Finance Terms: Unitranche Debt

A stack of coins with a unitranche debt label on top

Unitranche debt is a relatively new financing option that has gained popularity among businesses in recent years. This article will provide a comprehensive guide to what unitranche debt is, how it works, the benefits and drawbacks of using it, and everything else you need to know about this type of financing.

What is Unitranche Debt?

Unitranche debt is a type of financing that combines senior and subordinated debt into a single loan, provided by a single lender. Unlike traditional senior debt, which is provided by banks, unitranche debt is typically offered by specialized lenders, such as private equity firms, hedge funds, or specialty finance companies.

The loan structure is unique in that it includes elements of both senior and subordinated debt. The loan will typically have a fixed interest rate and a maturity date, like senior debt, but will also have features like payment-in-kind interest (PIK), equity warrants, or other subordinated debt-type features. Essentially, unitranche debt combines different forms of debt financing into one instrument, providing businesses with more flexibility and simplifying their capital structure.

One of the benefits of unitranche debt is that it can be a faster and more streamlined process than obtaining multiple types of financing from different lenders. This can be especially helpful for smaller businesses or those with limited resources for managing multiple loans and lenders.

However, it’s important to note that unitranche debt can also come with higher interest rates and fees compared to traditional senior debt. Additionally, because it is a relatively new type of financing, there may be less established market standards and less transparency in terms of pricing and terms.

Understanding the Benefits of Unitranche Debt

One of the main benefits of unitranche debt is its simplicity. Instead of juggling multiple loans from different lenders, businesses can obtain a single loan from a single provider, making the borrowing process much less complicated.

Additionally, unitranche debt is often faster, more flexible, and cheaper than alternative financing options, such as mezzanine financing. Because the loan is provided by a single lender, negotiations are typically quicker and smoother. Furthermore, unitranche debt lenders often have a higher risk tolerance and are more willing to work with businesses that may not qualify for traditional bank financing due to their credit history or limited operating history.

Another advantage of unitranche debt is that it can provide businesses with more control over their financing. With a single lender, businesses can negotiate terms that are tailored to their specific needs, rather than being subject to the terms of multiple lenders. This can include more flexible repayment schedules, lower interest rates, and fewer restrictions on how the funds can be used.

Finally, unitranche debt can be a useful tool for businesses looking to grow or expand. Because the loan is typically structured as a revolving credit facility, businesses can draw on the funds as needed, allowing them to invest in new projects or initiatives without having to go through the borrowing process again. This can be particularly beneficial for businesses in industries that are subject to rapid change or require significant upfront investment, such as technology or healthcare.

How Does Unitranche Debt Work?

Unitranche debt is structured so that the loan provider assumes first-lien status on the borrower’s assets, meaning they have priority over all other creditors in the event of default. This enables unitranche debt lenders to take on more risk than traditional senior debt providers, while still offering a comparable interest rate.

The unitranche loan typically has a term of five to seven years and will have a yield in the range of 8-12%, depending on the creditworthiness of the borrower. The loan’s interest rate may be fixed or floating, depending on the lender’s preference. Payment schedules can vary but are usually quarterly and provide for interest-only payments for the first few years.

It is important to note that unitranche debt is a relatively new financing option that has gained popularity in recent years. This type of debt is particularly attractive to mid-sized companies that may not have access to traditional bank loans or may not want to dilute their equity by taking on additional investors. Additionally, unitranche debt lenders often have more flexibility in structuring the loan to meet the specific needs of the borrower, which can be a significant advantage in certain situations.

Differences Between Unitranche Debt and Other Financing Options

Unitranche debt is different from traditional senior debt in several ways. For one, the loan provider assumes both senior and subordinated debt status, combining two separate forms of financing. Additionally, unitranche debt providers are typically non-bank lenders, known for their appetite for risk and more flexible financing requirements. Compared to mezzanine financing, unitranche debt often offers a more streamlined borrowing experience, with a single lender providing all the financing and overseeing the entire transaction process.

Another key difference between unitranche debt and other financing options is the interest rate. Unitranche debt typically has a higher interest rate than traditional senior debt, but a lower interest rate than mezzanine financing. This makes it an attractive option for companies that need financing but want to avoid the high costs associated with mezzanine financing.

Furthermore, unitranche debt often comes with fewer covenants and restrictions compared to other financing options. This allows companies more flexibility in how they use the funds and operate their business. However, it’s important to note that unitranche debt providers may still require certain financial reporting and performance metrics to ensure the loan is being repaid on time and in full.

