Private Debt: FOLO Tranches & Covenants

In middle-market corporate acquisitions, unitranche debt structures combine senior and subordinated tranches into a single credit agreement governed by an internal Agreement Among Lenders (AAL). First-Out Last-Out (FOLO) waterfalls dictate cash distribution priority and collateral enforcement rights during restructuring.

FOLO Cash Flow & Subordination Mechanics

How the internal Agreement Among Lenders (AAL) enforces payment prioritization:

⚡ Payment Blockage Notices & Enforcement Standstill

Upon the occurrence of an event of default (e.g. Total Net Leverage Ratio exceeding 5.50x), First-Out lenders issue a Payment Blockage Notice. This freezes all cash interest and principal payments to the Last-Out tranche, redirecting 100% of enterprise cash flows toward First-Out debt service until senior recovery reaches 100% par value.

Debt Tranches Compared

Debt Tranche	Lien Priority	Typical Spread (SOFR + bps)	Standstill Period
First-Out Senior Unitranche	First Lien / First Recovery	SOFR + 375 bps	Immediate Enforcement
Last-Out Subordinated Unitranche	First Lien / Second Recovery	SOFR + 750 bps	90–180 Days Standstill
Mezzanine Second Lien Debt	Second Lien Subordinated	SOFR + 1050 bps (PIK)	180+ Days Standstill

Private Debt Structuring Invariants

Essential covenants for institutional private credit underwriting:

Cross-Default Integration: Require cross-acceleration triggers ensuring any default under working capital facilities automatically triggers unitranche remedies.
Excess Cash Flow (ECF) Sweeps: Mandate 50%–75% annual ECF sweeps applied pro-rata to First-Out amortizations before Last-Out equity distribution.
Voting Rights & Enforcement Control: Grant First-Out lenders exclusive authority to direct foreclosure actions until senior obligations are paid in full.

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