Term Loan B
Also known as: TLB, Institutional term loan, Leveraged loan
The institutional loan that funds most buyouts. The bank commits first and sells afterwards, and the gap is its exposure.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat actually happens?
When a company is bought in a buyout, most of the money comes from a loan. But it is not a bank loan in the old sense — the bank arranges it, then sells almost all of it to investment funds.
That is what a Term Loan B is: a loan designed from the start to be sold to institutions rather than held by a bank. The interest floats with market rates, there is barely any repayment until the end, and the whole thing is documented so it can be traded like a security.
The awkward sequence is that the bank commits before it sells. When the buyout is signed, the bank has promised the money. Only weeks later does it find out what investors will actually pay for it.
To protect itself, the bank negotiates flex: the right to move the terms — a higher rate, a lower price — within agreed limits if the market will not take the loan as agreed. Inside the flex, the bank is fine. Beyond it, the loan stays on the bank's own books at a loss.
- 1
Commitmentat signing
The bank binds itself to fund on agreed terms, with flex to move pricing if the market will not take it.
- 2
Ratings and preparation2–4 wks
The loan is rated, the lender presentation is built and the credit agreement is drafted.
- 3
Launch1 day
The loan is announced to institutional investors with a price range and a commitment deadline.
- 4
Syndication1–3 wks
Funds and collateralised loan obligations commit, and push back on terms as a condition of size.
- 5
Allocationdays
The loan is allocated at whatever the market cleared, within the flex — and beyond it the bank keeps the paper.
Does it clear inside the flex — The institutional loan market decides. Inside the flex the bank is fine; outside it, the loss is the bank's and it shows up in its results.
Documentation push-back — The lenders decides. A syndication that reprices in terms rather than in margin is telling you what lenders were actually worried about.
Who is on the deal
| Who | Side | What they are actually for |
|---|---|---|
| The borrower | Sell side | Is usually a company that has just been bought, borrowing to pay for its own acquisition. |
| The underwriting bank | Both | Committed the money first and is now selling it, which is exactly where its risk lives. |
| Collateralised loan obligations | Buy side | The largest organised buyer of this paper, and the reason there is a market at all. |
| Loan funds | Buy side | Buy for the floating rate and push back on documentation as a condition of size. |
| The rating agencies | Neither | Rate the facility, which decides which vehicles are permitted to hold it. |
| The agent bank | Neither | Administers the loan for its life: payments, transfers, waivers and votes. |
- Desk
- Leveraged Finance
- Lender
- Funds and collateralised loan obligations, not banks
- Rate
- Floating, so the cost moves with policy rates
- Amortisation
- Minimal — repaid at the end, or refinanced
- Bank's protection
- Flex: the right to move terms to get it sold
What decides whether it completes
Not how hard this is, and not a rating — there is deliberately no total. It says which of five blockers decides whether this transaction happens at all, in the same order on all 70 transaction types so they can be compared. This publication's own reading; see the notice below.
- Pricedecides it
- Financingdecides it
- Approvalbarely applies
- Diligencebarely applies
- Executionmatters
What decides it here. The bank has already committed, so the only question is whether the loan clears inside the flex it negotiated. Inside it, the terms move and everybody is fine; outside it, the paper stays on the bank's own book and the loss is disclosed in its results rather than in the borrower's.
3 · IntermediateHow it runs in practice
Why funds rather than banks
Banks are poorly suited to holding long, low-rated, illiquid loans: capital rules make it expensive and their funding is short. Funds are better suited — particularly collateralised loan obligations, which raise long-dated money specifically to hold portfolios of these loans. The market exists because that mismatch was solved by moving the asset to a different holder.
What makes the paper tradable
- A rating, so that mandated vehicles can hold it.
- Standardised documentation, close enough between deals that a fund can read a new one quickly.
- Minimal amortisation, so the cash flow is predictable and the loan behaves like a bond.
- An agent bank that handles transfers, so a position can change hands without renegotiating anything.
Floating rate, and why that matters now
Unlike a fixed-rate bond, the coupon moves with the benchmark. That protects the lender against rising rates and moves the whole risk onto the borrower's ability to service a bill that grows. A structure sized comfortably at one rate level can be uncomfortable at another with no change in the business — which is a different failure mode from anything on the bond desk.
Covenant-lite, precisely
It does not mean no covenants. It means no maintenance covenants — no quarterly test the borrower must pass regardless of what it does. Incurrence covenants remain: tests that apply when the borrower wants to do something, such as borrow more or pay a dividend. The practical consequence is that lenders no longer get an early seat at the table when performance slips; they wait until a payment is missed.
4 · AdvancedThe numbers & the documents
The flex, in detail
A commitment letter specifies how far terms may move to clear the market: usually a maximum increase in margin, a maximum discount to par, and sometimes the right to move money between tranches. Reverse flex — improving terms when demand is strong — also exists and is used.
What the flex does not usually cover is the covenant package. Lenders pushing back on documentation therefore create a harder problem than lenders pushing back on price, because the sponsor negotiated those terms as part of the deal and has to be asked to give them up.
Original issue discount as the pricing lever
Loans are often sold below par: a lender pays 98 for a loan that repays 100. That discount is a yield increase without reopening the margin, and it is where flex usually lands first. It also means the headline margin understates the cost, and the honest comparison between two loans has to include it.
Where the documents decide the next crisis
- The definition of earnings, and how much may be added back.
- Restricted subsidiaries — which parts of the group the covenants reach.
- Permitted investments and asset transfers — whether value can leave the lenders' reach.
- The amendment threshold — what a majority of lenders can do to a minority.
That last one is not a technicality. It decides whether a group of lenders can agree a deal that leaves the others behind — see uptiering and drop-downs.
What happens to the loan afterwards
It trades. Loan prices are quoted as a percentage of face value and are a real-time read on how the market sees the credit — frequently better information than the bonds of the same issuer, because loan investors sit closer to the documents. The instrument on the markets side is the leveraged loan.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow people on the deal think about it
Now say it back
Close the page and give Term Loan B in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — name both sides and what each one is actually trying to get.
- What has to happen, in order — the three or four stages, not the whole timetable.
- Where the money comes from — cash, new shares, or borrowed; somebody has to fund it.
- What kills it — the ordinary way, not the dramatic one.
Where this transaction shows up elsewhere
- EasyLeveraged buyoutDealA company bought largely with borrowed money, secured on the company itself
- MediumBridge to bondDealA loan that exists to be replaced
- MediumHigh-yield bond issueDealSame market, different transaction: here the covenants are the deal, and the roadshow exists to explain them
- HardHow to Read a Credit AgreementPlaybooksTwo loans at the same margin are not the same loan
- HardLevfinDeskHow a buyout is funded: the commitment, the flex, syndication, covenants and the exit that has to exist before the…