1L/2L vs Unitranche

Gents have you come across transactions where a borrower evaluates the option of either 1l/2l Loans or a Unitranche facility? 
what are the pros / cons when deciding which solution to go with - is there an overwhelming tendency to go with 1 of these 2 options?

Appreciate any insight you can share mates.

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Comments (9)

Most Helpful
Dec 28, 2020 - 9:39am

Unitranche is usually going to be easier logistically & have more certainty of close - only one lead investor needs to sign off, there isn't an intercreditor to worry about, and legal docs can generally be much simpler. The tradeoff & analysis between the two is going to be based on (1) cost of capital and (2) amount of debt available.

All else being equal, pricing will look like 1L less than Uni less than 2L, so you have to check the blended (weighted) cost of the 1L & 2L vs. the unitranche standalone. The other factor here is that you may or may not be able to get more or less debt in a 1L / 2L structure vs. uni.

In some situations, a 2L investor will want to limit the amount of 1L debt ahead of them to ensure they have some asset coverage, which limits the amount of total debt. in other situations, it might be the opposite, where bringing in a 2L lender will allow you more debt vs. a unitranche facility since some 2L lenders don't care about asset coverage while the uni guys might.

Ultimately, the analysis will revolve around the weighted cost of capital and the amount of debt available.

  • Associate 2 in CorpDev
Dec 28, 2020 - 11:22am

Thanks mate appreciate the thoughts above - can anyone add on? For example on whether typically 1l/2l debt will result in higher leverage / better blended pricing, or vice versa?

Also, assuming a single bank can provide both 1l/2l, how does that change the dynamics? Would they effectively behave as one lender as both divisions within the same bank will be more cohesive?

  • Associate 1 in IB-M&A
Dec 28, 2020 - 12:08pm

How are most of these lenders determining cost of capital for these loan issuing companies? Hypothetically let's say that you have a $300-$400 mil EV company thats overall "moderate" for risk at that size (like a food/soft goods distributor, something conventional in terms of operating model). Is there a quick and dirty way to get a weighted average cost of capital proxy for something like that from the Ladner perspective? I mean I'm just curious if unitranche or 1L/2L lenders asses that differently than just a conventional CAPM? Is there anything unique about how CAPM inputs are determined compared to like a basic middle market sell side equity deal? Thanks in advance.

Dec 28, 2020 - 5:34pm

you're overthinking this. lenders just look at comps and slap a premium/discount on it depending on the credit.

for 2L pricing, in my experience the borrower / advisor is often solving for a target blended rate, so compared to a unitranche you have a cheaper 1L but a more expensive 2L, if the reason you're doing a 1L/2L is because you can't find a unitranche anchor. if you're simply maximizing debt capacity then often 2L is a structurally subordinated tranche (read: non-IG) that commands a significant premium, again based off comps

everything is comps. finance is one big circularity.

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  • Analyst 1 in S&T - FI
Dec 29, 2020 - 9:57am

Can confirm. Recently assisted on the deal that went from UT to 1L/2L and the inter-creditor discussion easily added 1-2 months to the close. 

  • Associate 2 in CorpDev
Dec 29, 2020 - 12:14pm

Interesting - what was the reason for shifting from UT to 1l/2l though? Usually discussions move the other way around, or so I would have thought

Dec 29, 2020 - 12:42pm

Probably one of the 2 reasons cited above, which are definitely interlinking reasons. 1) they either could not build a book (enough financing size) under a 1L/2L subordinated structure or 2) the rates offered were not enticing as in a uni structure.

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Dec 30, 2020 - 12:32am

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