medium · Debt Capital Markets bond-instruments-structures
A B2/B-rated borrower is evaluating two financing structures: a $500 million Term Loan A (TLA) that amortizes 10% of the principal per year over a 5-year tenor, and a $500 million Term Loan B (TLB) with a bullet maturity in year 7.
Which statement accurately describes the impact on the borrower's periodic cash flow and refinancing risk?
- The TLA and TLB structures have identical refinancing risks because the total principal amount is the same.
- The TLB structure imposes a higher cash flow burden during the life of the loan but eliminates refinancing risk at maturity.
- The TLA structure reduces annual cash flow availability but results in lower refinancing risk at maturity compared to the TLB.
- The amortizing TLA increases refinancing risk because the borrower must frequently access capital markets to make principal payments.
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