Senior Stretch Loan
What is a Senior Stretch Loan?
A senior stretch loan is a type of hybrid loan structure offered basically to center market companies to finance leveraged buyouts (LBOs). Like "unitranche" financing, the senior stretch loan consolidates senior debt and junior (or subordinated debt) into one package, normally at a below cost to the borrower than a separate senior loan and junior piece (mezzanine or second lien).
How a Senior Stretch Loan Works
Senior stretch loans "stretch" to oblige the financing needs of the borrower, yet at a higher risk to the lender than a conventional senior loan. With this higher risk comes a higher blended interest payment to the lender.
These types of loans have removed market share from the traditional method of financing a leveraged buyout by getting a commitment for a senior loan for a portion of the total funding need, then, at that point, getting junior debt as mezzanine financing or second lien debt for the balance.
Senior stretch loans can be helpful for the borrower, yet they imply greater risk on the lender's part.
Advantages and Disadvantages of a Senior Stretch Loan
For the borrower, the senior stretch loan gives speed and convenience. The borrower doesn't need to haggle separately with two distinct parties, the senior loan provider and the junior loan provider.
All things considered, the borrower manages a single lender and consequently smoothes out the documentation interaction, saving time and legal fees, while likewise improving the flexibility of the private equity sponsor of the LBO to close the transaction. What's more, on the off chance that there is a requirement for credit agreement waivers or assents from now on, the borrower just needs to go to the single lender.
Senior stretch loans have permitted more modest organizations to exploit financing that is recently been saved for bigger companies. These loans assist little and medium-sized organizations with tracking down the essential mix of financing and unite required specialty lenders.
Be that as it may, the senior stretch loan presents extra risk to the lender since it is presented to the greater overall leverage of the borrower. In the event that a bank gives just a senior loan, it very well may be presented to 4x debt-to-EBITDA, for example, however with a senior stretch loan, the leverage may be 6x or 6.5x. Likewise, and connected with the risk that accompanies higher leverage, the single lender would remain solitary without a syndicate to share the risk.
Features
- For the lender, they get flexibility, as well as an increased risk since they're presently presented to the greater overall leverage of the borrower.
- These loans consolidate senior and junior debt into a single package and are named as such in light of the fact that they "stretch" to oblige the borrower's financing needs.
- This type of loan gives convenience and speed to the borrower, as well as savings on legal fees.
- The blended status of a senior stretch loan makes it higher-risk than conventional senior loans, requiring a higher interest payment to the lender.
- Senior stretch loans are hybrid loans utilized by center market firms to fund leveraged buyouts (LBOs).
