Unitranche debt is a form of flexible financing, typically used to fund mid-size buyouts and acquisitions. Unitranche financing is structured differently from other loan types since there is only one

tranche In structured finance, a tranche is one of a number of related securities offered as part of the same transaction. In the financial sense of the word, each bond is a different slice of the deal's risk. Transaction documentation (see indenture) u ...

, rather than more traditional loans which may prioritize

senior debt In finance, senior debt, frequently issued in the form of senior notes or referred to as senior loans, is debt that takes priority over other unsecured or otherwise more "junior" debt owed by the issuer. Senior debt has greater seniority in the iss ...

over

subordinated debt In finance, subordinated debt (also known as subordinated loan, subordinated bond, subordinated debenture or junior debt) is debt which ranks after other debts if a company falls into liquidation or bankruptcy. Such debt is referred to as 'subordi ...

Overview

Unitranches are private and often tailored to specific borrowers, but they share many features in common. Unitranche facilities are typically covered under a single-loan agreement, and are typically used to finance acquisitions. Unitranche loans have only one set of documents between the borrower and the lenders, who enter an Agreement Among Lenders between themselves. Security is achieved through these inter-lender agreements, and the borrower may not be aware of what agreements exist between the different lenders involved. Unitranche loans combine senior and junior or subordinate loans into one package, and therefore often include more capital than the borrower would be able to obtain under either loan type.

History

From the mid 2010s to 2021, a growing number of large

private debt In economics, consumer debt is the amount owed by consumers (as opposed to amounts owed by businesses or governments). It includes debts incurred on purchase of goods that are consumable and/or do not appreciate. In macroeconomic terms, it is ...

fundraisers and credit funds have led to an increasing number of unitranche loans used to finance large scale acquisitions. The creation of larger private debt funds in 2015, including BlueBay’s €2.1 billion direct lending fund and ICG’s €3 billion senior lending fund, made larger private credit sources available for unitranche loans. In 2016,

Ares Management Ares Management Corporation is an American global alternative investment manager operating in the credit, private equity and real estate markets. The company was founded in 1997 and is headquartered in Los Angeles, California, with additional of ...

led the first $1 billion unitranche loan to underwrite the acquisition of

Qlik Qlik ronounced "klik"(formerly known as Qliktech) provides a business analytics platform. The software company was founded in 1993 in Lund, Sweden and is now based in King of Prussia, Pennsylvania, United States. The company's main products ...

Thoma Bravo Thoma Bravo, LP, is an American private equity and growth capital firm with offices in San Francisco, Chicago and Miami. It is known for being particularly active in acquiring software companies and has over $114 billion in assets under manage ...

. This precipitated a wave of unitranches over $1 billion over the next five years. Due to the growth of unitranche financing, it has become more common for

private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a ty ...

firms to act as lenders for large corporations, in lieu of traditional banks. According to

Bloomberg Bloomberg may refer to: People * Daniel J. Bloomberg (1905–1984), audio engineer * Georgina Bloomberg (born 1983), professional equestrian * Michael Bloomberg (born 1942), American businessman and founder of Bloomberg L.P.; politician and ma ...

, the volume of unitranche financing was roughly $3 billion in 2016, and had increased to $21.6 billion in the first half of 2021. Direct lending has become an increasingly common source of financing for mid-market deals, despite shrinkage during the

COVID-19 pandemic The COVID-19 pandemic, also known as the coronavirus pandemic, is an ongoing global pandemic of coronavirus disease 2019 (COVID-19) caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The novel virus was first identif ...

. They may still be less popular in Europe than in the United States. A 2020 survey of the leading European private equity firms by ARCOS Capital found that 78% of firms preferred senior bank financing, compared to only 22% who preferred unitranche financing. Many European banks also began partnering with alternative lenders to provide

PIK loan A PIK, or payment in kind, is a type of high-risk loan or bond that allows borrowers to pay interest with additional debt, rather than cash. That makes it an expensive, high-risk financing instrument since the size of the debt may increase quickly, ...

s, which have been considered "unitranche killers".

References

{{Reflist

Overview

History

References

Further reading