In middle-market leveraged buyouts, unitranche debt combines senior and junior risk into a single credit agreement. Behind the single headline rate sits an Agreement Among Lenders (AAL) establishing First-Out Last-Out (FOLO) waterfalls, dictating interest priority, payment blockage notices, and liquidation recovery hierarchies.
AAL Waterfall Dynamics & Priority Schemes
How First-Out and Last-Out lenders bifurcate cash flows under performing vs distress scenarios:
During ordinary operation, interest payments are distributed pro-rata according to agreed coupon spreads (e.g. SOFR + 350 bps for First-Out; SOFR + 750 bps for Last-Out). Upon the occurrence of a Material Event of Default, the waterfall 'flips' to sequential distribution: First-Out lenders receive 100% of principal and interest before a single dollar flows to Last-Out tranches.
Tranche Structural Terms Compared
| Credit Tranche | Typical Pricing (Spread) | Default Priority | Enforcement Control |
|---|---|---|---|
| First-Out (Senior Revolver / Term A) | SOFR + 300–400 bps | Super-Priority 1st Lien | Controls Remedy Period (90–120 days) |
| Last-Out (Term B / Junior Risk) | SOFR + 700–900 bps | Subordinated Recovery | Buyout Option (Par + Accrued) |
| Mezzanine / HoldCo PIK | 12%–15% Fixed/PIK | Deep Subordination | Zero Remedy Control |
Institutional Private Credit Structuring Guidelines
Covenants necessary to protect Last-Out capital in private debt facilities:
- Par Buyout Rights: Ensure Last-Out lenders possess the unilateral contractual right to purchase the First-Out loan at par plus accrued interest upon default to prevent premature fire-sale foreclosures.
- Payment Blockage Limits: Restrict First-Out payment blockage notices to a maximum of 179 days in any 360-day period to prevent perpetual liquidity strangulation.
- Voting Threshold Caps: Require unanimous consent or supermajority (66.67% aggregate debt) approval for credit agreement amendments that extend maturity dates or forgive principal.
Explore Institutional Credit Solutions
Structure robust capital facilities. Review our analysis on Private Debt Waterfall Frameworks, inspect enterprise cloud hosting on WinWinHost, examine compiler optimization on WebDesigner.la, or schedule a private debt advisory consultation.