What is a Senior Stretch Loan
A senior stretch loan is a type of hybrid loan structure offered primarily to middle-market companies to finance leveraged buyouts (LBO). Also known as "unitranche" financing, the senior stretch loan combines senior debt and junior debt into one package, typically at a lower average cost to the borrower than a separate senior loan and junior piece (mezzanine or second-lien).
BREAKING DOWN Senior Stretch Loan
Senior stretch loans "stretch" into financing needs of the borrower but at a higher risk to the lender than a conventional senior loan. With this higher risk comes a higher blended interest payment to the lender. These types of loans have taken market share away from the traditional method of financing a leveraged buyout by securing a commitment for a senior loan for a portion of the total funding need and then obtaining junior debt in the form of a mezzanine or second-lien loan for the balance.
Pros and Cons of a Senior Stretch Loan
For the borrower, the senior stretch loan provides speed and convenience. The borrower does not have to negotiate separately with two different parties, the senior loan provider and the junior loan provider; it deals with a single lender and thus streamlines the documentation process, saving time and legal fees and enhancing the flexibility of the private equity sponsor of the LBO to close the transaction. In addition, should there be a need for credit agreement waivers or consents in the future, the borrower only has to turn to the single lender for execution. However, the senior stretch loan presents additional risk to the lender because it is exposed to greater overall leverage of the borrower. If it provides only a senior loan, the bank would be exposed to 4x debt-to-EBITDA, for instance, but with a senior stretch loan, the leverage could be 6x or 6.5x. Also, and related to risk with higher leverage, the single lender would stand alone without a syndicate to share the risk.