Term Loan B vs high yield bond: which senior debt should finance an acquisition?

Same senior debt, two different logics: covenants, rating, early repayment.

Introduction: two ways to raise senior debt, one acquisition to finance

To finance a mid-sized acquisition, a company or its sponsor faces two options for the senior debt tranche of its financing: a Term Loan B, a loan syndicated to institutional investors, or a high yield bond, a note placed with the bond market. Both finance the same senior debt, but under two different logics of documentation, covenants and investors.

According to law firm Norton Rose Fulbright, the European market has seen a convergence in the terms of institutional syndicated loans and high yield bonds, but several structural differences remain, in particular on covenants, tenor and the investor base.

"Traditional Credit Facility: maintenance and incurrence covenants, typically tenor of 3 to 5 years, term loan tranches traditionally amortizing. High Yield Bonds: less onerous incurrence covenants only, typically tenors of 5 to 10 years, bullet maturity.", Norton Rose Fulbright, High Yield Bonds: An Issuer's Guide, 6th European Edition, October 2025.

This distinction bears directly on the cost and the flexibility of the financing. The choice depends on the size of the transaction, the issuer's willingness to carry a public rating, and its capacity to accept heavier documentation in exchange for greater repayment flexibility. This article defines the two instruments, explains how they fit together in a financing package, details their respective advantages and limits, then presents two worked examples, one in France and one in Switzerland, before a FAQ of ten questions.

Term Loan B: a floating-rate senior loan syndicated to institutional investors.
High yield bond: a bond rated below investment grade, placed with the bond market.
Covenant-lite: a financing with no financial covenant tested periodically, or with only a single conditional covenant.
Non-call period: the period during which a bond cannot be repaid early without a high premium.
Senior secured: a ranking marketed as secured and priority, whose actual extent depends on the documentation.

Structure the senior financing of your next acquisition

The choice between a Term Loan B and a high yield bond commits the capital structure for several years. Before committing, a no-obligation thirty-minute discussion with Hectelion helps frame the options, through our booking calendar.

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Definition: what is a Term Loan B and a high yield bond?

Term Loan B: a quick definition

The Term Loan B is a senior loan, most often secured, syndicated to institutional investors, debt funds and loan securitisation vehicles. Its maturity is generally five to seven years, with limited annual amortisation, often around 1%, and repayment that is mostly in fine at maturity. Its rate is floating, indexed on a reference rate plus a margin (spread). It is documented by a credit agreement, whose amendments are negotiated with a limited number of lenders.

High yield bond: a quick definition

The high yield bond is a bond issued on the market by a company whose rating is below investment grade. According to Norton Rose Fulbright, the issuers concerned are rated Ba1 or below by Moody's, and BB+ or below by S&P Global Ratings. It is documented by an indenture and addresses a broader investor base: bond funds, hedge funds, insurers and pension funds.

According to S&P Global Ratings, a BBB- rating is the lowest rung of investment grade, and BB+ the highest rung of speculative grade. This threshold is what qualifies a bond as high yield.

Origin: from syndicated bank credit to the speculative-grade bond market

The Term Loan B market developed from the 1990s, when large leveraged acquisitions outgrew the balance sheet capacity of lending banks, which then syndicated an institutional tranche distinct from the traditional bank tranche, which became the Term Loan A. The high yield bond market developed in parallel in the United States, then in Europe, as a bond alternative to bank credit for issuers without an investment grade rating.

Cov-lite: the Term Loan B's convergence towards the bond market

Norton Rose Fulbright notes a gradual convergence of the two markets in Europe: a growing share of Term Loan Bs, described as covenant-lite, now include only a single financial covenant, conditional on drawings under the revolving credit facility, for the sole benefit of the lenders of that facility, which brings their profile closer to that of a high yield bond.

Why compare the Term Loan B and the high yield bond?

