In leveraged buyouts and middle-market corporate acquisitions, borrowers prefer a single credit agreement with blended interest. Unitranche financing accomplishes this by pairing a First-Out senior lender with a Last-Out subordinated lender via an internal Agreement Among Lenders (AAL) that is completely invisible to the corporate borrower.
The First-Out Last-Out (FOLO) Structure
How the single borrower-facing coupon is bifurcated internally between credit partners:
The corporate borrower signs a single note paying a blended coupon (e.g. $\text{SOFR} + 650\text{ bps}$). Under the private AAL contract, the First-Out bank receives priority debt service ($\text{SOFR} + 350\text{ bps}$), while the Last-Out direct lending fund absorbs subordinated default risk to capture an elevated synthetic yield ($\text{SOFR} + 950\text{ bps}$).
Credit Tranche Priority & Rights Compared
| AAL Tranche Tier | Typical Leverage Attachment | Effective Yield Spread | Enforcement Trigger Rights |
|---|---|---|---|
| First-Out Tranche | 0.0x – 2.5x Senior EBITDA | SOFR + 300 – 400 bps | Immediate waterfall priority on payment default |
| Last-Out Tranche | 2.5x – 5.5x Total EBITDA | SOFR + 850 – 1,100 bps | Standstill period (90 – 180 days) + buyout option |
| Blended Borrower Facility | 0.0x – 5.5x Consolidated EBITDA | SOFR + 600 – 700 bps | Single Administrative Agent representation |
AAL Governance & Waterfall Mechanics
Key covenants negotiated within Agreement Among Lenders documentation:
- Post-Default Payment Waterfall: All liquidation proceeds flow 100% to First-Out principal and interest until fully redeemed.
- Last-Out Buyout Right: The Last-Out lender holds the option to purchase the First-Out debt at par to seize control of restructuring.
- Voting Thresholds: Material amendments (maturity extensions, collateral releases) require unanimous consent across both tranches.
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