Private Debt Analyst Modeling Test Question

Unitranche is a blended rate, priced more or less in between a 1L TLB & 2L TLB.
Not a ton of public comps out there to see examples of structure and pricing, but generally you’ll be safe w/:
Unitranche Pricing - Benchmark to start w/

• L+650 (SOFR+650)
• 1.00% floor
• 99.0 OID
• = 650 + 100 + (100/4)
• = 775 bps
• = 7.75%

OID

• = (Original Issue Discount), or 1% Upfront Fee - whose all in yield is based on a 4 year average life accounting convention - and this portions yield is simply divided by 4 (1.00% / 4 = 0.25% = 25 bps

Amort

• 1% per year (0.25% per quarter) or 5%/year are safe assumptions - depends honestly on direct lender’s trademark go to amort IMO as well as the Company itself. Some direct lenders love the heavy amort. Or as a safe bet just put 2.5% per year and meet in the middle. Just rationalize it out. Just trying to help give ppl baseline numbers to work w/.
• Misinformation and false leads and insight all over this post. You’ll likely confuse ppl and lead college kids down a rabbit hole researching “credit sculpting” only to have it be an inefficient use of time - at scale…as this is a term in Project Finance only. Literally 1st time ever hearing this term in my entire life. Guys - I know you’re trying to be helpful and contribute - but please make sure to double check for accuracy before posting insight, or ask someone in the industry quick

Follow-up: Adding in commentary in old Unitranche Post, +cleaned up a bit

• Subject: Bifurcated Unitranche Vs 1L/2L
• Date: 11/30/2020
• URL: https://www.wallstreetoasis.com/forum/investment-banking/bifurcated-uni…
• Username: @loanboy043
• URL: https://www.wallstreetoasis.com/comment/2288750#comment-2288750
• Unitranche (FO/LO) vs. 1L/2L TLB
• Note: "There’s an old post of mine on some unitranche stuff - altho not all 100% accurate when u drill into specifics (I said amort is heavier in unitranche/direct lending - my revised answer is it depends. Sometimes there is no amort! Such as a recurring revenue deal or negative EBITDA company)."

Considerations to hit on:-

• Leverage @ FO/LO,
• partner w/ banks (who can also provide the Revolver),
• Intercreditor vs. AAL,
• No Syndication risk,
• financial covenants,
• tenor,
• prepayment premium,
• non-sponsor vs. sponsor,
• non-rated vs. rating,
• tighter docs (EBITDA add-backs capped)
• 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 - Depends. 1L: 1%, 2L: None. STANDARD practice Unitranche:  Depends. BESPOKE, CUSTOMIZED amort to Borrower and what the Lender is willing to get done. Many times at least 1%, otherwise 2.5-5%, other times higher. Cerberus deals have annoyingly non-rounding amort that's a pain to spread for comps (4% / 4% / 4% / 4%).
• 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: https://www.wallstreetoasis.com/comment/2289318#comment-2289318

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?
Advantages of Unitranches

• Unitranches provide "one-stop" financing for the entire transaction with a perceived lower execution risk and more efficient closing. Borrower is typically negotiating with 1 lead lender vs. 1L/2L – 2 sets of lenders  (each with their own loan documentation and diverse interests). Uni’s don’t have delays associated w/ lenders in different credit facilities having to complete separate due diligence. Unitranches also usually have no delays associated with syndication, and they are not accompanied by the baggage of flex rights and other syndication provisions.
• There is a single set of loan documents in unitranches. Thus, there is one set of covenants (including financial and reporting covenants) for the borrower to negotiate and monitor. This also means that the borrower has only one interest payment and one amortization payment. From the borrower's perspective, unitranches can be easier to administer on a post­closing basis given that there is one agent administering the debt and one set of covenants to address.

