Within secured debt, there is the first lien debt, which is the highest-ranking debt. Falling yields and larger deals have wreaked vast changes on the structure of unitranche loans and put intense pressure on joint ventures set up by lenders to win business in that niche market. Unitranche facilities did not generally provide the same leverage as bifurcated structures when they were available. Unitranche loans are mainly used by middle market borrowers with sales under $500million and an annual EBIDTA of $50million or less. As with other deal terms, market standards and terms in intercreditor arrangements change over time and circumstances. When funds entered the high yield debt market, in addition to their regular equity business, they developed the unitranche financing concept in order to open up new profit opportunities and to provide an instrument to diversify risks. sells the first-lien portion of a unitranche loan to other lenders and retains the last-out piece, the retained portion is actually a riskier junior loan. As lenders look for new opportunities, the possibility of structuring loans with different price points and different attributes as a "unitranche" has captured the attention of lenders. Direct Lending Our Direct Lending strategy invests in directly originated first and second lien secured loans, including unitranche investments. Although, the bifurcated loan is presented as a single facility, the loan is split into first-out (FO) and last-out (LO) pieces, and is divided among at least two or more lenders investing in the tranche. Liens recorded first are generally addressed (i.e. There was a point where unitranche loans seemed to replace the first lien-second lien deal structure. Borrowers do not experience delays since loan due diligence does not involve different credit facilities. the first lien lenders to make an election of rem-edies within the prescribed time period or forfeit the right to take remedial action in the future. Unitranche loans are a blend of subordinated and senior and is typically represented as a bifurcated unitranche with first-out and last-out loan pieces. Unitranche loans have maturities of five to six years and interest is paid quarterly. At first, unitranches were solely granted with high interest margins and, due to operational requirements of debt funds, only as term loans. Today Refinitiv LPC data shows all-senior midcap leverage for private sponsored club deals has risen to 4.2x. EBITDA focuses on the operating decisions of a business because it looks at the business’ profitability from core operations before the impact of capital structure. The unitranche loan facility is used largely in middle market lending transactions and differs from first/second lien facilities and senior/mezz facilities as it is provided under a single credit agreement, has a single set of security documents, and is administered by a single agent for the lenders.. First Lien paid in full first from the proceeds of the collateral. Unitranche financing is a hybrid loan structure that blends subordinated and senior debt to form a single debt instrument. A trigger event can include a bankruptcy event of default, acceleration or violation of a maximum FO leverage ratio. There could be ambiguity associated with enforcing subordination provisions. In our core junior debt fund, we can hold investments of up to US$170m. As a technical matter, the loan is divided into distinct first and second lien components, with the first lien component having lien priority over the second lien component in the same way as in a traditional first lien-second lien financing. Another risk that unitranche borrowers face is the threshold issue related to unitranche loans in bankruptcy. The first-lien lenders may be entirely shut of the voting on the issue of enforcement if these lenders hold only a minority portion of the unitranche loan and the AAL does not alter the majority voting requirement of the unitranche loan agreement by requiring the vote of a majority of both the first-out and last-out tranches. The most prevalent intercreditor arrangements are first lien/second lien, split collateral, senior/mezzanine, and unitranche. A prepayment fee of 1-2% of the total unitranche facility is not uncommon. Debt amortizes over time compared to first/second lien or senior/mezzanine debt, where the first lien or senior debt amortizes but the junior debt does not amortize. Pledged assets are usually transferred to the lender from the borrower to secure the debt. An AAL takes the place of the intercreditor agree-ment used in a traditional senior/junior or first lien/ second lien debt structure. Unitranche lenders and borrowers need to gain more insight into bankruptcy-related issues and provisions. Borrowers may have challenges amending the loan agreement or waiving covenants as the lender’s rights and identity are hidden. The loan is divided into distinct first and second lien components, with the first lien component having lien priority over the second lien component in the same way as in a traditional first lien-second lien financing. Whereas a unitranche requires incremental borrowings to be made at the average cost of debt, a bifurcated structure that makes optimal use of incremental baskets can finance incremental borrowings at the cost of first lien debt. Either could suit an investor’s risk appe - tite, but understanding the hold position Unitranche has established itself as a viable product but some careful questions about Typically, unitranche lenders will look for non-call / early prepayment protections for at least the first 12 to 24 months of the facility’s