Term Loan A vs Term Loan B: How to Structure Senior Debt in 2026

Term Loan A or Term Loan B: two senior debt tranches, two risk and cost logics to finance an LBO or acquisition.

Introduction: two senior debt tranches, two risk logics

Why is the same senior debt almost always split into two distinct tranches in an acquisition or LBO structure? The answer comes down to one thing: the lender base. Term Loan A (TLA) and Term Loan B (TLB) designate the two main tranches of senior debt in a structured financing: the first, amortising, is underwritten by commercial banks; the second, repaid in a bullet at maturity, is placed with institutional investors (debt funds, CLOs).

"A long-maturity instrument with minimal amortisation, with bullet repayment at maturity, typically five to seven years, with only 1% annual amortisation over the life of the loan.", Corvid Partners, on Term Loan B.

Three factors make this choice structuring in 2026: the level of rates (3-month Euribor at 2.17% in April 2026 according to Janus Henderson Investors) weighs directly on the cost of debt service, the institutional CLO market remains subject to closure phases that temporarily restore value to bank TLA, and Franco-Swiss relationship lenders continue to arbitrate between covenant discipline and leverage volume. This publication successively covers the definition and origin of these two tranches, the reasons and method for combining them, the situations that call for it, their respective advantages and limitations, five frequent structuring mistakes, two worked cases (France and Switzerland) and the most common questions from company directors on the topic.

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Definition: what are Term Loan A and Term Loan B?

Term Loan A is the senior debt tranche known as "pro rata", traditionally held by one or more commercial banks, amortising significantly over the life of the loan and subject to financial covenants tested periodically. Term Loan B is the "institutional" tranche, placed with debt funds, CLOs (collateralized loan obligations), insurance companies and pension funds, whose amortisation is nominal and whose principal is repaid in a single bullet at maturity.

According to De Brauw Blackstone Westbroek, the two tranches differ first in their repayment profile: Term Loan Bs "have a maturity of five to seven years and often feature minimal amortisation (1% of principal per year, if any) before a bullet repayment at maturity. These features distinguish TLB from Term Loan A, which in principle amortises in full over the life of the loan", De Brauw Blackstone Westbroek. The two tranches share the same seniority ranking and the same security within the debt structure, but they do not address the same lender pool and do not follow the same risk logic: TLA favours the progressive reduction of bank exposure, TLB favours preserving the borrower's cash over the life of the loan. For a condensed definition of the two tranches, see Hectelion's Term Loan A / Term Loan B glossary entry.

In summary: the table below compares the two tranches across the six dimensions that structure the trade-off.

Dimension	Term Loan A	Term Loan B
Investor base	Relationship commercial banks	CLOs, debt funds, insurers, pension funds
Amortisation	Significant and regular, often quarterly	Nominal (about 1% per year), balance as a bullet
Typical maturity	5 to 6 years	6 to 7 years
Cost (margin)	The lowest of the two tranches	Higher, institutional liquidity premium
Covenants	Maintenance, tested periodically	Incurrence, most often cov-lite
Cash flexibility	Limited from year 1 due to amortisation	Preserved until maturity

In the structure, TLA brings financial discipline and controlled cost, TLB brings leverage maximisation and operational flexibility.

Origin: the split between the bank market and the institutional market

The distinction between Term Loan A and Term Loan B originates in the development of the American syndicated leveraged loan market during the 1990s and 2000s. As institutional investors, particularly loan securitisation vehicles (CLOs), became active buyers of senior debt, arrangers progressively separated the tranche aimed at relationship banks, shorter and amortising, from the tranche aimed at the institutional market, longer and bullet.

This architecture spread to Europe in the wake of the growth of the European CLO market from the mid-2000s, then became standard in mid-market Franco-Swiss LBO and acquisition transactions as European debt funds and CLOs gained depth. The market is not fixed, however: the TLA/TLB mix fluctuates with institutional liquidity cycles. In 2022, during a marked slowdown of the European institutional market, White & Case noted a comeback of Term Loan A, with pro rata tranches then accounting for roughly half of European leveraged loan issuance, up from 43% the previous year, a reminder that the split between the two tranches is a market parameter as much as a structuring choice. The reverse cycle is observed in 2026: after a record 2025 driven by refinancings and opportunistic repricings, European euro-denominated Term Loan B issuance fell by around 8% over the first five months of the year, to 124.8 billion dollar-equivalents, a sign that the institutional market is finding a more measured pace without closing altogether.

