Middle-market direct lending increasingly combines bank senior revolvers and institutional mezzanine debt into a single synthetic unitranche. Agreements Among Lenders (AAL) govern First-Out / Last-Out (FOLO) payment waterfalls, defining silent post-default cures, buyout rights, and liquidation priorities.
Synthetic Unitranche & Agreement Among Lenders (AAL)
How AAL side contracts divide single credit agreements behind borrower view:
In a standard performing state, cash interest is paid pro-rata based on agreed tranche spreads (e.g. SOFR + 300 bps First-Out vs SOFR + 850 bps Last-Out). Upon the occurrence of an uncured Material Event of Default, the waterfall transitions instantly to sequential liquidation: all principal, accrued interest, and enforcement fees must be paid 100% to First-Out holders before Last-Out lenders receive a single dollar.
Unitranche Tranche Profiles Compared
| Tranche Position | Typical Leverage Attachment | Target Yield Spread | Enforcement Control |
|---|---|---|---|
| First-Out (Senior Bank Facility) | 0.0x – 2.5x EBITDA | SOFR + 275–350 bps | Primary Voting Rights after Standstill |
| Last-Out (Direct Lending Fund) | 2.5x – 5.5x EBITDA | SOFR + 750–950 bps + PIK | Tranche Buyout Option at Par |
| Blended Unitranche (Borrower Rate) | 0.0x – 5.5x EBITDA | SOFR + 625–700 bps | Single Administrative Agent Interface |
Structuring AAL Intercreditor Covenants
Essential protective covenants in private debt structuring:
- Standstill Periods: Require 60–90 day standstill durations before First-Out lenders can accelerate remedies, allowing Last-Out funds to negotiate sponsor equity cures.
- Par Purchase Rights: Grant Last-Out lenders unconditional 10-day windows to purchase the First-Out debt at par plus accrued interest to assume full restructuring control.
- Cap on First-Out Over-Advances: Restrict First-Out super-senior emergency protective advances to a strict percentage (typically 10–15%) of total commitments.
Explore Advanced Private Credit & Debt Structuring
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