Cost and flexibility cannot be read from the rate alone. A floating-rate Term Loan B can cost more or less depending on how the reference rate moves, while a fixed-rate bond locks in the cost for the whole term.
Covenants differ in nature. The Term Loan B most often keeps a conditional financial covenant, while the high yield bond traditionally carries none, at the cost of more detailed debt-incurrence and restricted-payment clauses.
Repayment flexibility is reversed. The Term Loan B is generally repayable at any time, with a limited and temporary penalty. The high yield bond imposes a non-call period, followed by declining redemption premiums.
The size of the transaction drives the choice. Norton Rose Fulbright places the ideal bond candidate at around EUR 250 to 300 million of financing needs, a threshold beyond which bond market liquidity becomes relevant.
The rating commits the issuer beyond the financing itself. A high yield bond requires a public rating, generally from Moody's and S&P, which itself becomes a signal followed by the market.

How are a Term Loan B and a high yield issuance put together?

The two instruments follow distinct steps.

Term Loan B: an arranger structures the loan and its credit documentation, syndicates it to debt funds and loan securitisation vehicles, and the loan is then drawn at the closing of the acquisition.
High yield bond: the issuer prepares an offering memorandum, obtains a rating from the agencies, then banks acting as initial purchasers place the notes with institutional investors, often over a few days of roadshow.

In both cases, the ranking of the debt and its relationship with other tranches, in particular a revolving credit facility, is organised through an intercreditor agreement. Norton Rose Fulbright notes that more than 90% of European high yield bonds are marketed as senior secured notes or senior notes, but that the actual extent of the security package must be checked in the documentation, not only in its commercial label.

Feature	Term Loan B	High yield bond
Typical tenor	5 to 7 years	5 to 10 years
Amortisation	About 1% a year, then in fine	Bullet repayment
Rate	Floating	Fixed most often, sometimes floating
Covenants	Often a residual conditional covenant	Incurrence covenants only, no financial covenant
Early repayment	Free, limited and temporary penalty	Non-call period then declining premiums
Rating	Not mandatory	Required (Moody's and S&P)
Investors	Banks, institutional debt funds	Bond funds, hedge funds, insurers, pension funds

When to choose the Term Loan B rather than the high yield bond?

The Term Loan B suits transactions where early repayment flexibility matters, for example when a partial sale or a quick refinancing is anticipated. It also fits amounts below the bond market's liquidity threshold, and issuers who prefer to avoid a public rating. The high yield bond suits transactions of sufficient size, when the issuer seeks a fixed rate over a long term and lighter documentation on financial covenants, at the cost of a stricter non-call period. A combined package, Term Loan B for part of the senior debt and a high yield bond for the rest, is also common in large LBOs, each market absorbing the portion for which it is deepest.

Whom to consult to structure this choice?

Three criteria guide the choice of adviser.

The size of the transaction: beyond the bond liquidity threshold, a high yield issuance becomes worth considering alongside the Term Loan B.
Tolerance for covenants: an issuer that wants to avoid any financial covenant, even a conditional one, leans towards the bond rather than the loan.
Capacity to absorb rating and placement costs: a bond issuance involves preparation, rating and roadshow costs that the Term Loan B does not require.

Hectelion works on financial structuring and on financial instrument valuation, in particular to establish the value of a Term Loan B or a bond tranche at the time of a refinancing or a sale. As part of a merger or acquisition, the choice of senior debt fits into the rest of the financing plan. Hectelion is not authorised by FINMA and does not work on listed transactions.

Advantages: flexibility, cost, market access

The Term Loan B offers flexibility of early repayment that few bond instruments allow without a significant penalty. The high yield bond offers a locked-in cost over a long term when issued at a fixed rate, and access to a market of a wider range of investors, which can reduce dependence on a narrow circle of bank lenders.