life, although the length of the non-call period and the prepayment fees are strongly negotiated and vary across the market. First 'Lien' Lenders and First 'Out' Lenders: The Meaning of 'Unitranche' December 2, 2012 As lenders look for new opportunities, the possibility of structuring loans with different price points and different attributes as a "unitranche" has captured the attention of lenders. Borrowers can benefit from the simple amortization requirements during the initial years of the term of the loan. Unlike a first lien and second lien facility, the unitranche facility is provided under a single credit agreement, with … Senior Stretch Loan: A specific type of loan to a business entity, which possesses certain characteristics of both asset-based loans and cash-flow loans. Preferred Equity. First Out, Last Out waterfall upon a triggering event (but However, such loans hardly make a difference from the borrower’s perspective since unitranche … Viktor, a 22-pound cat of uncertain breed, was smuggled aboard Aeroflot in Latvia heading to Vladivostok – an eight-hour trip. What they are . The amortization enables the borrower to have the flexibility to make the payment on the debt or refinance the debt. Unitranche financing is a hybrid loan structure that blends subordinated and senior debt to form a single debt instrument. 1st/2nd lien financing. We have provided over $1.8B in commitments to 133 companies for acquisitions, recapitalizations, refinancings, expansion projects and other growth capital needs. Within secured debt, there is the first lien debt, which is the highest-ranking debt. first-lien/second-lien, senior/subordinated or secured/unsecured) debt structure for highly leveraged companies. In certain instances, we also make subordinated debt investments, which may include an associated equity component such as warrants, preferred stock or other similar securities and direct equity co-investments. Whereas a unitranche requires incremental borrowings to be made at the average cost of debt, a bifurcated structure that makes optimal use of incremental baskets can finance incremental borrowings at the cost of first lien debt. [4] Pitchbook, Unitranche deals: What you need to know about agreements among lenders, (Oct 15, 2015), https://pitchbook.com/news/articles/unitranche-deals-what-you-need-to-know-about-agreements-among-lenders. Unitranche will have at least 2 covenants , often 3+ depending on how storied the credit (1) Leverage (w/ heavy step-downs - For Exmaple - Manitex - Total Lev: 5.00x at closing, step-downs to 2.85x, for total step-downs of 2.35x turns of lev), (2) FCCR, and often more (3) Secured Lev, Liquidity, etc.) The firm is owned by its management team and is currently investing its most recently established fund, Penfund Capital Fund VI. Although, unitranche loans provide higher yields than traditional senior debt, they add incremental risk to the portfolio. Super senior vs unitranche points will be of peripheral concern to the sponsor / borrower (the customer of both the super senior lender and the unitranche lender) but may cause execution risk, especially in a competitive auction scenario. Unitranche financing is a hybrid loan structure that combines senior debt and subordinated debt into one amount bearing a blended interest rate that would usually fall between the rate for the two types of debt. All these levels are the highest since the Great Recession… Similarly, first-lien leverage (with second lien) is up to 4.5x. Europeans need to properly adjust the US product to fit within the legal and market framework of Europe.3. payment subordinated or first and second lien loan transaction . A unitranche loan, as the name implies, is one tranche of debt that can replace the traditional two tiered (i.e. Structure of unitranche financings. [3], In the payment waterfall, the FO and LO debts are generally paid pari passu. There are, however, other considerations when looking holistically at both alternatives. Second Lien Use and application Market trends / recent deals Documenting the 2nd Lien - composite or separate facility agreement “Typical” terms, leverage, pricing and call protection Pros and cons of 2L vs unitranche, high yield bonds Other tools for achieving the target IRR PIK (PIYC, PIYW, Toggles) Ares led the first 10-figure unitranche deal in 2016, a US$1.08bn unitranche to Qlik, which was an anomaly until last year. The main beneficiaries of unitranche debt are middle-market corporate borrowers with sales of less than $100 million and an EBITDAEBITDAEBITDA or Earnings Before Interest, Tax, Depreciation, Amortization is a company's profits before any of these net deductions are made. Is this still the case? Unitranche loans combine what would otherwise be separate first and second lien facilities into a single secured loan facility. In the sub $40 million EBITDA market where covenants still exist, unitranche products are a competitive offering to a first lien-second lien tranche and we see sponsors/issuers making their decision based on a number of factors, including leverage (oftentimes a first lien-second deal can get higher leverage than a uni- tranche), interest in the second lien tranche (can be harder to place this debt), and the need for … First-lien yields on loans with a total size of $200 million or less averaged 6.3% in the first quarter on volume of $2.95 billion, according to LCD’s pool of data. Finding the Line: Senior Stretch vs. Unitranche (First of Two Parts) On a fourteen-hour flight from Seoul, we sat next to the head of a very successful private credit shop. Covenant ‘lite’ status is one of the main