What is a Senior Stretch Loan?
A senior stretch loan is a kind of hybrid loan development offered principally to middle-market firms to finance leveraged buyouts (LBOs). Similar to “unitranche” financing, the senior stretch loan combines senior debt and junior (or subordinated debt) into one package deal deal, typically at a lower average value to the borrower than a separate senior loan and junior piece (mezzanine or second lien).
Key Takeaways
- Senior stretch loans are hybrid loans used by middle-market firms to fund leveraged buyouts (LBOs).
- The ones loans combine senior and junior debt proper right into a single package deal deal and are named as such on account of they “stretch” to accommodate the borrower’s financing needs.
- The mixed status of a senior stretch loan makes it higher-risk than usual senior loans, requiring a greater passion rate to the lender.
- This kind of loan provides convenience and speed to for the borrower, along with monetary financial savings on legal fees.
- For the lender, they get flexibility, along with an higher threat on account of they’re now exposed to the bigger basic leverage of the borrower.
How a Senior Stretch Loan Works
Senior stretch loans “stretch” to accommodate the financing needs of the borrower, on the other hand at a greater threat to the lender than a conventional senior loan. With this better threat comes a greater mixed passion rate to the lender.
These kinds of loans have taken market percentage transparent of the usual way of financing a leveraged buyout by the use of securing a willpower for a senior loan for a portion of the entire funding need, then obtaining junior debt inside of the kind of mezzanine financing or second lien debt for the steadiness.
Senior stretch loans can also be to hand for the borrower, on the other hand they comprise higher threat on the lender’s segment.
Advantages and Disadvantages of a Senior Stretch Loan
For the borrower, the senior stretch loan provides speed and luxury. The borrower does not have to negotiate one after the other with two different occasions, the senior loan provider and the junior loan provider.
Instead, the borrower gives with a single lender and thus streamlines the documentation process, saving time and legal fees, while moreover making improvements to the flexibility of the private equity sponsor of the LBO to close the transaction. In addition to, if there is a need for credit score ranking agreement waivers or has the same opinion at some point, the borrower most simple has to turn to the only lender.
Senior stretch loans have allowed smaller corporations to get pleasure from financing this is in the past been reserved for greater firms. The ones loans help small- and medium-sized corporations find the important mix of financing and produce together required strong point lenders.
Then again, the senior stretch loan pieces additional threat to the lender on account of it is exposed to the bigger basic leverage of the borrower. If a monetary establishment provides only a senior loan, it may well be exposed to 4x debt-to-EBITDA, as an example, on the other hand with a senior stretch loan, the leverage might be 6x or 6.5x. Moreover, and related to the risk that incorporates better leverage, the only lender would stand on my own with no syndicate to percentage the risk.
