Senior secured notes
LBOBonds secured on the borrower's assets, carrying a fixed coupon, incurrence covenants and a non call period rather than free prepayment.
Also written: SSN, secured notes, senior secured bond
Senior secured notes sit where a senior loan would sit in the structure, secured on the same collateral and ranking ahead of unsecured debt, but they are bonds. They are sold to bond investors under a prospectus, carry a rating, pay a fixed coupon and run longer than a loan, typically seven years.
The covenant package is incurrence only, so there is no quarterly maintenance test. What replaces the lender's early warning is the call structure: the notes cannot be redeemed at all for an initial period, and afterwards only at a declining schedule of premiums. Prepaying inside the non call period requires a make whole payment designed to leave the investor economically indifferent.
That is the trade a sponsor is making. Fixed rate funding removes the risk that a floating coupon reprices against the business over a long hold, and it does so at the cost of the flexibility a loan gives you. Refinancing opportunistically when spreads tighten, which is routine in the loan market, is expensive or impossible here.
They also need scale, because a small issue is hard to place and trades badly afterwards, which is why they appear in larger buyouts rather than in the mid market. They are normally issued alongside a super senior revolving facility that is paid ahead of them out of enforcement proceeds under the intercreditor agreement.
Worked example
An illustrative 300 of seven year senior secured notes at a 7.5% fixed coupon, non call for three years, then callable at par plus half the coupon.
The first call price is therefore 103.75, falling toward par as maturity approaches.
A sponsor selling the business in year two cannot repay at par. Either the buyer inherits the notes, or someone pays a make whole, which is exactly why a short expected hold argues against fixed rate bonds however attractive the coupon looked at issue.