Category: Business – This Explainer

Prepayment risk is the possibility that borrowers repay principal earlier than an investor expected. This explainer covers mortgage refinancing, home sales, calls, auto and consumer loans, reinvestment risk, premium amortization, cash-flow uncertainty, prepayment models, burnout, seasoning, extension risk, and why falling rates can hurt some fixed-income investors even as bond prices usually rise.

A tranche is a class within a structured-finance transaction that receives cash and absorbs losses according to a defined priority. This explainer covers senior, mezzanine, and equity layers, payment waterfalls, subordination, attachment and detachment points, credit enhancement, ratings, triggers, prepayment allocation, thickness, correlation, and why a highly rated tranche is not the same as a highly rated asset pool.

A collateralized debt obligation, or CDO, finances a pool of debt assets by issuing securities with different payment priorities. This explainer covers collateral managers, special-purpose vehicles, senior, mezzanine, and equity tranches, waterfalls, overcollateralization and interest tests, cash and synthetic structures, correlation, reinvestment, ratings, liquidity, and why complexity can magnify model and tail risk.

Loan syndication is the process of arranging one credit facility funded by multiple lenders. This explainer covers borrowers, lead arrangers, agents, commitments, term loans and revolvers, underwriting, bookbuilding, allocations, common documentation, covenants, voting, secondary trading, settlement, concentration and information risk, and why participation spreads exposure without making the borrower safer.

A cash sweep is a loan feature that requires a borrower to use specified excess cash to repay debt ahead of schedule. The agreement defines the cash-flow measure, permitted deductions, testing dates, and percentage swept. It is common in leveraged finance because lenders want debt reduced when the business produces more cash than its budgeted needs. The calculation usually begins with operating cash flow and subtracts taxes, approved capital spending, working-capital needs, and other negotiated items. A borrower may keep a minimum cash balance before applying the sweep. Some structures reduce the sweep percentage after leverage falls below stated thresholds, giving management more flexibility as credit risk improves.

A revolving credit facility lets a company borrow, repay, and borrow again up to a committed limit during an agreed period. It functions more like a business credit line than a one-time loan. Companies commonly use revolvers for seasonal inventory, payroll timing, acquisitions, letters of credit, and short-lived gaps between paying suppliers and collecting customers. The borrower pays interest on amounts drawn and may owe a commitment fee on unused capacity. Loans can carry floating rates plus a credit spread, while the agreement sets maturity, borrowing procedures, financial covenants, and events of default. Letters of credit or swingline loans may share the same overall commitment and reduce remaining availability.

A term loan provides a defined amount of money that is repaid over a stated period rather than repeatedly redrawn. Businesses use term loans to purchase equipment, fund acquisitions, refinance debt, or finance projects with predictable needs. The loan can amortize in installments, require a large final payment, or combine modest scheduled payments with a maturity balance. Pricing may be fixed or based on a floating reference rate plus a spread. The agreement specifies maturity, payment dates, collateral, guarantees, covenants, prepayment rights, and default remedies. Some institutional term loans trade among lenders after closing, while relationship-bank loans may remain with the original bank group.

A bridge loan is short-term financing designed to cover a gap until a more permanent source of capital arrives. Companies use bridges to close acquisitions, refinance a near-term maturity, complete a property transaction, or fund operations while waiting for a bond sale, equity raise, asset sale, or long-term loan. Because the expected exit is central, lenders focus on timing and certainty of the takeout. Pricing often rises over time to encourage prompt repayment. The facility may include commitment fees, market-flex provisions, conversion into longer-dated debt, collateral, guarantees, or limits on additional borrowing and distributions.

Mezzanine financing sits between senior debt and common equity in a company’s capital structure. It is usually subordinated to bank loans and may be unsecured, so investors demand higher returns. Companies use it for acquisitions, expansion, recapitalizations, or ownership transitions when senior borrowing capacity and available equity do not fully cover the need. Returns can combine cash interest, payment-in-kind interest, arrangement fees, warrants, or conversion rights. The documents establish subordination, maturity, covenants, payment restrictions, and remedies. Mezzanine lenders often accept limited collateral protection in exchange for pricing and potential equity upside.

A unitranche loan combines senior and junior lending economics into one borrower-facing facility. Instead of negotiating separate first-lien and subordinated loans, a company signs a single credit agreement with one blended interest rate. The structure is common in middle-market acquisitions where speed, confidentiality, and certainty are important. Behind the scenes, multiple lenders may divide the exposure through an agreement among lenders. One group receives a lower-risk first-out return, while another takes a last-out position with higher yield. The borrower generally makes one payment and deals with a unified covenant package and administrative process.

Supply chain finance is a set of arrangements that lets suppliers receive approved invoice payments early while a buyer keeps its negotiated payment date. A bank or finance provider pays the supplier at a discount after the buyer confirms the obligation, then collects the full amount from the buyer when the invoice is due. The buyer’s credit quality usually drives pricing, which can give smaller suppliers cheaper funding than they could obtain alone. Programs require invoice approval, data exchange, payment instructions, and clear dispute rules. Participation may be optional, although commercial pressure and program design affect how voluntary it feels in practice.

A merchant cash advance provides a business with upfront funds in exchange for a specified amount of future sales receipts. The provider may collect a percentage of daily card revenue or fixed debits until the purchased amount is delivered. Providers often describe the transaction as a receivables purchase rather than a conventional loan. Cost is commonly expressed through a factor rather than an annual percentage rate. Multiplying the advance by the factor gives the total contractual payback, but it does not show the annualized cost. Frequent collections and short repayment periods can make the effective financing expense far higher than the factor initially appears.