National Commercial Loan Markets Glossary of Terms and Acronyms

Transcription

1 National Commercial Loan Markets Glossary of Terms and Acronyms

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3 Introduction As we have worked with the BancAlliance members across the past year, we have received numerous questions about many of the terms and acronyms that typically show up when evaluating commercial loans. As such, Alliance Partners has compiled this Glossary of Terms to help BancAlliance members better understand terminology used within the capital markets that will commonly be used in materials provided by Alliance Partners. The different credit acronyms and terms presented here are frequently found in documents such as Credit Committee Memorandums, Credit Agreements, Security Agreements or the Intercreditor Agreements that will accompany the commercial loans presented to the membership by Alliance Partners. Some of the terms presented in this document are based on industry accepted definitions provided by the Loan Syndications & Trading Association (LSTA), while other terms are those commonly used in the BancAlliance Credit Policy and BancAlliance Asset and Underwriting Guidelines. Our aim is to provide accurate and practical definitions, without being too technical. However, if any of our definitions are unclear, they are most likely unclear to others, and by flagging that shortcoming for us, we can improve the document for everyone. The Glossary is organized into two sections: Section 1: Definition of Terms This section is arranged alphabetically and readers can use this as they would any dictionary. Simply look up the term and the definition follows. Section 2: Acronyms This section is a simple listing of every credit and loan acronym we use and it unpacks each term for the reader. (For example, LTM = Last Twelve Months) The actual definition of each of these terms can then be found in Section 1. Our ambition is that this Glossary will be a living document and Alliance Partners will continue to add acronyms and terms as needed. As with all of our work we would appreciate any feedback that would make this more valuable.

4 Section 1: Definition of Terms Acceleration: The early maturity and demand for repayment of the total outstanding principal amount of a loan by a lender or group of lenders upon the occurrence of certain events described in a credit agreement (for example, the borrower s failure to make a scheduled payment, the borrower s filing for bankruptcy, or the borrower s nonperformance relative to their maintenance covenants). Accordion Feature/Incremental Facility: This is a feature of a credit facility that allows a borrower to elect to increase the amount borrowed by increasing the principal under the facility. This is typically subject to specific criteria in the credit agreement such as no event of default and a maximum leverage threshold prior to usage. The interest, maturity and other key terms applicable to the increased commitment are typically identical to those applicable to the funded term loan. Companies establish this facility in anticipation of the need for capital for possible expansion opportunities, such as acquisitions. Lenders in the existing bank group typically have the option but not the obligation to participate in the incremental facility. Administrative Agent: The institution that performs the record keeping associated with a loan, handles the interest and principal payments to be made in connection with the loan, and monitors the ongoing administration of the loan. Administrative Agent Fee: The annual fee paid to the administrative agent for its loan administration services. Affiliate: With respect to a specified person or entity, an affiliate is another person or entity that directly or indirectly, through one or more intermediaries, controls, is under common control with, or is controlled by the specified person or entity. Agency Fee: This is an annual fee payable by the borrower to compensate the agent for the mechanical and operational servicing work performed by them under the terms of the loan agreement. Agent: The broad title given to certain financial institutions that take on specific role of leadership (i.e. Administrative Agent, Collateral Agent, Syndication Agent) with respect to the credit agreement. Allocation: The primary syndication of a facility among committed lenders by the arranger; it takes place when the loan commitment process has been completed. The primary syndication is considered completed once the allocations have been announced, following which the loan may begin trading. Amendment: A revision to the terms (financial or otherwise) of a credit agreement, typically requested by a borrower.

5 Amendment and Restatement: A revision of a credit agreement that reflects modifications to the original credit agreement (either in one amendment or in a series of previous amendments). Applicable Margin: This is another term for the Spread over a benchmark rate such as Libor that determines the interest payments of a loan. In some cases, the Applicable Margin is fixed for the life of the agreement, but, in other instances, it increases over time or is dependent on the credit ratings and/or leverage of the borrower (based on a Pricing Grid). Arrangement Fee: The fee paid by a borrower to the arranger for structuring and syndicating the loan. Arranger: The firm that leads the structuring and syndication of a loan. See Lead Arranger. Asset-Backed Security (ABS): A security backed by an underlying asset, such as loans, bonds, or mortgages. Asset-Based Loan (ABL): A loan that is secured by specific assets (typically receivables or inventory) and made on the basis of a negotiated borrowing formula (borrowing base) that reflects a percentage of the value of the underlying assets. Assigning Lender: A lender that is selling and assigning its rights and obligations under a credit agreement (and any other documents related to such credit agreement) to another party pursuant to an Assignment and Assumption Agreement. This also includes any claims against any person arising in connection with a credit agreement. Assignment: A transfer of a loan that has the effect of substituting the assignee/buyer for the assignor/seller such that the assignee/buyer comes into privity of contract with the borrower, obtaining the rights and assuming the obligations of the assignor/seller under a credit agreement. Assignment and Assumption Agreement (also known as an Assignment Agreement): The agreement that documents the sale and assignment of rights and obligations under a credit agreement by a lender to an assignee. This agreement is typically a form that is attached to each credit agreement. Assignment Fee: The fee charged by an administrative agent and set forth in the applicable credit agreement for the costs associated with causing an assignment agreement to be effected. In recent years, many institutions have been waiving assignment fees on a reciprocal basis or eliminating them entirely.

