Sponsor Guide: Structuring Senior Stretch Loans Around Borrower Needs

Senior Stretch Loans: Structure, Pricing, and Terms

A senior stretch loan is a senior secured term loan that offers more leverage than a plain bank term loan while stopping short of unitranche or mezzanine sizing. It typically pairs with a super-senior revolving credit facility for liquidity and letters of credit. There is no blending of first and second lien risk, no agreement among lenders to share different tiers of priority, and documentation looks bank-like but with more capacity and flexibility. Pricing usually sits inside unitranche levels with a simpler intercreditor framework than a stacked structure.

Sponsors choose senior stretch to lower blended cost versus a unitranche, retain bank relationships via the revolver, and preserve options to syndicate or scale later. Direct lenders choose it to anchor core positions and fund add-ons without re-underwriting every move. Borrowers use it when they need extra turns of leverage and want straightforward covenants and modest call protection.

What Senior Stretch Is – and Is Not

Senior stretch is best understood as a first lien term loan that extends beyond typical bank leverage, yet does not morph into a blended product like unitranche loans. The revolver sits super-senior for working capital and letters of credit, while the stretch term loan funds at close and can add delayed draw capacity for acquisitions. There is no unitranche-style sharing of collateral proceeds and no mezzanine-style equity kickers.

Common variants include a stretch term loan plus a super-senior cash-flow RCF, a stretch term loan with a delayed draw term loan for acquisitions, or a split-collateral deal in which an ABL lender sits first on working capital while the stretch lender holds first on non-working capital assets. If the business needs higher leverage or looser flexibility than senior stretch supports, the next stop is a full unitranche loans solution or a senior-plus-second lien loans mix.

Why Sponsors and Lenders Pick Senior Stretch

Sponsors often want cost control with scalability, and senior stretch slots in that gap. The RCF preserves bank relationships and liquidity coverage, the term loan delivers incremental capacity, and the optional DDTL funds acquisitions without a full-blown refi. Direct lenders like the control, speed, and ability to support add-ons from a lead seat. Borrowers gain covenant simplicity, modest call protection, and a lower all-in cost than a unitranche while keeping optionality to syndicate or upsize.

Core Mechanics You Must Get Right

Capital stack: A super-senior RCF sits at the top for liquidity and LCs, the senior stretch term loan funds at close, and optional DDTLs support acquisitions or capex. An accordion provides incremental capacity with most-favored-nation protection.
Cash flow and priority: Collateral proceeds first pay RCF and hedging, then the stretch term loan, then junior debt. Asset sale and insurance proceeds sweep after agreed reinvestment periods and thresholds. Soft call protection often applies to voluntary prepayments and refinancings.
Collateral and guarantees: Security is all-assets with practical carve-outs. In the US, that means UCC filings and real estate mortgages; in Europe, expect debentures, share pledges, and local law security. Cash control may tighten via account control agreements or blocked accounts where appropriate.

Regional Legal Blueprints

US structures that reduce friction

US borrowers typically sit at AcquisitionCo or OpCo, often a Delaware C-corp or LLC, with guarantees from material domestic subsidiaries and limited foreign coverage. Security is granted under UCC Article 9, with mortgages where material. New York law governs most agreements, and an LSTA-style first-lien intercreditor governs dynamics between the RCF and the term loan.

UK and Europe structures that travel well

UK and European deals often use an English or Luxembourg BidCo with guarantees subject to financial assistance and corporate benefit constraints. An English law debenture grants fixed and floating charges, plus share pledges and bank account charges. Local law security in Germany, France, Spain, and Italy is routine. English law often governs, and LMA-style super-senior intercreditor arrangements are standard.

Pricing, Fees, and All-in Cost

Base rates reference SOFR in the US and SONIA or EURIBOR in Europe. Margins typically land between bank first-lien and unitranche spreads, and sponsors test both bank and private credit markets to set clearing levels. All-in cost reflects margin plus a fee stack that can move effective yield meaningfully.

Margin and floors: Pricing is margin over a base rate with a floor, often material in lower-rate regimes.
Upfront economics: Upfront fees or OID commonly range from 1% to 3% across 2023-2024 vintages.
DDTL and RCF fees: Ticking fees on undrawn DDTLs often run 50%-100% of the margin after a short grace period; RCF unused fees land around 25-50 bps.
Call protection: A soft call is frequent, often 1% for 6-12 months on voluntary prepayments or repricings to tighter terms. For deeper math, see call protection and OID.
Agency and admin: Expect administrative agent and collateral administration fees.

Consider an illustration: a 400 million dollar stretch at SOFR 3M plus 475 bps with a 50 bps floor, 2% OID, and a 1% soft call for six months. At a 5.30% SOFR, the cash coupon is about 10.05%. OID adds around 50-60 bps to effective yield over a 4-5 year life. A prepayment inside six months would cost 4 million dollars.

