December 7, 2022 - On Tuesday, December 6th, the LSTA hosted a webinar, “Recurring Revenue Loans: An Alternative to EBITDA-based Lending” which was presented by Latham & Watkins partners, Nicole Fanjul, Jesse Sheff, Dan Van Fleet, and Victor Ludwig. Recurring Revenue deals are a relatively new innovation which allow lenders to finance growth-stage companies that have low or negative EBITDA. Borrowers, who are interested in this type of deal structure, typically generate significant revenue which would generate positive cash flow, but choose to reinvest in sales, marketing and other customer acquisition activities. For those businesses with “sticky” customer relationships, revenue can provide a viable performance metric that acts as an alternative to EBITDA. Recurring revenue deals use the concept of “recurring revenue” in lieu of EBITDA and generally include revenues in respect of maintenance, support or licenses related to the borrower’s software that are expected to be on-going, pursuant to a contract or a subscription.
Recurring revenue deals rely on the borrower being able to transition from a focus on growth to generating profits within a specified time frame. It is especially a favored structure in the technology space, but as borrowers, sponsors, and lenders become increasingly familiar with the product, it could expand to other sectors with similar growth and customer acquisition models.
The recurring revenue market is on a spectrum; on one end of the spectrum the market is comprised of deals in the $25 million to $300 million range, and these deals are characterised by fairly conservative terms, covenant baskets, and financial covenants that vary widely from deal to deal. At the other end of the spectrum, the deals are much larger and range from $200 million to more than $1 billion. These larger deals are often sponsor-driven and have more flexible terms which are beginning to look similar to more traditional EBITDA-based sponsor deals.
Click here for the replay and the slides.