Limits: documentation, rating, minimum size

The Term Loan B remains dependent on the depth of the institutional loan market, narrower than the bond market for very large issuances. For issuers who find neither option at an acceptable cost, private credit financing remains a third path, in particular as unitranche debt, which combines the senior and subordinated profiles in a single tranche. The high yield bond imposes heavier documentation, an indenture and amendments that require a formal investor consent solicitation, as well as a public rating that becomes a signal followed by the market, including in case of a downgrade. Finally, the minimum size of financing needed for a bond issuance to find sufficient liquidity effectively excludes mid-sized transactions.

Liability management exercises: why a "senior secured" label is not enough

For several years, some distressed issuers have used the room for manoeuvre built into their own documentation to reorganise the ranking of their debt without the consent of all their creditors. Norton Rose Fulbright describes this type of transaction as the "J. Crew Trap Door", named after the first emblematic transaction of this kind, in 2016-2017.

The mechanism consists of transferring assets, sometimes intellectual property that formed part of the collateral of senior secured creditors, to a subsidiary left unrestricted by the existing documentation. That subsidiary can then raise new debt, secured by those same assets, which becomes structurally senior to the existing senior secured debt, even though that debt has not changed rank on paper: a form of de facto contractual subordination.

This type of transaction concerns the Term Loan B as much as the high yield bond. It is not the instrument that protects against this risk, it is the quality of the drafting of the restrictions on investments, asset transfers and unrestricted subsidiaries. An investor who compares two instruments only on the rate or the stated ranking ignores this documentary risk, which only surfaces when the issuer comes under financial stress.

The five mistakes to avoid

Mistake 1: comparing the two instruments on the headline rate alone

A floating-rate Term Loan B and a fixed-rate high yield bond cannot be compared directly on the rate shown at issuance. The expected path of the reference rate, the early repayment premium and the set-up costs must be factored in.

Mistake 2: believing a senior secured label guarantees full security

Norton Rose Fulbright notes that the actual extent of the security package of a bond marketed as senior secured can be limited, for example to pledges over accounts or shares. The commercial label does not replace reading the documentation.

Mistake 3: underestimating the cost of amending the documentation

Amending a credit agreement is negotiated with a limited number of lenders. Amending a bond indenture requires a formal investor consent solicitation, longer and more costly.

Mistake 4: ignoring the size threshold below which the bond loses its liquidity

A bond issuance of insufficient size can remain illiquid on the secondary market, which penalises investors and, in the end, the cost the issuer will have to pay at a future refinancing.

Mistake 5: neglecting the effect of a rating downgrade on the rest of the financing

The rating of a high yield bond is followed by the market and can influence the terms of the issuer's other financing tranches, including a Term Loan B issued alongside it.

Case 1: a French industrial LBO weighing a Term Loan B against a bond issuance

A French industrial group, valued at EUR 220,000,000 in an LBO, must finance senior debt of EUR 120,000,000. Below the liquidity threshold generally used for a standalone bond issuance, the sponsor chooses a seven-year syndicated Term Loan B, at a floating rate, with 1% annual amortisation. The choice avoids the rating and roadshow costs of a bond issuance, at the cost of a floating rate to monitor over the life of the loan. This example is illustrative.

Case 2: a Swiss group combining a Term Loan B and a senior secured bond

A larger Swiss group, with financing needs of CHF 320,000,000, combines a Term Loan B of CHF 180,000,000 with an institutional syndicate and a senior secured bond issuance of CHF 140,000,000. The issuance, offered to the public in Switzerland, is subject to the prospectus obligation of article 35 of the Financial Services Act, subject to the exceptions set out in article 37 of the same act. The combined package provides access to two different investor bases and spreads refinancing risk across two markets. This example is illustrative.

A word from the founder

"The Term Loan B and the high yield bond finance the same senior debt, but they sell two different promises to two different investors. The choice is never just about the headline rate.", Aristide Ruot, founder of Hectelion SA.