drawcards of the TLB product. In certain instances, we also make subordinated debt investments, which may include an associated equity component such as warrants, preferred stock or other similar securities and direct equity co-investments. Unitranches became feasible options for larger borrowers and started to offer leverage comparable to bifurcated structures. Additionally, unitranche products are diversified to reflect first-lien/second-lien, senior/mezzanine, hybrids, upside-down intercreditor or split collateral. Historically there was relatively little capital devoted to unitranche lending and as a result unitranche facilities larger than a few hundred million dollars in size were not readily available. The first-lien lenders may be entirely shut of the voting on the issue of enforcement if these lenders hold only a minority portion of the unitranche loan and the AAL does not alter the majority voting requirement of the unitranche loan agreement by requiring the vote of a majority of both the first-out and last-out tranches. Or more precisely, the passenger’s owner was penalized. [5] Geoffrey R. Peck &Todd M. Goren, Morrison & Foerster LLP, Developments in Unitranche Financing (2016), THOMSON REUTERS, https://media2.mofo.com/documents/160800unitranchefinancing.pdf. The Agreement Among Lenders (AAL) regulates unitranche transactions, focuses on the allocation of interest and principal, and enforce intercreditor rights and duties.1, The two types of unitranche loans are the straight and bifurcated unitranches. Back in 2013 single-tranche debt was 4.9x; today it stands at 5.3x. The most prevalent intercreditor arrangements are first lien/second lien, split collateral, senior/mezzanine, and unitranche. During a seizure or foreclosure of the property, the proceeds of the sale are distributed to the creditors. The single credit agreement offers for a single tranche of term loans and enables the borrower to pay a single interest rate to lenders. Back in the early 2000’s when middle market first-lien (in a mezz or second-lien structure) was 3-ish times debt-to-ebitda, you could “stretch” a senior-only financing to 3.5x, maybe 4.0x. Mechanics lien vs tax lien: Who has priority? The firm provides first lien term loans, unitranche term loans and equity co-investments to predominantly lower middle-market companies in North America. Typically, unitranche lenders will look for non-call / early prepayment protections for at least the first 12 to 24 months of the facility’s life, although the length of the non-call period and the prepayment fees are strongly negotiated and vary across the market. The commentary and comparisons in this article are based on observations from typical transactions over the past couple of years. In some of those deals, the impact of those provisions on the first lien lenders was mitigated by provid-ing that an affirmative decision by the first lien lenders not to exercise remedies constitutes the required election of remedies. What are Delaware Statutory Trust Investments? Each first priority lien creditor is paid first out of its own priority collateral, and the respective priority debt may be subject to a cap. One disadvantage for borrowers is that unitranche facilities typically do not include revolving credit , and borrowers using a unitranche product, therefore, often need a separate cash flow or asset based revolver to provide working capital. For those unfamiliar with this increasingly popular structure, here is our summary. While the unitranche has advantages, bifurcated structures continue to offer compelling benefits to borrowers, principally reduced risk and a lower cost of capital. Counsel must understand the pros and cons of each intercreditor arrangement and factors to consider in advising clients regarding the intercreditor arrangements in a given deal. first-lien/second-lien, senior/subordinated or secured/unsecured) debt structure for highly leveraged companies. During a trigger event, FO loan obligations are paid prior to LO obligations. In addition, there are fewer lender protections (financial covenants), in upper middle market structures which adds to the appeal for … A common type of a unitranche instrument is the bifurcated unitranche. First Lien TLBs benefit from first-ranking security, while Second Lien TLBs benefit from second-ranking security. Mezzanine Debt vs. When the debt has been repaid, the pledged asset is transferred back to the borrower. Penfund manages funds sourced from pension funds, insurance companies, banks, family offices and high net worth individuals and has invested more than $3 billion in over 225 companies since its establishment in 1979. Unitranche financing has been associated with bankruptcy-related risks. There are also no delays associated with syndication for unitranche loans. In most lien scenarios, there’s a “first in time, first in right” standard. First lien debt refers to a pledge of certain assets. Under lien subordination, the lien of the 1st lien debt is senior to and has priority over the lien of the 2nd lien debt on the same pool of collateral. During the COVID-19 pandemic, we’ve closed two transactions: 1) a US$100m investment in BroadStreet Partners; and 2) an increase in our investment in Caliber Collision to US$160m through a first-lien financing. While Second Lien TLBs feature cash-pay interest and are not subject to payment subordination in the same manner that Australian Opco Mezzanine financings are, they earn a higher margin and receive greater prepayment protections (discussed below) to reflect their riskier … There is no secondary market for unitranche loans making this