In middle-market leveraged buyouts, private credit funds increasingly utilize unitranche structures. First-Out Last-Out (FOLO) agreements among lenders (AAL) establish bifurcated risk-return tranches behind a single borrower-facing credit facility, governing cash flow prioritization, default blockages, and voting control.
First-Out vs Last-Out Cash Flow Priority
How repayments and collateral proceeds flow through the capital structure across pre-default and post-acceleration states:
While the borrower pays a single blended interest rate (e.g. SOFR + 650 bps), the AAL synthetically splits cash distributions into a First-Out senior tranche (SOFR + 375 bps) and a Last-Out subordinated tranche (SOFR + 875 bps), granting First-Out lenders total recovery priority upon enforcement.
Private Debt Tranche Structuring Compared
| Credit Tranche | Typical Leverage (EBITDA) | Spread (bps over SOFR) | Liquidation Priority |
|---|---|---|---|
| First-Out (Senior Unitranche) | 0.0x – 2.75x | S + 350 to 425 | Priority 1 (Full Recovery) |
| Last-Out (Subordinated Unitranche) | 2.75x – 5.50x | S + 800 to 950 | Priority 2 (Junior to First-Out) |
| Traditional Mezzanine Debt | 4.5x – 6.25x | 11.0% to 14.0% (PIK) | Subordinated to Senior Liens |
Institutional Covenants & Blockage Periods
Key risk management clauses in private credit intercreditor documentation:
- Payment Blockage Notices: A financial covenant breach triggers a 120-to-180 day standstill blocking cash interest distributions to Last-Out holders.
- Last-Out Buyout Rights: Subordinated lenders retain the right to purchase the First-Out debt at par plus accrued interest upon acceleration to control restructuring.
- Drag-Along Restructuring Provisions: If default persists, First-Out lenders hold statutory powers to direct the collateral agent without requiring unitholder unanimity.
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