A senior risk officer we know read with interest the first of our multi-part series on the unitranche product [link]. “What’s interesting is how quickly these one-stop financings have become the product of choice for borrowers,” he told us. “The unitranche is a real paradigm shift for borrowers and lenders, thanks to its ease of execution.”
Our friend’s observation has been echoed by many observers of the leveraged loan market. A product that began as a by-product of the credit crisis has become a permanent feature of the capital landscape. No longer just a hyper-stretched senior loan, unitranches now replicate many financing options for the issuer – senior debt/mezzanine, first- lien/second lien, even ABL/term debt – all under one document.
Lincoln International publishes a helpful guide to these alternatives [link], but the simplest is a small RC and unitranche term loan. The provider lends through the total leverage (say, five times ebitda) in the structure. Other lenders may participate in the tranche via an Agreement Among Lenders (AAL); a topic we’ll cover later in our series.
A variant would be a term loan bifurcated into first-out (at perhaps 3.5x leverage) and last-out (through five times). In this case, each tranche has separate treatment under the repayment waterfalls, along with separate voting rights, remedy standstills, and so on – all governed by the AAL.