Select Disadv.- Uni’s

• AALs are complicated. Many of the provisions are much more complicated than analogous provisions in intercreditor agreements given that there is 1 agent, 1 set, of covenants, 1 lien, and 1 set of loan documents (which loan documents have their own voting, exercise of remedies, and assignment provisions that need to be synchronized with the AAL). If the parties cannot agree on the precedent, the negotiations can be difficult and in some cases protracted. Additionally, the lender with the negotiating leverage in the unitranche is often the lender who originated the deal or who will hold the larger amount of debt. This can lead to AAL provisions that are disadvantageous, particularly in a bankruptcy or work­out scenario, to the lender without the negotiating leverage. (Paul Hastings, 2013)

Intercreditor Agreements Primer

• (careful – sourced UK thought leadership, but still should be helpful
• Intercreditor agreements are typically used where there is more than one secured lender to a group. Unsecured lenders may become a party to the ICA but only to confirm their debt ranks behind all the secured lenders’ claims. The primary purpose of an ICA is to ensure that each type of debt in a deal bears a risk commensurate with its pricing. The key provisions of the ICA are briefly: • the ranking of claims and distribution of enforcement proceeds according to the payment waterfall (payment cascade is a more accurate description) • specifying the ‘instructing group’ i.e. which party controls enforcement and the enforcement strategy • enforcement standstills (these apply to lenders who are outside the instructing group and are designed to give the ‘instructing group’ time to effect the enforcement) • the ‘intercreditor release mechanism’ permits the agent to release security and claims of the lenders to enable the security agent to maximize disposal proceeds by realizing the assets free of security, guarantees and all claims • the option to purchase is designed to protect junior lenders and gives them the right to acquire the senior debt for a make- whole and thus gain control of the debtor • restrictions on payments to junior creditors (payment stop notices). Note these tend not to apply in unitranche deals. Simply put, the role of an ICA outside the US is to protect the ranking of senior secured lenders vis-à-vis other more junior lenders, both pre and post distress. Against this background, ICAs incorporate some of the key features available from Chapter 11 in the US; in particular the ‘Absolute Priority’ rule (reflected in the payment and proceeds waterfall) and the ability to sell assets free of collateral under s363 of the Bankruptcy Code (reflected in ‘intercreditor release mechanism’). Whilst there is an intercreditor template produced by the Loan Market Association (LMA) and precedent transactions are influential, each ICA is ultimately a commercially negotiated document between different parties.

Unitranche vs. 1L/2L

• -limited # of parties
• larger DDTLs - important for borrowers with tuck-in acquisition strategy
• -no intercreditor complexity (AAL)
• -higher WA cost of debt than 1L/2L (often) - varies tho
• -limited investor base
• -not as receptive to repricing compared to syndicated 1L
• harder to get cov-lite structure
• tenor: 5yr vs. 1L 7yr
• Ratings - 1L  TLB / 2L -- need ratings (CLOs - largest investor, need a rating).
• Non-rated deals - typically add a premium to pricing of ~50-75 bps for NR/NR, altho depends on deal (illiquid, smaller investor universe).
• 1L / 2L - slightly more ardous execution process - syndication requires creating Lender Pres, CIM, and RAP if rated.

DDTLs w/ Direct Lenders:

• While direct lenders are particularly sensitive to the terms under which additional debt may be incurred, they are, especially for borrowers with an acquisitive investment thesis, often willing to provide significant committed post-closing incremental financing in the form of delayed draw term loan commitments. While this feature is available in the BSL market, the conditions are typically more restrictive – for example, limited to funding specifically identified acquisitions that are scheduled to close within a relatively short period (typically six to 12 months following the initial funding) – and it is still generally disfavored by institutional lenders seeking the yield certainty of fully funded investments.

Selected Challenges of Direct Lending

• 1) Revolvers - fund on short term notice
• a borrower's desire for flexible and readily accessible revolving credit and letters of credit. This ability has long been a mainstay and competitive strength of commercial banks, and while many direct lenders have made strides in providing this critical function, it still represents a challenge to their ability to compete in this part of the financing market. In particular, direct lenders historically – and, in certain cases, still – fund borrowings by calling capital from their investors and/or borrowing under fund-level credit facilities. The time it takes for lenders to do so, however, may be inconsistent with a borrower's desire for funding on short notice. More recently, direct lenders have attempted to mitigate this disadvantage by restructuring their balance sheets to ensure that cash is available in order to make revolving loans on short notice and finding creative ways to issue letters of credit, either directly or through an arrangement with an acceptable third  party provider.

