Bringing scale to unitranche

Early in March, Macquarie Corporate and Asset Finance (MCAF) Lending provided $125 million of a $250 million first-lien senior credit facility to support the recapitalization of Netsmart Technologies by Genstar Capital. It also recently provided customized unitranche financing to support the acquisition of Logibec by GI Partners. Together, the two transactions made a clear statement of the group’s accelerating presence in the growing market for unitranche financing.

Bill Eckmann, a Managing Director at MCAF Lending joined Macquarie in September 2014 to lead their primary origination lending efforts to private-equity backed companies in the US. Though his focus is on unitranche and senior lending to private equity-backed companies, MCAF Lending’s broad mandate allows the lender to provide financing up and down the capital structure to all forms of corporate entities.

Here, Eckmann discusses current trends in the US unitranche market. 

 

Q

Exactly what is unitranche, and how is it different from traditional types of lending?

Eckmann: In a traditional club deal or syndicated loan structure, there is always first-lien debt and usually junior capital (either second-lien or mezzanine debt). With unitranche there is – for the borrower – just a single tranche of debt with a blended interest rate. Within the unitranche structure there are typically two sets of lenders – those who hold the ‘first out’ dollars of risk and those who hold the ‘last out’ dollars or risk – this arrangement is spelled out in an arrangement among lenders (AAL). Within the unitranche structure, because it merges both the senior and junior debt tranches of the capital structure, the leverage will be higher (anywhere from 5x to more than 6x EBITDA) compared to a traditional all senior (3.5x to 4x EBITDA) or stretch senior (4x to 5x EBITDA).

 

Q

What are the advantages of unitranche?

 Eckmann: The most obvious advantage of the unitranche is simplicity to the borrower. Unlike in either a first lien/second lien or first lien/mezzanine transaction where the borrower has to be involved in the negotiation of an intercreditor or subordination agreement, in a unitranche the borrower won’t be directly involved in the negotiation of an AAL, if there even is one.

Another advantage of the unitranche is the cost savings to the borrower. In a traditional first lien/junior debt capital structure, any required amortization or excess cash flow sweep pays down the low-cost first lien debt (leaving the junior capital outstanding in full). Because a unitranche blends together all debt, the debt paid down in a unitranche structure has a higher cost of capital. All borrowers like that feature, as it saves them significant dollars over time. 

The unitranche product is quite compelling – it is easier to execute, cheaper and customizable for the borrower.

Q

 How has the unitranche market evolved over the last few years?

Eckmann: Unitranche is now a must-have product for any lender. The market has expanded significantly, in terms of type of offering, number of players, and overall sophistication. For example, we now see a few select players (Macquarie included) that can commit to and hold position sizes in the hundreds of millions of dollars. And at the other end of the spectrum you have smaller alternative lenders doing $25 million unitranches for $5 million EBITDA businesses. There are now multiple first-out focused lenders who can provide cheaper pricing through a modest level of leverage, as well as a plethora of last-out players who want that higher yield – most of the business development companies and even the traditional mezzanine funds target these last-out tranches. Over time we will continue to see the unitranche product become an even larger proportion of overall lending.

 

Q

 What are market terms for unitranche?

 Eckmann: Given the increasing prevalence of the unitranche product being offered by lenders, we are now seeing Libor plus 600bps to 750bps. And I have seen a few transactions price as low as Libor plus 575bps for the highest of quality credits.But for the average deal in today’s market, it tends to be priced at Libor plus 650bps. And these rates tend to always have a Libor floor of 1.00%. Call protection varies from 103/102/101 to non-call 2. But terms will vary and tend to be very borrower specific.

 

Q

What differentiates Macquarie in what is an already crowded lender field?

Eckmann: The four main differentiators I like to talk about are efficiency, certainty, size, and borrowing costs. As to efficiency, what Macquarie offers is a true ‘one-stop’ unitranche solution – we aren’t forced into choosing to be first-out or last-out. Though we have the flexibility to invest in either the first-out (including the revolver) or last-out aspects of a unitranche, we prefer to hold both the first dollar and last dollar or risk and thus most of our unitranches don’t have AALs. This differentiates Macquarie from most of the marketplace. By not having an AAL, the borrower only deals with my team as opposed to being exposed to some of the behind the scenes AAL negotiations which oftentimes results in a credit agreement adverse to the borrower since the first-out and last-out providers usually have differing interests.

As to certainty, borrowers want to know who their lenders are. With Macquarie, it is just us and you don’t have the risk of our bringing in another lender and carving up the credit agreement with an AAL, to which the borrower has no visibility.

In size, though we can make investments as small as $25 million, we have the capacity to make initial commitments of as much as $350 million, with a long-term hold size of $200 million or so. That is backed by Macquarie’s $100 billion balance sheet. Lower borrowing costs come from Macquarie’s investment grade credit ratings.

 

Q

Do you have an ability to invest in non-US deals?

Eckmann: This is actually another important strength and differentiation. We can invest directly in US dollars, Canadian dollars, pounds sterling, euros, among others. Being able to fund  in local currencies lowers borrowing costs. The Logibec unitranche transaction, funded in Canadian dollars, is a prime example.

The ability to work in multiple currencies also opens the opportunity to help borrowers hedge their currency risks. For example, Macquarie can provide a bifurcated loan where we fund a portion in US dollars and a portion in Euro. That is something most of our competitors cannot do. While I am based in New York with a focus on the Americas, my group has a team in London that is focused on Europe, and there is also a team in Sydney focused on Asia. We have built-out a meaningful US business with special attention on private-equity firms, but we work closely with all of the teams worldwide to leverage local expertise.

 

Q

What have been some of your most active sectors for unitranche lending?

Eckmann:  Macquarie is well known globally for its expertise in infrastructure. But within MCAF Lending, of the more than $29 billion the group has put to work since 2009, our investment strategy is industry agnostic. Representative investments span companies with embedded services such as software, route-based businesses, cell tower and cable companies, businesses that provide compliance or certification services, companies with a sizable composition of aftermarket revenue, asset-backed businesses such as equipment rental, and facility-based businesses such as those in the cold storage / warehouse space or in the healthcare space such as residential care homes or skilled nursing. However, the businesses we invest in tend to have some common characteristics: recurring  revenue streams, significant customer switching costs, and/or a differentiated position in its marketplace.