Unitranche debt structures blend senior and subordinated risk into a single credit agreement with the borrower. Behind the scenes, Agreement Among Lenders (AAL) contracts govern First-Out / Last-Out (FOLO) payment waterfalls, dictating interest priority, voting rights, and enforcement control during liquidity stress.
First-Out vs Last-Out Tranche Dynamics
How risk-adjusted returns and liquidation priority bifurcate within a unified loan:
Upon a material covenant default (e.g. leverage exceeding 5.50x), First-Out lenders can trigger a formal payment blockage notice (typically 120–180 days), redirecting 100% of borrower cash flow toward First-Out principal amortization before Last-Out lenders receive interest or yield distributions.
Private Debt Capital Stack Architecture
| Debt Facility Tranche | Pricing Spread (SOFR + bps) | Default Waterfall Priority | Voting & Remedies Control |
|---|---|---|---|
| First-Out (FO) Senior Tranche | SOFR + 325 - 400 bps | Priority 1 (Super-Senior) | Unilateral Enforcement after Blockage |
| Last-Out (LO) Junior Tranche | SOFR + 750 - 900 bps | Subordinated to FO Payoff | Buyout Option (Par + Accrued) |
| Traditional Mezzanine Debt | SOFR + 1050+ bps | Junior Lien Subordination | Standstill Agreement (180 Days) |
Underwriting Invariants for Credit Committees
Essential covenants when structuring unitranche term loans:
- Last-Out Buyout Right: Protect the junior tranche by guaranteeing the right to purchase the First-Out loan at par plus accrued interest within 30 days of acceleration.
- Excess Cash Flow (ECF) Sweeps: Mandate quarterly 50–75% ECF sweeps to pay down First-Out principal until total leverage drops below 3.50x.
- Springing Financial Covenants: Trigger debt service coverage ratios (minimum 1.25x DSCR) whenever revolving credit utilization exceeds 35%.
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