type of loan relatively illiquid. Mezzanine debt and preferred equity both sit between the senior debt and common equity in the capital stack and generally serve similar functions to fill a gap in funding and/or provide additional leverage. Besides discussing the relative viewing merits of Bohemian Rhapsody versus Saving Private Ryan (there was plenty of time for both, plus X-Men: Days of Future Past ), the subject turned to trends in the capital markets. He resides in Seattle, WA. First Lien/ Second Lien Split Lien Unitranche Senior paid in full first. These advantages are particularly powerful in the current market when companies are able to get large first lien incremental baskets and DDTLs (delayed draw term loans). first-lien/second-lien, senior/subordinated or secured/unsecured) debt structure for highly leveraged companies. One of the implications is that unitranche lender’s counsel need expertise in resolving issues unique to unitranche lending during bankruptcy proceedings.2  Unitranche loans have not been assessed in bankruptcy courts and there are no stated rulings regarding how issues will be addressed during a bankruptcy.5 During a bankruptcy proceeding, unitranche loans may have potential issues with the voting provisions of AAL. The article will also include a discussion on the risks and implications of incorporating unitranche loans in a company’s capital structure. Penfund is a relationship lender that remains open for business irrespective of broader market conditions. Direct Lending Our Direct Lending strategy invests in directly originated first and second lien secured loans, including unitranche investments. By maximizing use of incremental baskets and then periodically refinancing both first and second lien debt and reloading baskets, a bifurcated structure can offer a significantly reduced cost of capital compared to a unitranche. A unitranche loan, as the name implies, is one tranche of debt that can replace the traditional two tiered (i.e. Description. ment among lenders (AAL). In a 1st/2nd lien financing, there are two separate groups of lenders who are separately granted liens on the same collateral. Compare that to unitranche leverage. Unitranche lending involves one tranche of debt as opposed to the typical two-tiered senior debt/subordinated debt and first lien/second lien structures familiar to most borrowers, as well as a single credit agreement for long-term capital. In two-tranche loans, first- and second-lien lenders are classified separately and have separate voting rights. paid) first. sells the first-lien portion of a unitranche loan to other lenders and retains the last-out piece, the retained portion is actually a riskier junior loan. In a unitranche financing, lenders reengineer the terms of a single tranche of debt through a side agreement called an agreement among lenders, or AAL. Pledged assets are usually transferred to the lender from the borrower to secure the debt. Each first priority lien creditor is paid first out of its own priority collateral, and the respective priority debt may be subject to a cap. How Investors Can Make Money From Renting Office Spaces, 4 Types of Alternative Investments You Should Know About, Blended interest rate that is generally higher or equal to that of traditional loan debt. Description. Single credit agreement and security agreement authorized by both the lender and borrower. For borrowers with >$75 million in EBITDA unitranches typically weren’t an option and even for smaller borrowers the unitranche cost more than a bifurcated structure. Pursuant to an intercreditor agreement, the two lender groups agree that the first lien lenders have a senior priority lien and therefore recover first on … It is uncertain whether a bankruptcy court will carry out the agreements set forth in the AAL. The use of one credit facility to blend junior and senior debt results in a greater debt than debt available to a borrower under a first lien or senior credit facility alone. Unitranche borrowers benefit from this type of financing structure due to the low cost of fees. Counsel must understand the pros and cons of each intercreditor arrangement and factors to consider in advising clients regarding the intercreditor arrangements in … Whereas a unitranche requires incremental borrowings to be made at the average cost of debt, a bifurcated structure that makes optimal use of incremental baskets can finance incremental borrowings at the cost of first lien debt. Unitranche financing is a one-stop financing that reduces the execution risk and allows the borrower to only negotiate with one lender. Penfund is a leading provider of junior capital to middle market companies throughout North America. Second lien debt refers to loans that are reimbursed only after loan balances on senior debts are repaid in full following a default. A unitranche loan, as the name implies, is one tranche of debt that can replace the traditional two tiered (i.e. The purchase of FO obligations is typically at par and usually includes specific prepayment premiums.