Unitranche Funding
Unitranche funding is the best solution for a cash flow-based deal that needs both a senior and subordinated component. Unitranche funding offers both senior and subordinated layers in one integrated loan from one loan provider. Unitranche is provided by a number of different types of lenders including private debt funds, public business development corporations, independent mezzanine funds and alternative finance companies. Unitranche is ideal for companies with the following criteria:
- Loan need of > $15 million.
- Combined company has light assets but strong EBITDA.
- EBITDA > $5 million.
- Combined history of stable financial performance.
- Total debt to EBITDA multiple of less than 4x.
Unitranche Funding is a loan consisting of two components blended into one, unified loan structure. This type of loan is efficient and scalable as it alleviates the usual intercreditor bottlenecks between senior and subordinated lenders. Unitranche funding was popularized by private credit funds to compete with banks and mezzanine debt lenders by combining the benefit of their loans within an integrated structure making it more user friendly to raise. It involves one lender providing both the senior loan portion and the subordinated loan portion, making them a one-stop lender with less credit risk than a conventional mezzanine loan. While the loan amounts are larger, the replacement of the senior lender eliminates the need for structural subordination by the unitranche funding provider. This materially derisks their credit risk and gives them more influence as the sole provider of institutional debt capital to the borrower. As private credit funds continue to take market share from bank lenders, the adoption of unitranche funding is accelerating in the market.
Key Advantages of Unitranche Funding
The acquisition financing legal phase is fraught with potential delays and subordination negotiation is a primary cause. Senior bank lawyers often dig in and demand onerous terms with respect to blockage and standstill rights. Mezzanine debt lenders take more risk yet are susceptible to excessive bank subordination creating misalignment for them. Many deals fail because this negotiation takes so long. Unitranche Funding eliminates this stressful step in the process as it is one lender, not two providing the financing. Working with one lender rather than two makes due diligence easier and the credit approval process more streamlined. The entire deal timeline accelerates. Unitranche lenders also provide undrawn facilities for future acquisitions which makes their loan structure grow over time. This future access to capital is very valuable to companies that have plans to acquire a multitude of companies.
Key Disadvantages of Unitranche Funding
The subordination by the senior lender gives the borrower protection against the actions of the mezzanine debt lender. If the company is underperforming and the mezzanine lender is becoming aggressive, the senior lender can deactivate them and make them standstill. This allows the company to get back on track without the mezzanine lender breathing down their neck. With one lender, this protective mechanism goes away exposing the company to actions of the unitranche lender without a braking system. As the sole lender, the Unitranche funding provider can also exert pricing pressure. They can change the pricing structure with the borrower at a later date, especially if the company upsizes its delayed draw term loan facility.Frequently Asked Question
It ranges from 9% to 12% interest rate per year and sometimes requires equity warrants, where the risk return ratio takes on an equity investment complexion.
There are several EBITDA level break points which translate to higher debt multiples. Companies up to $8 million in EBITDA will be close to 3.25 times EBITDA. Companies with EBITDA from $8 million to $15 million will land close to 3.75 times EBITDA. Companies with EBITDA of $15 million+ will be at 4.0+ times EBITDA.
Private credit markets, including business development corporations and private credit funds provide the bulk of unitranche funding in the middle market. Many newly formed credit platforms located in high density private equity regions are providing unitranche funding. Private equity funds have also raised their own debt funds which provide it as well.
This is very important especially if you need additional funding to execute your growth plan. If your plan calls for a high level of acquisition activity, the delayed draw term loan is your capital bridge to your long-term vision.
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Unitranche funding is essentially a one stop, cash flow-based financing. Because it’s delivered by a single source provider, it is easier to raise and faster to close than a conventional two layer solution.
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