A unitranche loan is a single secured term loan that blends senior and junior debt into one instrument under one credit agreement. One lien package, one covenant set, one amortization schedule, one administrative agent. An Agreement Among Lenders can sit behind the scenes to split economics and control between different lender sleeves, often called first-out and last-out.
When speed and certainty beat marginal pricing
Sponsors use unitranche when speed, confidentiality, and execution certainty matter more than shaving 50-100 basis points. Typical borrowers are sponsor-backed businesses with positive EBITDA, asset-light models, and predictable cash conversion. These deals support buyouts, add-ons, growth capital, and recapitalizations where closing risk is the enemy and a small, aligned lender group is an asset.
In these transactions, incentives are clear. Sponsors want speed to signing, tight circles, and fewer syndication variables, even if they give up some pricing and portability. Direct lenders want spread, fees, and strong control rights inside a small club. First-out and last-out sleeves help match investor mandates to risk. Management teams usually prefer one counterparty, fewer borrower-facing intercreditor headaches, and faster decisions, accepting tighter cash control triggers and heavier reporting.
Variants that shape control, risk, and price
Unitranche is a family of structures rather than a single form. Understanding the choice points helps you price risk and negotiate control.
- Straight unitranche: One class, one pro rata allocation, and no internal split.
- First-out or last-out: One facility with two sleeves. First-out takes priority on payments for a lower margin. Last-out earns a higher margin with subordinate economics. The Agreement Among Lenders or an embedded waterfall sets the order of payments, voting, and remedies.
- Super-senior revolver: A bank revolver ranks ahead for working capital and letters of credit. A deed of priority or an intercreditor agreement governs enforcement and payment priority.
- Bifurcated double L: Two separate facilities drafted to behave as one via cross-defaults and aligned covenants. This approach is more common in European financings.
Stack position and why it streamlines execution
Unitranche usually occupies the senior secured term loan spot with a first-priority lien, sometimes sharing collateral with a super-senior revolver under a common waterfall. It effectively replaces a first-lien plus second-lien or mezzanine stack. A typical sponsor setup runs equity, then a unitranche term loan, with a super-senior revolver above it for working capital. Preferred equity or holdco PIK can sit between equity and term debt in more aggressive structures.
The core simplification is practical. Relative to a first-lien plus mezzanine or second-lien structure, unitranche compresses documentation and removes a borrower-facing intercreditor. All recoveries flow through one lien and one enforcement path. Allocation of value becomes contractual among lenders rather than driven by distinct security ranking. The rule of thumb is simple: price is what you pay, terms are what you live with.
Legal frameworks by region
Documentation, perfection, and enforcement norms differ by jurisdiction. Plan early to avoid close-date surprises.
United States
- Governing law: New York law typically governs. Security follows Article 9 with share pledges, all-assets liens, and upstream guarantees from material domestic subsidiaries. Foreign subsidiary pledges are often limited for tax reasons.
- AAL mechanics: Agreement Among Lenders provisions are contracts among lenders and do not bind the borrower. Subordination and turnover provisions rely on contract law and Bankruptcy Code Section 510.
- Super-senior agreements: Revolvers use a conventional intercreditor where the unitranche agent signs for the term lenders while the AAL manages any internal split.
United Kingdom and Europe
- Documentation style: English law with LMA-based templates is common. A deed of priority governs revolver versus unitranche. First-out and last-out can be embedded in the credit agreement or documented in a side AAL.
- Security packages: Structures use share charges at the top and debentures or local security across operations with accession mechanics for acquisitions.
- Fund regulations: Loan-origination fund rules matter. AIFMD II sets leverage caps, risk retention, credit-granting standards, and risk controls that influence sleeve sizing and lender behavior.
Mechanics that drive cash flow and control
Capital contributions
- Term facility: Lenders commit to a single term loan; delayed-draw tranches fund acquisitions or capex. A bank typically provides the super-senior revolver and any LC fronting. Sponsors fund equity and any holdco PIK, often with equity commitment letters at signing.
Priority of payments
- External waterfall: The super-senior revolver sweeps first if present. The unitranche sits behind it and ahead of all junior or unsecured claims.
- Internal waterfall: First-out receives interest and principal up to its entitlement, then last-out. Turnover provisions redirect misdirected payments to the correct sleeve.
Collateral and guarantees
- Guarantee set: Domestic material subsidiaries guarantee and grant security. Foreign guarantees and pledges are limited for tax. Negative pledge and subsidiary debt limits protect collateral value.
