What is an Unsecured Term Loan?
Unsecured term loans are not backed by particular assets. They may be taken out by companies where assets are not available for an asset based loan (ABL) structure or can be taken out as a complement to an asset-based structure. They are typically loans over a fixed term with fixed monthly payments (or more frequent).
Unsecured term loans in the ABL context are typically “subordinated” to the ABL facility and offer some additional capital beyond what the borrowing base allows. However, they require careful structuring and the senior secured lender may require the right to “approve” any such additional debt and ensure it does not interfere with the ABL facility payment terms.
Typical uses:
Growth capital: e.g., funds for expansion, acquisitions, or long-term investments.
Refinancing: Additional capital to refinance existing debt or provide a cash-out to equity holders
Considerations in structure and terms
Less Restrictive: Often have fewer covenants and monitoring requirements compared to the ABL facility.
Higher Interest Rates: Due to their unsecured nature and subordinated position, these loans typically carry higher interest rates than the ABL facility.
Covenant Interaction: While generally less restrictive, payment terms or any other covenants on unsecured term loans must be carefully evaluated to ensure they will work in conjunction with ABL facility/senior lender.
Impact on ABL Facility: The presence of unsecured term debt may affect the terms and availability under the ABL facility