An Interactive Learning Guide
Unitranche debt is a single loan that combines both senior and subordinated debt into one facility. Think of it as a "one-stop shop" for debt financing, rather than having multiple separate loans with different lenders.
Instead of negotiating with multiple lenders (senior lender, mezzanine lender, etc.), the borrower deals with just one lender who provides the entire debt package at a blended interest rate.
One loan agreement instead of multiple complex documents
Faster execution without coordinating multiple lenders
More adaptable terms compared to traditional structures
Often allows for more total debt than traditional structures
Company requires $50M for a leveraged buyout
Direct lender offers entire $50M as one facility
Interest rate (e.g., SOFR + 6.5%) reflects combined risk of senior and subordinated debt
Lender may structure it with an Agreement Among Lenders (AAL) for first out/last out internally
Let's compare how the same $50M financing would look in traditional versus unitranche structures.
• 3-4 different lenders
• Separate loan agreements
• Intercreditor agreements
• Complex coordination
• One lender relationship
• One loan agreement
• Faster execution
• Flexible terms
| Feature | Traditional Structure | Unitranche |
|---|---|---|
| Number of Lenders | Multiple (3-4+) | Single lender |
| Documentation | Multiple agreements + intercreditor | One agreement |
| Execution Speed | Slower (4-8 weeks) | Faster (2-4 weeks) |
| Flexibility | Limited (multiple parties) | Higher (single relationship) |
| Workout Process | Complex (multi-party) | Simpler (one party) |
| Typical Pricing | Varies by tranche (5-15%) | Blended (6-8%) |
| Covenant Complexity | Higher | Moderate |
AAL is the internal mechanism that allows unitranche lenders to manage risk and economics. Think of it as a contract that creates invisible dividing lines within the single loan.
Agreement Among Lenders (AAL) is a contractual arrangement that splits a unitranche loan into "first out" and "last out" portions, determining who gets paid first in case of default, and defining the attachment levels where losses begin.
Lower risk portion that gets repaid first. Often sold to banks or conservative investors at lower rates.
Higher risk portion that absorbs losses first. Retained by direct lenders for higher returns.
Adjust the attachment level to see how it affects the first out and last out portions:
With a 60% attachment level on a $100M collateral pool with $65M of unitranche debt: • First Out: $60M (protected up to 60% LTV, lower risk) • Last Out: $5M (exposed to losses if value drops below 60%, higher risk)
Imagine the collateral value drops. Here's how losses flow:
Collateral Value: $100M | Total Debt: $65M | Attachment: 60%
LTV now 92.9% - Still above attachment level, no losses yet
Below 60% attachment! Last Out takes $5M loss. First Out still fully protected at $55M.
Last Out wiped out ($5M loss). First Out takes $10M loss. Recovery: $50M / $60M = 83.3%
Sell safer "first out" portion to banks at lower rates, keep riskier "last out" for higher returns
Earn spread between blended rate charged and lower rate paid on first out portion
Free up capital by selling first out, enabling more deals
Match different investors' risk appetites within same facility
Unitranche debt can be structured in various ways depending on the lender's strategy and the borrower's needs. Click on each structure to learn more:
One lender holds entire facility
Split between two lender groups
Multiple lenders, single facility
The simplest form where one direct lender provides and holds the entire unitranche facility.
Provides full $50M unitranche facility at SOFR + 6.5%
One credit agreement, one relationship, one point of contact
Retains entire facility on balance sheet, earning full spread
• Maximum simplicity for borrower
• Fastest execution
• Strongest lender relationship
• Most flexible for amendments and waivers
• Lender needs significant capital
• Higher concentration risk for lender
• May limit maximum facility size
Understanding the economics of unitranche debt is crucial. This calculator helps you see how pricing works and how returns are distributed.
Reference rate (SOFR, LIBOR replacement) that fluctuates with market conditions
Margin above base rate reflecting borrower credit risk (typically 5-8% for unitranche)
Original issue discount (1-3%) and/or closing fees (1-2%) paid at funding
0.5-1.0% on undrawn portions of revolving or delayed draw features
All-in yield for unitranche: 8-12% depending on:
• Company size and credit quality
• Leverage levels (higher debt = higher rate)
• Industry risk profile
• Market conditions and competition
• Covenant package and structure
Unitranche rate falls between senior debt (5-7%) and mezzanine (12-15%), typically landing at 6-8% spread over base rate. This is competitive with the weighted average cost of a traditional multi-tranche structure, while offering simpler execution and better relationship dynamics.