CandleFocus

Unitranche Debt

Unitranche debt is an emerging form of debt finance most commonly being deployed in the financing of leveraged buyouts of midsize companies. Unitranche debt is unique because it combines both senior and junior debt into a single loan with one repayment structure and one interest rate. This single debt product is provided by a single lender, often referred to as the unitranche financier.

The unitranche debt structure essentially eliminates the multiple loans of a traditional leveraged financing and streamlines the process with a single loan at a blended rate of interest. Unitranche debt is not the same as traditional bank financings, such as first lien/second lien loans, as the unitranche financier provides all of the debt capital as a single instrument. The financier effectively combines both senior loans and mezzanine loans into the same loan product.

In general, unitranche debt is attractive because the borrower only needs to deal with one lender, who provides a single document, rather than multiple documents. This provides operational efficiencies and cost savings to the borrower when compared to traditional syndicated loan products. Furthermore, the single financing document typically calls for fewer covenants than multiple loan products, so the borrower has less restrictive terms to adhere to.

Due to the single loan structure, unitranche savings can be seen by the issuer in terms of time and cost, as the time involved to coordinate multiple lenders is eliminated. The cost savings are due to the fact that the lender maintains control and negotiates directly with the borrower over the entire loan product. The interest rate on unitranche debt is typically higher than a traditional leveraged loan and closer to the rate of a mezzanine loan, providing additional interest rate savings to the borrower.

In conclusion, unitranche debt is an effective financing solution for leveraged buyouts of mid-sized companies. It eliminates the need to coordinate multiple loans and streamlines the process with a single loan structure, while providing the issuer with cost and time savings. The interest rate on unitranche debt is typically higher than a traditional leveraged loan, reflecting the risk the lender takes by offering all of the debt capital as a single loan product. However, the interest rate is lower than a traditional mezzanine loan, thus allowing the borrower to save on costs associated with the loan.

Glossary Index