A business can move back to a bank once its numbers fit bank policy again: leverage inside what a senior cash-flow lender will write, commonly 2x to 3.5x EBITDA, debt service coverage of at least 1.25x on actual results, and a clean story about whatever sent it to private credit. Time the move for when the fund's call protection has run off or become small. Expect a lower rate, but also steady amortization, tighter covenants, and usually a requirement to move operating accounts to the bank. Run the refinance competitively and compare the whole package, not just the rate.
- Why move
- Lower cost of debt once the business fits bank policy again
- Bank reach
- Senior cash-flow lending commonly 2x to 3.5x EBITDA
- Coverage a bank looks for
- Commonly at least 1.25x debt service coverage
- What you give up
- Lighter amortization, looser covenants, a lender with more discretion
- Check first
- Call protection, the payoff mechanics, and the bank's deposit requirement
Why companies make the return trip
Most businesses do not go to private credit because they prefer it. They go because a bank could not do what they needed at the time: lend further against earnings to fund an acquisition, stay with them after a covenant breach, or write a structure the bank's credit policy does not allow. See moving from a bank loan to private credit for that first leg.
The fund charged for that flexibility, in a higher rate, an upfront fee and call protection. Once the reason for the flexibility has passed, the business is paying a premium for room it no longer uses. That is the moment to look at a bank again.
- Leverage has come down. Earnings have grown, debt has been paid down, or both, and total debt now sits inside what a bank will write.
- The bad year is in the past. The breach, the lost customer or the margin squeeze that sent the business to a fund has been followed by results a bank can underwrite on their own.
- The acquisition has been absorbed. The add-on the fund financed is integrated, and the combined business has a track record rather than a forecast.
- The structure is no longer needed. The interest-only period, the delayed-draw facility or the unitranche blend solved a problem that is gone.
What the bank will test
A bank underwrites the business as it is today, on historical results, under a credit policy its regulators examine. Expect it to ask the same questions a fund asked, with less room for judgement in the answers.
| Test | What the bank looks at | Where a private-credit borrower can fall short |
|---|---|---|
| Leverage | Senior debt against EBITDA; senior cash-flow lenders commonly lend 2x to 3.5x | A unitranche loan sized beyond bank reach, with earnings not yet grown into it |
| Debt service coverage | Cash flow against principal and interest; banks commonly look for at least 1.25x | Light amortization flatters coverage today; bank amortization adds principal to the payment |
| Track record | Results after whatever went wrong, shown in the financial statements | Too few quarters since the breach or the acquisition |
| Earnings quality | Add-backs a bank will accept, which is usually fewer than a fund accepts | Adjusted EBITDA built on pro forma synergies or run-rate assumptions |
| Collateral | Receivables, inventory, equipment and real estate behind the loan | An asset-light business whose loan was underwritten on enterprise value alone |
| Relationship | Operating accounts, treasury services, sometimes a line of credit | Accounts held elsewhere under control agreements with the fund |
The coverage test catches more borrowers than the leverage test. A fund loan with little amortization makes debt service small. Move the same debt to a bank that wants it repaid over the life of the loan and the annual payment rises, even at a lower rate. Run the coverage math on the bank's payment, not the fund's. See debt service coverage ratio and interest-only vs amortizing loans.
Add-backs are the other common gap. A fund may have accepted adjusted EBITDA built on synergies from an acquisition or a run rate from a new contract. A bank is likely to want those earnings in the historical statements before it lends against them. See lending on run-rate EBITDA and EBITDA add-backs.
Timing the move around call protection
Most private credit loans carry call protection: a premium paid on the amount repaid if the loan is refinanced in its early years. It usually steps down each year and then disappears. The cheapest time to leave is when it has run off; the right time is when the interest saved over the remaining life of the old loan is worth more than the premium and the costs of closing the new one.
- Read the prepayment clause before talking to banks. Note what counts as a prepayment event, the premium in each year, and whether a partial paydown is treated differently from a full refinance. See prepayment penalties and call protection.
- Price the whole exit. Call premium, any unamortized upfront fee you write off, the bank's own fees, legal costs on both sides, and the cost of any interest rate hedge the fund loan required and the new loan does not. See the refinance break-even.
- Start before the step-down date, not after. A bank process takes time to run well. Starting a few months before the premium falls means the new loan can close shortly after it does.