Why structure senior debt as Term Loan A and Term Loan B

Five reasons drive the structuring of senior debt into two complementary tranches.

First, widen the available lender base. Commercial banks fund the TLA while CLOs and debt funds fund the TLB, allowing a larger total amount to be raised than a single lender pool would accept alone.

Second, maximise leverage without consuming the target's cash. TLB, repaid as a bullet, only weighs on the income statement through interest, not on the cash available for investment or early deleveraging.

Third, balance cost and flexibility. TLA, cheaper, disciplines the structure through maintenance covenants tested regularly, while TLB, more expensive, leaves the borrower more operational room.

Fourth, adapt to current market conditions. During periods of closure or volatility in the institutional market, bank TLA remains available when TLB may become more expensive or harder to syndicate, and vice versa in a favourable period.

Fifth, match the repayment profile to actual cash generation. Contractual amortisation is reserved for the portion of debt the company can absorb without straining its working capital.

How a combined Term Loan A and Term Loan B structure is built

Structuring begins with determining sustainable senior leverage, generally expressed as a multiple of the target's normalised EBITDA, from which the total senior debt amount is set. The structuring advisor then determines the split between the pro rata tranche and the institutional tranche based on observed appetite in the bank market and the CLO market at the time of the raise, as well as the target's risk profile. Margins and covenant structure are then negotiated separately for each tranche, with TLA generally keeping maintenance covenants tested quarterly while TLB most often limits itself to incurrence covenants, triggered only by certain transactions (additional debt, distribution, acquisition).

Each tranche's amortisation profile is then matched to the target's forecast business plan, so that TLA's debt service remains covered by available cash flow without drawing on the revolving credit line. Legal documentation is drawn up as either a single multi-tranche credit agreement or separate facilities depending on market practice, before syndicating each tranche to its natural lender pool, relationship banks for TLA, CLOs and debt funds for TLB. This last step directly conditions the closing timeline, as institutional syndication can extend over several weeks depending on market conditions. This architecture fits more broadly into LBO, MBO, MBI or OBO financial structuring, where TLA/TLB senior debt is only one building block of the financing plan.

When to use a combined Term Loan A and Term Loan B structure

Using a combined structure becomes relevant in four situations.

First, the senior debt amount exceeds the threshold a relationship bank pool is willing to carry alone, generally above 20 MCHF or 20 M EUR of senior debt in Franco-Swiss mid-market practice; below that, a single bank facility is usually sufficient.

Second, the business plan calls for a growth or capital investment phase in the first years after the acquisition, a period during which the cash preservation offered by the TLB component becomes a decisive asset.

Third, the market context itself pushes the mix one way or another: during a tightening of the institutional market, increasing the TLA share secures the raise when TLB would be more expensive or slower to place, whereas in a favourable period, a larger TLB share helps optimise the weighted average cost of debt.

Fourth, refinancing existing debt is a natural occasion to revisit the mix between the two tranches in light of current market conditions, particularly when the margin gap between TLA and TLB has narrowed or widened since inception.

When both the bank market and the institutional market are difficult to access, a complementary recourse to private credit can also be considered to complete the acquisition financing.

Who to call on to structure a Term Loan A and a Term Loan B

Three criteria guide the choice of the right partners.

First, arranging the pro rata tranche requires an established banking relationship or access to a pool of commercial banks active in the relevant size segment.

Second, placing the institutional tranche requires access to CLO and debt fund investors, generally through an investment bank or a syndication agent with an institutional distribution network.

Third, arbitrating the mix between the two tranches, cross-negotiating covenants and ensuring overall consistency between the structure and the target's business plan fall to an independent financial structuring advisor, free from lending banks, the only party positioned to represent the borrower's interests exclusively.

