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STRATA DEBT STRUCTURING ASSOCIATION

DEBT FINANCING

Visual Learning Guide

Capital Structure

Understanding the hierarchy of claims and risk-return profiles

Senior Secured Debt
First claim on assets • Lowest risk • Highest priority in liquidation
Rate: SOFR + 150-600 bps
Security: 1st Lien
Covenants: Maintenance/Incurrence
Second Lien Debt
Secured but subordinated to first lien • Medium-high risk
Rate: SOFR + 700-900 bps
Security: 2nd Lien
Covenants: Incurrence only
Unsecured / High-Yield
No collateral • Fixed rate bonds • Flexible covenants
Rate: 6.5% - 9.5% fixed
Security: None
Covenants: Incurrence
Subordinated / Mezzanine
Equity-like features • PIK interest • Warrant participation
Rate: 12-15% + warrants
Security: None
Covenants: Minimal
Equity
Residual claims • Highest risk • Unlimited upside potential
Return: Variable IRR target
Priority: Last in liquidation
Control: Voting rights

Debt Instruments

Visual representations of key debt financing types

Revolver
Revolving Credit Facility
DRAW
REPAY
REPEAT
Draw when needed for working capital
Repay when cash flow permits
Pay commitment fee on unused portion
  • Purpose: Short-term liquidity, working capital needs
  • Maturity: 3-5 years with ability to renew
  • Rate: SOFR + 250-400 bps
  • Covenants: Maintenance (tested quarterly)
Typical Use Cases

Seasonal inventory build, unexpected expenses, bridging timing gaps between receivables and payables

Term Loan A
Amortizing Bank Debt
Year 1 - 20% Paid
Year 3 - 40% Paid
Year 5 - 70% Paid
Year 7 - Fully Paid
Origination Maturity
  • Structure: Regular principal amortization (5-15% annually)
  • Maturity: 5-7 years
  • Rate: SOFR + 150-300 bps
  • Lenders: Commercial banks, relationship-focused
Typical Use Cases

Strategic acquisitions, growth capex, general corporate purposes for investment-grade or strong credit companies

Term Loan B
Institutional Leveraged Loan
Minimal Amortization (~1% annually)
Years 1-7: Interest Only Year 8: Bullet Payment
  • Structure: Minimal amortization, bullet repayment at maturity
  • Maturity: 7-8 years
  • Rate: SOFR + 400-600 bps (higher than TLA)
  • Covenants: Incurrence-based (covenant-lite common)
Typical Use Cases

Leveraged buyouts (LBOs), dividend recaps, refinancing. Favored in aggressive capital structures where cash preservation is key

High-Yield Bonds
Unsecured Fixed-Rate Debt
Year 1-9
Interest
Year 10
Interest
Maturity
Principal + Interest
  • Rate: 6.5% - 9.5% fixed (sub-investment grade)
  • Maturity: 7-10 years, bullet repayment
  • Security: Unsecured (no collateral)
  • Market: Publicly traded, institutional investors
Typical Use Cases

Large LBOs, refinancing existing debt, funding acquisitions. Attractive for companies too small for investment-grade bonds but too large for bank-only financing

Mezzanine Debt
Subordinated Hybrid Financing
Cash Interest 9%
PIK Interest 4%
Equity Warrants 5-15%
Total Return: 13-18%+ with upside participation
  • Structure: Cash + PIK interest, plus equity kicker (warrants)
  • Maturity: 8-10 years, subordinated to all senior debt
  • Covenants: Minimal to none
  • Priority: Above equity, below all other debt
Typical Use Cases

Bridge-to-equity in growth companies, filling capital gaps in LBOs, management buyouts where senior debt capacity is maxed out

Asset-Based Lending
Secured by Current Assets
📦
Inventory
50-65%
📄
Receivables
80-90%
🏭
Equipment
40-60%
Borrowing Base Formula
  • Collateral: A/R, inventory, equipment (current assets)
  • Availability: Based on % of eligible collateral value
  • Rate: SOFR + 200-400 bps
  • Monitoring: Monthly/weekly borrowing base certificates
Typical Use Cases

Retail, distribution, manufacturing companies with significant working capital. Ideal for seasonal businesses or those with volatile cash flows

Unitranche
Single Blended-Rate Facility
ONE LENDER
Senior + Subordinated Combined
Blended Rate: SOFR + 550-750 bps
  • Structure: Combines first lien and second lien into single facility
  • Simplicity: One lender, one agreement, one rate
  • Flexibility: Light maintenance covenants
  • Speed: Faster execution than multi-tranche deals
Typical Use Cases

Middle-market LBOs, sponsor-backed deals, situations requiring speed and simplicity. Popular for deals $10M-$500M in size

Second Lien
Junior Secured Debt
1st Lien
Priority: 1st
L+400
→
2nd Lien
Priority: 2nd
L+700-900
Same collateral, different priority
  • Security: 2nd lien on same assets as 1st lien
  • Subordination: Repaid only after 1st lien satisfied
  • Rate: SOFR + 700-900 bps (premium over 1st lien)
  • Covenants: Incurrence-based, minimal restrictions
Typical Use Cases

Filling capital structure gaps in LBOs, alternative to mezzanine or unitranche. Less common post-2008 but still used in aggressive structures