1. Debt Repayment Profiles
Now, let's visualize and understand some different debt repayment profiles.
So what we're looking at here is the amount of debt in the
vertical axis and time on the horizontal axis.
So a company may have a senior debt tranche A with equal amortization
paying back gradually over time, all the way down to a balance of
zero. It may also have a tranche B of senior debt as well,
that would also be amortizing over time, but at maturity there would be
a balloon repayment to pay it all the way down to a balance
of zero. So as we work down the capital stack, we may also
have a piece of mezzanine debt. There would be no principal repayment at
all until maturity, at which case it is all paid at once in
a bullet repayment. And even more subordinated, you may have a piece of
PIK debt or Payment in Kind debt, where the amount of debt is
actually increasing over time up until the point of maturity, at which case,
it's all paid back in one go with a bullet repayment.
So what you'll notice with this diagram is that the more senior lenders
are getting paid back their principle much sooner than the subordinated
lenders, and in the extreme example of the PIK debt, the amount of
principle is actually increasing over time and it's not paid back at all
until final maturity.
2. Let's practice!