In recent months, I’ve had clients ask about “unitranche financing” ….what is it, what is different, when would you use it and where do you get it? The definition that we use in the Handbook of Financing Growth is –
“A hybrid senior loan product that blends first and second lien debt, and in some instances mezzanine, into a single tranche.”
A tranche is a round or an installment of funding. A company typically seeks to maximize its borrowings with lower cost senior (or first lien) debt and then add debt that is increasingly more expensive as the lien position decreases. It is similar to the concept that a mortgage on a house is the cheapest because it has the deed of trust in first lien position in the event of default. If you then get a second mortgage or equity line of credit, it has a second lien on the property and is a bit more expensive. Lastly, if you obtain unsecured debt like a credit card …it is the most expensive. In business, the unsecured debt is usually called subordinated debt or mezzanine financing.
Historically, each type of debt comes from a different funding source. A business would get senior debt from the bank, junior debt from a hedge fund or specialty finance company, and subordinated debt from a mezzanine lender or growth equity investor (mezzanine is a hybrid debt and equity).
In the market now, there are lenders that have combined all of the levels of debt for a company into a single financing resource (and set of documents) call “unitranche financing”. This can make a lot of sense when a company needs to get a deal done quickly and with a single lender ….eliminating the negotiations and costs among multiple parties.