Bifurcated unitranche vs 1L/2L
From my understanding, unitranche loans will be more convenient for the issuer.
For the banks and bond investors who are making the loans, is the 1L/2L vs. unitranche structure that different for them? As in 1L/2L and first-out/last-out sounds fairly similar for the lenders. Is that the right way to think about it?
Because both FO and LO are technically invested in the same piece of debt, they are counted as pari passu in payment order but only different in waterfall. Hence, compared to a traditional 1L/2L where the payments are made separate, one payment is made for the unitranche facility altogether. Theoretically, if there aren't cross-default covenants, then in the case of a traditional 1L/2L the borrower could default on the coupon of the 2L without affecting the 1L, whereas you can't do that with the unitranche. What this also means is that the FO and LO will always mature at the same time, whereas with 1L/2L you can have different maturities.
Thanks for the response. Would direct lenders prefer that the issuer can't default on the loan without defaulting on the bank loan?
Just thinking from the lender's perspective. They're still getting paid (about) the same amount whether it's 2L or LO so it doesn't make too much of a difference to them?
Unitranche (FO/LO) vs. 1L/2L TLB - Will answer in more detail, but additional considerations to hit on:
Considerations -
Also - 2L more often seen in Sponsor deals (LBO), less-often in non-sponsored. Unitranche - seen in both, but an additional solution in non-sponsored (HPS, Ares, Comvest, Owl Rock).
Tenor - Direct Lending/Unitranche - 5yr / vs. 1L 6-7yr and 2L 7-8yr
Financial Covenants (Unitranche - 2+ vs. 1L/2L - cov-lite or middle market 1-2) . Unitranche will have at least 2 covenants , often 3+ depending on how storied the credit (1) Leverage (w/ heavy step-downs - For Exmaple - Manitex - Total Lev: 5.00x at closing, step-downs to 2.85x, for total step-downs of 2.35x turns of lev), (2) FCCR, and often more (3) Secured Lev, Liquidity, etc.) vs. 1L/2L - cov-lite or middle-market will also have covenants, but more often a Total Lev and Interest Cov. ratio, vs. Unitranche less so does Interest Coverage Ratio.
Prepayment penalties - heavier, altho sometimes less-so (but often at least 102, 101 or NC1, 102, 101 to give certainty of ecomomics).
Amort - Unitranche is heavier vs. 1L - !% (more for middle market) , 2L - none
Unitranche (FO/LO) - leverage @ attach point -(2.0 / 4.0x) - where banks can get approved + direct lenders can boost returns meet their hurdle rate
Unitranche - bank such as PNC, Wells, CapOne, often partner w/ Institutional Lender - often they've done deals w/ them in the past and will see eye to eye on the docs, structure
Intercreditor Agreement vs. Agreeement Among Lenders
Intercreditor Agreement (1L/2L), with separate Loan Agreements - 1L CA + 2L CA = 3 legal docs
Agreement Among Lenders (AAL) + CA = 2 legal docs
Hopefully that gave you additional stuff to think about. Happy to delve further, send you some materials or examples.
If anyone disagrees, or wants to add, please weigh in.
Thanks for the detailed response. I am an undergrad non-finance major reading up on various debt primers and this is very helpful. Just wanted to ask for some clarification:
1. Intercreditor Agreement vs AAL: what are the implications of 1 additional legal doc? Does it slow down the process? Does it make a huge difference?
2. Non-rated vs ratings: do you mean unitranche loans don't need to be rated vs 1L/2L must get ratings?
3. Higher prepayment penalty: what's 102/101/NC1?
4. Which one has a higher attach point?
5. Could you explain the step-down a bit more in terms of multiples? I've only seen it in % before so bit lost on that example (Manitex - Total Lev: 5.00x at closing, step-downs to 2.85x, for total step-downs of 2.35x turns of lev)
6. Do you mean HPS/Ares/Comvest do unitranche for non sponsored deals?
Hi, I am not so familiar with unitranche terms, may I know if there are any good books on this topic? Many thanks.
i'll answer the rest another time, some less important tthan others.
3. "Prepayment Premium" / Call protection - explanation
see language below -n after NC1, as part of definition of:
"Prepayment Premium"
#6 HPS / Ares / Comvest - yes. they do non-sponsor
Ares:
5. Financial Covenants (step-downs)
Example below
(b) Leverage Ratio. Maintain as of the end of each fiscal quarter, a ratio (the "Leverage Ratio") of Funded Debt, calculated as of such date, to
EBITDA, measured for the period of four fiscal quarters then ended, of not greater than the ratios set forth below for the applicable fiscal quarter then
ending:
Fiscal Quarter Ending / Maximum Leverage Ratio
March 31, 2017 and June 30, 2017 5.00 to 1.00
September 30, 2017 and December 31, 2017 4.75 to 1.00
March 31, 2018 through and includingDecember 31, 2018 4.00 to 1.00
March 31, 2019 through and including December 31, 2019 3.50 to 1.00
March 31, 2020 through and including December 31, 2020 3.00 to 1.00
March 31, 2021 and each fiscal quarter thereafter 2.85 to 1.00
Uniranche vs. 1L/2L
DDTLs w/ Direct Lenders:
Selected Challenges of Direct Lending
1) Revolvers - fund on short term notice
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