Unitranche loans: how are they evolving?
Annette Kurdian & Sam Lukaitis
25 February 2015
Outline
1. What are unitranche loans?
2. Unitranche loans compared to other potential financing structures
3. What are the advantages/disadvantages of unitranche loans to borrowers?
4. Intercreditor issues:
a) The Intercreditor agreement: RCF/hedging v unitranche
b) The Agreement among lenders: “first out”/“senior” v “last out”/“junior”
c) other market approaches: joint venture arrangements and “dual tranche”
unitranche loans
5. The future of unitranche loans
Unitranche loans: how are they evolving?│ February 2015
What are unitranche loans?
 Background
•
History: from the US to Europe
•
Why are they relevant now? A source of liquidity in the mid-market as banks delever/adhere to liquidity and capital requirements imposed by Basel III
•
Traditionally ACPs, but banks re-entering the market to invest alongside the
unitranche providers (i.e. not just capex/RCF)
1. “Classic unitranche”
•
Avoids senior/mezz – blended interest rate allows lenders to take individual risk
positions and receive different economic rewards
•
Risk/reward position – historically not disclosed to borrower (dealt with in “AAL”)
2. “Strategic unitranche”
•
For more difficult credits
•
Traditional lenders not as interested – a more expensive senior deal as no real
blending of senior/mezz. Often alongside equity co-invest to achieve targeted returns
Unitranche loans: how are they evolving?│ February 2015
What are unitranche loans? (cont.)
 Purpose
•
Multi-purpose financing
•
E.g. acquisition (Anesco, CRH, Big bus tours, Wireless logic)/refinancing (Trainline,
KP1)/dividend recap (Amtek global technologies)
 Size? From small beginnings  financing mid-market deals
 Is there a market standard? A search for common themes
•
Increasingly so, but the terms vary depending on lender/credit/debt
advisers/competitive tension…and the type of unitranche
 Use in Europe: need to watch bank monopoly issues (e.g. France & Germany) but
deals done using bond or fronting bank structures
 Key selling point of unitranche is its flexibility – positions evolve and bespoke
covenant packages can be created…
Unitranche loans: how are they evolving?│ February 2015
Unitranche: structuring
Financial sponsors
“Senior”
tranche
Management
“Junior”
tranche
Shareholders’ agreement
Topco
Agreement among
lenders
Intercreditor group
Covenant group
Parent
RCF
Vendor
Sale and
purchase
agreement
Hedging
Bidco
Unitranche facility
“Senior A” / “Junior B”
Target
Guarantee and
security package
Target opcos
Guarantee and
security package
Unitranche loans: how are they evolving?│ February 2015
Unitranche and other debt products: deal size
Possible funding options
Unitranche
Syndicated loan
Club loan
Bilateral loan
High Yield Bond
Asset-based Lending
0
50
100
150
200
250
300
350
400
450
Source: Michael Dance (Senior Consultant), Grant Thornton
Unitranche loans: how are they evolving?│ February 2015
Unitranche: market sentiment
“Bonds jostle with unitranche financing in cash-strapped European
middle market”
(Financial Times, 8 October 2013)
“Unitranche loans increase presence in Europe's leveraged market”
(Reuters, 22 December 2014)
“Chunky unitranches provide alternative route for slow syndications and
unique deals”
(Debtwire, 5 January 2015)
Unitranche loans: how are they evolving?│ February 2015
Unitranche and other debt products: features compared
Comparison of Key Features
5.0–5.5x
3.0–4.5x
ssRCF/HYB
EUR 150–800m (ssRCF a small % of capital
structure)
4.0–6.0x
3–4 weeks (fast)
8 weeks (medium)
12 weeks (min.) (slow)
Flexible terms
Yes: tailored to client
Historically, tight covenants  but note
cov lite/TLB
Incurrence covenants = operational flexibility
Cash retention
Good (bullet repayment often
without cash sweep / cash sweep +
unitranche right to waive)
Usually but negotiated
Historically, more restrictive: cash
sweep and amortisation but note cov
lite/TLB
Mezz only
Very good
More expensive than senior
Dearth of mezz opportunities – query if
overall slightly cheaper than unitranche?
No for senior only (sometimes for mezz)
Expensive for small issues but can be fixed
rate
No, but HY will sometimes have PIK
Most flexible
Size
Leverage
Speed
Call protection
Pricing
PIK / Equity /
Warrants
Distributions
Unitranche
EUR 30–250m
Sometimes
More flexible than senior/mezz
Senior/Mezz
EUR 30–800m (Syndicated)
HYB only
Fees / Expenses
Generally cheaper than senior/mezz
Historically limited, but growing
convergence with HY flexibility
Generally more expensive
Documentation
Single loan agreement, ICA, “AAL”
Two loan agreements, ICA
RCF, HYB, ICA
Payment blocks
Not usually but query if in “AAL” if
US style?
Unitranche lead subject to
RCF/hedging step-in rights (3/6
months/insolvency?), but note “AAL”
Mezz typical payment blocks – 120 days
No (unless subordinated HYB – 179 days)
Enforcement
Expensive
Senior lead subject to mezz step-in
HYB lead subject to RCF/hedging step-in
rights (90/120/150 days)
rights (3/6 months/insolvency)
Unitranche loans: how are they evolving?│ February 2015
Unitranche: what are the advantages and disadvantages
to Borrowers?
Advantages
Disadvantages