6 Section 1: Definition of Terms Availability Period: Period of time between the signing of a loan agreement and the expiry of the lender s commitment to lend, during which the borrower is permitted to draw additional advances or issue letters of credit, capped by the overall commitment as defined in the credit agreement, \provided the conditions precedent have been satisfied and the repeated conditions precedent continue to be satisfied. Average LIBOR Rate: For the Delayed Period (see below for definition), it means (i) the sum of all the individual LIBO Rates for each day in the period from (and including) the date two (2) Business Days before the Commencement Date and to (but excluding) the date that is two (2) Business Days before the Delayed Settlement Date (ii) divided by the total number of days in such period. Balloon Payment: Final repayment of a facility where the repayment schedule is heavily weighted to the final amortization payment. Basis Points: (bps) 1/100 of one percent (0.01%). It is the unit of measurement used to describe fees or spreads in most loan transactions. Best Efforts Syndication: A transaction in which the arranging syndicate does not firmly commit to provide all the funds requested by a borrower, but rather commits to using its best efforts to raise the money; as a consequence, the related pricing and fees will typically be lower than those for fully underwritten transactions. Traditionally, best efforts syndications were used for risky borrowers or for complex transactions. Since the late 1990s, however, the rapid acceptance of market flex language has made best efforts loans the rule even for investment-grade transactions. Bid Price: The price at which a potential buyer would agree to purchase a loan. Book Equity: This is typically defined as the total of a company s common stock equity as it appears on its balance sheet and is equal to the company s assets minus its liabilities. Book equity is also defined as a historical recording of the starting point for a company s common stock equity on the balance sheet, adjusted for a number of subsequent events pertaining to cash earnings, accounting assumptions, tax code assumptions, and foreign currency and/or derivative positions. It is not typically relied upon by potential investors in a business as a meaningful indicator of value since GAAP accounting often forces various adjustments to book equity for accrual assumptions unrelated to the value of the business. Bookrunner: The bank(s) appointed to run the books during the execution phase of syndication with responsibility for issuing invitations, disseminating information to interested banks and informing both the borrower and the management group of underwriters of daily progress. This is a high profile role and generally considered the

7 most desirable syndication task. Borrowing Base: This is the amount that a lender may advance at any one time against the dollar value a borrower pledges as collateral. The amount a borrower may request is limited by both the total commitments of the lenders under the applicable credit facility and by the borrowing base. The borrowing base normally consists of the sum of eligible accounts receivable and inventory. Advanced rates are typically 85% and 50% for accounts receivable and inventory, respectively. Bullet Payment: A facility where the repayment is in one amount on the final maturity date of the syndicated agreement. Buyout (or Management Buyout): The acquisition of a company by an external group of managers who have secured financial backers and who plan to manage the company upon completing the acquisition. Call: The right to buy an asset at a specified price at or prior to a given date. Cash Interest Coverage: This measures a Company s ability to pay the interest due to its creditors. Cash interest coverage uses EBITDA divided by and gross interest paid as reflected in the Borrower s cash flow statement instead of interest payable as reported on the income statement (which may be net of interest income received on cash on hand). Change of Control: A merger, an acquisition of the issuer, a substantial purchase of the issuer s equity by a third party, or a change in the majority of the board of directors. One of the events of default in a credit agreement is a change of control of the issuer. Chapter 11: US bankruptcy law under which a corporation seeks protection from its creditors while it seeks to revitalize the business. Closing Date: The date on which a credit agreement closes or takes effect. Club Deal: A smaller loan (usually $25 million to $150 million) that is pre-marketed to a small group of relationship banks. The arranger is generally a first among equals, and each lender gets a full cut, or nearly full cut, of the fees. Collateral: The assets of a borrower that are pledged to secure its loans. Collateral can be specific assets like equipment, real estate, inventory or receivables or will typically include other tangible and intangible assets of a borrower.

