The Unitranche – What it is, and Why it Matters (First of a Series)

As with all great capital market innovations – price flex, CLOs, and second-lien term loans – the unitranche seems obvious in hindsight. Having one lender provide a senior secured tranche that mimics a combined senior and subordinated debt structure solves a number of borrower issues. Yet its development was hardly a foregone conclusion.

A decade ago the notion of one debt provider bridging the divide between a secured and unsecured obligation was far-fetched. Banks still dominated the senior debt space, and private funds ruled the mezzanine class. But then two things happened.

In late 2007 GE Antares and Allied Capital (later acquired by Ares) developed the first unitranche fund – the Senior Secured Loan Program. The $3.6 billion SSLP fund offered one tranche to borrowers by synthetically blending pricing for a first-out tranche (provided by GE) with a second-out tranche (Allied’s contribution).

Then came the Great Recession. In the face of uncertain liquidity and a derailed loan syndication market, the unitranche offered certainty of execution. Private equity sponsors are typically reluctant to put all their financing eggs into one provider basket. But the unitranche became an increasingly attractive one-stop credit solution for a number of concerns raised by disruption in the capital markets.