What is a primary characteristic of Term Loans in leveraged buyout (LBO) deals?

A primary characteristic of Term Loans in leveraged buyout (LBO) deals is that they usually have fixed interest rates paid in cash. This feature provides predictability in the financing costs over the life of the loan, which is essential for managing cash flows in a leveraged scenario. The fixed interest rate also helps the borrowing company budget its debt service obligations, making it easier to plan for long-term financial commitments.

Term loans in LBOs are designed to provide a stable source of capital that supports the acquisition and growth of a target company, reflecting the structured nature of the financing. These loans often have a defined repayment schedule that consists of regular interest payments, enabling lenders to have a clear understanding of the cash flow dynamics involved. The interest payments are typically made in cash rather than being capitalized or paid in a different form, which aligns with the expectation of investors regarding returns.

While certain other features of term loans may vary, such as tenor and repayment structure, the hallmark of having fixed interest rates provides a strong backbone in the financial structuring of LBO transactions.