8 Section 1: Definition of Terms Collateral Agent: The agent in a syndicated loan that is responsible for post-closing monitoring of the collateral based upon the established reporting guidelines in the credit agreement, and ensuring that all liens on the collateral are properly filed and current. Commencement Date: In connection with a loan trade, the date when delayed compensation begins to accrue. Generally, the commencement date is 7 business days after the trade date in the case of par loans. It should be noted that delayed compensation only applies to secondary loan transactions. Primary loan syndications are not eligible for delayed compensation. Commercial Paper: A short term unsecured promise to repay debt ata certain future date, usually written as a promissory note and sold at a discount. Commitment: The amount of credit that lenders have collectively agreed to provide to a borrower under a credit agreement. Commitment Fee: Fee paid upfront for the amount of the loan commitment. Compliance Certificate: This is a requirement in a credit agreement that all financial statements and any covenant or other compliance calculation be certified by a senior financial officer of the borrower. Conditions Precedent: A simplified closing list that specifies what the borrower must deliver to the lenders (or the administrative agent), what actions it must take, and what other circumstances must exist in order for the loan to close. Confidential Information Memorandum: The confidential information memorandum (CIM) or bank book is provided to prospective lenders after the arranger and the borrower have agreed on the basic structure and terms of a proposed loan. It is essentially a marketing document to assist in syndication of a loan. Confirmation: The LSTA Trade Confirmation, which sets out the key terms required for a binding trade based on the LSTA Standard Terms and Conditions for Par/Near Par Trade Confirmations. Contributed Equity: This can either be new cash contributed by the new owners to consummate an acquisition of a business or rollover equity from the existing owners of the business. Cost of Carry: This is the interest due from the seller of the loan to the buyer of a loan for the period after a sale is agreed and before it closes. It is typically defined as the interest that would accrue for any day on the Purchase Price at the Average LIBOR Rate

9 minus interest (if any) with respect to the Debt received and accounted for by seller of the loan as interest in accordance with generally accepted accounting principles for such day. If the interest received and accounted for by the seller of the loan exceeds the interest that would accrue at the Average LIBO Rate, then the amount of such excess interest shall be property of the buyer of the loan. Counterparty: One of the parties to an agreement (loan, contract, etc.) Covenants: Restrictions in credit agreements that dictate, to varying degrees, how borrowers are expected to operate within either financially and otherwise. Covenants generally fall into two main categories, affirmative covenants and negative covenants. Affirmative covenants generally include reporting requirements as well as financial benchmarks that must be met periodically. Negative covenants prohibit a borrower from taking certain actions and include compliance with financial covenants such as maximum leverage and minimum interest coverage. The covenants package can vary based upon market conditions and the financial strength of a borrower; stronger financially stable businesses typically have less restrictive covenants. Credit Agreement: The agreement entered into between the borrower, the lenders, the agent, and other financial parties that describes the terms and conditions of the loan being made to the borrower and the obligations and requirements for the borrower, its related entities (if any), and the lenders. Cross Default: An event of default under a loan agreement triggered by a default in the payment of, or the actual or potential acceleration of the repayment of, other financial indebtedness of the same borrower or of any member of the borrower group. Debt Service Coverage Ratio: This measures a borrower s ability to repay its obligations in regard to its borrowings. It is defined as Net Operating Income (NOI) divided by scheduled payments of debt such as principal and interest. Default: In its most general sense, a breach of, or failure to fulfill or comply with, the terms of a contract or instrument. In the context of loans and other debt obligations, a default is a contractually specified event that allows lenders to demand repayment, in some cases subject to a grace period and right to cure. Delayed Period: The period from (and including) the Commencement Date to (but excluding) the Delayed Settlement Date. Delayed Compensation: A component of pricing in the settlement of trades that is intended to put parties in the approximate economic position on the settlement date that they would have been in if they had closed on the commencement date.

10 Section 1: Definition of Terms Delayed compensation starts to accrue if the trade does not settle on or before the Commencement Date, typically seven business days after the trade date. (see Commencement Date.) Delayed Draw Term Loan: This is a special feature in a term loan that stipulates that the borrower can draw predefined amounts of the total pre-approved amount of a term loan at contractual times. There are certain conditions the borrower must meet, such as maintaining a certain level of cash on hand or meeting specific covenants. Delayed Settlement Date: The date following the Commencement Date on which settlement actually occurs. Distribution: Any payment of interest, principal, notes, securities, or other property (including collateral). Dividend Recapitalization: When a company incurs new debt in order to pay a special dividend to investors or shareholders. Documentation Agent: The bank that handles the loan documentation and selects the law firm that will act as lenders counsel. Domestic Subsidiary: With respect to any entity, a subsidiary that is formed in the same jurisdiction as that entity. Due Diligence: An investigation into the business, legal, and financial affairs of a company that may be undertaken in connection with a financing. Dutch Auction (Discounted Voluntary Prepayments): When a Borrower is permitted to make offers to Lenders to repurchase Term Loans at a discount. The offer must be made to all Term Loan Lenders and no Lender is obligated to participate. Dutch Auction provisions generally include that no revolving facility can be used to fund a repurchase and no event of default has occurred or is continuing. Effective Date: The date specified in an agreement as the date upon which the terms of that contract will take effect. Effective Yield: The return on investment (expressed as a percentage) in a specific loan, based upon the interest generated by the loan (factoring in any applicable interest rate floors), all fees received upon the purchase or origination of the loan, purchase discounts or premiums, scheduled principal repayments across the contractual life/term of the loan divided by the total borrowed. Eligible Assignee: A party that is permitted to enter into an assignment and acceptance