[4]. Here are 5 Ways To Ensure It Succeeds, Best Online Courses to Learn Real Estate Investment, CFDs Stock Contracts: Chance to Make Big Profits, StocksToTrade 2020 Review: A One-Stop-Shop Trading Powerhouse for Traders, Abu Dhabi Real Estate Holistic Property Management. Unitranche financing has gained popularity in the middle-market and has enabled hedge funds and business companies to secure capital and gain high yield returns. First 'Lien' Lenders and First 'Out' Lenders: The Meaning of 'Unitranche' December 2, 2012 . Over the past seven years, according to Refinitiv LPC data, all-senior midcap leverage for private sponsored club deals rose from 3.4x to 4.2x. First lien debt refers to a pledge of certain assets. Ownership of the asset remains with the borrower during the loan period. Unitranche financing has increased in the middle market as hedge funds, credit opportunity funds and business companies pursue high returns from borrowers in a low interest rate environment. It is also easier to get cov-lite structures using a bifurcated approach, providing borrowers with additional cushion and flexibility that may not be available with a unitranche. First-lien yields on loans with a total size of $200 million or less averaged 6.3% in the first quarter on volume of $2.95 billion, according to LCD’s pool of data. The article will present an overview of unitranche financing including the characteristics associated with this type of loan, and the benefits and disadvantages of structuring unitranche loans. Define First Lien Unitranche Loan. Companies that have challenges securing financing with traditional bank loans often seek other financing alternatives such as unitranche financing to meet their borrowing needs. Some bankruptcy courts may not have the jurisdiction to enforce the provisions of the agreement. For example, a bankruptcy court may authorize a reorganization that may be opposed by the lending party and will require the issue to be settled out of court.5, Since bifurcated unitranche loans are in their infancy stage in Europe, it is important for European dealmakers to understand bifurcated technology as well as the documentation principles to structure the loans. [1], The main function of a unitranche is to serve the same purpose as a traditional first or second lien or mezzanine debt but providing a more effective and streamlined process. LO lenders have buyout rights to acquire FO obligations during trigger event. Nate assists long standing business owners in creating and structuring transactions for capital formation and mergers and acquisitions across the middle market. D. Unitranche “Agreement Among Lenders” – A single credit facility secured by a single lien on the collateral pool. First Lien paid in full first from the proceeds of the collateral. 1st lien TLB - 101 soft call only in repricings for 6 months; 2nd lien TLB - 102, 101; Unitranche - 102, 101 (minimum), often heavier prepayment penalties; Example: NC1, 104, 103, 102, 101 (Non-call - 0 to year 1, 4% fee - Y1-2, 3%, 2%, 1%) see language below -n after NC1, as part of definition of: "Prepayment Premium" Assets and capital under management currently total $1.5 billion. The need for a second credit product for The unitranche loan facility is used largely in middle market lending transactions and differs from first/second lien facilities and senior/mezz facilities as it is provided under a single credit agreement, has a single set of security documents, and is administered by a single agent for the lenders.. Multiple debt tranches are combined into one single financing. The borrower of a unitranche loan will only have one group of creditors. [1] Marc A. Reich, Unitranche Lending… What You & Your Borrowers Need to Know, (March, 2014), http://www.abfjournal.com/articles/unitranche-lending-what-you-your-borrowers-need-to-know/, [2] NXT Capital, Not all unitranche loans are created equal, (May 2016), https://www.nxtcapital.com/wp-content/uploads/Unitranche_PDI_May_2016.pdf, [3] Proskauer, Unitranche 2.0: A Global Revolution, (Nov, 2015), http://www.proskauer.com/files/uploads/PDI28_Proskauer.pdf. This drives a $105m difference in free cash flow over the investment period. Unitranc… less expensive than the unitranche facility. Since unitranche facilities are contained in a single set of credit documents, they lower the borrower s transaction costs and decrease the amount of time to close. However, during the case of a waterfall trigger event, the AAL payment waterfall is enforced for all collateral earnings and payments from the borrower. The rights of the company and various creditors are established in a single debt instrument. Unitranche loans are mainly used by middle market borrowers with sales under $500million and an annual EBIDTA of $50million or less. These advantages are particularly powerful in the current market when companies are able to get large first lien incremental baskets and DDTLs (delayed draw term loans). For those unfamiliar with this increasingly popular structure, here is our summary. The number of lenders who participate in the unitranche market has increased significantly over the past 5 - 6 years and this structure is used frequently . means a Bank Loan that is a First Lien Bank Loan that (a) has a total net leverage ratio greater than 5.25 to 1.00 as of its Cut-off Date and (b) whose Obligor does not also have a Second Lien Bank Loan outstanding. Over the past seven years, according to Refinitiv LPC data, all-senior midcap leverage for private sponsored club deals rose from 3.4x to 4.2x. Ownership of the asset remains with the borrower during the loan period. At least 12 joint ventures were formed between 2014 and 2016 to serve that market, with one lender usually providing the senior or first-out position and another the last-out junior. First Lien/Second Lien Split Collateral Senior/Mezzanine Unitranche Lien subordination is the pri- mary feature of this structure. The underlying tranche can be almost any type of secured debt, including senior or junior lien term loans or a revolver or both. [2] The FO tranche typically involves a revolver offered under the credit agreement and includes an exclusive portion of the term loan.