- Cash control: Cash dominion, blocked accounts, and springing sweeps turn on leverage or liquidity triggers. Hedging often ranks pari with the unitranche or super-senior with the revolver by agreement.
Consent and voting
- Sacred rights: Borrower-facing sacred rights, such as economics, maturity, pro rata sharing, and collateral releases, usually require all affected lender consent; a majority handles routine waivers.
- Internal vetoes: Last-out often holds vetoes over priming debt, collateral releases, fundamental changes, and key covenant waivers. First-out may keep cash control and payment blocking rights within set limits.
Transfers and information
- Assignments: Borrower consent to assignments and disqualified lists shape the lender-of-record base. Minimum holds curb fragmentation.
- Reporting: Direct lenders expect monthly liquidity and KPIs, quarterly financials with MD&A, annual audits, compliance certificates, plus direct access for business reviews and site visits.
Documentation map
- Credit agreement: Economics, covenants, defaults, and, if no standalone AAL exists, the embedded internal waterfall.
- Security and guarantees: All-assets security, share pledges, and subsidiary guarantees with local law packages as needed.
- AAL: Internal waterfall, voting, enforcement, buyouts, and loss allocation. This is lender-only and confidential.
- Intercreditor or deed of priority: Governs revolver versus unitranche on enforcement, payment, hedging priority, and releases.
- Fee letter and ancillaries: Margin grid, OID, fees, and call protection sit in the fee letter. Ancillaries include ISDAs, equity commitments, subordination agreements, escrow for delayed draws, and closing deliverables.
Pricing, fees, and a quick model
Unitranche loans price as a reference rate plus a margin. As of 31 Oct 2024, 3-month Term SOFR was 5.33 percent, and many facilities include a floor. First-out or last-out splits often see first-out in the low to mid hundreds over base while last-out carries the rest. Borrowers pay the blended rate. Original issue discount or upfront fees typically range from 1 to 3 percent. Call protection is common. A 102 or 101 soft call discourages quick refinancings and often a make-whole applies to delayed-draw tranches or forward underwrites. Ticking fees accrue on undrawn delayed-draw tranches after a grace period.
For illustration, consider a 300 million dollar unitranche with 3-month SOFR at 5.33 percent, a 6.50 percent blended margin, and 2 percent OID. Cash interest is 11.83 percent. If repaid over three years, OID may lift lender yield by roughly 180 basis points. A 102 or 101 schedule raises early-year costs further, which shapes refinancing windows and motivates sponsors to time takeouts once spreads compress or leverage falls.
Two modeling tips can improve decision quality. First, treat floors and rate caps as part of the economic bargain by side-by-side comparing the all-in rate with and without floors for each rate path. Second, quantify prepayment friction by layering call protection and OID into the effective APR for year 1 and year 2. This approach clarifies whether the theoretical savings of a cheaper market will survive the real cost of an early refi. For the base rate, see how SOFR floors can raise all-in costs when rates fall.
Accounting, tax, and regulatory essentials
On borrower books under US GAAP, unitranche loans sit at amortized cost, with OID and fees amortized under the effective interest method. Modifications are assessed under debt modification guidance. Under IFRS, amortized cost applies and issuance costs reduce carrying value. Disclosure covers terms, maturities, covenants, and defaults. If refinancing is uncertain within 12 months, address going concern and current classification.
For lenders, many private credit managers fair value loans if they report as investment companies or business development companies. Others apply current expected credit loss accounting for held-for-investment assets. Under IFRS, investment entities mark to market through P&L while non-investment entities use amortized cost where appropriate.
Tax considerations are deal-specific but follow familiar principles. US interest deductibility faces 163(j) 30 percent adjusted taxable income limits and OID follows tax amortization schedules. Withholding can often be mitigated via the portfolio interest exemption for qualifying non-US lenders with proper documentation. For non-US borrowers, treaty relief, hybrid-mismatch rules, and transfer pricing must be addressed. Regulators also matter. In the US, many direct lenders are registered investment advisers subject to the SEC’s private fund adviser rules on reporting, audits, fees, and expenses. In Europe and the UK, AIFMD II and similar regimes set leverage caps, borrower concentration, origination and servicing standards, and disclosures that shape fund capacity and underwriting policies.
Key risks and edge cases to underwrite upfront
- AAL alignment: If the AAL and credit agreement diverge on payment language, lenders risk leakage in stress. Harmonize definitions and waterfalls.
- FO or LO control: Last-out vetoes can stall priming or DIP decisions. Buyout options help but can be hard to finance in a crunch.
