A unitranche loan is a single debt facility that blends senior and subordinated risk into one instrument with one coupon. The subordination happens privately among lenders through an Agreement Among Lenders, not through public inter-creditor agreements like traditional senior and mezzanine financing stacks.
The structure emerged because sponsors value speed and certainty over the lower headline rates available in broadly syndicated loans. Lenders prefer the control and bilateral relationships that come with higher risk-adjusted returns. The borrower trades a modestly higher all-in cost for deal certainty, faster execution, and fewer counterparties to manage.
As a practical rule of thumb, the speed premium is real. If unitranche financing can close 30 to 45 days faster than a syndicated alternative, sponsors often justify 50 to 100 basis points of extra spread by avoiding financing gaps, broken syndications, or delayed closings that jeopardize purchase agreements.
Private credit became the go-to debt solution for sponsor-led mid-market buyouts. Global private credit assets under management reached about $2.1 trillion in 2025, up from 1.5 trillion dollars a year earlier. Private credit provided roughly 80 percent of North American buyout financing by deal count in 2023 as syndicated markets remained selective.
Unitranche dominates direct lending for cash flow leveraged buyouts in the core and upper middle market. Average all-in yields for new private credit deals ran 12 to 13 percent in the first half of 2024. Average total leverage in sponsored middle-market unitranche deals hovered around 5.0x EBITDA in mid 2024 as lenders focused on free cash flow and covenant headroom.
Private lenders increasingly arranged mega-unitranche solutions above 2 billion dollars in 2023 and 2024, facilitated by clubs of direct lenders and business development companies.
In the United States, unitranche facilities operate under New York law credit agreements with a separate Agreement Among Lenders among direct lenders. The borrower signs the credit agreement and security documents but not the AAL. The AAL creates a first-out and last-out waterfall, lien and payment subordination, consent rights, and loss sharing for the lender group. Courts generally treat AALs as enforceable contracts among lenders.
In the United Kingdom and European Union, unitranche facilities use English law facilities agreements with a parallel intercreditor deed setting priority between the unitranche and any super-senior revolving credit facility. Security comes via English law debentures and local law pledges across operating jurisdictions.
Super-senior revolving credit facilities appear in both regimes. A separate intercreditor agreement sits between the RCF lender and the unitranche agent, giving the RCF priority over working capital collateral and waterfall proceeds up to a cap.
Capital comes from one or more private credit funds or business development companies, often via a single administrative agent. Sponsors contribute equity at closing. Lenders fund the term loan simultaneously or per a draw schedule that supports acquisitions and capital expenditure.
Collateral includes a first-priority lien on all assets of the borrower group and a pledge of shares, with guarantees from material subsidiaries. Foreign subsidiaries may be excluded or capped for tax or financial assistance reasons to avoid adverse withholding or trapped-cash outcomes.
Priority of payments under the AAL dictates that first-out lenders receive scheduled interest, amortization, and prepayments before last-out lenders. The AAL sets cure rights, purchase options, and voting thresholds for waivers and amendments so that each tranche has a say in changes that affect its economics or risk.
Information rights match private credit standards. Lenders expect monthly and quarterly financials, compliance certificates, budget-to-actuals, and sometimes board observer rights. Transfer restrictions limit assignments to competitor lenders and distressed-debt buyers without sponsor consent, while allowing transfers to affiliated funds and CLOs subject to minimum holds.
Unitranche loans are maintenance-covenant instruments with at least one leverage covenant tested quarterly. In the first half of 2024, the vast majority of private credit deals contained a maintenance covenant; only a small minority were covenant-lite and those skewed to large-cap credits with strong sponsors.
The financial covenant is typically a single net first-lien or total net leverage covenant with an initial cushion of 25 to 35 percent over the base case plan, stepping down as cash flow grows. Incremental debt permissions are sized by the larger of a fixed amount and a grower basket, with most-favored-nation protection capping new-money margin increases at 50 basis points for 6 to 12 months.
Restricted payments are permitted subject to leverage tests and starter baskets. Builder baskets are driven by a portion of consolidated net income. Investments and transfers are limited to permitted baskets and acquisitions to keep leakage controlled.
Voting thresholds differ inside the AAL. First-out lenders often hold veto rights over collateral releases, payment priorities, and maturity extensions that affect their tranche. Last-out lenders typically control structural waivers and the ability to accelerate.
Equity cure options exist but are bounded. Many deals limit cures to two per rolling four quarters and require cash-only cures. For more detail, see how an equity cure works in practice.
