Unitranche Financing
Definition
Unitranche financing is a single loan facility that combines senior and subordinated debt into one instrument, typically used in middle-market leveraged buyouts. Rather than split financing into first-lien and second-lien tranches with different lenders, a unitranche provides the entire debt package from one lender or lending syndicate. Pricing reflects blended risk, typically L+450 to L+650 basis points with higher advance rates than traditional senior debt alone.
Why it matters
Unitranche simplified middle-market LBO financing by reducing execution complexity and eliminating inter-creditor negotiations. For borrowers, benefits include single point of contact, faster closings, and higher leverage (often 5.0-6.0x EBITDA vs 3.0-4.0x for senior-only). For lenders, unitranche generates higher all-in yields (9-12% in 2024-2025 environment) while maintaining first-lien security. The structure became dominant in sub-$500M deals where traditional syndication is inefficient. However, recovery analysis is more complex—in default, unitranche lenders face blended recovery rates rather than pure senior or subordinated outcomes.
Common misconceptions
- •Unitranche is not 'riskier' than senior debt—it simply prices blended risk explicitly. The security position is still first-lien.
- •Unitranche doesn't mean 'covenant-lite.' Many unitranche facilities include maintenance covenants, particularly in sponsor-backed deals.
- •The 'single lender' description is somewhat misleading—many unitranche facilities involve multiple lenders in a syndicate, but with a single intercreditor arrangement.
Technical details
Structural mechanics
Unitranche facilities typically include both senior and subordinated risk but maintain first-lien security on all collateral. The economic subordination is achieved through payment waterfalls and priority of payments during amortization or default, not through separate lien positions.
Standard terms include first-lien on all assets, FCCR covenants (typically 1.0-1.2x), leverage maintenance covenants (often 6.0-6.5x total debt / EBITDA), and financial reporting requirements. Pricing includes upfront OID (2-4%), annual management fees (0.5-1.0%), and prepayment penalties for early refinancing.
Risk positioning vs traditional structures
In traditional structures: Senior lenders at L+300 with 3.5x leverage, mezzanine at 12-14% PIK with additional 2.0x leverage. Total blended cost ~9%.
In unitranche: Single lender at L+550 with 5.5x leverage, all-in cost ~10%. The lender captures both senior and subordinated economics but assumes blended default risk.
Recovery expectations: Traditional senior debt recovers 70-80% in default, mezz recovers 20-40%. Unitranche models blended recovery of 50-60%, reflected in pricing and underwriting.
Risk positioning vs traditional structures
In traditional structures: Senior lenders at L+300 with 3.5x leverage, mezzanine at 12-14% PIK with additional 2.0x leverage. Total blended cost ~9%.
In unitranche: Single lender at L+550 with 5.5x leverage, all-in cost ~10%. The lender captures both senior and subordinated economics but assumes blended default risk.
Recovery expectations: Traditional senior debt recovers 70-80% in default, mezz recovers 20-40%. Unitranche models blended recovery of 50-60%, reflected in pricing and underwriting.
Standard terms and pricing
Unitranche facilities typically include first-lien on all assets, FCCR covenants (typically 1.0-1.2x), leverage maintenance covenants (often 6.0-6.5x total debt / EBITDA), and financial reporting requirements.
Pricing includes upfront OID (2-4%), annual management fees (0.5-1.0%), and prepayment penalties for early refinancing. All-in yields typically range 9-12% in 2024-2025 environment.
The economic subordination is achieved through payment waterfalls and priority of payments during amortization or default, not through separate lien positions.
Risk positioning vs traditional structures
In traditional structures: Senior lenders at L+300 with 3.5x leverage, mezzanine at 12-14% PIK with additional 2.0x leverage. Total blended cost ~9%.
In unitranche: Single lender at L+550 with 5.5x leverage, all-in cost ~10%. The lender captures both senior and subordinated economics but assumes blended default risk.
Recovery expectations: Traditional senior debt recovers 70-80% in default, mezz recovers 20-40%. Unitranche models blended recovery of 50-60%, reflected in pricing and underwriting.
Market evolution and fund strategy
Unitranche emerged as BDCs and direct lending funds gained scale (2010-2015), allowing them to hold $50-150M single-borrower exposures. Growth accelerated as traditional banks reduced middle-market lending post-financial crisis. By 2020, unitranche represented 60%+ of middle-market LBO financings under $500M enterprise value. Fund managers favor unitranche for higher yields and relationship control, but require more sophisticated underwriting given blended risk profile.