11 with a lender with the consent of any party whose consent is required pursuant to the terms of the applicable credit agreement. Most credit agreements will state the eligibility requirements for a potential buyer of debt to become a lender of record in a credit facility. Enterprise Value (EV): This is the total value of a Company or the amount the company is worth. For a publicly-traded company, EV equals market cap plus debt minus cash. For a privately-held company, the EV can be estimated in different ways and is derived by applying an appropriate enterprise value multiple, based upon the mean of publiclytraded or merger and acquisition (M&A) comparable multiples, to the Company s most recent trailing twelve month EBITDA. Equity Cure: The right to repair a breach of a debt covenant by infusing cash equity into the borrowing company, as permitted by the terms of the loan documents. An equity cure right allows the borrower to utilize new cash equity to make up a shortfall in revenues, cash flow or profits, thereby curing the debt covenant breach. Typically limited to four cures for the term of the credit agreement. Event of Default: A default under a credit agreement that has not been remedied or waived by the lenders after the expiration of any applicable grace period. Excess Cash Flow Sweep (ECF Sweep): An annual mandatory debt prepayment based upon a predetermined percentage (typically ranging from 50% to 75%) applied to the excess cash flow a borrower generates each year as defined in the credit agreement. Excess cash flow generally reflects the amount of money or cash flow a company generates from operations after it has paid dividends, debt service, capital expenditures for plant and equipment maintenance, and the like. At the end of each fiscal year, the borrower will calculate its excess cash flow, as defined in the credit agreement, and sweep the applicable percentage of it to repay its outstanding loans. Extension Fee: The fee charged when an existing committed facility is extended beyond the original maturity date. Facility Fee: An annual percentage fee, that is payable by the borrower and calculated based on the committed amount of the facility, whether or not it is fully funded. Fee Letter: A letter outside of the formal credit agreement that identifies the type and amount of fees payable by a company with respect to a syndicated loan, including arrangement and structuring fees or underwriting fees, administrative agency fees, collateral agent fees, and other amounts payable to the arrangers. The Fee Letter will also generally reflect market flex language, which details certain provisions of the facility that may be subject to change if necessary to complete syndication.

12 Section 1: Definition of Terms Financial Covenants: A type of covenant set forth in a credit agreement that can be divided into two categories: (i) those that test the borrower s financial position at a particular date (such as a net worth or current ratio covenant) and (ii) those that test performance over one or more fiscal periods (such as leverage, interest coverage, fixed charges coverage, and capital expenditures covenants). Covenants in the second category are typically measured and reported on a quarterly basis to monitor performance trends. Financial Sponsor (Private Equity Fund): An entity that generates a return for its investors by buying businesses, growing them organically or through add-on acquisitions, and eventually exiting its initial investment via a sale, refinancing or initial public offering. A Financial Sponsor funds the acquisition of a company through a combination of debt raised by the company to be acquired and equity contributed from the Financial Sponsor s fund/pool of capital (a leveraged buyout). First Lien: A first position right (ahead of other creditors) to sell the collateral/assets of a borrower who fails to meet the requirements of the credit agreement. It is a perfected first lien if it is duly recorded with the relevant government body, enabling the lender to act on it should the borrower default, even in the event of bankruptcy of the borrower. Fixed Charge Coverage Ratio (FCCR): Defined as the ratio of Operating Cash Flow (EBITDA less unfinanced capital expenditures, dividends and cash taxes) to Fixed Charges (interest expense + scheduled principal payments). Fixed Rate: An interest rate that does not change. Floating Rate: A variable interest rate comprised of a base rate such as LIBOR or Prime plus a spread over that base rate (e.g. L + 400). The total interest rate changes over time based upon changes in the base rate, sometimes subject to a rate floor that prohibits the base rate (and, thereby, the total interest rate) from dipping below a certain level. Foreign Subsidiary: With respect to any entity, a subsidiary that is formed in a jurisdiction other than the one in which such parent entity has been formed. See Subsidiary. Free Cash Flow (FCF): This is a measure of how much cash flow is available to pay down debt. FCF is defined as EBITDA less capital expenditures, taxes, interest, and management fees or other cash obligations specific to the business and/or loan (before scheduled principal payments). Fully Underwritten Syndication: This is a transaction in which the arranging syndicate

