In the US, when you hear the word unitranche, the key question to answer is whether it is straight or bifurcated. Straight unitranche is, essentially, a senior stretch loan that provides five to six turns (or more) of leverage as an alternative to a first-lien/second-lien or senior/mezzanine structure, with the lenders sharing payments on a ratable or priority basis as set forth in the loan agreement.
Bifurcated unitranche, on the other hand, appears on the surface to be a single credit facility just like straight unitranche. However, the loan is bifurcated into first-out and last-out loans, with the last-out lender skimming interest and other economics from the first-out lender, and the first-out lender receiving payment priority upon the occurrence of certain triggering events. This bifurcation typically occurs in an interlender agreement commonly referred to as an agreement among lenders (AAL).
Meanwhile, in the UK and continental Europe, the unitranche product has historically consisted of a product more similar to the US-style straight unitranche (i.e., a senior stretch term loan as an alternative to a first lien/second lien or senior/mezzanine structure) but, unlike in the US, a super senior revolver has typically been included alongside the term loan. Recently, however, the more complex US bifurcated unitranche structure has started to gain traction in the UK and continental European marketplace.
The US unitranche market has rapidly evolved over the past few years. The number of lenders offering unitranche products has increased dramatically and the structure has been adopted by both the lower middle market and the upper middle market. Unitranche facilities as small as $10 million and as large as $500 million are now available.
Unitranche in the US has also expanded from a single product to a platform of products. Previously, bifurcated unitranche almost exclusively followed a first-lien/second-lien structure in terms of creditors’ rights, enforcement actions, payment priorities and other terms. The unitranche platform now includes a suite of products that are intended to mirror first-lien/second-lien, senior/mezzanine, split-collateral, upside-down intercreditor arrangements or hybrids thereof.
In some transactions, the traditional unitranche has been coupled with one or more additional tranches of debt for an added layer of complexity. One example is a bifurcated unitranche facility that has one or more additional tranches of debt in a separate facility, whether it is additional senior debt in front of it, or second lien/mezzanine debt behind it. Another example is the three-tranche unitranche facility, which could be structured in one facility as a first-out tranche followed by second-out and third out-tranches or alternatively as a split-collateral asset-backed loan/term structure with an additional bifurcation of the term loan.
In either case, the result could be three or more tranches of debt held by lenders with vastly different interests and risk profiles.
Historically, lenders rarely disclosed the agreement among lenders to the borrower, but as popularity and awareness have grown, many borrowers are demanding disclosure of these interlender terms. In some cases, this demand for disclosure is addressed by adding some of the core terms to the credit agreement. Alternatively, it is addressed in many cases by disclosing the agreement among lenders to the borrower and, often, having the borrower sign an acknowledgment of that agreement.
CROSSING THE POND
The UK and continental European markets have long had their own unitranche product, which, as described above, traditionally consisted of a modest super senior revolving facility that had priority over a term-loan facility.
More recently, the US-style bifurcated product has washed up on the shores of Europe. The bifurcated product is a vastly different structure to traditional European unitranche. As such it presents a number of unique structural and documentation considerations.
In addition to payment priority and economics, AALs address a number of other interlender points including transferability, purchase rights, voting, enforcement, and other related creditor rights. These interlender points will extend well beyond the list of traditional European intercreditor agreement issues given that an AAL is often designed to replicate a two-document structure (whether senior-mezzanine or senior-second lien), but uniquely within the confines of a shared facility/security/claim.
Considering the lack of a settled market on AALs in the UK and continental Europe (unlike the case with many intercreditor and subordination issues), fully understanding the factors above will be critical in determining where the parties land on many of the negotiated points. In addition, negotiation of an AAL can uniquely hinge on a number of factors, including which lender originated the deal and the relative sizes of the tranches.
Given that bifurcated unitranche in the UK and continental Europe is in its infancy where can lenders look for guidance? The same place that helped provide guidance on the development of intercreditor agreements: US structured deals. This US technology, which is years ahead of Europe in terms of development, can provide some clear guideposts as to how unitranche issues might be addressed in the UK and continental European market, as well as where the UK and continental European unitranche product might be headed.
In the US, bifurcated unitranche has gained traction in the marketplace and evolved dramatically over the past few years, from a single product to a platform offering many different products. This diverse platform is expected to continue in the US not as a replacement for, but as a complimentary offering to, traditional first-lien/second-lien, senior/mezzanine, split-collateral and upside-down intercreditor arrangements.
In the UK and continental Europe, it’s expected that the bifurcated market will continue to utilize the newly found US technology. As banks and alternative lenders get increasingly comfortable with the product and as the UK and continental European AAL market continues to settle, the bifurcated unitranche product is likely to become an important part of the options available to sponsors looking for competitive financing offering less execution risk. The super senior revolving facility is likely to remain an important part of the European unitranche landscape, irrespective of whether structured as a stretched senior or bifurcated product.
While creditors’ rights in bifurcated facilities are generally designed to track what you would expect to see in a two-document structure (whether first-lien/second-lien, senior/mezzanine, split-collateral or otherwise), there are key differences – some of which may surprise you.
In addition, given the infancy of the bifurcated unitranche structure in Europe and the fact that the US approach is new on the scene, it is important that market participants understand both the US bifurcated technology as well as traditional European two-document principles, in order to properly Europeanise the US bifurcated product to fit within European market and legal framework.
There are also many creditor’s rights pitfalls along the way that are unique to bifurcated unitranche. It is critical to retain counsel with broad experience across the unitranche platform to help you determine the best structure for you.