A combination of subordinated debt and senior debt combines and merges into one instrument debt. It is a hybrid loan structure in which the borrower is liable to pay all the interest rates blended between the rate of subordinated debt and senior debt. According to its history, these unitranche debts were first introduced in 2005 in the United States.
They gained immense popularity as one of the essential financing options in the European leveraged loan market, which started in 2012. Unitranche financing goal is to establish debt-financing terms which are flexible and that increase access to capital for the companies. New energy will be given to the traditional debt and increase the market's liquidity by the borrowers of the market.
Non-traditional entities lend the debt, which is mainly provided by unitranche debts in which institutional lenders and debt funds are included. The focus is primarily on middle-market lending and lender acquisition. Under this financing, individual lenders will provide the full credit with one single document in the time of financial crises and credit crunch, which followed the troubled companies and then unable to offer loan facilities from mainstream credit markets.
How does a unitranche loan work?
The financing option of a unitranche loan, which is the most flexible one among all the financing debts, is uniquely designed best to fit the needs and demands of the borrower so that the interest rates and risk level can be optimized by the loan design. During the organizational deal, the borrower is must liable to staggered the priority levels if repayment default occurs. When the deal is closed, the average cost of debt does not allow the borrower to keep track of the disparate repayments.
The unitranche debt is divided into different vehicles as tranches. Each tranche receives its class designation, which underwrites carefully to determine and help the terms, detailing the period's pay, seniority, duration of the agreement, and interest rates. Each borrower identifies the tranche through their specified name issued every year and records letters that make the investment easier for the investors for a particular vehicle.
Other provisions, in which additional tranches are subdivided which determines the seniority for the repayment at the principal, call rights, fixed interest versus floating rates that can be tagged into tranches. Inside every tranche, the investors are divided separately into two groups which they call first-out and last-out. Both of these categories have shared relationships with each other the AAL governs said and outlines the rights of sub-tranches and repayments.
Users of Unitranche loans:
Unitranche debt is mostly beneficiary for middle-market corporate with sales of $100million less than and $50 million less than EBITDA. These unitranche loans for credit markets act as an alternative for corporations that do not have access to substantial credit facilities from traditional financial institutions. Unitranche loan sizes, on average between $100 million, are often used for the buyouts of finance leveraged as buyouts managements and equity acquisition privately.
Unitranche debt structure:
The definition of Unitranche debt clearly shows a combination of senior debt and subordinated loans in the unitranche debt structure. Senior debt is money which company-owned and then first claims its cash flows. Senior debt is more secure than any other debt. Meanwhile, Subordinated debt is a debt that works on the ranking of debts if one company falls into bankruptcy or liquidation.
Also, Considering the impact on the capital structure of companies moving forward with the financing of unitranche corporations should consider all the effects of unitranche debt structure on their capital structure. Many times the companies deny getting a single loan because of more risk. Instead, they want to benefit from diversifying sources that provide multiple funding across different lenders.
Unitranche debt structure is simple and tight when timeless, which means that unitranche debt may not be the right debt option for every company due to their diversified company structures and financing options.
Advantages of Unitranche debt financing:
There are mainly three main essential benefits of unitranche debt financing are present which are discussed below:
- Simple Structure with flexible repayment terms: Financial covenants of one set to think through and analyze to simplify the negotiations with all the lenders and structured repayments, which can also be adapted to business cash flow's unique profiles.
- Reduced Cost: Single instrument of debt reduces the legal document numbers, including all the required inter-creditor agreements, and decreases the overall cost.
- Efficiency and Certainty of closure: Agreement of a single loan with a counterparty makes the loan easier to ensure and close, particularly in any acquisitions scenario where all the period's exclusivity creates timelines tight.
Disadvantages of Unitranche Debt:
Unitranche loans with call protections usually come with the requirement of borrowers to make all the certain repayments for a predetermined time duration. This will then lock all he calls protection from borrowers' debt for a specific minimum time duration. Also, they are not liable to use excess cash and reserves to pay their debt off voluntary some amounts.
Unitranche debt financing is the most popular way during the economic crisis to remain in the business middle-market and access overall alternative financing markets. Unitranche debt provides relief to its debtors, eases all the market stress, and empowers its borrowers with the most flexible conditions in the industry. Unitranche debt is the most easy-going and least regulation-bloated with the speediest ways to provide companies that help them grow in a sustainable process. The low overheads and lending process provide long-term savings, saving their money. Business owners can easily focus on their most important business commitments to grow and run their businesses. The varying structure provides ease for the company owners and helps them to maintain their debt according to their company cash flows and helps them manage their business, and gives them an edge over their competitors.
