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Debt Financing
Traunche B Loans
Traunche B loans (also called junior secured loans, second-lien loans or last-out participation loans) provide incremental liquidity and leverage to borrowers who are capped out with their existing senior lenders.
These facilities, which are typically funded by hedge funds, are structured with a junior lien behind the senior lender on all of the borrower’s assets and, on occasion, a senior lien on some of the borrower’s assets that are considered to be boot collateral (assets securing the loan with no advance provided by the senior lender). As a form of junior debt, traunche B loans contain more risk than traditional senior debt and therefore command higher interest rates.
When funding a traunche B loan, the fundamental credit decision is based on the premise that excess value is available from the borrower or its assets beyond what the senior lender is providing. This can include excess liquidation value from the borrower’s assets or having an enterprise value that exceeds the amount of the senior loan. The methodology for underwriting such loans depends on the specific circumstances of the borrower, its industry, and the availability of or lack of senior lines.
Traunche B loans are ideal for companies that need to supplement their existing credit and have collateralized assets with a liquidation value that exceeds their advanced-upon debt balance. They are also often used by companies in distressed situations. Whether supplementing existing credit or helping to take out an existing bank group with new financing, a traunche B loan may be the best vehicle available to a company to get the capital it needs to fix its balance sheet or provide critical liquidity to execute its restructuring or turnaround plan.
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