Actionable Ideas for Companies and Sponsors

Incremental First Lien Term Loans to Refinance Second Lien Term Loans

With the flurry of new issue activity that occurred in 2017, a number of second lien term loans have call protection scheduled to sunset in 2019 and 2020, minimizing potential breakage costs. By refinancing these second liens, the issuer can save significantly on interest expense, and investors gain comfort in the shift to first lien leverage from the growth and deleveraging of the business since the original financing. With market technicals remaining strong for issuers, companies can take advantage of this investor interest and issue incremental first lien term loans to refinance existing second lien term loans. Recently, Jefferies was left lead on a $115 million incremental first lien for ABC Financial to repay the Company’s second lien term loan. Pro forma for the transaction, the weighted average spread of fund debt decreased from L+556 to L+425. While the Company will pay a 1% prepayment premium on the second lien, the interest premium far outweighs the penalty.