Unitranche loans – flexible funding for the mid-market

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Unitranche loans have become an established feature of UK mid-market financing but what are the advantages and disadvantages for borrowers?

Unitranche loans have become an established feature of UK mid-market financing. With origins in the US, borrowers and sponsors are increasingly being drawn to the product. Unitranche loans are provide by specialist non-bank lenders and saw their popularity increase at a time when bank liquidity to the mid-market was limited.

As with all debt products, unitranche loans have their advantages and disadvantages which must be carefully considered but what are they?

Advantages

Speed
Unitranche loans will typically be provided by a single lender. Negotiations can be fast-tracked with the lender as there is no need to bring along a syndicate of banks. Alongside speed comes certainty that the funding will be delivered and not frustrated by multiple credit committees or the syndications market.

Flexibility
Because unitranche loans are not typically syndicated or marketed to a wider group of lenders parties can negotiate bespoke terms. Lenders are not hampered by having to deliver a marketable product that can be traded in the secondary market so the covenants can be tailored to the needs of the client.

Lower debt service
Unitranche lenders are typically looking to have their funds deployed for a fixed period of time so there is little or no amortisation. With lower annual debt service more cash can be retained within the business for growth and development.

Waivers, amendments and increases
While a unitranche lender may seek to tranche the loan and transfer out parts to other lenders, typically a unitranche lender will want to hold the investment to term. Where there is only one lender the process for obtaining waivers and amendments or agreeing bolt-on debt for further acquisitions will be much easier and quicker than a conventional syndicated bank facility.

Leverage
Leverage will typically be 1xEBITBA higher than an equivalent senior syndicated facility.

Disadvantages

Unsurprisingly the advantages of unitranche loans come at a price and some borrowers may find that unitranche loans are initially more expensive than a conventional syndicated package.

Pricing
With flexibility comes higher margins. Interest rates will typically be higher than a conventional senior syndicated package.

Interest cost
With little to no amortisation, unitranche loans may not suit borrowers who are seeking to reduce leverage gradually over time with available cash. The cost of having to pay interest on debt which might otherwise be reducing could be substantial.

Bullet payments
The principal will need to be repaid at maturity as a bullet. Like any bullet repayment product this presents a refinancing risk for the borrower.

Prepayment fees/make-whole
While it will certainly be a point for negotiation, unitranche lenders typically expect their funds to be deployed for a fixed period so may impose a prepayment premium for early repayment. For borrowers seeking to reduce capital over time or refinance early this premium could be a costly impediment.

David Varnham recently joined Mills & Reeve to lead our banking team in Birmingham. David moved from the banking team of Allen & Overy LLP where he spent over 10 years.

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