Clarifying Unitranche terminology in Direct Lending / Private Credit
Can somebody explain why they call direct lending term loans "unitranche"? I've seen many PC arms also name it "senior stretch" is it the same thing as saying unitranche, or this another different meaning?
Where did this word originate from? Why do they call it unitranche specifically in this space? Is it bc it's a club deal among debt funds / other lenders not holding the entire amount? Similar to syndicating a deal...
Most people in IB tend to know unitranche as a combination of a hybrid loan structure that combines senior debt and subordinated debt into one loan.
Essentially a senior stretch. Say you'd do a 1st lien / 2nd lien structure of 4.5x 1st Lien / 6.0x total. Essentially, you'd just do a 6.0x hold through a single 1st lien term loan.
It's confusing because separately there is an actual unitranche product which appears as a single loan to the borrower, but on the back-end it's parsed into a 1st-out and last-out piece being held by two different firms. Some firms you would see this are LMM lenders, such as Modern Bank taking a first-out position and someone like LBC Small Cap taking the last-out position. Keep in mind they can structure it so it is advantageous for both, where a Commercial Bank is able to accept a lower rate that brings down the overall blended rate to the borrower.
In most cases, people are referring to the first instance where it's essentially just a first-lien stretch type deal.
Sorry, this is confusing, so if Bank A underwrites the deal, you are saying Bank A will underwrite the total 6.0x and only hold the exposure on the 1L 4.5x while Bank B (other lenders) will come in to take the remaining 2L structure that allowing it to be called unitranche?
Comment below said senior stretch is referencing going up to 4.5x.
So for the definition of a "true" unitranche so to speak, essentially there will be one first-lien loan that the borrower sees of 6.0x. On the back end, there will be an Agreement Among Lenders (AAL) that essentially splits the loan into a first-out piece and a last-out piece. It's effectively a synthetic first-lien / second-lien structure of sorts that will also lay out the economics that each lender receives such as amortization and pricing on each piece, as well as things like recoveries in bankruptcy. Note that in bankruptcy, it will still appear as a first lien loan, it will be for the two lenders on the back end to work out who gets what % of the pie according to the agreement. So the agreement could say something like in the event of bankruptcy 1st-out position is entitle to all of the proceeds until it is made whole on its position. A contract between lenders determining who gets what outside the eye of the borrower, who for all it knows, there is a single loan and lender. Just google "Unitranche “Agreements Among Lenders” and Gibson Dunn has a nice summary piece on it.
Some firms you would see this are LMM lenders, such as Modern Bank taking a first-out position and someone like LBC Small Cap taking the last-out position. Keep in mind they can structure it so it is advantageous for both, where a Commercial Bank is able to accept a lower rate that brings down the overall blended rate to the borrower.
More commonly though, people just refer to uniranche as leverage above a certain threshold. It's just a term loan loan with leverage that would go up to the 6.0x structure without actually having separate tranches on the back end between different lenders.
Do senior stretches still apply a 1L / 2L AAL structure? They just don't go as far as higher leverage to a unitranche right?
The alternative to a "unitranche" loan is to have a capital structure with many "tranches" of debt, from senior secured to subordinated. Having many tranches of debt can at times be disadvantageous, like if you need to push out maturities of these tranches of debt due to liquidity issues (an "amend and extend"). In that scenario, you'd need to negotiate individually with each lender from each tranche which can take a long time.
So, in the mid-2010s private credit funds started offering this "unitranche" loan, where they combine all of these tranches into one tranche. The advantage being that you only need to deal with one lender, or a small group of them (a "club deal"). This is thought to be particularly useful in time-sensitive situations, like coordinating an LBO.
Senior stretch loans are quite similar to unitranche, but they don't go as far down the capital structure as a unitranche loan would. Senior stretches typically max out at around 4.5x EBITDA whereas unitranches can rise above 6x EBITDA.
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