Pros and Cons of Using Unitranche Debt for Business Financing

Unitranche debt has some significant advantages compared to other forms of financing, but it also has some drawbacks. Here are some of the pros and cons of using unitranche debt for your business:


  • Simplicity and streamlined borrowing process
  • Higher risk tolerance and more flexible financing requirements than traditional bank lenders
  • Potentially lower interest rates compared to mezzanine financing
  • Faster loan approval and funding process
  • Combining multiple debt types simplifies capital structure


  • Higher interest rates than traditional senior debt
  • Might require giving up equity warrants/ownership
  • May have less favorable loan covenants than traditional senior debt
  • The lender assumes considerable control of the borrower company’s assets

One of the benefits of unitranche debt is that it can be a good option for businesses that are looking to grow quickly. This is because unitranche lenders are often more willing to take on risk than traditional bank lenders, which can make it easier for businesses to secure the financing they need to expand.

However, it’s important to note that unitranche debt can also be more expensive than other forms of financing. This is because unitranche lenders are taking on more risk, and they need to be compensated for that risk. As a result, businesses that choose to use unitranche debt may end up paying higher interest rates than they would with other types of financing.

When is Unitranche Debt the Best Option for Your Business?

Unitranche debt is a suitable financing option for businesses that need flexible financing options and more straightforward processes than traditional bank loans or mezzanine financing. It can be an excellent option for businesses that are growing or have complex capital structures, making it hard to obtain financing through traditional means. It is often the best choice for companies with a solid revenue stream, which is vital to meeting the interest payment and principal repayment requirements.

Additionally, Unitranche debt can be a good option for businesses that need to move quickly to secure financing. The streamlined process of obtaining Unitranche debt means that businesses can often receive funding faster than with traditional financing options. This can be especially important for businesses that need to act quickly to take advantage of growth opportunities or to address unexpected expenses. However, it is important to carefully consider the terms and interest rates associated with Unitranche debt to ensure that it is the right choice for your business.

Top Providers of Unitranche Debt in the Finance Industry

Unitranche debt is currently offered by a group of specialized lending firms. Some of the top lenders in the finance industry include:

  • Antares Capital
  • Ares Capital
  • Goldman Sachs
  • Owl Rock Capital
  • SunTrust Robinson Humphrey

Unitranche debt is a type of financing that combines senior and subordinated debt into a single loan. This type of financing has become increasingly popular in recent years due to its flexibility and simplicity. Unitranche debt is often used to finance acquisitions, recapitalizations, and growth initiatives.

Antares Capital is one of the largest providers of unitranche debt in the finance industry. The firm has a long history of providing financing solutions to middle-market companies. Ares Capital is another major player in the unitranche debt market. The firm has a diversified portfolio of investments across a range of industries.

Common Misconceptions About Unitranche Debt Debunked

One common misconception about unitranche debt is that it is the same as mezzanine debt. Although both financing options are similar in some ways, there are significant differences, mainly related to their capital structure, and how the financing is provided. Also, some businesses may be hesitant about taking on debt that has equity features such as warrants, but the reality is that equity upside can often offset the added costs of unitranche debt.

Another common misconception about unitranche debt is that it is only suitable for larger companies. However, unitranche debt can be a viable financing option for small and mid-sized businesses as well. In fact, unitranche lenders often specialize in providing financing to these types of companies, and can offer more flexible terms and faster turnaround times than traditional lenders.

It is also important to note that unitranche debt is not a one-size-fits-all solution. Each financing option has its own advantages and disadvantages, and it is important for businesses to carefully consider their options and choose the one that best fits their needs. Working with an experienced financial advisor can help businesses navigate the complex world of debt financing and make informed decisions about their capital structure.

Examples of Successful Use of Unitranche Debt in Business Financing

Several businesses have successfully leveraged unitranche debt in their financing structure, including:

  • The Cheesecake Factory, which used unitranche debt to finance its acquisition of the North Italia restaurant chain
  • The Vitamin Shoppe, which received a $300 million unitranche loan for refinancing purposes in 2018
  • E. & J. Gallo Winery, which used a unitranche loan to finance its acquisition of the Orin Swift wine brand in 2016

Unitranche debt has become increasingly popular in recent years due to its flexibility and efficiency in financing transactions. It combines senior and subordinated debt into a single loan, which simplifies the financing process and reduces costs for borrowers.

Another advantage of unitranche debt is that it allows borrowers to work with a single lender, rather than multiple lenders, which can streamline the negotiation and documentation process. This can be particularly beneficial for middle-market companies that may not have the resources to manage multiple lender relationships.

How to Qualify for Unitranche Debt and What to Expect During the Application Process

Qualifying for unitranche debt requires a business to demonstrate its revenue generating potential, credit history, and growth prospects and have a strong business plan. The lender will also inspect the company’s balance sheet, income statement, and cash flow statements to calculate its financial distress risk, and assess the potential impact of any economic downturns.

