A unitranche loan is a single secured term loan that feels like one facility to the borrower but privately splits into senior and junior sleeves for the lenders under an agreement among lenders, or AAL. The AAL sets who gets paid first, who votes, and who controls enforcement, effectively creating a first-out and last-out stack behind one set of borrower-facing documents. Think one set of payments and covenants for the company, and two pockets with different rights behind the curtain for lenders.
Why sponsors and lenders choose unitranche
Sponsors choose unitranche when they want speed, one negotiating counterparty, and tight confidentiality. Direct lenders favor it because they can tailor covenants and control outcomes more than in a broadly syndicated term loan B. Banks often sit on top with a super senior revolving credit facility for working capital, leaving the term risk to private credit providers. The result is faster signing and funding on timing, tighter covenant control on risk, a single voice to management on optics, and a known path to close on certainty.
Where unitranche wins in practice
Private credit has grown to well over a trillion dollars, and unitranche loans dominate mid-market buyouts in the US and are spreading across Europe. The structure tends to win when sponsors prize execution certainty over the lowest margin and want to keep the capital stack compact. In quieter markets or very large tickets, syndicated loans can still win on pricing and depth. For regional nuance, sponsors often prefer unitranche for mid-market buyouts in Europe, while term loan B can outperform on scale in hot US markets, making US vs Europe unitranche terms a key consideration.
Core building blocks you must get right
Legal form and guarantees
In the US, the borrower is usually a Delaware operating entity with guarantees from material domestic subsidiaries and security over substantially all assets. In Europe, borrower and security hubs often sit in the UK, Luxembourg, or the Netherlands, with local-law security where assets sit. Guarantees run upstream, downstream, and cross-stream, subject to fraudulent conveyance, financial assistance, and corporate benefit rules. Europe may require whitewash procedures, which extends diligence and adds cost.
Governing law and security package
Credit agreements usually follow New York law in the US and English law in Europe. Security follows the law of the asset. Expect UCC filings, share pledges, account control agreements, IP filings, and real estate mortgages as needed. The closing checklist drives funding readiness, so build time for lien searches, local counsel, and any real estate filings that can lag.
Super senior RCF at the top of the stack
Many deals add a bank revolver for working capital with first priority on current assets. A separate intercreditor ranks the RCF ahead for collections and sets standstill and turnover rules. This creates cheaper liquidity but adds more parties to coordinate and more documents to align before closing.
Mechanics and the payment waterfall
The borrower funds the acquisition, refinances target debt, pays fees, and may keep cash on the balance sheet. Delayed-draw term loans support add-ons and capex, subject to milestones. The first-out and last-out split is not visible to the borrower and is handled by the AAL.
Under a typical AAL waterfall after enforcement:
- FO priority: First-out receives principal, interest, and fees first from collateral proceeds.
- LO next: Last-out gets paid after the FO is current and satisfied.
- Subordinated items: Default interest and other contractually subordinated items follow.
Outside enforcement, scheduled and voluntary payments are often pro rata, while call protection and prepayment terms allocate according to the AAL. This setup delivers predictable recovery profiles for lenders and a clean interaction model for borrowers.
Covenants and controls that matter most
- Cash dominion: Lenders take control of accounts when leverage or liquidity falls below thresholds, or on default. Account control agreements must cover all material accounts to shorten time-to-cash in a downturn.
- Financial maintenance: Where an RCF exists, the sole maintenance test is often a springing first-lien leverage covenant tied to revolver usage or liquidity. Without an RCF, expect a lighter maintenance covenant serving as an early warning system.
- Incremental capacity: Provide a starter basket plus ratio-based incremental debt, protected by most-favored-nation pricing for 12-24 months and tight restricted junior debt rules. This supports growth while protecting the senior sleeve.
- Restricted payments and investments: Use an available amount mechanism sized off retained excess cash flow with leverage tests and caps. Limit leakage to unrestricted subsidiaries to preserve collateral.
- Transfers and disqualified lenders: Disqualify competitors and adverse-credit strategies, and keep FO placements concentrated to preserve enforcement discipline in a workout.
Engineering the FO-LO split and AAL
Set the FO share to match the desired blended rate and recovery profile. A larger FO reduces the blended margin but raises senior exposure. A smaller FO increases coupon and junior exposure. Draft standstills, step-in rights, and buy-out mechanics with precision, and align definitions across the AAL and the credit agreement, including acceleration, enforcement action, and remedies. Tight drafting reduces disputes under stress and clarifies who acts first when problems hit.
