Simply put, unitranche debt combines senior and junior debt (whether mezzanine or second lien) into one instrument or “tranche”. The borrower signs one set of documents and pays interest to one lender, with the cost of the loan a blend between that of a traditional senior loan and a subordinated loan.
Initially, unitranche loans were provided to smaller EBITDA companies by
legacy mezzanine providers and held by a single lender. This eliminated the need to layer two separate debt securities into a company’s capital structure and provided greater certainty of execution.
Today, unitranche loans are far more common. They are offered by dozens of capital providers to borrowers with EBITDA ranging from less than $5 million
to more than $50 million.
Bifurcated unitranche is one variation. The loan appears to the borrower as
a single facility; but behind the scenes, it is divided into first-out and last-out pieces, and split among two or more lenders investing in the tranche that best suits their risk tolerance.
As a result, unitranche structures can be quite tailored, with complicated legal and economic terms negotiated among multiple lenders. Each lender’s rights to collateral and cash flows from the borrower are governed by an Agreement Among Lenders (AAL), which is essentially an intercreditor agreement among the unitranche lenders. The AAL not only governs cash flow applications
that drive each lender’s ultimate yield and security rights, but also critical
legal terms such as voting, enforcement and buyout rights.
Originally published in Private Debt Investor’s May 2016 issue