The base rate is a floating benchmark, often Term SOFR in the United States and SONIA or EURIBOR in the United Kingdom and Europe, plus a credit spread. Margins in the first half of 2024 clustered in the SOFR plus 550 to 725 basis points range for core and upper middle market, with 50 to 100 basis points step-downs at leverage milestones for top-tier credits. Base-rate floors are common at 50 to 100 basis points.
In first-out and last-out unitranches, the borrower pays one blended margin, and the AAL privately redistributes cash with a strip or fee flip. First-out economics often come via higher upfront fees, back-ended exit fees, or a spread paid by last-out. The last-out receives the residual coupon and bears higher final-loss risk.
Original issue discount and upfront fees are paid at closing and amortized for accounting. In the first half of 2024, average OID on private credit deals ran around 2 to 3 percent of funded principal. Arranger or structuring fees of 50 to 150 basis points are common on larger clubs.
Most unitranches carry call protection for 12 to 24 months. Typical terms include 102 to 101 soft call on repricing or refinancing and 1 percent hard call in year one on voluntary prepayment. Scheduled amortization is light at 1 to 5 percent per year with a bullet maturity at 5 to 7 years.
Consider a 500 million dollar unitranche at SOFR plus 650 basis points with a 1 percent floor, 2 percent OID, and a 1 percent upfront fee. With SOFR at 5.3 percent, the cash coupon is 11.8 percent, producing about 59.0 million dollars of annual interest. OID and upfront fees add approximately 1.0 percent to the effective yield if amortized over a five-year expected life, taking the all-in lender yield to roughly 12.8 percent. For investors, that all-in result ties directly to yield-to-maturity math and the timing of fees.
Under United States GAAP, the unitranche is recorded at amortized cost. Debt issuance costs and OID are amortized into interest expense using the effective interest method. Under IFRS 9, the borrower classifies the unitranche as a financial liability measured at amortized cost unless designated at fair value through profit or loss.
Private credit funds and business development companies generally report investments at fair value with unrealized gains and losses through earnings. Banks may carry loans at amortized cost with CECL allowances. Borrowers disclose debt terms, maturities, interest rates, covenants, and compliance status in the notes to the financial statements.
AAL enforceability and bankruptcy dynamics present complexity. AALs govern lender-on-lender priorities, but bankruptcy courts focus on rights against the debtor. Lenders must ensure sacred rights truly require unanimous consent and MFN protections cover uptiers and similar liability-management tactics.
RCF intercreditor friction can emerge. Super-senior banks may have shorter standstills and tighter cash dominion triggers. Without clear turnover and release mechanics, an RCF can delay enforcement or block waivers that private lenders want to grant, which can harm recoveries or slow restructurings.
Covenant erosion through aggressive EBITDA add backs, large grower baskets, and ratio-based exceptions can weaken protections. In 2024, market caps on pro forma cost savings add backs clustered around 25 to 35 percent of EBITDA. Transfer and liquidity constraints can trap lenders in deteriorating credits, while overly permissive transfers can shift control to distressed specialists early in a downturn.
Traditional senior plus mezzanine can achieve a lower weighted cost of capital if mezz carries equity kickers, but intercreditor complexity slows execution and reduces flexibility. Unitranche wins on speed, confidentiality, and single-document control.
Broadly syndicated term loans usually price inside unitranche in risk-on markets with active CLO demand and covenant-lite terms. In volatile markets or for smaller issuers, distribution risk and prolonged timelines favor unitranche. For background, see how syndicated loans work across cycles.
High-yield bonds provide long non-call periods and no maintenance covenants but require scale and ratings, public disclosure, and open market windows. Unitranche serves private companies with bespoke needs better when speed and certainty outrank headline price.
Compressed timelines where a sponsor needs committed financing in 2 to 3 weeks favor unitranche. Credits that are strong but niche, with limited syndicated demand or complex adjustments requiring bespoke diligence, benefit from the structure. Buy-and-build strategies that need delayed-draw term loans and permissive M and A baskets with predictable funding work well.
By contrast, collateral-rich companies that can anchor a low-cost asset-based facility with a modest cash flow piece may find better alternatives. Issuers with near-term public-market refinancing catalysts that can achieve tighter spreads in BSL or bond markets should consider those options. Companies with volatile cash flows or thin EBITDA where a maintenance covenant creates undue default risk may be poor fits.
The unitranche market reflects a shift toward relationship lending over distributed execution. For sponsors who value certainty and speed over the last basis point of cost savings, and for lenders who prefer control over scale, unitranche delivers what both parties actually want. The higher cost is the price of getting what you pay for.
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