13 firmly commits to provide all the funds requested by a borrower. See also Best Efforts Syndication. Grace Period: The period between signing the loan agreement and the first repayment of principal. Also, the period that may be allowed to the borrower to remedy an event of default. Guarantee: A guarantor s agreement to purchase or otherwise become liable for the debts or other obligations of another entity. Guarantees can be conditional or unconditional. Common forms include upstream (a subsidiary guaranteeing debt of its parent), cross-stream (a subsidiary guaranteeing debt of a sister company, where both are ultimately owned by the same parent), downstream (a parent guaranteeing a subsidiary) or bad boy ( Protection given to a lender in businesses typically owned by a sole proprietor where the owner of either the business or the underlying collateral securing the loan agrees not to be irresponsible in providing information to the lender or damaging the lender s security position in a loan, for example: pledging collateral to another lender. In general, it is intended to protect lenders from the antics of an irresponsible borrower. Unlike a personal guarantee, where a lender can go after personal assets of a principal for any breach of the loan agreement, whether or not it is due to events outside the control of the principal, this provision only provides protection to the lender to go after personal assets if it is determined that the principal knowingly deceived the lender, either prior to making the loan or during the term of the loan) Guarantor: The grantor of a guarantee or contingent agreement to purchase or otherwise to become liable with respect to the debts or other obligations of any person. Hedge Funds: Collective investment vehicles often organized as private partnerships or formed as offshore vehicles for tax and regulatory purposes. Implied Equity Value: The implied equity value equals the enterprise value (EV) minus outstanding debt plus cash. In the case of an acquisition of a business by a financial sponsor, it is the cash equity invested by that sponsor. Intercreditor Agreement: An agreement entered into by classes of lenders or creditors of a borrower that sets forth the arrangement governing how those lenders or creditors will exercise their rights and remedies under the applicable credit agreement. For example, first lien lenders and second lien lenders will enter into an intercreditor agreement pursuant to which the second lien lenders forgo or restrict their rights. For example, second lien lenders may agree (1) not to take enforcement actions (or to limit their right to take such actions) with respect to their liens, (2) not to challenge enforcement or foreclosure actions taken by the holders of the first liens, and (3) to

14 Section 1: Definition of Terms limit their right to challenge the validity or priority of the first liens; second lien lenders may also acknowledge the first lien lender s entitlement to first proceeds of the shared collateral. Interest Coverage: It is the ratio of EBITDA for the last four fiscal quarters to Interest Expense for the same period. Interest Expense: Defined to include only cash interest. However, cash interest is not literally confined to interest paid in cash during a particular period, but rather measures interest payable in cash for a particular period. Interest Rate Floor: Floors are used to protect investors from the loss of income that would result from a decline in interest rates. Investment Grade: A security with a rating of BBB or higher by Standard & Poor s and Baa or higher by Moody s. Know Your Customer (KYC): It refers to the various checks and investigations required as part of the procedures to ensure appropriate underwriting and to prevent money laundering. Lead Arranger: Essentially the middleman in the syndication process. One or a small group of commercial or investment banks act as the Lead Arranger or Co-Lead Arrangers with responsibility for structuring, syndicating, and administering the loan. In most transactions, the Lead Arranger drives the deal; sets the terms; interfaces with the client and investors; prepares, negotiates, and closes documents; and manages the syndication process. Consequently, the Lead Arranger generally receives premium compensation, which increases with the complexity or difficulty of the financing. The title of Lead Arranger is the most significant designation for the lender responsible for executing the transaction. The Bookrunner, the lender managing the syndication process, is usually one of the Co-Lead Arrangers. Letter of Credit (LC): An undertaking by the issuer of the Letter of Credit (virtually always a bank, although legally it can be anyone) to pay the beneficiary of the Letter of Credit a specified sum against delivery of documents during the term of the Letter of Credit. The issuer is unconditionally obligated to honor a drawing under the Letter of Credit if the proper documents are presented, without any requirement that the issuer verify the truth of statements in the documents. So long as the documents strictly comply with the terms of the Letter of Credit, the issuer is obligated to pay. The borrower (in letter of credit terminology, the account party ) will in turn be unconditionally obligated to reimburse the issuer for the amount paid by the issuer as a result of any drawing under the Letter of Credit.

15 Letter of Credit Fee: A fee accruing at an agreed per annum rate that borrowers are obligated to pay to each revolving credit lender on its participation in the undrawn amount of each outstanding letter of credit. As letters of credit are issued under a revolving credit facility, all of the revolving credit lenders share in the credit exposure because, even if they are not the letter of credit issuer, they have participations in the letters of credit. In the case of the issuer of each letter of credit, its participation therein for purposes of this calculation is deemed to be its remaining credit exposure after subtracting the participations of the other revolving credit lenders. Leveraged Buyout (LBO): Acquisition of a company by an investor, typically a financial sponsor, in which a significant percentage of the purchase price is funded by debt (leverage). Such financings often include a variety of debt instruments from both banks and debt capital markets (such as high yield bonds). Leverage Ratio: Defined as the ratio of debt at a given date to EBITDA for the rolling four quarters most recently ended prior to that date, typically expressed as a multiple, e.g. 3x or 4.5x. LIBOR Based Loans: Funded floating rate loans for which interest (or Adequate Protection Payments) is calculated pursuant to the terms of the Credit Agreement (or an Adequate Protection Order) by using a Spread or Applicable Margin over a London Interbank Offered Rate. LIBOR Floor: A minimum reference rate of interest established by the Credit Agreement that governs the calculation of interest (or Adequate Protection Order that governs the calculation of Adequate Protection Payments) for LIBOR Based Loans, to which the Spread or Applicable Margin is added. The interest rate can never be less than the LIBOR Floor plus the Spread/Applicable Margin. Lien: The legal right to retain property of another person until the owner of such property fulfills a legal duty to the person holding such property, for example, payment for work done on the property or repayment of debt secured by such property. Loan Market Association (LMA): The association registered in the United Kingdom to promote liquidity in the Euroloan market by, among other things, standardizing the documentation used in loan syndications and debt trading under English law. Loan Syndications and Trading Association (LSTA): A not-for-profit organization dedicated to promoting the orderly development of a fair, efficient, liquid, and professional trading market for corporate loans originated by commercial banks and other similar private debt. The LSTA was formed largely in response to the exponential growth in loan trading volume in the secondary debt market.