Speed of execution / deliverability

Sourcing working capital requirements /
committed (but undrawn) facilities

Flexibility (covenant package / structure
often more bespoke so suits complex
situations)


Lower debt service burden (bullet
repayment preserves cash for growth via
acquisitions and capex)
Simplicity of decision making (tighter lender
group / relationship lending)

Pricing (may be higher in the first couple years,
but can apply cash to entire tranche of debt
(incl. PIK) rather than just senior and less
expensive debt)
Transparency

Non-call (lock in returns for lost yield but subject
to negotiation)
Leverage – at least a turn / turn and a half
higher than senior only (usually 5.0x-5.5x
but have seen up to 6.0x)

Equity / warrants: board observer rights?


Unitranche loans: how are they evolving?│ February 2015
Unitranche: intercreditor issues (RCF/hedging v
unitranche)
 Ranking
•
The approach now generally follows the European ssRCF/HY intercreditor position (i.e. pari but
RCF/hedging “super senior” in relation to distribution of enforcement proceeds)
 Enforcement
•
The approach now generally follows the European ssRCF/HY intercreditor position (i.e.
unitranche control subject to RCF/hedging step-in rights – consultation?)
•
“Material events of default”: non-payment, insolvency, financial covenant breach, information
covenant breach, cross-default, negative pledge etc
 Voting
•
RCF/hedging will have entrenched rights which cannot be amended/waived without their
consent: e.g. enforcement regime, RCF acceleration provisions, “Material events of default”,
certain other matters that go to the security package (given RCF/hedging’s super senior
position)
 Option to Purchase
•
Unitranche able to take out the “super senior liabilities” at par following acceleration
Unitranche loans: how are they evolving?│ February 2015
Unitranche: “Agreements among lenders”
 Background
•
The AAL is the document required to get from the unitranche facility (as set out in
the credit agreement) to the underlying agreement that has been struck between
the unitranche providers (“Classic unitranche”)
 Key Principle
•
The “First out” or “Senior” unitranche lender receives a lower portion of the blended
interest rate paid under the credit agreement in exchange for an enhanced
risk/security position
 Payments
•
The US approach: (i) distribution of interest payments – “First out” take senior
portion; (ii) prepayments rateable but post “waterfall trigger event” all payments to
“First out”
 Enforcement
•
The opposite to the European ssRCF/HY position: “First out” control enforcement,
therefore more in line with the senior/mezz position
Unitranche loans: how are they evolving?│ February 2015
Unitranche: “Agreements among lenders” (cont.)
 Voting
•
Default rule: consent of both the majority “First out” and majority “Last out” required
 Transfers
•
“Right of first offer”
•
What does this mean for a potential investor? More than one AAL?
•
Potential disclosure and confidentiality issues?
 Buy-out
•
Bilateral buy-out options post-enforcement (both ways) and where “Last out” fails to
approve an amendment (by the “First out”)
 Other potential issues?
•
Transparency, liquidity for incoming/outgoing lenders, insolvency, schemes of
arrangement…not work out tested!
Unitranche loans: how are they evolving?│ February 2015
Unitranche: joint ventures and “dual tranches”
Joint ventures
• General – e.g. Ares/GE joint venture
• Transaction specific
“Dual tranche” unitranche
• Two tranches (each provider a lender of record): senior (A) and junior (B)
• Different pricing within unitranche or same as RCF? Senior tranche often
invested by banks providing the RCF/hedging
• Purpose to achieve overall reduction in unitranche margin (as if blended)
• Intercreditor issues? Does “senior” unitranche vote get counted in “super
senior lender” vote on entrenched rights/enforcement etc?
Unitranche loans: how are they evolving?│ February 2015
Unitranche: the future
• Deal sizes growing
• Future club deals (e.g. Trainline and beyond)?
• Convergence with HY/TLB terms and/or covenant lite?
• Partnerships between banks and direct lending institutions are key
• Market will evolve to get deals done…
Unitranche loans: how are they evolving?│ February 2015
Any questions?
Or comments, or observations?
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Unitranche loans: how are they evolving?│ February 2015
Your presenters
Annette Kurdian
Partner, Banking
Tel: +44 20 7456 2431
[email protected]
Sam Lukaitis
Associate, Banking
Tel: +44 20 7456 2296
[email protected]
Unitranche loans: how are they evolving?│ February 2015
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Unitranche loans: how are they evolving?│ February 2015