Easier lending requirements, bifurcation of loans and the trendy Term Loan B financing for larger operators – these are new financing trends. Watch Unbridled Capital’s financing insights here from Rick Ormsby.
The question for this episode is have there been any changes in the credit market that make financing easier for operators? Well, number one, over the past few years, there's been an increase in covenant-lite loan packages and a slight increase in lease-adjusted leverage ratios to enable higher borrowing. Number two, we continue to see a trend of bifurcating acquisitions into two separate loans, one for the operating company, oftentimes called opco, and the other for the property company, oftentimes called propco. Buyers are increasingly doing this to get higher Loan-to-Values, LTVs, on the property side and longer amortizations, as high as 25 years, which is longer than historic levels. And number three, a big trend is the Term Loan B financing in the marketplace. Term Loan B is a term loan structured for sale to institutional investors. Term Loan B loans are starting to happen with larger operators, typically $30 million or more in EBITDA.
There have been several in the Taco Bell system, for example, and a few of our clients are going through them currently. They are very expensive to structure, several million dollars or more, and interest rates can be higher than what a traditional lender might offer. However, the loans are generally interest only, or at least have very little amortization, and leverage can be pushed to seven X or more, sometimes higher. Franchisees are using these loan proceeds to pay back debt obligations and fund acquisitions and remodels. Generally, there is also a big dividend that is issued to shareholders as well.
If you have any further questions about financing, valuations, or M&A, please feel free to reach out any time. Thanks so much.