What are Senior Secured Loans?
A Senior Secured Bank Loan (SSL), often called floating-rate loans are short term Business Financing debt obligations funded by either a bank or non-bank lender to U.S based for-profit corporations. The word Secured within SSL’s stems from the fact that they are usually “secured” by a company’s total assets, including but not limited to the revenue, receivables, inventory, and equipment.
The word Senior stems from the fact the blanket lien the SSL will place on the corporation will be a UCC-1 lien covering all of the business assets in a first lien position even in the event of a bankruptcy. An SSL will be the first loan to be repaid before any other creditors, preferred stockholders, or common stockholders receive repayment. Companies use these to finance the company’s growth, cover general operating expenses, fund an expansion, cover an acquisition, or for general corporate purposes.
One other major reason companies have been known to utilize Senior Secured Loans are for the purpose of ‘Recapitalization’, a process of making a company’s capital structure stable by restructuring its current outstanding debts and current equity mixture.
Senior Secured Loan terms can range from 3 to 5 years, some can go past that even extending up until an 8-year term. In SSL’s, there is usually an option for corporations to repay the loan prior to the full maturity as these loans do not have a non-call period. Some lenders may even offer early payment discounts. Senior Secured Loans approvals can range from as low as $1.5mm to as much as $10 billion, issued to some of the country’s largest corporations. The industry average is somewhere between $5mm to $20mm for SSL’s. Due to the amount of range as a debt obligation that Senior Secured Loans can offer we have seen the SSL market grow over 250 percent in the last decade, today exceeding $975 billion.
Senior Secured Loans are funded by bank and non-bank lenders to mid-sized to larger corporations that have the merit to qualify for the size of the average SSL. Since the loans are always in the Senior Debt Obligation position within the total debt repayment structure, SSL’s are always listed as first lien and second lien, comes any unsecured debt followed by equity investors. SSL’s are generally backed by the company’s total assets including but not limited to the inventory, property, equipment, or real estate, as collateral. The underwriting department of the lender/investor of SSL will want to also review the last 3 years of the corporation’s financials.
Between the company’s revenues, inventory, receivables, and equipment values an offer will be made off how much debt the company can afford to carry in a senior secured position. This Business Financing debt obligation tool is often used by corporations to provide the business with cash to continue its daily operations or any other capital needs that it may arise.
Senior Secured Loans aren’t typically fixed interest rate loans over the whole repayment term. Most SSL’s are funded with variable interest rates that fluctuate according to the London Interbank Offered Rate (LIBOR) or the Prime Rate. For example, if a lender’s rate is Prime + 5%, and the Prime Rate is at 3%, the loan’s interest rate will be 8%. Since International benchmark rates like the Prime or LIBOR often change monthly or quarterly, then the interest on a Senior Secured Loan may increase or decrease at regular intervals.
Be advised since SSL’s are at the top of a company’s capital structure, if the company files for bankruptcy, please remember the secured assets are typically first sold and the proceeds are distributed to Senior Secured Loan holders before any other type of lenders or investors are paid back. However on average, the majority of businesses with SSL’s that have had the misfortune of ending up filing for bankruptcy have been able to cover the SSL’s balance entirely, meaning the lenders/investors of the SSL were paid back. This is due to the fact Senior Secured Loans take precedence in the repayment structure; they are relatively safe, though they are still considered non-investment grade assets.
Since the 2008 Global Financial Crisis there have been more and more regulations that have affected the banking sector and the overall debt markets. These restrictions have limited borrowing opportunities for many small and medium-sized U.S. businesses—the cornerstone of our economy—from traditional lending channels. These businesses have turned to alternative sources of financing, such as SBA Loans and Senior Secured Loan that are being funded by Business Development Companies (BDCs) and private lenders. Thus creating new opportunities for corporations to access the capital they need for their businesses to thrive.
- Senior Secured Loans are typically secured via a lien against the total assets of the business
- Therefore SSL’s take priority over all of the other debt obligations of a business.
- With this debt financing product the Interest paid before bond and equity holders thus eliminating any extra accounting confusion.
- Since SSL’s are in 1st lien position then in the event of an unforeseen bankruptcy. The Senior Secured Loan receives payment before other creditors, preferred stockholders, and common stockholders, when the assets of the borrower are sold off.Thus making it simpler for the corporation to be allowed to return payment to its most senior creditors.
- Terms on Senior Secured loans can range beyond the typically 5 year max for term for an unsecured or junior debenture Business Term Loan to up to 6 to 8 years.
The capital from an SSL can be used by the corporation to fund Capital Expenditures, General Business Advances like new marketing initiatives, Corporate Acquisitions, and Leveraged Buyouts.
Since Senior Secured Loans take up first lien position over a corporation’s total asset and are paid before all other creditors and investors. Bank and Non-Bank Lenders that fund SSL’s will take a very deep dive into many aspects of a corporation. Prior to offering and funding a term sheet. The following items are needed industry wise yet please be advised there may be some lenders that may require additional information.
Senior Secured Loans recipients the corporation must be engaged in, propose to do business in,or have the majority of their operations within the U.S
In order to qualify for a Senior Secured Loan the Corporation must have been operating the business for a minimum of 3 years under the current Tax ID/EIN number.
Since SSL’s come with extended repayment periods compared to short-term funding options, a company’s financials and credit score are more important. Most lenders will want to know that the principal owners of the business have pristine credit history, typically north of 700+ FICO.
On top of the principals of the business needing to have a good credit score with no tax liens or judgment issues. The corporation itself must both have good credit scores with no liens or judgments including a recently discharged Bankruptcy.
Also the applying corporation for this Business Financing Product needs to have been operated with a reported profit for the two most recent years, including the YTD quarters of the year the corporation is applying.
Therefore applying corporations need to provide the 3 most recent years of financial statements, business and personal tax returns, and 12 most recent bank statements of the company.
Senior means all assets will be pledged including the companies receivables so the current A/R Summary and A/P Summary must be provided
As well as a fully appraised Equipment Value and recorded Net Orderly Value of current inventory levels.
Full Board Approval when necessary also the companies owner/principals may need to have a reasonable amount of equity already invested or be ready to invest to build one up prior to funding.