Module IV· Debt TranchesAdvanced
Question
What is a 'Bullet Loan' compared with an 'Amortizing Loan', and how does the choice affect IRR?
Answer
What
Bullet loans and amortizing loans differ in their repayment profile:
| Aspect | Bullet | Amortizing |
|---|---|---|
| Mandatory amortization | 0% until maturity | 1–10% p.a. |
| Maturity payment | 100% Principal | 0% (all repaid along the way) |
| Typical tranche | TLB, Mezzanine | TLA, RCF |
| Cash availability | high (no amortization drag) | low (amortization pulls cash) |
| Refi risk at maturity | high | low |
Consequence
Bullet is sponsor-friendly (more cash for IRR optimization) but brings refi risk at maturity. Amortizing is lender-friendly but costs IRR performance.
Deep diveShow more details
Example — $200m Senior Debt, 7 years, 5% coupon, EBITDA $50m
| Structure | Cumulative amortization Year 1–6 | Cash for Sweep / Bolt-Ons | IRR effect |
|---|---|---|---|
| 100% Bullet | 0 | high (all cash stays) | Baseline +0% |
| 5% Amortizing + Bullet | $60m | medium | −1.5% IRR |
| 10% Amortizing | $120m | low | −2.5% IRR |
Mix as best practice
TLB as bullet (standard, IRR optimization), TLA as amortizing (bank requirement). The sponsor optimizes the cash-flow profile and gives the lender reduction at the front end.
Common pitfalls
- Bullet at maturity: the sponsor MUST refinance: market conditions in Year 7 are uncertain. If a refi is not possible, default looms.
- Amortizing: allows natural deleveraging, but the cash drag reduces optionality for add-ons.
Pitch tip
Question: "Bullet or amortizing?"
Answer: "TLB as bullet, TLA as amortizing — a mix is best practice. The sponsor optimizes the cash-flow profile for IRR, the lender gets an initial reduction. With pure bullet, the refi risk in Year 7 is substantial — in difficult market conditions the sponsor may be forced to refinance on poor terms"