In middle-market leveraged buyouts, borrowers prefer single-loan documentation over fragmented multi-lien syndications. First-Out Last-Out (FOLO) unitranche structures combine senior bank liquidity and institutional private credit behind a single credit agreement governed by a confidential Agreement Among Lenders (AAL).
FOLO Payment Waterfall Mechanics
How pre-default and post-default interest and principal distributions prioritize lenders:
Pre-default, both First-Out (FO) and Last-Out (LO) tranches receive contractual interest ($S + 350\text{ bps}$ and $S + 750\text{ bps}$ respectively). Upon a Material Event of Default and Waterfall Trigger Event, 100% of collateral realization proceeds and operational cash flow must amortize FO principal down to zero before LO receives any principal distribution.
Capital Stack Tranches Compared
| Unitranche Component | Leverage Attachment | Target Coupon Margin | Post-Default Priority |
|---|---|---|---|
| First-Out Revolver / Term A | $0.0\text{x} – 2.5\text{x}$ EBITDA | SOFR + 300 – 375 bps | 1st Super-Priority Waterfall |
| Last-Out Term B (Private Credit) | $2.5\text{x} – 5.5\text{x}$ EBITDA | SOFR + 700 – 850 bps | Subordinated to FO Payoff |
| Blended Borrower Rate | $0.0\text{x} – 5.5\text{x}$ EBITDA | SOFR + 550 – 625 bps | Single Lien Security Package |
Critical AAL Covenants & Buyout Rights
Key negotiation points inside private Agreement Among Lenders contracts:
- Standstill Periods: FO lenders enforce 90–180 day standstill restrictions preventing LO lenders from unilateral foreclosure.
- Last-Out Buyout Option: LO lenders hold the unconditional right to purchase FO debt at par plus accrued interest to take control of workouts.
- Voting Thresholds: Material amendments (maturity extensions, collateral releases) require unanimous consent across both tranches.
Explore Structured Corporate Credit & Capital Markets
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