International Top 30 position: 4

The impending arrival of the unitranche loan

North American lenders find themselves in a borrowers’ market where there is fierce competition for every quality middle-market financing out there. Historically, lenders have tried to differentiate themselves from their competition by offering aggressive pricing, reduced banking fees and flexible covenant packages. Now, US and European lenders have gone one step further and are marketing a new loan structure called the ‘unitranche loan’.

A unitranche loan is a lending facility where a single lender offers the borrower a senior and a subordinated tranche of debt and blends them into a single loan. Accordingly, rather than one lender providing a senior debt tranche and a second lender providing a separate subordinated debt tranche, one lender provides the borrower with one single tranche of debt comprised of both senior and subordinated debt. The pricing of a unitranche loan reflects the unification of the senior/subordinate structure, and is priced somewhere along the continuum between senior debt and subordinated debt.

Because a typical financing involves two separate tranches of debt (senior and subordinated), the borrower’s assets are typically subject to a first ranking charge in favour of the senior lender and a second ranking charge in favour of the subordinated lender.  Each tranche of debt would require (i) a separate credit agreement; (ii) separate pricing and fees; (iii) a separate security package; (iv) a unique covenant package, and each lender’s rights would be governed by a heavily negotiated ‘inter-creditor agreement’. Comparatively, a unitranche loan requires only one credit agreement, one set of security documents and negotiation with one lender. The reduced complexity of a unitranche loan often results in reduced legal fees, quicker closing times and increased certainty of closing; all features which are extremely important to today’s borrower…

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