- Ask the fund first. A fund that sees a refinance coming may offer to reprice its own loan rather than lose it. That conversation is worth having, and it is easier with bank term sheets in hand. See repricing a loan without refinancing it.
The saving from a lower rate is earned over years; the call premium is paid on the day you close. Do the arithmetic on both before committing to a date.
What changes when the bank is your lender
Owners who have lived with a fund for a few years sometimes forget what bank debt asks for. The rate is lower. Much else is tighter.
- Amortization. More principal due along the way, which uses cash the business may have planned to spend on growth.
- Covenants. Standard coverage and leverage tests set by policy and tested every quarter, with less headroom than a fund built from your forecast. See covenant headroom.
- Deposits. Most banks expect the operating accounts to move to them, which means new treasury setup, new payment instructions for customers, and some months of overlap.
- Guarantees. A bank may ask for a personal guarantee that the fund did not require. Negotiate it in the term sheet, not at closing. See releasing a personal guarantee in a refinance.
- Acquisitions and distributions. A bank will usually want to approve each acquisition and limit distributions more closely than a fund that lent for growth. If more acquisitions are planned, check whether the bank will offer a delayed-draw facility or an accordion.
- After a problem. A bank that sees a covenant breach often moves the loan to its special assets group. A fund is more willing to amend and stay, at a price.
None of this argues against the move. It argues for choosing the bank structure deliberately. A business with steady earnings and modest plans should take the lower cost. A business with an acquisition pipeline may be better served by a bank that writes a senior loan alongside an asset-based line, or by staying with a fund on repriced terms.
Running the refinance
The process is the same as any refinance, with one extra party to manage: the fund being repaid.
- Build the package. Financing model on bank amortization, lender presentation, blind teaser and underwriting memo. Midas Partners builds that package in a day once the documents are in; by hand, the same package takes at least a week. See the package.
- Write the history plainly. Why the business went to private credit, what the fund financed, and what the results have been since. A bank will read the fund loan's covenant compliance certificates in diligence, so the memo should say what they show.
- Choose banks by fit. Hold size, industry, geography and appetite for the structure. Some banks lend on cash flow; others lend mainly against collateral. Of the 1,800+ lenders in Midas Partners's book, the right ones are those that match the file, not the longest list. See the lender book.
- Approve each lender by name. Lenders see a blind teaser first, and the client approves each lender by name before it learns who the company is.
- Compare term sheets on the whole deal. All-in cost, amortization, covenant levels against your forecast, guarantees, deposit requirements, and room for acquisitions and distributions.
- Coordinate the payoff. A payoff letter from the fund with the exact amount, the per diem and the call premium; releases of liens and control agreements; and UCC terminations once the wire lands. See the payoff letter and UCC-3 terminations.
When to stay with the fund
Staying is sometimes the better answer. If leverage is still above bank reach, a bank loan will only refinance part of the debt, and the gap must come from equity, a second-lien loan or mezzanine, which can cost more than the fund loan it replaces. If the business plans another acquisition within a year or two, the fund's flexibility may be worth its price. And if the call premium is still large, waiting may simply be cheaper.
The useful question is not "bank or fund" but "what will the market offer this business today". A competitive process answers it with term sheets, and the fund's own repricing offer is one of them.
Common questions
- How long after a covenant breach will a bank lend to us?
- It depends on the bank and the cause, not on a fixed period. Banks underwrite on historical results, so they want enough quarters after the breach to see the problem solved in the financial statements, not only in a forecast.
- Will a bank lend as much as our private credit fund did?
- Often not. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, and unitranche lenders stretch further. If the fund loan is larger than a bank will write, the move works only after earnings grow or debt comes down, or with another layer of capital.
- Do we have to pay the call premium to refinance?
- If the loan is still inside its call protection period, yes, unless the fund agrees otherwise. Read what the agreement counts as a prepayment event and how the premium steps down, and compare the premium with the interest you would save.
- Will our private credit fund try to keep the loan?
- Many will, by offering to lower the spread or loosen terms. That offer is easier to judge with bank term sheets in hand, and a repricing can avoid the costs of a full refinance.
- Is it worth moving if the rate saving is small?
- Not always. Bank amortization, tighter covenants and the costs of closing can outweigh a small rate saving. The refinance break-even, on the bank's real payment, answers it.