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.
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.