The financial market is rapidly and drastically changing. With the demand for funds continuing to exceed supply, banks and funds and their respective teams are having to work harder than ever to fill capacity in their facilities. To achieve this, they are searching for non-bank lenders to join their syndicated subline facilities, as participants. Attracting insurance companies and institutional investors via a term loan tranches has been one solution.
The term loan tranche is attractive to some insurance companies because it is fully funded on day one, without the rapid deployment of capital over the tenor of the facility, as is the case in a committed revolver. Adding a term loan tranche to an existing facility, or creating a new facility with a term loan tranche alongside a traditional revolver, could help the agents to find much needed sources of funding. Of course, this means the facility is not a true bridge that is reduced to zero when capital calls are funded. Thus the fund has ongoing carrying costs associated with the term tranche, while term lenders get ongoing interest not shared by revolving lenders. So care is needed in structuring a facility with a term tranche.
To bring in non-bank participant lenders to these structures, parties should consider the relationship between the term loan commitment size, the revolver commitment size and the size of the collateral pool. This collateral would generally consist of the uncalled capital commitments of investors, and can be structured as a single senior lien securing the obligations of the two different tranches, with a common custodian administering the collateral pool for both tranches.
Once parties answer the “how much” question, the next question is “how long.” Insurance companies seek terms of three to five years for these types of investments. Bank lending, on the other hand, usually focuses on tenors of one or two years. Keeping maturities aligned could be one way to approach this challenge.
The addition of term loans may occur in a cycle of modestly declining overall facility sizes, influenced by the borrower’s preferences given their cost of capital.
In conclusion, banks and funds can benefit greatly from term loans, and it is an attractive solution to bring in non-bank participant lenders to syndicated subline facilities. A term loan tranche alongside a traditional revolver can help to find valuable sources of funding while ensuring a dependable and consistent return stream from lending.