For my last co-op, I got to intern at Fiera Capital on their Private Debt team which manages $5B+ of investors. Within the first week, there are a lot of terms related not just to lending but even M&A that I had trouble figuring out the meaning. I’m writing this article to make it easier to learn and understand finance.

Revolver or Revolving (Loan, Debt, Credit)

This means that there’s a max limit on how much the borrower can borrow and it can be repaid to free up the amount available to borrow. A credit card is an example of this.

Accordion Loan

An agreement that the limit can be increased or that a term can be added.

FCCR - Fixed-Charge Coverage Ratio

FCCR = (EBITDA minus taxes unfunded capex and distributions) / (Fixed Charges Before Tax including interest expense)

Unfunded Capex

Unfunded CAPEX = Net CAPEX - increase in long-term debt

From a lender’s point of view, when assets are sold, the capex does not decrease, unlike a DCF model.

Distribution

My broad definition is: Non operational cash outflow.

Typically this is defined in the legal contract with a lot of leeway. For example, some distributions might be salary related, so it is hard to make a court believe that the covenant was a legitimate if it was preventing management from earning a living (as ridiculous as it sounds, according to my co-worker at FPD).

Leverage = Total Funded Debt / EBITDA

Funded Debt

Funded debt refers to all types of loans provided by lenders. The reason “funded” is used, is because “debt” on its own implies all liabilities.

EBITDA

Earnings before interest expense, taxes, depreciation and amortization. This is the number used because taxes are usually a fraction of EBITDA, depreciation/amortzation are not cash values, and interest expense is what the private lender would get (assuming that the lender is senior).

Pro-Forma EBITDA

Pro-Forma means that the EBITDA is an estimate under a specific assumption or scenario. For example, the scenario is “loan injected.”

Normalized EBITDA

A Normalized EBITDA is the EBITDA we’d expect the firm to generate after adjustments including the remval of non-recurring expenses. When combined with Pro-Forma, previous recurring expenses might be expected to stop as well. For example an extra employee that would no longer be getting paid post-deal. Although this is what we expect a normalized EBITDA figure to be, the adjustments that were made need to be inspected because it’s possible the company did remove recurring expenses. An example of a normalized EBITDA would be a retailer of the company over ordering in one year and under ordering the next year. Such a situation would lead to a greater disparity between two years. So if there is evidence that the retailer over ordered, then a case for normalization may be made. A bad example of normalization is removing rent expense when there is a going concern.

Going Concern

A going concern is that the company is not closing shop anytime soon.

Secured Loan and Lien

Secured means that the loan has collatoral. An example is a mortgage where the loan is secured on the home. A credit card is an unsecured loan. When an asset is secured, the term sheet may say something like “lender has first lien on accounts receivable.”

Senior, Junior Lender

A senior lender for a company is the lender that gets dibs usually on assets and is usually the longest tenured or the biggest. It depends on the intercreditor agreement if there’s a few lenders and subscription agreement if there are many. A junior lender exists when there are at least two lenders and one is the senior.

Intercreditor Agreement

An intercreditor agreement is a custom agreement between lenders on the priority of payment and securitiy.

Subscription Agreement

A subscription agreement is an agreement between many lenders based on the same contract drafted by a bank.

Current Ratio

Current Assets / Current Liabilities

CIM - Confidential Investment Memorandum

This is a prospectus by the company to the lender for the loan. It will generally have info about the company, an overview on its financials, and what they are asking for. Generally, just like with pitching to equity investors, companies will try to appear as squeeky clean as possible.

Preliminary Investment Memorandum

After discussion with the company about their CIM and a walk through of their internals, a PIM is drafted for review. This is a proposal for a deal to make. It needs to be reviewed by people higher up.

Investment Memorandum

This is the raw deal. The big one. This should be everything you need to know about the deal. The background info, the financials, the terms of the loan (including covenants), and the risks and mitigations. The risks and mitigations is the most important component because why else would the firm be coming to a private lender and not a bank which is cheaper. The money did not come out of thin air. It is the investors.

In one instance (not at Fiera PD), a company was in the business of selling sonic boom devices that can be used to detect mining and minerals. The company stated that most of its revenue came from universities. What was not mentioned and was not stated as a risk by the account manager of the loan was that Oil & Gas companies were funding these research endeavers. When gas prices plummeted, revenue was cut by 90%.

Financial Covenant

A financial covenant is basically a requirement for the company to not be considered in a default state (other than missing a payment). These covenants basically exist for insight into the performance of the company and a guage on how risk has changed. Covenants could be leverage based but obviously, each lender will have different risk appetite. To be in the private lending business, the risk appetite is obviously higher than bonds and banks, but might not be as high as individual equities. Investors are just looking to out perform the market on a long-term basis.

Tuck-in

A tuck-in is when a company acquires another company and merges it into a subsidiary or division rather than the entire firm.

Follow-on Draws

Future loans.

bps - Basis Points

50 bps is 0.5 percentage points (not 50% but 0.5%).

EOI - Expression of Interest

Commitment Fee

A fee for committing money to the borrower. Similar to a front-end load. So if the loan is $1m with a 1% commitment fee, the other party will get $990,000.

Cash Sweep

Sometimes a term sheet will include “cash sweep” where excess cash that is not required for ongoing operations will be used to pay down the principal debt ahead of schedule.

COI - Certificate of Insurance

LOI - Letter of Intent

Bridge Loan

A bridge loan is a loan that is temporary and short-term (up to 2 years). It is used for say financing operations where an exit will happen. An exit could be long-term financing, bankruptcy completion, or even selling the business soon.

VTB - Vendor Take Back

I believe this is when you agree to a purchase price of $500,000 and you only give $450,000 to the vendor. The $50,000 is a vendor take back which is a liability that is still payable. A VTB is an alternative to borrowing more from a lender.

[T / S] DSCR - [Total / Senior] Debt Service Coverage Ratio

Net Operating Income / Interest Expense

Interest Paid-in-kind (PIK)

The interest is accrued rather than paid in cash in the period.

Expression of Interest (EOI)

Interest/appeal in making a deal was expressed

Next Twelve Months (NTM)

The value that is being looked at is based on 12 months of projected data

Trailing Twelve Months (TTM)

The value that is being looked at is based on 12 months of projected data

Last Twelve Months (LTM)

Literally TTM. I hope that we get rid of this terminology as I’m not the only one who starts reading LTM as long-term before realizing the m stands for months. Please re-write your sentences such that TTM is use rather than LTM.

Canadian Private Debt Players

• Fiera Private Debt (I worked here)
• Centurian Asset Management
• Roynat (Royal Bank + National Bank Collaboration)

Commit Facility

Money goes after preconditions. Cancellation clause for between signing and disbursement.

Demand facility

You can call back the loan without the lender in default. Typically a lower coupon because of this stipulation.

Mezzanine Debt

Can convert the debt to equity interest.

Purchase Price Allocation (PPA)

Purchase price allocation is an application of goodwill accounting whereby one company, when purchasing a second company, allocates the purchase price into various assets and liabilities acquired from the transaction

SOFR

Secured Overnight Financing Rate. BASED ON OBSERVED U.S. TREASURY MARKET TRANSACTIONS.

LIBOR

London Interbank Offered Rate. This rate isn’t used anymore due to the 2012 rate-rigging scandal. It was only an ESTIMATION.

4Cs of Credit

• capacity
  • how much throughput for the payments
• character
  • trustworthiness, credit score, references, KYC
• collateral
  • what is being offered in case of a default
• capital
  • net worth