What is Unitranche Debt
Unitranche debt is a type of structured debt that obtains funding from multiple participants with varying term structures. This type of debt is typically used in institutional funding deals. It allows the borrower to obtain funding from multiple parties which can result in decreased costs from multiple issuances, provide for greater fundraising through a single deal process and facilitate a faster acquisition in a buyout.
Understanding DOWN Unitranche Debt
Unitranche debt deals can be structured in a number of ways. They primarily focus on priority repayment levels for the borrowers. Levels of risk can vary substantially in a structured unitranche debt deal with borrowers agreeing to various priority levels for repayment in the case of default. Unitranche debt may also be compared to syndicated debt. Both types of debt are structured under an overarching issuance agreement that provides an average cost of debt to the issuer.
Structuring Unitranche Debt
Structured unitranche debt will divide portions of the structured debt vehicle into tranches. Each tranche will have its own class designation. The issuer of the debt typically works with a large investment bank or group of investment banks to provide the structuring of the debt in an underwriting process. The underwriters will determine and document all of the terms of each tranche including details on its interest payments, interest rate, duration and seniority.
Seniority is typically the primary factor influencing the terms of each tranche level. The tranches of the debt can be dividend and represented by class level names such as the year of issuance followed by a letter. For example a unitranche vehicle with four tranches could be structured as 2018-A, 2018-B, 2018-C and 2018-D providing an identifier for lenders seeking to invest in the vehicle.
Underwriters will structure the tranches by seniority with the lowest risk tranches having the highest seniority for repayment in the case of default. These tranches are also known as secured tranches. Each tranche will have differing levels of seniority if the issuer defaults. Some unitranche vehicles may also rate various tranches to support marketing and disclosure of tranche sales. Underwriters can also structure each tranche with varying terms. Therefore, individual tranches can be customized and created with different provisions that are favorable for the issuer. Provisions may include call rights, full repayment at principal with no coupon and floating versus fixed rates.
Unitranche versus Syndicated
In some cases a syndicated loan may also be considered a type of unitranche debt. A syndicated loan is similar to a unitranche loan in that it involves multiple lenders making an investment. Syndicated loans also involve underwriters and an extensive underwriting process. In a syndicated loan the lenders all typically agree to similar terms however some syndicated loans may include individual loan portions to each lender considered as tranches. Overall, syndicated loans are typically less complex in their structuring than unitranche debt.