Documentation levers also move economics. ESG margin ratchets of 5-15 bps tied to credible KPIs can smooth the path to a lower all-in. MFN protections on incremental debt often sunset in 12-24 months with 50-100 bps caps, and sponsors negotiate scope and carve-outs for acquisition-related debt.

Covenants and Incremental Capacity

Maintenance covenants often spring when the RCF is drawn above a threshold or liquidity dips below a set level. Incurrence covenants govern additional debt, liens, investments, restricted payments, and asset sales. Clean definitions and objective tests avoid disputes.

EBITDA definitions: Cost savings and synergy addbacks can be included if realized within 18-24 months and subject to dollar or percentage caps. A board-approved plan, tracking, and auditor alignment are essential.
Incrementals: Facilities typically combine fixed-dollar free-and-clear baskets with ratio-based capacity, allow reclassification when leverage improves, and use grower baskets tied to EBITDA or total assets. MFN applies, with carve-outs for amortizing DDTLs, local debt, or short-dated acquisition tranches.
Intercreditor with RCF: Payment waterfalls prioritize the RCF during enforcement or payment defaults, with negotiated standstills and step-in rights. Hedging is super-senior only if secured on the same collateral. For a deeper dive, see intercreditor agreements.

Accounting, Reporting, and Tax Fundamentals

Accounting follows amortized cost models under US GAAP and IFRS, with OID and fees folded into effective interest rates. Disclosure should match covenant design and liquidity runway.

US GAAP: Under ASC 470, record at amortized cost net of OID and fees and apply the effective interest method. Evaluate classification when covenants include subjective acceleration triggers, and use ASC 470-50 for modification vs extinguishment assessments.
IFRS 9: Classify at amortized cost if cash flows are solely payments of principal and interest and the business model is hold-to-collect. Fold fees and OID into the effective interest rate and monitor reclassification and disclosures if acceleration triggers arise.
Disclosure: Report maturities, interest sensitivity, liquidity risk, covenant status, and fair value. Keep MD&A aligned with incremental capacity and available liquidity. Support addbacks with policy and evidence.
Tax basics: Model Section 163(j) limits in the US and CIR in the UK. Use portfolio interest exemption where possible and ensure treaty relief where applicable in Europe. Calibrate transfer pricing for management and guarantee fees, and use debt pushdown carefully to respect corporate benefit and thin cap rules. Gross-up clauses typically allocate withholding risk to the borrower.

Compliance and Regulatory Watchouts

Direct lending remains a regulated activity in some jurisdictions, so assignment, licensing, and servicing paths must be confirmed early. US borrowers must also handle new transparency rules.

Lender licensing: Germany’s KWG and regimes in Italy and Spain can restrict direct lending without a license. Plan assignments and sub-participations with local counsel.
Corporate Transparency Act: US borrowers must file beneficial ownership information and keep it current. Expect lenders to tie KYC to these records.
Sanctions, AML, and AIFMD: Confirm compliance across the borrower group and acquisition targets. For ESG-linked features, use measurable KPIs with third-party verification.

Tailoring the Facility to the Business

Customization drives fit and avoids day-two issues. Align structure with seasonality, revenue quality, capex intensity, and cross-border needs.

Add-on programs: Size DDTLs to a realistic pipeline and use acquisition baskets linked to EBITDA. Require pro forma leverage and minimum liquidity post-close.
Seasonal businesses: Scale the RCF, spring tests off availability or liquidity, and trigger cash dominion only under stress, not routine seasonal use.
Software and ARR: Use ARR-based covenants and conversion ratios, perfect IP and key contracts, and tie incremental capacity to retention KPIs while capping growth addbacks.
Capex-heavy profiles: Pair with a capex DDTL that funds against milestones, supports sale-leasebacks, and introduces leverage step-downs as assets turn on cash flow.
Cross-border groups: Adopt multi-borrower, multi-currency structures with local guarantees and security. Optimize withholding via treaty lenders and design sweeps to minimize trapped cash.
Carve-outs and separations: Build broad baskets for TSA obligations, allow delayed perfection for migrating assets, and document a migration plan with clear CPs and sunsets.

Governance, Risks, and Practical Safeguards

Senior stretch can stumble on optimistic EBITDA, tight liquidity, or collateral leakage. The best protection is disciplined documentation and operational testing.

EBITDA optimism: Cap addbacks, set time limits, and require supportable plans approved by the board and aligned with auditors.
Liquidity tightness: Avoid traps from over-advances or ABL reserves by using liquidity-based incurrence tests and practical grace periods.
Collateral migration: Prevent leakage to unrestricted subsidiaries with hard caps and fair market value tests, and align lien and investment baskets.
Agent coordination: Multiple agents raise coordination risk. Clarify enforcement triggers, standstills, release mechanics, and step-in rights. Test account control agreements operationally.

