Providing debt advisory services to borrowers and sponsors gives us a daily view of the evolving market place. Every day new lenders enter the market, causing it to become increasingly opaque. Innovation is more prevalent than ever before with the international influence now benefiting UK borrowers.
Historically lenders have differentiated themselves from the fierce competition by offering aggressively low pricing, reducing arrangement fees and offering relaxed, flexible covenants.
In more recent time, the credit market is being penetrated by new non-banking and private debt lenders, who have had a long and prosperous heritage in trading bonds and private equity, allowing them to offer differentiable credit such as unitranche loans.
Capital is now taking many forms and filling many different spaces so the traditional senior debt, mezzanine and equity is no longer as clear as it used to be.
Unitranche transactions are governed by a single document typically called the Agreement Among Lenders (AAL). Unitranche lending involves one tranche of debt and a first/ second charge structure as well as a single credit agreement for long term capital. Opposed to the typical two-tiered senior debt, separate notes and security agreement for two classes of debt with complicated inter-credit agreements.
The inter-creditor’s rights and obligations are detailed within the AAL. It allocated interest and principal payments disproportionally between the lenders, creating a multi-tranche transactions.
The unitranche debt instrument was created to simplify debt structure and accelerate the acquisition process. A unitranche loan can be advanced by a single lender or if the hold is too large for one particular lender, the lender has the option to split the unitranche loan into “first-out” and “last-out” tranches to one or more lenders. 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. This will potentially remove any potential complexity and reduce the legal fees.
Unitranche loans give different rights to the different lenders participating in each loan, these rights will depend on what ‘tranche’ of the loan the lender is funding.
Unitranche lending is more transitionally focused than relationship focussed as traditional banking loans would be. This is due to the single offering and the geographical location of many unitranche lenders. Additionally, subordinated debt lenders tend to have fewer companies in their portfolios than do unitranche providers, allowing them to spend more time understanding the companies and working out problem situations.
Small and lower middle market businesses are increasingly benefiting from unitranche financing solutions, which offer the advantages of speed, simplicity, and certainty of closing. EBITDA multiples can be in the upper single digits so where a senior debt provider permits 3x as a multiple Unitranche lenders could offer 8x.
This type of facility removes the need for mezzanine finance and will minimise, and possibly completely remove, the need for management team, or sponsor, equity.
Recently we have seen unitranche loans used to stave off equity dilution in growth capital corporate deals or as highly leveraged dynamic debt in asset management plays for real estate. As you will have imagined there are a number of other ways to utilise this flexible type of funding. MBO/MBI's and re-capitalisations are also suitable transaction types that could be compatible.
We are happy to speculate our time to help clients ascertain if a Unitranche facility provides them with a solution.
Please contact Managing Director Jamie Davidson to discuss Unitranche lending as part of our Debt Advisory offering.
0131 564 0172
07919 863 034