Senior debt vs unitranche: which fits your deal?

What each one is

Senior debt is the loan that gets paid first. It holds a first lien on the company's assets, usually carries the tightest covenants and the most scheduled amortization, and is priced lowest because it is the safest position in the capital structure. For lower-middle-market companies it comes from banks, SBA lenders and some private credit funds. Where senior debt alone is not enough, the traditional answer is a second layer behind it: mezzanine debt, a second-lien loan or a seller note.

Unitranche collapses those layers into one. The borrower signs one credit agreement, grants one lien and pays one rate on one balance. Behind the scenes the lenders may split the loan into a lower-risk first-out piece and a higher-risk last-out piece, held by different investors under an agreement among lenders, but the borrower deals with one agent and one set of terms.

Unitranche is not a cheaper senior loan. It is a more expensive loan that goes further, in exchange for simplicity.

How far each one goes

Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA. Unitranche lenders stretch further than that in a single loan, because they are pricing for the extra risk of the top slice. How much further depends on the same things that decide senior leverage: the size and stability of earnings, recurring revenue, customer concentration, capital intensity and the equity beneath the loan. How much debt a business can carry walks through how lenders run those numbers.

More debt still has to be paid. A unitranche lender tests coverage on the whole loan at its blended rate. A business that clears coverage comfortably on senior debt can fall short on a larger unitranche, because the extra principal comes at a higher rate. Unitranche lenders often offset this with lighter scheduled amortization, which eases coverage now and leaves a larger balance due at maturity. That balance is a refinancing the company will have to make, on whatever terms the market offers then.

Senior, senior plus mezzanine, and unitranche side by side

Comparing the cost honestly

The most common mistake is comparing the unitranche rate with the senior rate. That comparison always favors senior debt, and it is the wrong one if senior debt alone cannot fund the deal. The right comparison is the unitranche against the stack it replaces: the blended cost of senior plus mezzanine, including the mezzanine's PIK interest, its warrants valued at what the equity is likely to be worth when they are exercised, both lenders' fees, and the legal cost of negotiating two loan agreements and an intercreditor agreement.

On that basis unitranche often compares well, especially where the mezzanine piece would carry warrants. It compares badly when the business needs only a thin slice above senior. Paying a blended rate on the whole balance to fund a small top layer can cost more than borrowing that layer separately, or covering it with a seller note or a little more equity.

Early repayment belongs in the comparison too. Unitranche lenders commonly charge a premium for repayment in the first years. A company that expects to sell, refinance or pay down debt quickly should put that premium into the cost, because it will pay it.

Which companies unitranche fits

• Acquisitions that need more than senior leverage, where the buyer wants one lender at the table rather than negotiating two against each other.
• Buy-and-build platforms, where a delayed-draw facility inside the unitranche can fund add-on acquisitions on terms agreed up front.
• Companies with recurring, predictable earnings that can carry more debt at a higher rate without straining coverage.
• Recapitalizations where owners want to take out more than a senior lender would provide, and accept the cost.

It fits less well where the business is small enough for SBA terms, where earnings are cyclical, where most of the value sits in receivables and inventory that an asset-based lender would finance more cheaply, or where the company expects to repay quickly and would pay call protection for nothing. A business that has outgrown its bank but does not need more leverage may be better served by a straightforward senior loan from a credit fund; see moving from a bank loan to private credit.

Unitranche and the revolver

Most unitranche facilities are term loans. Working capital usually comes from a revolving line alongside, provided either by the unitranche lender or by a bank that is repaid from the collateral ahead of the term loan, which is why the line is priced below it. The borrower should know which arrangement it has, because it decides who controls the collateral in a bad year and who must agree to amendments. A company that relies on a large working capital line should settle how the revolver sits before choosing between structures, not after the term sheet is signed.

What unitranche lenders look at

Unitranche lenders underwrite enterprise value as much as cash flow. The top of their loan sits where mezzanine used to, so they want a clear view of what the business would sell for. They look hard at the equity beneath the loan, the evidence behind each add-back, management depth, and whether an owner group or sponsor could support the business through a bad year. Many prefer private equity-backed borrowers, but not all; some lend to independent sponsors and owner-operators with enough equity and a strong file. See financing an acquisition without a sponsor.

Of the 1,800+ lenders in Transparent's book, 1,148 write term and private credit, which is where unitranche sits. The financing model in Transparent's lender package sizes each structure — senior alone, senior plus a subordinated layer, and unitranche — on coverage and leverage, so the choice is made on numbers a lender can reproduce rather than on the first term sheet to arrive.