Voting, consents, and control
Borrower-facing amendments typically require a majority in interest of all unitranche lenders, with sacred rights requiring each affected lender. Inside the AAL, FO usually controls enforcement for a defined period. LO can step in if FO stands still or a timeout hits. Material outcomes like 363 sales, credit bids, and debt-for-equity swaps often require both FO and LO consent, with a built-in deadlock breaker. This balance keeps options open while preventing hasty value destruction.
Economics and fees the borrower will see
Borrowers see a floating base rate plus a blend of the FO and LO margins, with original issue discount and call protection. Typical economics include:
- Base rate: Term SOFR or local equivalents with a floor and standard conventions.
- Margin: A blended rate to the borrower, split internally by the AAL.
- OID and upfront fees: OID reduces funded proceeds and accretes to yield; upfront fees are paid in cash.
- Ticking and unused fees: Apply between signing and close and on undrawn delayed-draw capacity.
- Call protection: Make-whole or non-call in year one, then step-down premia, plus a soft-call on repricing.
- Exit and ECF: Some lenders add back-end exit fees; excess cash flow sweeps step down with leverage.
Example: a 600 million unitranche with FO of 240 million at SOFR + 5.0 percent and LO of 360 million at SOFR + 9.0 percent produces a blended SOFR + 7.3 percent, plus 2.0 percent OID and a 1 percent year-one prepay premium. With SOFR at 5.0 percent, day-one cash coupon is 12.3 percent, with OID yield recognized over time. For more on repricing mechanics, see Call Protection and OID in Private Lending.
Accounting, tax, and reporting touchpoints
- Borrower accounting: Under US GAAP, book at amortized cost net of OID using effective interest. Modification accounting applies to amend-and-extend and add-ons. PIK capitalizes to principal. Disclosures cover maturities, rates, fair value, and covenants. Under IFRS, amortized cost applies if SPPI holds. Features like PIK toggles and make-wholes can push to fair value through profit or loss.
- Lender accounting: Investment companies mark to fair value quarterly with committee oversight. Banks on amortized cost apply expected credit loss models. Independent valuation agents and back-testing improve marks and governance.
- Tax considerations: Withholding on cross-border interest, OID accrual, interest deductibility caps like section 163(j) and ATAD, and anti-hybrid rules can be material. Solve with gross-up clauses, portfolio interest or treaty routes, and clear increased-costs language to avoid cash flow surprises.
Layering a super senior RCF the right way
Adding an ABL or cash-flow RCF can reduce revolver pricing and sharpen liquidity discipline. Set clear collateral splits: ABL takes first priority on current assets, unitranche takes first on non-current, with mutual second liens. Cash dominion periods sweep collections to the RCF, then turn over to the term agent once caps hit. Standstills should run both ways with practical exceptions for perishables and going concern needs. To align these mechanics, ensure the intercreditor framework is drafted and tested with base and downside cases.
Common failure modes and fixes
- AAL ambiguity: Vague standstills or misaligned definitions lead to enforcement paralysis. Fix by matching terms across documents and defining triggers, timelines, and remedies.
- Priming and uptiering: Loose investment and transfer baskets enable drop-downs and non-pro rata exchanges. Fix with robust sacred rights, anti-subordination language, and limits on unrestricted subsidiaries.
- EBITDA inflation: Uncapped add-backs and long-dated synergies distort leverage and baskets. Fix with ceilings, timelines, and independent validation.
- Incremental creep: Starter baskets plus ratio debt can erode seniority. Fix with real dollar caps, strong MFN, and true-ups on portability and acquisitions.
- Cash control gaps: Missing account control agreements or broad carve-outs delay dominion. Fix by auditing ACA coverage and closing gaps pre-funding.
- Collateral leakage: Foreign subsidiaries and IP left outside security reduce recovery. Fix with share pledges, local security where feasible, or tight negative pledges with springing liens.
- RCF misalignment: Turnover caps and borrowing base rules can trap cash. Fix by modeling both base and downside scenarios to align intercreditor mechanics.
Timeline and roles from term sheet to funding
- Weeks 0-1: Lock the term sheet, including leverage, pricing, call protection, covenant framework, baskets, FO-LO parameters, and whether an RCF is needed. Kick off diligence lists to set the deal box.
- Weeks 1-3: Draft the credit agreement, security, AAL, intercreditor, and fee letters. Start lien searches, engage foreign counsel, and plan tax. Surface blockers early.
