In middle-market direct lending, unitranche debt blends senior and junior risk into a single loan agreement presented to the corporate borrower. First-Out Last-Out (FOLO) structures govern repayment priority internally through Agreements Among Lenders (AAL), defining cash-flow waterfall bifurcations during covenant defaults.
Agreements Among Lenders & Waterfall Cascades
How payment waterfalls bifurcate interest and principal distributions between first-out banks and last-out debt funds:
During a Waterfall Triggering Event (e.g. non-payment, insolvency, or un-cured leverage breach), 100% of proceeds from collateral realization and operating cash sweep directly to extinguish First-Out principal before Last-Out lenders receive any capital recovery.
Unitranche FOLO Tranche Comparison
| Debt Tranche | Typical Investor | Yield Margin (SOFR+) | Liquidation Priority |
|---|---|---|---|
| First-Out (Senior) | Commercial Banks / Super-Senior Funds | 250 – 350 bps | Priority 1 (Full Recovery) |
| Last-Out (Subordinated) | Private Credit Funds / BDCs | 650 – 850 bps | Priority 2 (Subordinated) |
| Blended Unitranche (Borrower View) | Single Underwriting Agent | 525 – 625 bps | Pari Passu Single Lien |
Direct Lending Covenant Protections
Key terms negotiated between First-Out and Last-Out lenders within the AAL:
- Standstill Periods: Restrict Last-Out lenders from initiating foreclosure actions for 90 to 180 days following a covenant breach.
- Buy-Out Rights: Grant Last-Out lenders the option to purchase First-Out debt at par plus accrued interest to take control of restructuring workouts.
- Voting Thresholds: Distinguish between required lender majorities and tranche-specific sacred rights.
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