In middle-market leveraged buyouts, direct lenders utilize unitranche structures to provide seamless single-document financing. Agreement Among Lenders (AAL) contracts govern the internal First-Out Last-Out (FOLO) waterfall, bifurcating risk and yield without exposing the borrower to multiple creditor classes.
First-Out Last-Out (FOLO) Tranche Mechanics
How cash flow priority and distress waterfalls distribute principal and interest payments:
Under normal operating conditions, both First-Out (revolving/term) and Last-Out lenders receive contractual interest. Upon an uncured Event of Default and triggering of a Waterfall Activation Notice, 100% of collateral recoveries and cash sweeps flow exclusively to extinguish First-Out principal before Last-Out lenders receive any proceeds.
Private Credit Capital Stack Positions Compared
| Tranche Position | Collateral Lien Priority | Typical Pricing Margin | Enforcement Control |
|---|---|---|---|
| First-Out Senior Unitranche | First-Priority Shared Lien | SOFR + 300 – 400 bps | Majority Vote after Standstill |
| Last-Out Subordinated Unitranche | Shared Lien (Contractual Sub) | SOFR + 700 – 900 bps | Restricted Standstill (90–180 Days) |
| Second Lien / Mezzanine | Junior Second Lien | SOFR + 950 – 1200 bps | Subordinated Intercreditor Deed |
Structuring Resilient Intercreditor Agreements
Essential legal and financial safeguards for institutional private credit syndicates:
- Define Explicit Standstill Horizons: Prevent premature debt acceleration by bounding Last-Out enforcement rights to standard 90–120 day standstill periods.
- Include Buyout Options for Subordinated Lenders: Allow Last-Out holders to purchase First-Out debt at par plus accrued interest upon default to preserve upside.
- Model Rigorous Leverage and Interest Coverage Covenants: Establish automated early-warning triggers based on Total Net Leverage Ratio (TNLR) and Fixed Charge Coverage Ratio (FCCR).
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