Tailored Senior and Subordinated Debt

In today’s world, businesses are constantly evolving. Change brings with it unique capital needs that demand an equally unique and tailored capital structure that best meets the need of the business. While senior debt and subordinated debt are the two most commonly preferred financial options for mid-sized companies, a third option of using tailored senior and subordinated debt, as a single debt instrument, is also being increasingly preferred by businesses.

What is tailored senior and subordinated debt?

Tailored senior and subordinated debt, referred to as unitranche debt in some financial circles, is a hybrid loan structure that combines senior debt and subordinated debt into one loan facility at a blended interest rate that falls between the rates of the two types of debt. Unitranche loans first made their appearance in the mid 2000’s, and weremainly targeted at middle market companies by private equity shops to facilitate leveraged buyouts. In recent years, such loans have gained momentum,especially after the recent recessionary when lenders looked to redeploy capital in the market.

Key advantages of tailored senior and subordinated debt

When compared to other middle market lending structures the volume of tailored senior and subordinated debt has shown a marked increase mainly due to the many advantages that it presents. The benefits include,

Reduced closing and administrative costs: Since there is only one credit agreement, the amount of loan documentation is cut in half. Also, most unitranche loans have only one administrative agent and one law firm representing the lenders.
Quicker closings: Many tailored senior and subordinated debt lenders are willing to underwrite the full financing without pre-closing syndication. This feature when combined with faster combinations leads to shorter timeframes in closing, especially in acquisitions.
Less syndication risk: Unitranche deals come with full underwriting and no pre-closing syndication. This minimizes the risk of the lead bank syndicating the loans, which can change pricing and other loan terms.
Greater amount of available senior debt: When businesses opt for tailored senior and subordinated debt, the chances of acquiring a greater amount of senior debt is much higher than in traditional senior/subordinated lending structures.
Option of no amortization or prepayment premiums: Many unitranche deals do not have amortization or pre-payment premiums. This gives mid-sized companies the flexibility to refinance or pay down more expensive debt, which they may not have in a first/second lien or subordinated financing with call premium.
Easier compliance and administration: Since tailored senior and subordinated debt comes with only one set of covenants and one reporting package to prepare, unitranche financing is both easier to administer and comply with.

Attract Capital, built upon a 25-year old knowledge base of the private capital markets, offers consulting services and financing solutions for your various financial needs. With a platform of over 100 lender and a proven workflow process, we can provide quick sourcing solutions including tailored senior and subordinated debt financing.