Unitranche facilities are a type of financing structure that combines both senior and subordinated debt into a single loan agreement with one blended interest rate, rather than having two separate loans. This simplifies the capital structure for the borrower, as they only need to deal with one loan and one lender or lending group, even though the loan is essentially a blend of different layers of risk.

Key features of unitranche facilities include:

1. Blended Interest Rate: Instead of having different interest rates for senior debt (which is typically lower) and subordinated debt (which is typically higher due to its higher risk), unitranche facilities offer a single, blended interest rate. This rate reflects the combined risk of the loan’s senior and junior components.
2. Single Loan Structure: Borrowers deal with just one loan agreement, which simplifies documentation, reporting, and administration. This makes the financing process more efficient compared to managing multiple loans with different repayment terms and covenants.
3. Tranche A/B Structure: Even though it is structured as a single loan, some unitranche facilities may have an “agreement among lenders” (AAL) behind the scenes, which divides the facility into tranches, often called “Tranche A” (senior) and “Tranche B” (junior or subordinated). The borrower doesn’t see this division, but it helps lenders manage risk internally.
4. Flexibility: Unitranche financing provides flexibility in terms of covenant structures and repayment terms. It is often more adaptable to the specific needs of the borrower compared to traditional senior and subordinated debt structures.
5. Speed and Efficiency: Since there is only one set of loan documents and typically fewer parties involved (such as a single lender or a small group of lenders acting together), unitranche facilities can be arranged more quickly than traditional financing structures. This is particularly advantageous in time-sensitive transactions like mergers and acquisitions (M&A).
6. Higher Leverage: Unitranche facilities often allow for higher leverage compared to traditional senior lending, making them attractive for borrowers looking to maximize borrowing capacity, such as in leveraged buyouts or growth capital scenarios.
7. Common in Middle Market Transactions: Unitranche financing is popular in the middle-market segment, especially in private equity-backed deals, where companies may need a flexible and efficient financing structure to support acquisitions, expansions, or recapitalizations.

Benefits of Unitranche Facilities:

• Simplified Structure: One loan, one set of documents, and one lender group simplifies the process.
• Speed of Execution: Faster due diligence and loan execution, which can be critical in M&A deals.
• Higher Leverage: Borrowers can often secure more debt than they could with a traditional senior and subordinated debt stack.
• Predictable Payments: The single blended rate provides clarity and predictability for borrowers regarding their interest payments.

Potential Drawbacks:

• Higher Cost than Pure Senior Debt: The blended interest rate is typically higher than traditional senior debt rates, although it is lower than what subordinated or mezzanine debt would cost.
• Limited Lender Options: Not all lenders offer unitranche facilities, so there may be fewer potential financing partners compared to traditional structures.

Unitranche facilities are commonly used in leveraged buyouts (LBOs), private equity transactions, and corporate refinancings where borrowers need substantial amounts of debt and value the simplicity and flexibility of this financing option.