A Guide to Understanding Unitranche Debt

The world of corporations and enterprises can be complicated, especially when it involves money. While successful in the revenue department, many organizations still need financial assistance from other companies, usually lenders.

With the need for money for specific business-related reasons, these organizations look for lenders to pool funds. Some find a single source, while others look for several. Some still find several sources of funds that are treated as one.

This is called a unitranche debt. If you are not familiar with this kind of debt, this simple guide can help you understand.

A Guide to Understanding Unitranche Debt

What Is A Unitranche Debt?

This type of financing follows a hybrid model. It is offered to corporate borrowers with sales less than $100 million. They must also have an EBITDA of less than $50 million. 

Essentially, it is a combination of senior and subordinated loans from various sources treated as one. In short, they are unified into one tranche. Like all other types of debt, an interest rate is imposed on the borrower.

The thing is, these multiple loans have their own interest rates. Because a unitranche debt is combined into one, the borrower will be paying only one rate. This is determined by looking at the highest and the lowest rates and setting the final rate in the middle. 

This option is often used in institutional funding, giving the borrower the chance to dip into different lender funds. This gives the person taking out the loan to close a deal faster when done the right way. 

Unitranche Debt Structures

Another thing you need to know about this is that it can have different structures, which is mainly concerned with the repayments. This is why lenders have call protections that allow them to set predetermined schedules for repayments. 

The main providers of these kinds of debt are non-traditional lenders, including debt funds. These are more focused on middle-market lending, as well as acquisition finance.

Difference Between Unitranche And Syndicated Debt

Many people consider syndicated debt as a type of unitranche debt. However, it is important to understand that the two are different. While a syndicated loan involves more than one lender investing in your company, each entity agrees upon the terms or similar terms.

Such a loan also uses underwriters and involves a complex underwriting process. Plus, these loans can be in the form of several lenders that each provide individual ones. Each is considered a single tranche.

The main difference is its structure as both involve multiple lenders, but syndicated loans have multiple tranches, while unitranches are multiple tranches that are unified.

So, Is Unitranche Good Or Bad?

Borrowers have the capacity to determine whether this kind of debt is good or bad. On the negative side, this may be unfavorable for organizations that do not have the capacity to commit to fixed repayment schedules. 

On the plus side, this kind of debt is much more simple for the borrower as it would no longer need to keep track of several credit lines; instead, it will be managing only one. Plus, applying for this loan is much easier compared to sending in applications for many.

This option also gives borrowers the ability to negotiate the loan terms, making the contract a more flexible one. Plus, this is much easier to access compared to loans issued by traditional sources such as banks. 

With the help of unitranche debt issuers, these lenders are gathered together and are given proposals and negotiations to establish terms that would be more favorable to borrowers.

More Benefits

Corporations dealing with transactions that must be settled within a given timeframe with a fast-approaching deadline will benefit from this, as well. This gives them access to funds enough to close the deal in time. 

Plus, this kind of debt is much more cost-efficient, as it usually has lower administrative costs. This is because you are only dealing with one administrative agent. You also have the opportunity to get a lower interest rate. 

A Guide to Understanding Unitranche Debt

The Bottom Line

Unitranche debt is a great option for corporations who need financial assistance can be favorable to them. 

With various advantages such as minimal costs, access to multiple sources, lower rates, and easier application, this option may help enterprises in need.