16 Section 1: Definition of Terms Lockout Period: Defined as the period of time during which a loan may not be paid off early. London Interbank Offered Rate (LIBOR or LIBO Rate): It refers to the London-based wholesale market for jumbo U.S. dollar deposits between major banks, which is set by the British Bankers Association (BBA) and published by the BBA at approximately 11:00 a.m. London time each business day. Since such deposits are often referred to as Eurodollar deposits, the terms Eurodollar and LIBOR are often used interchangeably. Loss Given Default (LGD): The loss incurred by a lender in the event that the borrower of the loan defaults. Loan to Value (LTV): A ratio of outstanding debt to the value of the business. Management Buyout (MBO): An acquisition of a business by the managers and/or employees of that business, resulting in partial or full ownership. As with leveraged buyouts, management buyouts are often funded in part by equity from a third party source, such as a financial sponsor, and by debt. Mandatory Prepayments: Requirement that the borrower prepays loans upon the occurrence of specified events. Mandatory prepayments should be contrasted with the corresponding requirements in bond indentures, in which a required prepayment will be structured as an offer to prepay made to all bondholders rather than an obligation that bonds be prepaid or redeemed. In a credit agreement, the prepayment is usually required to be made immediately, and the lenders (with the exception of B loan tranches) will not be given the opportunity to opt out of a prepayment. Market Capitalization (Market Cap): Market capitalization is equal to the company s total shares outstanding multiplied by the current market price per share. Mark-to-Market (MTM): Recording the price or value of an asset, whether it be a loan, bond, stock or other security, portfolio, or account, to reflect its current market value. Market Flex: Agent s right to revise the structure, terms and/or pricing of a loan if the syndication of that loan fails to raise the required level of commitment from participants. Material Adverse Change (MAC)/Material Adverse Effect: A clause typically included in a credit agreement that provides a representation and warranty by the borrower that since a specified date, there has been no material adverse change (a MAC ) in its business, condition (financial or otherwise), assets, operations or prospects, and subsidiaries, taken as a whole. The continued accuracy of such representations will generally be a condition precedent to new loans under a credit agreement. Thus, if a material adverse change has occurred, the MAC representation could not be truthfully

17 made and the obligations of the lenders to make new loans would be suspended for as long as the material adverse change continues (or unless the condition is waived). Material Nonpublic Information: This describes information regarding a loan or borrower that is not generally available. Information is deemed to be material nonpublic information when: (i) there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision; (ii) the disclosure of the information would be viewed by the reasonable investor as having significantly altered the total mix of information made available or (iii) the disclosure of the information is reasonably certain to have a substantial effect on the market price of the security. The SEC has stated that information is nonpublic if it has not been disseminated in a manner making it available to investors generally, that insiders must wait a reasonable time after disclosure before trading. Mezzanine Finance: The layer of funding in a capital structure between common equity and secured debt that can be structured as subordinated debt or preferred equity. Mezzanine capital is senior only to the common equity in its claim on a company s assets, and, as a result, is a more expensive source of funding than secured debt. Mezzanine Finance providers may receive equity warrants and structure part or all of their interest as PIK ( paid in kind ) which is accrued and capitalized. Middle Market: These are companies that are smaller in size than nationally recognized entities and although the definition of middle market continues to fluctuate, it is generally thought to comprise companies with less than $750 million in sales and EBITDA levels of $25 million to $75 million. These companies depend upon the loan market as their primary source of financing as their size limits their access to other forms of capital. Net Operating Income: Gross profits less operating expenses. Non-Investment Grade: A security with a rating of BB or lower by Standard & Poor s or Ba or lower by Moody s. See also Investment Grade. Offer/Ask Price: The price at which a seller of a loan or commitment offers to sell that loan or commitment. The Bid Price is the price at which a buyer of a loan or commitment offers to buy that loan or commitment in the secondary loan market. Operating Cash Flow (OCF): This is a measure of financial performance and is defined as EBITDA less Capital Expenditures. Optional Prepayment: The general rule that a loan may not be prepaid without the consent of the lender. Credit agreements will nearly always expressly override the

