Unitranche clarification
Hey there,
I am here to ask a clarification about unitranche debt, and why it is gaining so much success over "bank loans" in LBO financing:
1) Is it really cheaper? From my understanding Unitranche is priced at a weighted average (prolly not that simple) of the interest rates on single tranches, so is it meant to be cheaper just bc of less overhead costs (documentation, legal, time etc.)
2) I often read about LevFin IB Teams struggling to compete with Private Credit firms in financing takeovers bc of unitranche, but can't also traditional Banks offer unitranche? Is it just bc they prefer to syndicate?
Any clarification would be highly appreciated. Currently in my last semester at a Master in Finance and haven't gone so much in depth yet.
1) It can be cheaper - but it depends. All depends on the alternatives. Right now Uni financing is running like S+700bps with ~300bps OID - that's pretty costly with SOFR at 4%+. It can be quicker than accessing the Institutional Market (TLB/HY) - while the syndication process takes a while, banks can underwrite commitments prior to syndication so from the Sponsor's perspective, I'm not really all too sure it's faster. There's plenty of Institutional deals that only have one tranche of debt (TLB). Where I can definitely see the Uni being a faster execution & cheaper is when you have several tranches of debt in the cap stack (1L / 2L / HY, etc.) - that said, when you have these types of cap structures with 3+ different tranches of debt, that's not really the Uni's Target Market.
2) Banks typically can't/won't hold these highly levered deals on their balance sheet for the most part - it's too costly. Sure, some banks with hold Term Loan A (generally at least 5% average amort per annum vs. TLB at 1% per annum) debt that is < 4x levered, but these Uni deals typically will have > 5x leverage (depending on rates).
Also, the Institutional Market typically can only be accessed for $50MM+ EBITDA companies (the more the better). A lot of Uni funds focus on < $30MM EBITDA companies so they fill a void that the Institutional & pro rata Bank Market cannot/will not.
What does TLB stand for?
Term Loan B
this is very helpful!!
Couple thoughts:
Uni execution does not require the premarketing -> ratings -> syndication process that an institutional deal would. In addition, there is no market risk from flex (even if it’s a fully underwritten deal there still is market flex).
There were at least one or two fully levered syndicated unitranches done in 2021 in the software space that went OK, but very much not the norm. Banks don’t want to hold revolver that’s pari passu with debt going that deep. Ratings agencies also like the junior debt cushion of a “normal” tranched structure and syndicated market is very ratings sensitive.
if you have a large financing need for a very strong company, a multi-tranche, multi-currency offering will probably always get you the best execution, but it’s more work.
Also, there are very few true unitranches that get done these days. Most deals that people call uni are just super stretch senior. A true uni was originally designed to take away the pain for a borrower of organizing a multi-tranche capital stack. Instead of a borrower having to interact with potentially many different lenders and separate agent lenders with conflicting goals and priorities, the original unitranche deals collapsed that down into one point of contact. Then that one point of contact went behind the scenes and arranged a group of lenders with an agreement among lenders (“AAL”) that allocated the capital structures risk in a more traditional fashion (collateral priority, yields, etc.). Unitranches today are mostly a result of competitive credit markets where lenders just agreed to a very highly levered deal but then don’t also structure or arrange an AAL.
Sovos was the deal I was thinking about: https://www.lcdcomps.com/lcd/n/article.html?rid=170&aid=12483715
Marketed @ 7.3x all first lien + 2.5x of pref behind to fund a refi, M&A and dividend
first lien cleared at L+450 99.75 OID - July 2021, simpler times
Solid responses above.
To add some content - I commented on this w/ detailed bullets, URLs, etc
Terrible unformated copy n paste of some of it below, most likely sabotaging this thread tho
comps out there to see examples of structure and pricing, but generally you'll be safe w/:
Unitranche Pricing - Benchmark to start w/
OID=
Amort
Misinformation and false leads and insight all over this post.
Follow up:
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Date:
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Unitranche (FO/LO) vs. 1L/2L TLB
Prepayment penalties -
Amort -
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(2) Follow-up Questions –User: Intern in PE – LBOs. Date 12/1/2020
URL:
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?
Advantages of Unitranches
Unitranche vs. 1L/2L
Selected Challenges of Direct Lending
2. Non-rated vs ratings: do you mean unitranche loans don't need to be rated vs 1L/2L must get ratings?
Yes
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?
Do you mean HPS/Ares/Comvest do unitranche for non sponsored deals?
QR Code -
old post (trying something new. New idea given WSO platform isn't good 2/ links. (Wow it worked. Awesome!)
URL:
Copy n pasting 2nd comment & 3rd comment
URL:
URL:
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
URL:
Attempting to compile all URLs in thread at the bottom: 1st draft
Copy n pasting 2nd comment & 3rd comment
URL:
URL:
Broadly Syndicated Corporate Loans
underlying line of credit portion of a Syndicated Loan. In certain circumstances, the Fund may receive a prepayment penalty fee upon the prepayment of a Syndicated Loan by a borrower. Other fees received by the Fund may include covenant waiver fees, covenant modification fees or other amendment fees.
URL:
A few links to PDf docs on Uni's I sourced w/ Chrome Extension called "Link Grabber" - highly recommend getting this tool
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(delete - included in master comment above)
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