Filo Loans: Understanding Personalized Lending And Borrowing

A FILO loan is a commercial loan that is first-in, last-out in funding and payment. This means that the loan is fully funded at the close of the transaction and is the last to be repaid from the proceeds of the collateral. FILO loans are typically paired with debt capital provided by banks, where banks maintain a first lien on all assets of the borrower, and the FILO loan supplements this bank debt. FILO loans are growing in popularity with senior lenders and mezzanine lenders and are seen in an increasing number of transactions.

FILO loans are always part of a larger lending transaction

A FILO loan is a type of commercial loan that is "first-in, last-out" in funding and payment. This means that while it is funded in full at the closing, it is the last to be repaid from the proceeds of the collateral, after all first-out bank debt is repaid in full. FILO loans are always part of a larger lending transaction, most often found in asset-based revolving credit facilities. They are typically paired with debt capital provided by banks, where banks provide a limited amount of capital while maintaining a first lien on all assets of the company. The FILO loan then supplements this bank debt while sharing the first lien of the bank.

FILO loans are often used to finance growth, mergers and acquisitions, and dividends. They are particularly relevant for borrowers who need 10-20% more capital than can be supported by an asset-backed structure. In these cases, a FILO loan can be structured based on a discount to the enterprise value of the borrower, or the value of certain assets or recurring revenues. For example, a senior lender may bring in a FILO lender to loan against a portion of the additional asset value in the company, increasing the effective advance rate.

FILO loans are also attractive to hedge funds and mezzanine lenders because the loan pricing is often similar to that of a mezzanine deal. However, a FILO loan is part of the senior credit facility and receives the benefit of a first lien on the company's assets. This means that the FILO lender is ahead of most creditors in the event of bankruptcy. Additionally, the borrowing base calculation on a FILO loan is performed only at closing, which protects the FILO lender in the event of a downturn.

Despite these advantages, FILO loans are relatively more expensive than first lien-only debt provided by banks, and the FILO lender is not usually permitted to take separate action with respect to the collateral. Therefore, it is important for the FILO lender to work with a trusted agent who can act on their behalf.

FILO loans are similar to mezzanine loans

FILO, or First-In-Last-Out, loans are a type of loan that is ""first-in, last-out" in funding and payment. This means that the loan is funded in full at the closing (i.e., "first in"), and once repaid, the funds cannot be borrowed again (i.e., "last out"). FILO loans are always part of a larger lending transaction and are most commonly found in asset-based revolving credit facilities. They are often used to supplement senior loans and can be a preferable alternative to mezzanine financing.

Mezzanine loans are a type of financing that bridges the gap between debt and equity financing. They are typically used by established companies to fund specific growth projects or acquisitions and are often funded by the company's long-term investors or existing funders. Mezzanine financing can be structured in several ways, including unsecured subordinated debt, secured debt, or preferred equity.

FILO loans share some similarities with mezzanine loans. Both loan types can be used as part of a larger lending transaction and can provide access to additional capital. FILO loans are often seen as a good alternative to mezzanine financing, as they can offer similar benefits but with some key differences. One of the main similarities is that both FILO and mezzanine loans are attractive to hedge funds and mezzanine lenders due to their loan pricing, which is often similar to that of a mezzanine deal.

Another similarity between FILO and mezzanine loans is that they both have a "last-out" component. In a FILO loan, this refers to the fact that it is the last to be repaid from the proceeds of the collateral, after all first-out bank debt is repaid in full. Similarly, mezzanine loans are subordinate to senior debt, meaning they have a lower priority in the event of repayment or bankruptcy.

In addition, both FILO and mezzanine loans can provide access to more debt capital than traditional bank loans. FILO loans can provide more debt capital than first lien debt provided by banks, while mezzanine financing can offer more generous returns to investors compared to typical corporate debt.

FILO loans are a good supplement to a senior loan

A FILO (First-In-Last-Out) loan is a type of commercial loan that is "first-in, last-out" in funding and payment. This means that it is fully funded at the close of the transaction and is the last to be repaid from the proceeds of the collateral, after all first-out bank debt is repaid in full. FILO loans are typically found in asset-based revolving credit facilities and are part of a larger lending transaction.

Another advantage of FILO loans is their low-maintenance structure. Reporting obligations are limited to financials and covenant compliance certificates, and typically no amortization is required, meaning cash flow is available for other corporate needs. The simpler legal documentation of FILO loans is also attractive, requiring only a single credit agreement supplemented by an Agreement Among Lenders (AAL). Additionally, FILO loans offer better protection for lenders in the event of a downturn compared to mezzanine loans. FILO lenders have a first lien on the company's assets, giving them priority over most creditors in the event of bankruptcy.

However, it is important to consider that FILO loans are relatively more expensive than first lien-only debt provided by banks. FILO lenders get repaid last among senior-secured, first lien borrowers, which can increase the cost of borrowing. Nonetheless, under the right circumstances, FILO loans can effectively supplement a senior loan, providing access to additional capital and flexibility in lending structures.

FILO loans are funded in full at closing

A FILO loan is a type of commercial loan that is "first-in, last-out" in funding and payment. This means that the loan is fully funded at the close of the transaction but is the last to be repaid from the proceeds of the collateral. This loan structure is often used to supplement a senior loan and is found in asset-based revolving credit facilities.

FILO loans are typically part of a larger lending transaction, where another lender serves as the administrative agent. The FILO lender is usually not permitted to take separate action with respect to the collateral, and the administrative agent holds the rights to the collateral on behalf of all lenders. This means that the FILO lender must work closely with the agent, as they will not be able to take independent action.

The borrowing base calculation for a FILO loan is performed only at closing, when funds are advanced. This means that if the borrower's assets decline in value after closing, and the outstanding amount of the FILO loan exceeds the borrowing base, no prepayment of the FILO loan is required. This provides some protection for the FILO lender in the event of a downturn.

FILO loans are often attractive to hedge funds and mezzanine lenders because the loan pricing is similar to that of a mezzanine deal, but with the added benefit of being part of the senior credit facility and having a first lien on the company's assets. This gives the FILO lender priority over most creditors in the event of bankruptcy.

FILO loans are attractive to hedge funds

FILO, or First-In-Last-Out, loans are a type of commercial loan that is "first-in, last-out" in funding and payment. This means that the loan is funded in full at the closing, but once repaid, the funds cannot be borrowed again. In the event of a foreclosure on collateral, the proceeds are paid out to cover expenses, fees, interest, and principal on the senior revolving loan, and only then to repay the FILO loan.

FILO loans are often attractive to hedge funds and mezzanine lenders because the loan pricing is often similar to that of a mezzanine deal. However, the FILO loan is part of the senior credit facility and receives the benefit of a first lien on the company's assets. This means that the FILO lender has a higher priority claim on the borrower's assets in the event of bankruptcy, which can provide better protection in the event of a downturn.

Additionally, FILO loans typically provide more debt capital than a first lien debt provided by banks and allow for full utilization of debt capacity when paired with an ABL. The reporting obligations for FILO loans are also limited to financials and covenant compliance certificates, and typically no amortization is required, making cash flow available for other corporate needs.

FILO loans can also be structured based on the value of certain assets or recurring revenues of the borrower, making them accessible to borrowers with limited current or fixed assets. The simpler legal documentation and single credit agreement required for FILO loans can also be advantageous for borrowers. However, it is important to note that FILO loans are relatively more expensive than first lien-only debt provided by banks, and periodic appraisals are required for asset-backed structures.

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