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?
Answer (@loanboy043)

3. "Prepayment Premium" /  Call protection  - explanation

• Term Loan A - no penalty
• 1st lien TLB - 101 soft call only in repricings for 6 months
• 2nd lien TLB - 102, 101
• Unitranche - 102, 101 (minimum), often heavier prepayment penalties
• Example: NC1, 104, 103, 102, 101 (Non-call - 0 to year 1, 4% fee - Y1-2, 3%, 2%, 1%)
• see language below -n after NC1, as part of definition of:

"Prepayment Premium"

• (ii) if such Prepayment Event occurs on or after the 12-month anniversary of the Closing Date but prior to the date that is 24 months after the Closing Date, a prepayment premium equal to 4.00% of the outstanding Loan Amount subject to the Prepayment Event;
• (iii) if such Prepayment Event occurs on or after the 24-month anniversary of the Closing Date but prior to the date that is 36 months after the Closing Date, a prepayment premium equal to 3.00% of the outstanding Loan Amount subject to the Prepayment Event;
• (iv) if such Prepayment Event occurs on or after the 36-month anniversary of the Closing Date but prior to the date that is 48 months after the Closing Date, a prepayment premium equal to 2.00% of the outstanding Loan Amount subject to the Prepayment Event; and
• (v) if such Prepayment Event occurs on or after the 48-month anniversary of the Closing Date, a prepayment premium equal to 1.00% of the outstanding Loan Amount subject to the Prepayment Event (such amounts described in clauses (ii), (iii), (iv) and (v) are herein referred to as the "Repayment Premium").

4. Which one has a higher attach point?

• skipped. too late at night rn, will follow-up

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)
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

6. Do you mean HPS/Ares/Comvest do unitranche for non sponsored deals?

Answer:#6 HPS / Ares / Comvest - yes. they do  a lot of non-sponsor
Ares:
"Ability to Commit $500mm+in a single transaction"
13% of portfolio to non-sponsored companies"

• HPS – Competitive Strengths: Diversified Sourcing Network.
• HPS believes its diversified sourcing approach sets its platform apart from many of its peers. While the vast majority of peers focus their sourcing almost exclusively on financial sponsors and lending to businesses controlled by them, HPS has built an extensive relationship network across a breadth of private and public companies, management teams, banks, debt advisors, other financial intermediaries and financial sponsors. As a result, HPS has historically sourced approximately two-thirds of its private credit investments from channels other than financial sponsors. HPS believes its non-sponsor sourcing tilt significantly reduces the level of competitive intensity and allows it to focus on structuring improved economics, stricter financial covenants and stronger loan documentation. In addition, the direct dialogue with management teams results in a better understanding of the underlying borrowers and better positioning to actively manage investments throughout their life. While HPS is principally focused on the non-sponsor channel, its exposure to sponsor transactions tends to increase in times of public market dislocation (when certainty of capital and speed of execution with a single counterparty is often sought after and highly valued). The ability to flex in and out of both sponsor and non-sponsor markets will allow the Fund to remain nimble across different market dynamics.
• QR Code - old post (trying something new. New idea given WSO platform isn't good 2/ links. (Wow it worked. Awesome!)
• 

Edit - March 2026:

Wow. Saw the love - 25 likes, and the loving comments (post of the year - very nice, "god's work" - love it, I'm honored). Very well, I'll be risky and try editing my post,  and adding a couple visuals to it. Big time risk here, is in the past when I've clicked edit - it completely de-formats any formats and structure you put in, totally sabotaging the original and going-forward post...

well here we go..

Mega Unitranche Deals

Unitranches - FO/LO