18 Section 1: Definition of Terms general rule and allow the borrower to prepay loans at any time at its option (subject to certain exceptions, such as with respect to competitive bid loans and, of course, the need for any payment of a LIBOR loan prior to the expiration of its interest period to be accompanied by a prepayment fee). Original Issue Discount (OID): Debt that is originally issued at a price below par value. The original issue discount is usually amortized over the life of the loan. Par/Near Par Loan: Generally, a loan that is expected to be paid in accordance with the terms of its original credit agreement and/or trades at or near a purchase price of 90 percent of face value, or par. Debt that trades at or near par is generally transferred pursuant to an Assignment and Assumption Agreement without the LSTA s Purchase and Sale Agreement. Par/Near Par Trade Confirmation: This is a document between seller and buyer that ratifies that a trade for a Par/Near Par Loan has taken place. It is subject to the standard terms and conditions for Par/Near Par Trade Confirmations published by The Loan Syndications and Trading Association (LSTA). Pari Passu: A Latin term meaning without partiality that is used to describe an equal claim by lenders to payments or to the assets of a borrower. Typically, the term is used in a representation with respect to pari passu ranking to the effect that the obligations of the borrower under the credit agreement rank at least equal with all other obligations of the borrower. Participation: A sale to the participant of an undivided interest in a lender s loan and/ or commitment to a borrower with respect to which the selling lender maintains the relationship with the borrower and remains a party to the credit documentation. The transaction is generally not disclosed to the borrower or the public. The lender remains the official holder of the loan, with the participant owning the rights to the amount purchased. Consents, fees, or minimums are almost never required. The participant has the right to vote only on material changes in the loan document (rate, term, and collateral). Non-material changes do not require the approval of participants. Payment in Kind (PIK): Payment in kind, or PIK, is non-cash interest accruing to the principal balance of the loan (i.e., compound interest). PIK interest accrues until maturity or refinancing, at which point it is paid in lump sum along with the rest of the principal outstanding. PIK interest is typically a feature of mezzanine debt and is sometimes seen in conjunction with a cash pay interest rate portion (i.e., a mezzanine loan might have a 10% cash interest rate plus a 3% PIK interest rate). Perfected Lien: It means, in general terms, that steps have been taken to make a lien

19 enforceable over the competing claims of other creditors such as by giving public notice of a security interest. Prepayment Fee: An additional fee due upon a prepayment of a loan structured as a percentage of the amount of principal being prepaid (e.g. if there is a 2% prepayment penalty during year one, a $1,000 prepayment in the first year would result in a $20 prepayment fee). Prepayment premiums typically apply to term loans, are in low amounts of 2% descending to 1%, and apply only to prepayments made in the first or second year following the closing. Pricing Grid: Possible interest rates in a credit agreement that are set forth in the form of a grid that varies by type of loan (by tranche and by pricing option) and the relevant financial measure. It is used when the applicable margin in the credit agreement is dependent on the credit rating and/or leverage of the borrower. When a pricing grid is based upon credit ratings, the relevant parameters will include reference debt, the identity of the credit rating agencies to be relied upon, and the treatment of split ratings (when the rating agencies assign different ratings to such reference debt). When a pricing grid is based upon leverage, the relevant date to test leverage is the end of the borrower s most recent fiscal quarter. Regardless of the form of the pricing grid, many credit agreements will provide that, during the existence of an event of default, the applicable margin will bump up to the highest level on the grid. Prime Rate: The primary benchmark rate publicly announced by a bank for interest on its loans. (Some banks prefer to call their publicly announced rate their base rate, and others prefer prime rate. ) The base or prime rate is unilaterally determined by the bank based upon its cost of funds, competitive pressures, and other factors. Even though the prime rate can be changed at any time, banks are reluctant to change it to reflect seasonal or other short term increases in their cost of funds because of its economic (and sometimes political) importance. Priority: In the context of liens, the order in which liens are satisfied by borrower payments or disposition of collateral in bankruptcy or otherwise. For example, a first lien lender enjoys priority over a second lien lender and will be paid out of the proceeds of the collateral secured by its lien before the second lien lender is paid. However, a second-priority lien gives a second lien lender effective priority over trade creditors and other unsecured creditors to the extent of the value of its interest in the collateral. Private-Side Lender: A lender that receives and uses syndicate information (which may include material nonpublic information) in loan originating, loan trading, and/or lending and is, therefore, subject to trading restrictions if it is in possession of material nonpublic information.

20 Section 1: Definition of Terms Pro Forma (PF): Pro forma adjustments reflect the impact of events that have not yet occurred or the full year impact of events that did not occur as of the beginning of a fiscal reporting period (i.e. January 1st). Examples of pro forma adjustments include showing the full year P&L impact of an acquisition that was made mid-year. Another example is showing the effect on a balance sheet of a recapitalization before the loan has officially completed. Pro Rata: A general principle in virtually all credit agreements that the lenders are treated on a proportional basis. Thus, lenders in a tranche make loans of that tranche ratably, i.e., in amounts that are proportional to their commitments (with an exception for competitive-bid loans). Similarly, principal and interest are paid and prepaid ratably in accordance with the outstanding amounts of the relevant tranche. Commitments are reduced, and commitment and facility fees are paid, proportionally in accordance with the commitments of the particular tranche. Public-Side Lender: A lender that has elected to conduct loan trading and/or lending solely on the basis of public information. Typically, a public-side lender may also be involved in securities trading and sales. Reference Bank: A specific bank named in a credit agreement whose rates are used to determine the prevailing interest rate offered by banks for a Eurodollar time deposit matching the applicable LIBOR interest rate for a loan under that credit agreement if the applicable rate is not available through a screen quote from Reuters or Telerate. Register: The list maintained by the administrative agent that identifies the name and address of each lender and the amounts of their respective commitments and loan balances. The credit agreement will normally state that the loan register is conclusive and thus is the definitive determinant of who must consent to modifications to the agreement and who are the required lenders. Representations and Warranties: The statements in a credit agreement that affirm the basic understandings upon which the lenders are extending credit. They address legal and financial issues, matters relating to the business and capital structure of the borrower and its subsidiaries, and various other matters of concern to the lenders. Some representations, particularly those relating to legal condition, will also be covered by the legal opinion of the borrower s counsel. Requisite Lenders: Also known as majority lenders. These are typically defined in a loan agreement to mean the lenders holding greater than 50% or 66 2/3% of the sum of unused commitments and outstanding loans under the loan agreement. Requisite lender approval is required for certain amendments and waivers to the loan agreement.

