Amortization schedules are vital tools for understanding how loans work, especially for long-term financing like mortgages. However, amortization schedules can seem complicated at first glance. This article aims to explain term loan A amortization schedules in simple terms, so you can better understand this useful concept.
What is a Term Loan A?
A term loan A (TLA) is a type of loan made to a business, typically as part of a leveraged buyout transaction. The “A” refers to it being the first lien term loan, meaning it has priority for repayment over other loans in the structure. TLAs are usually variable rate loans based on LIBOR with terms between 5-7 years.
Here are some key features of term loan As:
- Senior secured debt with priority for repayment
- Used to finance mergers, acquisitions, leveraged buyouts
- Typically have lower interest rates than bonds
- Maturities between 5-7 years
- Amortizing loan structure (repaid over time)
- Variable interest rate tied to LIBOR
- Issued in large pool to institutional investors
What is Amortization?
Amortization refers to the process of gradually repaying a loan over time through scheduled payments Each payment is partially interest and partially principal (the original loan amount).
In the beginning, interest makes up most of the payment because the principal is still large But as the loan amortizes (or decreases) over time, the portion going to principal increases while the interest portion decreases.
This continues until the full principal has been paid off The amortization structure helps the borrower through manageable payments and provides certainty to the lender of receiving repayment
Amortization Schedule Basics
An amortization schedule outlines the periodic payments, interest amounts, and principal reductions over the full loan term. It shows the declining loan balance with each payment until the principal reaches zero.
Here are some key elements of an amortization schedule:
- Payment amounts and timing (monthly, quarterly, etc)
- Interest portion of each payment
- Principal portion of each payment
- Remaining principal balance after each payment
- Total interest paid over full amortization
These schedules help visualize how amortization works and the changing payment breakdown. They can be presented annually or monthly.
Term Loan A Amortization
Term loan As have standardized amortization schedules. The initial TLA amount is repaid annually based on an amortization percentage rather than a fixed principal payment.
Typical TLA amortization percentages range from 5% to 20% of the initial balance per year. For a $100 million TLA with 5 year term and 5% amortization, the schedule would be:
- Year 1: $100 million balance, $5 million principal payment
- Year 2: $95 million balance, $4.75 million principal payment
- Year 3: $90.25 million balance, $4.5125 million principal payment
- Year 4: $85.7375 million balance, $4.286875 million principal payment
- Year 5: $81.35 million balance, $81.35 million final payment
The principal payments decline over time as the balance decreases. However, this structured amortization allows the borrower flexibility in the early years when cash flow is tightest.
Some key benefits of TLA amortization schedules:
- Flexibility in early years with smaller payments
- Interest savings from declining principal balance
- Fixed amortization percentage provides payment certainty
- Fully amortized to facilitate maturity/refinancing
Impact on Interest and Term
Because TLAs repay more slowly at first, they incur more interest over the life of the loan compared to straight-line amortization. However, the structured schedule provides flexibility for borrowers.
The amortization percentage also impacts the term length needed to fully repay the TLA. The higher the percentage, the quicker the principal is repaid.
For example, a $100 million TLA would take:
- 20 years to repay with 5% amortization
- 10 years with 10% amortization
- 5 years with 20% amortization
So higher amortization percentages require a shorter term to fully amortize the TLA principal.
Real World Example
Here is a snapshot of an actual TLA amortization schedule to illustrate the concepts:
- TLA Amount: $650 million
- Term: 7 years
- Amortization: 10%
- Interest Rate: LIBOR + 275 basis points
| Year | Beginning Balance | Principal Payment | Interest Payment | Ending Balance |
|---|---|---|---|---|
| 1 | $650 million | $65 million | $19.1 million | $585 million |
| 2 | $585 million | $58.5 million | $17.4 million | $526.5 million |
| 3 | $526.5 million | $52.65 million | $15.8 million | $473.85 million |
| 4 | $473.85 million | $47.385 million | $14.2 million | $426.465 million |
| 5 | $426.465 million | $42.6465 million | $12.8 million | $383.8185 million |
| 6 | $383.8185 million | $38.38185 million | $11.5 million | $345.43665 million |
| 7 | $345.43665 million | $345.43665 million | $10.4 million | $0 |
You can see the structured amortization in action with the fixed principal payment percentage, declining interest expense, and fully amortized balance by maturity.
While amortization schedules can appear complex initially, understanding the basics helps decipher term loan A amortization. The key takeaways are:
- TLAs have structured amortization, typically between 5-20% of initial principal per year
- Amortization allows flexible early payments when cash flow is tightest
- Interest expense declines over time as principal is repaid
- Faster amortization means a shorter term is required
- Amortization tables provide clarity into the repayment structure
Armed with this knowledge, you can better analyze the impact of TLA amortization schedules and make informed borrowing decisions. The structured repayment offers benefits, but also comes with interest tradeoffs that must be evaluated.
Amortized Loans
Amortized loans are generally paid off over an extended period of time, with equal amounts paid for each payment period. However, there is always the option to pay more, and thus, further reduce the principal owed.
Example of an Amortization Loan Table
The calculations of an amortized loan may be displayed in an amortization table. The table lists relevant balances and dollar amounts for each period. In the example below, each period is a row in the table. The columns include the payment date, principal portion of the payment, interest portion of the payment, total interest paid to date, and ending outstanding balance. The following table excerpt is for the first year of a 30-year mortgage in the amount of $165,000 with an annual interest rate of 4.5%
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Term vs Amortization
FAQ
Are term loans amortizing?
How is term and amortization different?
What is the amortization of a term loan B?
What is mandatory amortization of a term loan?
What is loan amortization?
Loan amortization refers to a schedule of how and when a debt will be repaid with interest. As noted, we will focus on fixed-rate debts, such as auto loans, personal loans with installment payments, or mortgages.
How does an amortized loan payment work?
An amortized loan payment first pays off the interest expense for the period; any remaining amount is put towards reducing the principal amount. As the interest portion of the payments for an amortization loan decreases, the principal portion increases.
What types of loans are amortized?
Amortization isn’t just used for mortgages — personal loans and auto loans are other common amortizing loans. Just like with a mortgage, these loans have equal installment payments, with a greater portion of the payment paying interest at the start of the loan. What is an amortization schedule?
What is a loan amortization schedule?
Once it is determined, an “amortization schedule” can be created that details exactly how much of each loan payment goes towards retiring the loan’s principal balance versus how much goes towards interest. Loan term and amortization are two of the four inputs that are needed to calculate a loan’s payment and create an amortization schedule.