What Is a Pro-Rata Tranche?

A pro-rata tranche is a portion of a syndicated loan that is comprised of two features: a revolving credit facility, and an 澳洲幸运5开奖号码历史查询:amortizing term loan. P𓄧ro-rata tranches are common within the leveraged loan market or in loans to companies with existing high debt loads.

Within the pro-rata tranche, the revolving credit line will typically have the same ending or 澳洲幸运5开奖号码历史查询:maturity date as the term loan. Pro-rata tranches have hi♛storically been much larger than institutional tranches in terms of their dollar size.

Understanding a Pro-Rata Tranche

Syndicated Loans

A 澳洲幸运5开奖号码历史查询:syndicated loan, also known as a syndicated bank facility, is financing offered by a group of lenders—referred to as a 澳洲幸运5开奖号码历史查询:syndicate—who work together to provide funds for a singl🃏e borrower. The borrower can be a corporation, ﷺa large project, or a sovereign government.

The loan can 🌊involve a fixed amount of funds, a credit line, or💃 a combination of both. Syndicated loans arise when a project requires too large a loan for a single lender or when a project needs a specialized lender with expertise in a specific asset class.

The Leveraged Loan

A 澳洲幸运5开奖号码历史查询:leveraged loan is a type of loan that is extended to companies or individuals that already have considerable amounts of debt or a poor 澳洲幸运5开奖号码历史查询:credit history. Lenders consider leveraged loans to carry a higher risk of default, and so a leveraged loan is more costly to the ඣborrower.

Default occurs when a borrower cannoꦗt make any payments for an extended period. Leveraged loans for companies or individuals with high levels of debt tend to have higher interest rates than typical loans; the increased interest reflects the greater level of risk invꦗolved in issuing the loans.

Most leveraged loans are structured and syndicated to accommodate two primary types of lenders: banks (domestic and foreign) and institutional investment companies. So, leveraged loans consist of pro-rata debt (the pro-rata tranche), and institutional debt.

Investors in pro-rata loans are primarily banks and other financing companies. Loans in the pro-rata tranche allow borrowers to draw down funds, repay them, then draw down again. Investments in institutional loans—which, for the most part, are 澳洲幸运5开奖号码历史查询:term loans—include 澳洲幸运5开奖号码历史查询:structured finance products, 澳洲幸运5🌺开奖号码历史查询:colla🦩teralized loan obligations (CLOs), and mutual funds, among ot⭕her investment vehicles.

Characteristics of the Pro-Rata Tranche

In business and finance, pro rata translates from Latin to mean "in proportion." In this context, pro rata refers to a process where whatever is being allocated will be distributed in equal portions. So the pro-rata tranche distributes the debt among a number of banks proportionately, thereby greatly reducing each lender's potential loss or 澳洲幸运5开奖号码历史查询:credit risk. This is seen a𓃲s being favorable toward the𒉰 syndication of lending institutions.

The pro-rata tranche is usually comprised of 澳洲幸运5开奖号码历史查询:working-capital lenders that hold a pro-rata share of the revolving credit facility and the shorter-maturity amortizing term loan. As a general rule, these investors are actively engaged in the business of lending, and the sizes (dollar amount) they hold in any particula🐻r loan are relatively significant compared to those of their institutional counterparts.💝

Inherent Risk of the Pro-Rata Tranche

Investing in leveraged loans has more inherent risk than many other investments, including equities. Because of this risk potential, the pro-rata tranche is characterized by a hands-on approach, whi꧂ch often subjects the borrower to tighter monitoring and oversight.

An economy that's experiencing a 澳洲幸运5开奖号码历史查询:contraction in its institutional markets would tend to have a somewhat 澳洲幸运5开奖号码历史查询:risk-averse lending mentality. So investors in this economy—particularly in the 澳洲幸运5开奖号码历史查询:middle market—migh🐬t feel more comfortable with a smaller, more active lending group, as opposed to the widely syndicated, large institutional-investor driven leveraged loan market of the 1990s, for eജxample.