Glossary · Security / instrument
Unitranche
Also called: unitranche loan · unitranche facility · unitranche debt
A unitranche is a single senior secured loan facility, normally first lien, that combines what would otherwise be separate senior and junior debt into one tranche under one credit agreement, with one blended interest rate for the borrower.
Instead of negotiating a first-lien loan with one group of lenders and a second-lien or mezzanine loan with another, the borrower signs one credit agreement with a single lender or a handful of lenders and pays one margin. If the lenders want to divide the risk among themselves, they do it in a separate agreement among lenders. That agreement changes who is repaid first in a default but does not change what the borrower owes.
How a unitranche works
All lenders sit under one credit agreement and one set of security documents, and all share a first-priority lien over the collateral. The borrower deals with one agent and one set of covenants, and has a single amendment process. Leverage is higher than a standalone first-lien loan would carry, and the margin sits between first-lien and second-lien levels. A unitranche is usually accompanied by a revolving facility and often by a delayed-draw term loan for acquisitions. The revolver is frequently given first-out or super senior priority.
First-out / last-out and the agreement among lenders
Where lenders want different risk positions, they split the facility through an agreement among lenders (AAL):
- First-out lenders accept a lower margin in exchange for priority in the payment waterfall after a default or enforcement.
- Last-out lenders take a higher margin, are repaid after the first-out lenders, and usually receive voting protections and an option to buy out the first-out piece.
The borrower is often not a party to the AAL, or only acknowledges it, and may not see its terms. It continues to pay one rate under one credit agreement. See first-out / last-out.
In European practice the same effect is usually achieved with a unitranche and a super senior revolving facility under an intercreditor agreement to which the borrower is party.
Where unitranche risk comes from
A unitranche is first-lien senior secured debt. Its additional risk compared with a conventional first-lien loan comes from two places:
- the higher leverage through the tranche;
- for last-out holders, the subordinated position created by the AAL.
It does not come from a lack of security or seniority. A unitranche lender's loss begins where enterprise value falls below the unitranche (or first-out) attachment point.
Terms
- Pricing: base rate plus a blended margin, with a floor, an upfront fee or OID, and prepayment premiums. For US dollar loans the base rate is usually a term rate derived from the Secured Overnight Financing Rate (SOFR).
- Covenants: in the middle market, typically at least one maintenance covenant. Larger unitranches competing with the syndicated market are more often covenant-lite.
- Holders: usually a single direct lender or a club of a few, which simplifies amendments and workouts.
How LPs analyse unitranche exposure
For each position, ask whether the fund holds the whole unitranche, the first-out or the last-out piece. Then measure leverage through the fund's own piece. Two funds reporting "100% first lien" can carry very different risk if one holds mainly last-out positions. Last-out yields should be compared with second-lien and mezzanine yields, not with senior loans.
Worked examples
Illustrative unitranche sizing
A sponsor-backed company has $40m of EBITDA. A $220m unitranche replaces what might otherwise have been a $160m first-lien loan and a $60m second-lien loan. Leverage through the single tranche is $220m / $40m = 5.5x, compared with 4.0x for the first-lien loan alone.
Blended pricing and a first-out / last-out split
The borrower pays Term SOFR + 5.75% with a 0.75% floor. A 4.30% Term SOFR fixing sits above the floor, so the coupon is 10.05%. The lenders agree among themselves that 30% of the loan is first-out at a 3.25% margin. The last-out lenders then receive (5.75% − 0.30 × 3.25%) / 0.70 = 6.82% over SOFR. The borrower still pays 5.75% on the whole loan; only the allocation among lenders changes.
Examples are illustrative; figures are not market data.
Not the same as
- First-Out / Last-Out: First-out/last-out (FOLO) is an optional split of a unitranche among its lenders. A unitranche can exist without one.
- Second Lien: A first-lien/second-lien structure has two facilities, two lien priorities and an intercreditor agreement the borrower signs. A unitranche has one facility and one lien.
- Mezzanine Debt: Mezzanine is a separate, payment-subordinated instrument. Unitranche replaces the senior and junior layers with one first-lien loan.
Common mistakes
- Saying a unitranche is not senior secured. It is normally first-lien senior secured debt.
- Treating a last-out position as equivalent to a first-lien loan because both are "first lien" in the credit agreement.
- Comparing a unitranche margin with a first-lien margin without adjusting for the higher leverage it carries.
- Assuming the borrower knows the first-out/last-out split. The AAL is among lenders.
Edge cases
- A unitranche held by a single lender that later sells a first-out piece to a bank creates a FOLO structure after closing.
- Some unitranches carry a small amount of payment-in-kind (PIK) interest, which raises the balance and the effective leverage over time.
Sources
- Private Credit: Characteristics and Risks. Fang Cai; Sharjil Haque, Board of Governors of the Federal Reserve System (FEDS Notes), 23 February 2024. Status: Published (checked 2026-10-01). Characteristics section — supports: Private credit loans are bilaterally negotiated and mostly floating rate