Hectelion supports directors and investment funds in the financial structuring of their senior debt transactions in France and Switzerland, in full economic independence from traditional financial intermediaries. This independence makes it possible to arbitrate objectively between TLA and TLB without a conflict of interest tied to syndication fees, and to align the debt structure with the target's actual repayment capacity rather than a given lender's commercial appetite. When the financing is part of an external growth transaction, this support naturally combines with mergers and acquisitions advisory to secure the whole transaction.

Advantages: cost, flexibility, market depth

Term Loan A offers a lower financing cost, a long-term relationship with bank lenders willing to support the company beyond debt service alone, and financial discipline that reassures the other stakeholders of the structure. Term Loan B offers, in exchange for a higher margin, preserved available cash over the life of the loan, access to higher senior debt amounts than the bank market alone would allow, and greater contractual flexibility for external growth or distribution transactions thanks to incurrence rather than maintenance covenants. Combined, the two tranches widen the market depth accessible to the borrower and allow the weighted average cost of senior debt to be calibrated to the target's actual risk profile rather than being dictated solely by the availability of a single lender pool.

Limitations: covenants, over-leverage, documentary complexity

Term Loan A imposes maintenance covenants tested regularly, whose breach can trigger early acceleration even in the absence of a payment default, which reduces the borrower's operational room in the event of a setback. Term Loan B, conversely, frequently allows the borrower to incur substantial additional debt, a flexibility that De Brauw Blackstone Westbroek explicitly notes lets the company focus on growth rather than debt service alone, but which can also lead to over-leverage if this additional capacity is not framed by the business plan. Managing two syndications simultaneously, with different timelines and lender pools, further complicates legal documentation and can extend the closing timeline compared with a single bank facility, a factor to anticipate in a tight transaction calendar, just as the choice of closing mechanism (Locked-box or Completion Accounts) also shapes the calendar and the allocation of risk in the transaction.

The 5 mistakes to avoid

Mistake 1: Underestimating the weight of Term Loan A debt service from year one

Unlike Term Loan B, Term Loan A begins amortising from the first quarters after closing. Structuring that does not verify that year-1 available cash flow comfortably covers this debt service, principal and interest combined, exposes the company to early cash strain, before synergies or the post-acquisition growth plan have produced their effects.

Mistake 2: Confusing the absence of a maintenance covenant with the absence of risk on Term Loan B

A cov-lite or cov-loose structure reduces the frequency of financial tests but does not remove the risk of over-leverage. The additional borrowing capacity often associated with Term Loan B must be contractually framed, otherwise the company may end up with total leverage exceeding what its initial business plan anticipated.

Mistake 3: Neglecting the timeline and uncertainty of institutional syndication

Placing Term Loan B with CLOs and debt funds follows a market calendar that is not always aligned with the parties' desired closing timeline, particularly in periods of volatility. Failing to plan a fallback solution, a bridge bank facility or a temporary increase in the Term Loan A share, exposes the transaction to a financing risk at the worst moment of the negotiation.

Mistake 4: Not matching Term Loan A amortisation to the target's actual cash generation

An amortisation schedule copied from market standards rather than built on the target's specific business plan can create a mismatch between contractual maturities and actual operational repayment capacity, particularly for targets with strong seasonality or a long investment cycle.

Mistake 5: Ignoring repricing and refinancing options for Term Loan B over its life

Margins negotiated at inception are not necessarily optimal over the life of the loan. Failing to periodically revisit Term Loan B's terms in light of reference rate movements and market margins deprives the company of potentially significant financing cost savings over the life of the structure.

Case 1: French industrial LBO with 27 M EUR TLA/TLB senior debt

A French industrial SME is acquired in an LBO for an Enterprise Value of 45 M EUR, based on a normalised EBITDA of 9 M EUR, a 5.0x multiple. Senior debt amounts to 27 M EUR, a leverage of 3.0x EBITDA, funded by 18 M EUR of equity and quasi-equity from the sponsor. Senior debt is structured as a 15 M EUR Term Loan A (56%) and a 12 M EUR Term Loan B (44%).