Expect the following during the application process:

  • Due diligence on the company’s financials, management team, and growth potential
  • The loan provider may require equity warrants, which would convey an ownership stake in the company
  • The loan provider will select a typical yield of 8-12% and structure the financing terms accord to the borrower’s financial needs and growth potential

It is important to note that the application process for unitranche debt can be lengthy and complex. The lender may require additional documentation and information, such as tax returns, legal documents, and market research. It is crucial for the borrower to have a clear understanding of their financial situation and growth potential, as well as a solid business plan, in order to successfully navigate the application process and secure the necessary financing.

Tips for Negotiating a Favorable Interest Rate on Your Unitranche Debt

While negotiating the interest rate on unitranche debt can be a challenging task, there are ways to maximize your leverage. These include:

  • Showcasing your creditworthiness: demonstrating a strong credit history and financial indicators, like free cash flow and EBITDA, can influence the lender to offer more favorable terms
  • Shifting assets to secure the loan: to reduce the lender’s risk and increase leverage, shift assets with fewer encumbrances to the secured portfolio.
  • Comparing terms from other lenders: compare the rates and fees of other lenders, including those that offer mezzanine financing, to gain negotiating power and achieve a better deal.

Another way to negotiate a favorable interest rate on your unitranche debt is to consider the length of the loan. A longer loan term may result in a lower interest rate, as the lender has a longer period to earn interest on the loan. However, it is important to weigh the benefits of a lower interest rate against the potential drawbacks of a longer loan term, such as increased overall interest payments.

Additionally, it may be beneficial to negotiate for a variable interest rate rather than a fixed rate. A variable rate can fluctuate with market conditions, potentially resulting in a lower interest rate over time. However, it is important to understand the risks associated with a variable rate, as it can also result in higher interest payments if market conditions change unfavorably.

Potential Risks and Drawbacks of Using Unitranche Debt

One of the significant risks associated with unitranche debt is the lender’s control over the borrower’s assets. In the case of default, the lender will have priority over all other creditors, and the borrower may lose control of key assets. Additionally, loan covenants are less favorable than traditional senior debt offerings and require close monitoring by the borrower.

Another potential drawback of unitranche debt is the higher interest rates compared to traditional senior debt. This is because unitranche debt combines both senior and subordinated debt into one loan, which increases the risk for the lender. As a result, borrowers may end up paying more in interest over the life of the loan.

Furthermore, unitranche debt may not be suitable for all types of businesses. Startups or companies with unstable cash flows may find it challenging to meet the repayment obligations of unitranche debt. In such cases, traditional senior debt may be a better option as it offers more flexibility in terms of repayment schedules and interest rates.

Comparing and Contrasting Unitranche Debt with Mezzanine Financing

Unitranche debt and mezzanine financing are both forms of hybrid financing that can provide businesses with more flexible financing options They differ in their capital structure and how financing is provided:

  • Capital structure: Unitranche debt combines senior and subordinated debt into one loan, while mezzanine financing provides a subordinated loan with an equity component.
  • Providers: Unitranche debt providers are typically non-bank lenders, while mezzanine financing is often provided by private equity firms or hedge funds.
  • Costs and Fees: Unitranche debt often has lower costs and fees than mezzanine financing due to the streamlined lending process.

It is important to note that while both unitranche debt and mezzanine financing offer flexibility, they also have different risk profiles. Unitranche debt is considered less risky because it is secured by collateral and has a first lien position, while mezzanine financing is unsecured and has a second lien position. This means that in the event of default, unitranche debt holders are paid first before mezzanine financing holders. Therefore, businesses should carefully consider their risk tolerance and financial needs when choosing between these two financing options.

Steps to Take if You Default on Your Unitranche Loan

If a borrower defaults on a unitranche loan, the first thing to do is to contact the lender and negotiate a new repayment schedule or restructuring of the loan terms. If this is unsuccessful, the lender will begin the process outlined in their loan agreement and may work with a third-party to sell off any collateral. Borrowers should seek legal counsel in these situations to ensure they understand their rights and obligations.

In conclusion, unitranche debt can be a suitable financing option for businesses that need more flexibility and simplicity in their financing structures. While there are some risks and drawbacks, the benefits of unitranche debt are significant, and it might be the right choice for your business’s financing needs.

It is important to note that defaulting on a unitranche loan can have serious consequences for a borrower’s credit score and financial stability. In addition to potential legal action and the loss of collateral, defaulting on a loan can make it difficult to secure financing in the future. Therefore, it is crucial for borrowers to carefully consider their ability to repay the loan before taking on unitranche debt.

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