"In our structuring mandates, the question that comes up most often is not which of the two solutions is cheaper, but which one leaves the most room to manoeuvre the day the company has to refinance earlier than expected.", Aristide Ruot, founder of Hectelion SA.

FAQ: the 10 essential questions on the Term Loan B and the high yield bond

Introduction: what to remember before the questions

The questions below cover the points that come up most often when choosing between a Term Loan B and a high yield bond issuance.

Q1: Do the Term Loan B and the high yield bond finance the same rank of debt?

Often yes, both can occupy a senior rank, but the exact ranking and the security package depend on the documentation and the intercreditor agreement, not only on the name of the instrument.

Q2: Why does a high yield bond require a rating?

Because it is placed with a wide range of institutional investors, who rely on the Moody's and S&P ratings to assess risk without individually negotiating the terms of the credit, unlike a syndicated loan.

Q3: Can a Term Loan B be repaid early without penalty?

Generally, after a short protection period, often around 101% of par, the Term Loan B becomes repayable without a significant penalty, which clearly distinguishes it from a high yield bond.

Q4: What is covenant-lite?

A structure where the financial covenant is single and conditional, generally tested only when a revolving credit facility is drawn beyond a certain threshold, and for the sole benefit of the lenders of that facility, not the lenders of the Term Loan B.

Q5: Why are some high yield bonds described as secured and others as subordinated?

The ranking depends on the capital structure chosen by the issuer and on the security actually granted. The vast majority of European issuances are marketed as senior or senior secured, but the actual extent of the security package must be checked in the documentation.

Q6: Is there a minimum amount to issue a high yield bond?

There is no legal threshold, but market practice places the ideal candidate at around EUR 250 to 300 million of financing needs, below which secondary liquidity becomes uncertain.

Q7: Is a bond issuance in Switzerland subject to a prospectus?

Yes, in principle, under article 35 of the Financial Services Act, subject to the exceptions set out in article 37 of the same act, for example for certain very short-term securities.

Q8: Can a Term Loan B coexist with a high yield bond in the same financing?

Yes, this is a common structure in large LBOs. An intercreditor agreement then organises the ranking and respective rights of the two categories of lenders.

Q9: What is a non-call period on a high yield bond?

It is the period during which the issuer cannot repay the bond early, except by paying a high premium. It is followed by a period of declining premiums until maturity.

Q10: How can one objectively assess which of the two solutions costs less?

The full cash flows must be modelled over the relevant term: expected rate, amortisation, early repayment premiums and set-up costs, then the present values compared, rather than the rates shown at issuance.

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Conclusion: the Term Loan B buys flexibility, the high yield bond buys a locked-in cost

The two instruments finance the same senior debt, but they trade different considerations. The Term Loan B offers repayment flexibility and a lighter set-up, at the cost of a floating rate and a narrower market for very large amounts. The high yield bond offers a locked-in cost and access to a wide market of investors, at the cost of heavier documentation, a public rating and a restrictive non-call period.

The choice should never be limited to the rate shown at issuance. The full cash flows, the repayment flexibility and the cost of a future amendment to the documentation must be compared. In large transactions, combining the two instruments often gives access to both investor bases rather than choosing one at the expense of the other.

Hectelion can structure this comparison and establish the value of each tranche, alongside the legal advice needed to negotiate the documentation.

Summary of the article

The Term Loan B is a senior loan syndicated to institutional investors, at a floating rate, with minimal amortisation and flexible early repayment. The high yield bond is a rated bond, placed with a wide market of investors, generally at a fixed rate, with in fine repayment and a strict non-call period.

Covenants, documentation and the minimum size of financing drive the choice between the two instruments. A growing share of European Term Loan Bs, described as covenant-lite, are moving closer to the profile of high yield bonds.

In Switzerland, a bond issuance offered to the public is in principle subject to the prospectus obligation of article 35 of the Financial Services Act, subject to the exceptions in article 37. In large transactions, the two instruments are often combined rather than opposed.