Term Loan A is granted at the 3-month Euribor rate (2.17% in April 2026 according to Janus Henderson Investors) plus a 2.50% margin, an all-in rate of 4.67%. It amortises quarterly over 5 years, a linear amortisation of 3.0 M EUR per year, and carries a maintenance covenant tested quarterly (leverage ratio and interest coverage). Term Loan B is granted at the 3-month Euribor rate plus a 4.75% margin, consistent with the average 3-year discount margin of 496 basis points observed on the European WELLI index in April 2026, an all-in rate of 6.92%. It is repaid as a bullet at 7 years, with nominal amortisation of 1% per year (0.12 M EUR), and carries only incurrence covenants.

In the first year, Term Loan A's debt service amounts to approximately 3.63 M EUR (3.0 M EUR of principal and approximately 0.63 M EUR of interest on an average outstanding balance of 13.5 M EUR), and Term Loan B's to approximately 0.95 M EUR (0.12 M EUR of principal and approximately 0.83 M EUR of interest on the 12 M EUR outstanding balance). Total senior debt service, 4.58 M EUR, represents around half of the 9 M EUR EBITDA, for an interest-only coverage of around 6.2x. This comfortable coverage margin allows the target to absorb a cyclical slowdown without risking a Term Loan A covenant breach.

Case 2: Swiss acquisition structured with 30 MCHF TLA/TLB senior debt

A Swiss services company is acquired for an Enterprise Value of 60 MCHF, based on an EBITDA of 10 MCHF, a 6.0x multiple. Senior debt amounts to 30 MCHF, a leverage of 3.0x EBITDA, structured as an 18 MCHF Term Loan A (60%) and a 12 MCHF Term Loan B (40%), consistent with the Franco-Swiss market practice observed by Hectelion for this type of structure.

The 3-month compounded SARON stood at minus 0.04% in early August 2026 according to Bluegamma/SIX, a near-zero level consistent with the Swiss National Bank's policy rate held at 0.00% since March 2026. Term Loan A is granted at SARON plus 2.25%, an all-in rate of 2.21%, amortising quarterly over 6 years (3.0 MCHF of principal per year). Term Loan B is granted at SARON plus 3.00%, an all-in rate of 2.96%, repaid as a bullet at 7 years with nominal amortisation of 1% per year (0.12 MCHF).

First-year debt service amounts to approximately 3.36 MCHF for Term Loan A (3.0 MCHF of principal and approximately 0.36 MCHF of interest on an average outstanding balance of 16.5 MCHF) and approximately 0.48 MCHF for Term Loan B (0.12 MCHF of principal and approximately 0.36 MCHF of interest). Total senior debt service of 3.84 MCHF represents 38.4% of the 10 MCHF EBITDA, for an interest-only coverage of around 13.9x, a level that reflects the near-zero financing cost of the Swiss bank market in 2026, well below the euro-denominated European market where Euribor remains positive.

The executive's perspective

"In our financial structuring practice, we regularly see the Term Loan A / Term Loan B mix treated as an execution detail, settled late in the negotiation process. That is a mistake: this mix directly determines the structure's resilience to an operational setback and its capacity to fund the growth of the acquired company."

A structure made entirely of Term Loan A protects the financing cost but imposes strict cash discipline from year one. A structure made entirely of Term Loan B preserves cash but raises the average cost of debt and can open the door to poorly controlled additional leverage. Between these two extremes, the right mix almost always depends on the target's actual cash generation profile, not a standard market practice.

At Hectelion, our independence from lending banks lets us arbitrate this mix exclusively in the borrower's interest, without being incentivised by a syndication fee to favour one tranche over another. We systematically match Term Loan A's amortisation schedule to the target's actual business plan, not a market standard.

Aristide Ruot, Founder and Chief Executive Officer, Hectelion SA

FAQ: the 10 essential questions on Term Loan A and Term Loan B

Introduction: what to keep in mind before the questions

The questions below cover the most frequent concerns of directors and CFOs when negotiating senior debt structured as Term Loan A and Term Loan B, from choosing the mix to managing the structure over its life.

Q1: What is the essential difference between Term Loan A and Term Loan B?

Term Loan A amortises progressively over 5 to 6 years and is underwritten by commercial banks, while Term Loan B is repaid mostly in a single bullet at maturity, over 6 to 7 years, and is underwritten by institutional investors (CLOs, debt funds).

Q2: Is Term Loan A always cheaper than Term Loan B?

