250-400 basis points, and maintain first-priority security until loans are sold.

In venture debt, warrants provided to lenders as additional compensation, calculated as a percentage of the loan amount (typically 5-15%). Warrants are exercisable at the most recent equity round price, vest immediately, and have 10-year terms. Coverage varies by company stage and risk.

The priority of payments in structured finance or multi-tranche debt structures, determining the order in which cash flows are allocated to pay fees, interest, and principal across different classes of debt. Waterfalls are critical in CLOs, securitizations, and intercreditor arrangements.