A set interest rate for the life of the loan (e.g., 7.5% coupon paid semi-annually). The borrower knows exactly what they'll pay — no surprises. Common in bonds and high-yield notes.
A base rate that moves with the market, plus a fixed spread on top. The total cost changes as the base rate moves. Common in leveraged loans (revolvers, TLA, TLB).
Key concept: The spread is where credit risk lives. A safer borrower might pay SOFR + 200 bps; a riskier one pays SOFR + 600 bps. The base rate is the same for everyone — the spread is what the lender controls.
First claim on the pledged assets — gets paid first from any sale of collateral. Lowest risk position among debt holders, which is why it carries the lowest pricing.
Secured by the same collateral, but the claim sits behind first lien holders. Only recovers value after first lien is fully repaid — higher risk, higher pricing.
No specific collateral claim — stands behind all secured creditors. Relies on the borrower's overall ability to repay and whatever value remains after secured claims are satisfied.
Key principle: Security determines what happens when things go wrong. In normal operations, all debt gets paid on schedule. The distinction matters in distress — and that's exactly when it matters most.
Voting rights, board seats, approval over major decisions. They can directly influence how the company is run. If they don't like management's direction, they can vote to change it.
Contractual restrictions written into the debt agreement that limit what the borrower can do. No vote, no seat at the table — covenants are their protection instead. They can't steer the company, but they can set boundaries.
Tested on a regular schedule (typically quarterly) regardless of what the borrower does. Example: total debt cannot exceed 5.0x EBITDA, tested every quarter. If the borrower breaches — even passively because earnings declined — the lender can declare default. More restrictive; gives lenders an early warning system.
Only tested when the borrower takes a specific action (incurring new debt, making an acquisition, paying a dividend). If you don't take the action, the covenant is never tested. Less restrictive; gives borrowers more operational freedom.
Principal is repaid in scheduled installments over the life of the loan (e.g., 5–15% per year). The balance decreases over time — the company is actively deleveraging. Reduces lender risk but requires steady cash flow from the borrower.
Little or no principal is repaid during the loan — the full balance comes due at maturity. Preserves cash flow during the term but creates a large payment at the end. The borrower typically plans to refinance rather than repay from cash.
Key distinction: Amortization is forced discipline — it reduces debt whether the borrower wants to or not. Bullet structures give flexibility but shift risk to the maturity date: can the borrower refinance?
Why PIK exists: It preserves cash for companies that need it — growth-stage businesses, cyclical companies in downturns, or highly leveraged deals where cash interest would be too burdensome.
A $10M note at 14% PIK grows to ~$19.3M after 5 years of compounding. No cash leaves the borrower's account — but the total obligation escalates dramatically.
PIK is a trade-off between cash preservation today and a larger obligation tomorrow.
Lender perspective: Higher return on paper, but reinvestment risk — the lender isn't receiving cash they can redeploy into other opportunities.
In normal operations, everyone gets paid according to their contract. The order matters in distress: if the company can't pay everyone, the capital structure determines who gets paid first and who takes losses.
This hierarchy is why each layer prices differently: the lower you sit, the more risk you bear, and the more return you demand.
Pricing: SOFR + 250–400 bps depending on leverage, plus commitment fee. Not designed to be permanently drawn — it's a liquidity backstop, not long-term financing.
Pricing: SOFR + 150–300 bps depending on credit profile. Used for strategic acquisitions and conservative capital structures — companies that want to maintain strong credit profiles.
Pricing: SOFR + 400–600 bps for B/B- credits. Institutional investors buy it for higher yields, floating rate protection, senior secured recovery, and secondary market liquidity.
Pricing: SOFR + 550–750 bps all-in (blending what would be separate first lien and second lien facilities).
Pricing: 6.5–9.5% fixed coupon depending on credit rating (B to CCC). Higher cost than secured debt, but flexible covenants and longer maturity provide operational freedom.
| Instrument | Seniority | Security | Rate | Covenants | Maturity | Typical Pricing |
|---|---|---|---|---|---|---|
| Revolver | Senior | 1st Lien | Floating | Maintenance | 3–5 yrs | SOFR + 250–400 |
| Term Loan A | Senior | 1st Lien | Floating | Maintenance | 5–7 yrs | SOFR + 150–300 |
| Term Loan B | Senior | 1st Lien | Floating | Incurrence | 7–8 yrs | SOFR + 400–600 |
| Unitranche | Senior | 1st Lien | Floating | Light Maint. | 6–7 yrs | SOFR + 550–750 |
| High-Yield | Unsecured | None | Fixed | Incurrence | 7–10 yrs | 6.5–9.5% |
| Mezzanine | Subordinated | None | Fixed/PIK | Minimal | 8–10 yrs | 12–15% + warrants |
Next module: Introduction to Transaction Types — how LBOs, strategic acquisitions, and growth capital transactions each use these instruments differently.