Module IV· Debt TranchesIntermediate
Question
What is 'Unitranche financing' and why is it so popular in the middle market?
Answer
Mechanics
Unitranche = a single debt tranche combining senior and subordinated characteristics. Typically offered by direct lenders (debt funds such as Ares, ICG, Tikehau).
Deep diveShow more details
Comparison (TLA+TLB+Mezz vs Unitranche)
| Aspect | Classic sandwich | Unitranche |
|---|---|---|
| Number of tranches | 3+ | 1 |
| Lender | Banks + institutional + mezz fund | Single direct lender |
| Coupon | 4-5% / 5-7% / 12-15% | 7-9% (blended) |
| Negotiation | complex, multiple lenders | bilateral |
| Speed-to-close | 8-12 weeks | 4-6 weeks |
| Flexibility | inter-creditor issues | high (single lender) |
Consequence
The unitranche share in the middle market has risen to ~40-50% of all LBO financings (2018: 20%). Drivers: speed, flexibility, single-counterparty convenience.
Common pitfalls
- The unitranche coupon is HIGHER than a blended senior+sub coupon — a premium for single-lender convenience
- In distress: a single lender has full control — no inter-creditor protection for the sponsor
Pitch tip
Question: "When do you use a unitranche?"
Answer: "For smaller middle-market deals ($50-150m EBITDA) where speed matters and the sponsor has a clear story. For larger deals or first-time sponsors, prefer the classic sandwich for market breadth"