Long overshadowed by the high-profile institutional TLB market, pro-rata lending is back in the spotlight, fueled by the return of mega LBOs in recent months.
The TLA market has evolved beyond its traditional role as a gap-filler for choppy market conditions. Once a fallback for hung LBO syndications — as seen during the volatility of 2022 — they have since become a strategic financing tool with a more diversified holder base.
With market participants anticipating 2026 to be a watershed year for dealmaking, TLAs are likely to show up more frequently in large debt financings, not just as a tool to manage deal size but also to compete with direct lenders.
“We definitely see it come into play more regularly for bigger deals,” a banker said. “Sponsors use TLA to de-risk and banks use it to distinguish themselves from private credit.”
The most notable example of this is the $1.25bn TLA tranche tied to Hologic’s nearly $12bn financing package. The TLB portion was upsized and priced 50bps tighter than initial price talk.
The financing backing Dycom’s acquisition of Power Solutions, for example, also included a $440m TLA which was upsized to $1.54bn. BioMarin’s $3.7bn debt package for its acquisition of Amicus Therapeutics, which was launched on 23 January, has a TLA tranche, as does the debt package backing Electronic Arts’ blockbuster buyout.
“Some of these mega deals are the biggest deals that have been done in quite a while, so I think people are just trying to tap every market that they can find,” said a LevFin lawyer.
TLAs have also been used for proceeds outside of acquisitions — West Shore Home recently raised a $400m TLA to refinance debt, fund a dividend and repurchase shares.
Size control
TLAs have several key differences compared to TLBs. The debt is held by banks and has a more aggressive amortization schedule. The cost of borrowing is also lower, and the covenants tend to be tighter.
Unlike covenant-lite loans, TLAs typically come with a maintenance covenant which is regularly tested and triggered when the borrower’s financial performance declines before a payment is missed.
Now, the TLA has become a useful tool for managing deal size, particularly for jumbo buyouts.
Instead of flooding the TLB market with a massive loan that might pressure pricing, issuers can set aside a portion of the financing as a TLA for banks to hold. There is typically a three-month gap between the launch of TLA and TLB syndications, sources said.
The inclusion of a TLA tranche in the EA financing package is a “pretty smart risk decision” for banks, sources said, because of the amount of junior capital being put in by the sponsors. Since the equity cushion is sizable, the TLA — which sits at the very top of the capital stack — makes it a safe place for banks to park their money.
Another increasingly common use of TLAs is for “buy-and-sell” investments. For large companies with multiple business lines, a TLA is used as a short-term piece of the capital stack. After closing, the borrower tends to sell a division — usually underperforming — to pay down the TLA.
Ultimately, the core advantage comes down to the flexibility of not having to raise all the debt today.
“Everyone knows what Plan A is, but on these bigger deals, you better be pretty sure you know what Plan B is as well, and Plan B is just making sure that the deal you put on screens doesn’t have any way of potentially not getting done,” a second banker said. “This is the beauty of leveraged finance.”
That’s in contrast to four years ago, when TLAs were used to pick up the slack when the syndicated loan market was not willing to absorb committed financing due to choppy conditions.
At the time, the Federal Reserve’s rate hike campaign tightened credit conditions, making it much more difficult for banks to offload LBO paper in the syndicated market. This funding squeeze led sponsors to pressure banks for TLAs, according to a 9fin story here.
Evolving base
While TLAs are still a bank-only space, there has been a notable shift in both the diversity and the volume of participating institutions, sources said.
In just five years, the list of banks participating has grown from a single column to two or three columns, according to the second banker, and this list includes a diverse mix of domestic, foreign, investment, and commercial banks.
US regional banks and Asian banks are two mainstays of the TLA market, according to 9fin sources. One US regional bank executive said the need to grow and deploy bank assets was a key driver of the market’s expansion.
“Banks in general have been starved for loan growth, and there has been pretty low loan growth overall in the US,” they said. “Taking down some TLA exposure is a way to get loan growth.”
But that comes with a caveat: such banks are often only interested in TLAs tied to moderately leveraged credits, with a leverage at around 4x to 4.5x, the executive added.
Bad technical?
However, some market participants have expressed concern about the newfound prominence of the TLA market. Some buysiders said that existing TLB tranches risk getting repriced should banks decide to get rid of their TLA holdings.
“Historically, banks used TLA to help cover the funding gap, and that’s not something I really enjoy,” a buyside portfolio manager said. “The banks have this period where they are not allowed to sell for six months, then some of them are willing to sell it at huge discounts just to get rid of it, which has been a really bad technical for the TLB market.”
But bankers insist TLA market participants are invariably buy-and-hold investors who are in it for the long haul.
“My experience over the years is that banks don’t dump it and the spreads or relative value blows out on the TLB,” the executive said. “They are not liquid traders like CLOs or some of the funds.”