- Weeks 2-4: Run business diligence on quality of earnings, customer concentration, cohort health, working capital seasonality, capex, and regulatory exposure. Map account control and landlord waivers.
- Weeks 3-6: Negotiate covenants, AAL standstills and buy-outs, intercreditor caps and turnover. Draft solvency and perfection certificates.
- Weeks 4-7: Drive closing readiness. Execute ACAs, file UCCs, sign foreign security, complete opinions, sanctions and BOI checks, and set hedging.
- Weeks 6-10: Fund, then complete post-close filings, mortgages, and IP registrations. Implement reporting cadence and covenant testing.
Pre-signing tests and walk-away screens
- Enforcement math: Run a going-concern sale, a credit bid, and a liquidation through the waterfall. Confirm FO recovery and LO break-even under realistic timing.
- Cash control: Test dominion triggers against monthly models and verify ACA coverage on all material accounts. Avoid stragglers.
- Incremental and MFN: Model add-ons and repricings. Ensure no path exists to layer seniority through sidecars or equivalents.
- Tax and withholding: Validate gross-up coverage, treaty or portfolio interest eligibility, and deductibility headroom. Map hybrid risks.
- Intercompany flows: Ensure upstream guarantees and security work with the cash map and arm’s-length transfer pricing.
- Jurisdictional drag: If 30 percent or more of EBITDA sits in slow enforcement jurisdictions and alternatives are not workable, reduce leverage or reset terms.
- Cash conversion: If EBITDA-to-cash conversion sits under 60 percent due to capex and working capital, gate DDTLs to milestones or resize.
- Customer concentration: If top customers drive over 50 percent of revenue and contracts lack assignability and termination protections, tighten covenants and dominion.
- Reporting capability: If the company cannot deliver monthly closes and 13-week cash flows within 20 days, make an upgrade plan a closing condition.
Governance, information rights, and the workout playbook
Board observers are rare but strong inspection and access rights are common: monthly financials, KPI dashboards, covenant certificates, litigation updates, and budget-to-actuals. FO holders may get tighter liquidity reporting near dominion triggers. Pre-wire a default playbook that includes deposit account control, CFO replacement triggers, CRO engagement rights, a 363-style timetable, and credit bid rights. In cross-border groups, plan to enforce equity at the top company and use asset-level steps locally. This prep speeds decisions when time is expensive.
Practical drafting checkpoints that pay for themselves
- Sacred rights: Use one list that blocks priming, subordination, and collateral release without each affected lender.
- J. Crew protections: Limit transfers and IP licensing to unrestricted subsidiaries. Use most-valuable-asset tests and cash sweeps on leakage.
- EBITDA and CNI clarity: Cap add-backs with timeframes. Align non-cash charges, extraordinary items, and pro forma rules to avoid double counting.
- MFN scope: Cover incremental equivalents, sidecars, and reopeners with a reasonable sunset and cushion.
- Equity cures: Allow cures with frequency limits and clear cash application rules.
Where unitranche fits vs alternatives
- Versus senior-mezzanine: Unitranche wins on speed, single document, and lower blended cost at similar leverage. Senior-mezz can suit holdco PIK needs with lighter operating covenants.
- Versus syndicated TLB: Unitranche wins when confidentiality and speed matter. TLB wins on price and scale in favorable markets. Flex and ratings add timing risk to TLB execution. For a broader market context, see Direct Lending in Private Credit.
- With or without super senior RCF: An RCF reduces revolver cost and tightens liquidity discipline but adds intercreditor complexity. All-in-one simplifies parties but can force the term loan to absorb working capital behavior.
Records and closeout hygiene
Archive all executed documents and versions, approval trails, diligence Q&A, user access lists, and full audit logs in a controlled repository. Hash key files and store checksums with the index. Set a retention schedule aligned to credit policy and investor reporting. When the loan is repaid, instruct vendors to delete data and provide a destruction certificate. Legal holds always override deletion.
Conclusion
A unitranche works when the borrower sees one facility and the lenders privately settle seniority and control under a sharp AAL. Strong structures come from crisp definitions, enforceable collateral, aligned intercreditor mechanics, disciplined leakage controls, and a pre-agreed workout path. Sponsors buy speed and certainty, and lenders accept a blended yield in exchange for control. Do the math up front, model the waterfall under stress, verify cash control, and wire the playbook before funding. The value is in the drafting and in sticking to it when the wind shifts.