What is Unitranche Financing?

unitranche lien

Unitranche financing grew out of what practitioners describe as the market for junior capital. It was designed for the advantage of borrowers as a means to avoid some of the complexity of second lien deals.

Read on further to know more about unitranche loans, their uses for borrowers and the principal advantages for a borrower using this type of financing.

What is Unitranche Financing?

Unitranche loans combine what would otherwise be separate first and second lien facilities into a single secured loan facility. 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. However, such loans hardly make a difference from the borrower’s perspective since unitranche financing is structured as a single debt instrument, where all the debt is subject to the same terms.

Who uses unitranche loans?

Unitranche loans are mainly used by middle market companies and by private equity for leveraged buyouts. Although, there is no absolute definition, generally middle market borrowers consist of small- to medium-sized businesses with annual EBITDA of less than $50 million or sales of less than $500 million.

Who provides unitranche loans?

Specialty finance companies that engage in business development financing are the primary sponsors of unitranche loans. Mostly, such lenders are credit funds backed by hedge fund investors and managed by investment managers whose expertise focuses on acquisition finance and middle market lending.

What can unitranche loans be used for?

Borrowers generally use unitranche loans as a single source of financing instead of having separate first lien and second lien facilities.

Unitranche loans are generally used for,

  • Funding leveraged buyouts, which are usually private equity-backed acquisitions, but are also sometimes management-led buyouts.
  • Refinancing existing credit facilities as well as to provide additional financing to fund an acquisition, sometimes referred to as “add-on acquisition financing”.

What are the main advantages for unitranche loans for the borrower?

The main advantages of unitranche loans for a borrower are,

Speed of transaction:

Since a single lender provides the unitranche loan, borrowers can close their loans more quickly than if they were dealing with multiple lenders. This becomes especially important to the borrower since in the extremely competitive environment for acquisitions, the speed at which a private equity sponsor can close on a purchase often becomes a differentiating factor between rival buyers.

Certainty of closing:

Since unitranche loans are not syndicated, a sponsor with a committed unitranche loan may be able to present a more solid acquisition proposal towards closing an acquisition deal.

Simplicity of decision-making:

Since unitranche loans are structured as single loans and are mostly provided by one lender, it offers the borrower a streamlined process for ongoing administration and decision-making.

Attract Capital has 20+ years of experience in helping private companies access loans including unitranche loans directly from a lender platform of over 100 debt-financing providers.

Contact us now to set up a free consultation.