- Super-senior priming: Revolver banks may tighten controls and extract fees when liquidity tightens, eroding term loan recovery.
- Liability management: Loose baskets and open-market purchase language enable priming or drop-downs. Close the holes and require majority-of-all-lenders for non pro rata moves.
- Cross-border perfection: Local filings and formalities can delay first priority. Build timeline, conditions, and holdbacks into funding.
- Cash control triggers: Define unrestricted cash and liquidity precisely to avoid disputes over springing dominion.
- Recovery realities: Direct lending recoveries can trail traditional first-lien loans when leverage is higher and collateral is lighter. Structure accordingly.
Alternatives to benchmark
- First-lien and second-lien: Cheaper in benign markets but adds intercreditor complexity and execution risk.
- First-lien and mezzanine: Often pricier all in and can introduce equity-like features. Unitranche avoids dilution.
- Term Loan B: Lower margin when markets are open, but syndication and flex cause timing and optics risk with broader disclosure.
- High yield bonds: Offer long maturities but slower execution and limited fit for mid-market deal sizes.
- ABL plus second-out term: A strong fit for asset-rich issuers, less useful for asset-light service models.
Timeline, tests, and drafting moves that save time
Plan the execution like a build-to-close project. In week 0 to 1, sponsors engage lenders and lock a term sheet with price, leverage, covenants, fees, and conditions precedent. In week 1 to 3, confirmatory diligence runs while lender counsel drafts the credit agreement and negotiates the AAL in parallel. The intercreditor with the revolver bank progresses and hedging terms are set. In week 3 to 5, documents, KYC or AML, local security, and solvency analyses finalize. Preferred closings are simultaneous. For deferred closings, fund mechanics, delayed-draw conditions, and post-close perfection must be booked and calendared.
Lenders apply predictable kill tests to protect downside. If pro forma leverage leaves less than a 30 percent cushion to the maintenance covenant under base case, expect pushback or downsizing. If run-rate addbacks exceed 20 percent of LTM EBITDA without third-party verification in a set window, size and terms will tighten. If more than 20 percent of EBITDA sits where security cannot be perfected quickly, holdbacks or reduced commitments are typical. If add-ons matter, incremental capacity and MFN protections must support them or the structure dead-ends. Finally, match triggers and cures between revolver and term debt to avoid cash-control collisions.
Drafting choices prevent future stalemates. Define EBITDA addbacks with deadlines and independent verification, cap synergies, and exceptionals. Build both dollar and ratio capacity for incremental debt and apply MFN measured tranche-by-tranche over a meaningful tenor. Lock anti-priming so no drop-downs or unrestricted subsidiary back doors occur without majority-of-all-lenders consent and tighten open-market definitions. Include first-out and last-out buyout rights with realistic pricing and timelines. Align cash dominion and covenant triggers with revolver draw conditions to prevent conflicting controls.
Portfolio role, refinancings, and restructurings
Unitranche helps sponsors remove closing risk and keep lender groups tight, which suits businesses with steady cash flows, modest capex, and contained working capital needs. Asset-heavy or seasonal businesses often pair better with an ABL plus a second-out term. Refinancings into cheaper markets occur when spreads fall, leverage declines, or ratings markets reopen. Early takeouts must clear OID and call protection economics. For add-ons, incremental capacity and MFN terms decide whether the unitranche can flex or a full takeout is required. In distress, the agent enforces a single lien; the super-senior revolver is paid or rolled under an agreed standstill; first-out and last-out sleeves follow the AAL. If a DIP is required, incumbents often seek to provide it within agreed caps to retain control.
Pricing now and what it means for windows
With base rates elevated, all-in cash yields often land in the low to mid teens. As of 31 Oct 2024, 3-month Term SOFR was 5.33 percent. OID and early call terms make the first two years the most expensive period, which shapes refinancing windows. Competition is healthy for resilient credits, but lenders are tightening EBITDA addbacks, incremental debt controls, and transfer rules. MFN protections on pari incremental debt remain standard, and snooze-you-lose allocations keep clubs decisive.
Key Takeaway
Choose unitranche when certainty, confidentiality, and simplified execution outweigh marginal spread savings. If you adopt a first-out and last-out split, keep the AAL clean, definitions aligned, and buyouts workable while keeping the borrower out of inter-lender mechanics. Model the true cost including OID, floors, and calls, align revolver and term triggers, and right-size baskets so the structure supports add-ons without forcing a premature refinance.