21 Return on Assets (ROA): An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. It is calculated by dividing a company s annual earnings by its total assets. ROA is displayed as a percentage. Recurring Maintenance Revenue (RMR): Term typically used for financing businesses with a contractual underlying flow of revenues. A sample company that may have RMR would be a security alarm business where a residential or commercial customer is contractually billed each month for a monitoring fee. RMR tends to be very sticky and predictable revenue. Lenders may provide financing to this type of company based upon a multiple of the RMR as opposed to a more traditional multiple on EBITDA. Revolver Loan: A loan which can be drawn down, repaid, and redrawn. It is frequently secured by the borrower s receivables and/or inventory. The borrower grants a security interest in its receivables and/or inventory to the lender as collateral to secure the loan. Same Store Sales: A metric commonly used in retail (but which can be used in other contexts too) that measures year-over-year performance of a company s stores that have been open for a year or more. It allows investors to determine what portion sales growth stems from the existing store base (organic growth) versus new stores openings. Second Lien Loans: Loans secured by claims on collateral that are behind (second in priority) those of first lien loans. By 2004, the market had accepted second lien loans to finance a wide array of transactions, including acquisitions and recapitalizations. Second lien loans typically have less restrictive covenant packages, with maintenance covenant levels that are more lenient than those for the first lien loans. As a result, second lien loans are priced at a premium to first lien loans. Secondary Market Trading: Trading or sales that occur after a loan is closed and allocated. Loans trade at a percentage of par, and sales are structured as either assignments or participations, with investors usually trading through dealer desks at the large underwriting banks. Secured/Security: The asset collateral of the borrower pledged to repay the lenders in the event of default under a credit agreement. Secured loans are commonly used in the leveraged loan market. Seniority: The order of repayment. In the event of bankruptcy, senior debt must be repaid before subordinated debt is repaid. Settlement Amount: As used in LMA documentation, the amount to be paid by the

22 Section 1: Definition of Terms buyer to the seller at the date of the novation, assignment, or participation. The seller represents and warrants in the Standard Representations and Warranties that the amounts used in the settlement amount calculation are true and correct. Settlement Date: The date on which payment of the purchase price occurs against the transfer of the purchase amount of debt. Snooze You Lose : A clause in the loan agreement which disenfranchises a lender s voting right in relation to a specific amendment or waiver request if that lender has not responded to the agent within a certain pre-defined period of time. Soft Call: Similar to a prepayment fee, it is a provision that requires the borrower to pay a premium on any debt retired early (typically within the first year or two after the loan closes). Some soft call provisions are contingent upon/only payable if the source of the prepayment is a refinancing by the borrower with the proceeds of cheaper debt. Special Purpose Vehicle (SPV): A legal entity organized for a specific and limited purpose, SPV s activities are usually limited to the acquisition and financing of specific assets. Often referred to as a bankruptcy-remote entity, it is usually a company which is thinly capitalized and with an asset/liability structure isolated from any credit risk associated with the organizing company. Spread: The amount of yield the loan pays above a benchmark market interest rate. Standstill Period: A subordination provision that is typically found in certain kinds of Mezzanine Financings (usually only if the Mezzanine Lenders have the benefit of Financial Maintenance Covenants) and Second Lien Facilities. A Standstill Period will prevent the Subordinated or Second Lien Lenders from taking certain (or possibly any) remedies during an agreed upon time-frame (often 180 days), usually during an Event of Default. Step Down: Usually relates to an excess cash flow (ECF) sweep or pricing grid. In the case of an ECF sweep, the step down in prepayment percentage, (typically ranging from 25% to 75% of ECF) based on the borrower s leverage. As leverage decreases below certain thresholds, the percentage of the excess cash flow sweep is reduced. Swap Spread: The spread difference between the Treasury and LIBOR curves or the fixed- and floating-rate markets. Syndication Agent: The bank that handles the syndication of the loan. The title of Syndication Agent is often awarded in conjunction with large commitments, but the actual responsibilities of this role may be shared or handled by the administrative agent or the lead arrangers.