A simple rule of thumb: if the structure depends on aggressive addbacks or short-dated reinvestment mechanics to pass covenants, leverage is likely too high for senior stretch.

Alternatives and When They Fit

Senior stretch competes with several tools. The right choice balances speed, leverage, flexibility, and cost.

Unitranche: One counterparty, faster process, and broader flexibility at higher pricing and heavier call protection. Good when speed and maximum leverage outweigh cost.
Senior plus second lien: Potentially lower blended cost than a unitranche if the second lien prices well, but with a thicker intercreditor and more documentation.
HoldCo PIK: Leaves OpCo flexibility intact and avoids intercreditor friction, but is pricier and structurally subordinated. Useful for minority buys or shareholder returns when OpCo headroom is tight.
BSL TLB or secured bonds: Cheaper in hot windows but slower and market-dependent. Senior stretch offers bilateral certainty at a modest premium with greater documentation control.
ABL plus FILO/FOLO: Attractive for asset-heavy borrowers. Senior stretch can fund non-working capital assets and M&A alongside the ABL.

For deeper background on peers, see second lien loans, HoldCo PIK notes, and mezzanine debt. If you want a European angle on this product specifically, see senior stretch facilities and senior stretch loans.

Execution Timeline and Owners

A credible mandate-to-fund timeline is four to eight weeks when diligence is current. Clear ownership of tasks keeps the close on track.

Week 0-1: Pick lenders, agree term sheet and exclusivity, kick off diligence, and staff counsel and model owners.
Week 1-3: Negotiate headline credit agreement terms, intercreditor term sheet, and fee letter; start security and corporate approvals; order lien searches; and prepare perfection certificates.
Week 3-5: Finalize documents, complete KYC and sanctions, negotiate CPs, and line up landlord waivers, IP filings, and foreign security steps.
Week 5-8: Satisfy CPs, execute, fund, and finish any post-closing perfection within set windows.

The critical path commonly runs through intercreditor alignment with the RCF agent, local security formalities, KYC for new holding companies, and audited financials. Owners include sponsor treasury, sponsor counsel, lender counsel, the administrative agent, local counsel, and auditors for solvency support.

Kill Tests, Pitfalls, and a Deal Checklist

Four quick kill tests before you commit

Coverage squeeze: A base case below 1.5x fixed charge coverage. Scale back or consider a unitranche.
Weak guarantees: Guarantor coverage below 80% of EBITDA with no path to improve. Expect pricing or documentation pressure.
Enforcement drag: Value concentrated in slow-enforcement jurisdictions without workable security. Adjust structure or step back.
Covenant mismatch: Lender will not underwrite the recurring revenue covenants the business needs. Match lender to the asset.

Negotiation pitfalls that raise cost later

Uncapped addbacks: Vague EBITDA adjustments invite disputes. Use hard caps and clear standards.
Leaky MFN: Early sunsets and broad carve-outs undermine pricing discipline on incrementals.
Loose incrementals: No leverage gates or missing guarantor and collateral parity creates backdoor repricings.
Ambiguous intercreditor: Unclear enforcement control or release mechanics slow recoveries.
Hair-trigger cash control: Dominion that trips in the ordinary course will disrupt operations.

Practical checklist that improves outcomes

Use of proceeds: Map sources and uses; size DDTLs and builder baskets to a realistic pipeline; and set DDTL expiry dates to limit negative carry.
Protect operations: Add equity cures for maintenance tests and liquidity cures for springing covenants, plus workable reinvestment rights.
Refinancing flexibility: Keep the soft call shallow and short; include portability and yank-a-bank rights.
Add-on friendly: Draft acquisition baskets that work across jurisdictions with accessible tests and reasonable diligence conditions.
Leakage control: Align investments, restricted payments, and junior prepayments with leverage-based conditions and liquidity floors.

Market Calibration Through 2024

All-in private credit yields stayed elevated in 2024 as base rates remained high. Unitranche loans often priced in the low teens all-in, while senior stretch typically cleared several hundred basis points inside that, depending on structure and lender mix. Banks still favored super-senior RCFs with low undrawn fees and strong control rights, while private credit funds offered first-out or RCF solutions where banks pulled back, usually paired with tighter cash controls. Covenant discipline improved for cyclicals and smaller platforms; larger sponsor-backed credits still secured broader flexibility, often trading fees and call terms rather than headline margin.

Key Takeaway

Start with cash conversion, seasonality, and the acquisition plan. Build a stack with a super-senior liquidity tool and a senior stretch that funds growth and scales. Keep documentation clean: strong security and guarantees, crisp enforcement and cash control, disciplined economics, and covenants that match the operating model. Run tax, regulatory, and accounting work in parallel and use the intercreditor to align the RCF and term loan. Preserve options with expandable capacity, short soft call, and replacement rights. Executed well, senior stretch gives sponsors certainty and capacity at a solid price and gives lenders the protections and visibility they need to stay long.