In credit margin, yes, Term Loan A systematically carries a lower margin than Term Loan B to compensate for the liquidity risk borne by institutional investors. In total cost over the life of the loan, however, the gap depends on the amortisation profile and the level of reference rates at inception.

Q3: Can senior debt be structured with only a Term Loan B?

Yes, it is a common practice for transactions large enough to interest the institutional market directly, particularly when the sponsor prioritises cash preservation over the full life of the loan and accepts the associated extra cost.

Q4: What is a covenant-lite structure and why does Term Loan B benefit from it more?

A covenant-lite structure has no periodic maintenance financial test, only incurrence covenants triggered by certain transactions. Term Loan B benefits from it more often because institutional investors, less constrained by bank prudential ratios, accept a looser contractual control in exchange for the higher margin received.

Q5: Who underwrites a Term Loan A and who underwrites a Term Loan B?

Term Loan A is traditionally held by one or more relationship commercial banks. Term Loan B is distributed to CLOs, debt funds, insurance companies and pension funds, through an institutional syndication process.

Q6: Is the TLA/TLB mix fixed over the entire life of the loan?

No. A refinancing, a Term Loan B repricing or a later external growth transaction are all occasions to revisit the split between the two tranches in light of current market conditions.

Q7: What happens in the event of a Term Loan A covenant breach?

A maintenance covenant breach can trigger early acceleration or open a renegotiation with bank lenders, even in the absence of any payment default. This is one of the reasons why the amortisation schedule must be set cautiously against the target's actual business plan.

Q8: Can Term Loan B be refinanced or repriced before maturity?

Yes, Term Loan B documentation generally includes repricing mechanisms allowing the margin to be renegotiated downward if market conditions improve, subject to an early refinancing premium during an initial period (soft call). This negotiation remains active in 2026: several European issuers have sought to reduce their margin during the year, such as MotoGP Sports, which targeted a 275 basis point reduction on its 720 million euro Term Loan B.

Q9: How does the choice between TLA and TLB affect the sponsor's return?

A mix more favourable to Term Loan B increases the total leverage mobilisable for a given amount of equity, which can improve the sponsor's internal rate of return if the target generates enough cash to cover a higher cost of debt, but increases the risk in the event of underperformance.

Q10: Is the TLA/TLB structure suited to smaller SMEs?

It becomes relevant beyond a senior debt threshold generally observed around 20 MCHF or 20 M EUR in Franco-Swiss mid-market practice. Below that, a single bank facility remains most often sufficient and simpler to document.

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Conclusion: a mix to calibrate on the company, not on the market

Term Loan A and Term Loan B are not two competing products but two complementary building blocks of the same senior debt, each answering a distinct risk and cost logic. The choice of the mix between the two is neither a market standard nor a generic preference, but a trade-off specific to each target, calibrated on its actual cash generation capacity and its post-acquisition growth plan. Independent structuring, not remunerated by a syndication fee tied to either tranche, remains the best guarantee of a mix genuinely aligned with the borrower's interests.

Summary of the article

Term Loan A is the amortising senior debt tranche, underwritten by commercial banks, generally cheaper but subject to restrictive maintenance covenants. Term Loan B is the bullet-repayment tranche, placed with institutional investors, more expensive but more flexible and less cash-consuming over the life of the loan.

Combining the two tranches widens the available lender base, maximises total leverage without straining the target's cash, and matches the repayment profile to the company's actual operational capacity. This combined structure becomes relevant beyond a senior debt threshold generally observed around 20 MCHF or 20 M EUR in Franco-Swiss practice.

The French and Swiss worked cases presented in this article show that a reasonable mix, around 55 to 60% Term Loan A and 40 to 45% Term Loan B, keeps comfortable coverage of senior debt service by EBITDA while preserving an operational flexibility margin for the borrower.

Five structuring mistakes come up most often: underestimating Term Loan A debt service from year one, confusing the absence of a maintenance covenant with the absence of risk, neglecting institutional syndication timelines, poorly matching amortisation to the target's actual cash, and ignoring Term Loan B repricing options over its life. An independent structuring advisor, free from lending banks, remains the best safeguard against these mistakes.