Unitranche Explained: One Loan to the Borrower, Two to the Lenders — the Blended Margin That Collapses the Debt Stack, the First-Out/Last-Out Split, and the Agreement Among Lenders the Borrower Never Sees

A Unitranche Is the Whole Debt Stack Sold as One Loan

Most buyouts fund the purchase price by layering instruments — a debt stack of senior secured term loans at the bottom, then a more expensive subordinated or mezzanine layer above, each with its own margin, its own lenders and its own intercreditor agreement ranking one behind the other. A unitranche deletes the layering. It is a single term loan that spans the entire quantum a senior-plus-mezzanine structure would have covered, at one blended interest rate, under one credit agreement, from one lender or a small club of direct-lending funds. The borrower signs once, draws once, and pays one margin on the whole amount.

The product is the signature instrument of private credit. A bank arranging a Term Loan B underwrites the debt and sells it into the syndicated market; a direct lender writing a unitranche holds the paper on its own balance sheet to maturity. That single fact — held, not distributed — is what lets the same fund provide senior-risk and junior-risk money in one cheque, because it is not trying to slice the credit into tranches a secondary market will bid for. To the borrower this looks like radical simplicity. To the lender it is anything but, because the risk inside that one loan is not uniform — and the lenders quietly say so among themselves.

The Blended Margin Sits Between Senior and Mezzanine — and That Is the Pitch

The economics start from what the two traditional layers would each have cost. A senior Term Loan B might price at, say, SOFR+250–350; a mezzanine or junior layer wants a low-double-digit all-in return to sit behind it. Stack them and the borrower pays a cheap rate on the senior slice and an expensive one on the junior slice, weighted by size. A unitranche charges a single margin that lands between the two — one number applied to the entire balance — commonly SOFR+500–650 on larger deals, wider in the mid-market. The sponsor is not paying the senior rate, and it is not paying the mezzanine rate; it is paying the blend.

Whether that blend is cheap or dear depends entirely on the reference point, which is the whole trick of pricing the product. Set against a fully syndicated senior-plus-bond structure at its tightest, the unitranche margin looks rich. Set against the reality that the mid-market deal in question could never have accessed the syndicated market at all — too small, too story-driven, too fast a timetable — the blend is simply the price of debt that exists. The margin is not the reason a sponsor picks a unitranche. It is the toll it pays for the reasons it does.

One Loan to the Borrower, Two Loans to the Lenders

Here is the mechanic almost no candidate knows, and the one that makes the product worth understanding. The unitranche the borrower signs is frequently not held as a single undifferentiated loan by the people lending it. The lenders split it, among themselves, into a first-out tranche and a last-out tranche — the FOLO structure. The first-out lender takes a lower yield and ranks ahead in the payment and recovery waterfall; the last-out lender takes a higher yield and stands behind, absorbing the first loss if the credit fails. The two together reconstitute the blended coupon the borrower pays and the full quantum the borrower drew.

The borrower sees none of this. It signs one credit agreement, faces one agent, and pays one margin into one account. The bifurcation lives in a separate document the borrower is not a party to — often is not shown, and has no right to see. That document is where the real structure of a unitranche is written.

The Agreement Among Lenders Is the Private Contract That Splits the Recovery

The first-out/last-out split is governed by an Agreement Among Lenders (AAL) — a contract between the lenders only, sitting alongside but outside the borrower’s credit agreement. Where a conventional intercreditor agreement ranks separate instruments the borrower has signed, the AAL ranks two economic interests inside one instrument the borrower thinks is indivisible. It does the same job the intercreditor does, on debt the borrower never knew was tranched.

The AAL sets four things. The payment waterfall: on a default, recoveries repay the first-out tranche in full before the last-out sees a penny — which is exactly why the first-out accepts the thinner spread. The coupon skim: the blended interest the borrower pays is divided so the last-out earns its higher rate and the first-out its lower one. The voting and control: who can waive a covenant, accelerate, or direct enforcement, which the first-out usually leads while the credit performs and the last-out fights to influence once it is impaired. And the buyout right: on default the last-out lender can typically purchase the first-out’s position at par, buying out the senior money to seize control of the workout. None of it touches the borrower’s obligations. All of it decides who among the lenders gets paid, and who decides.

Put numbers on it. Take a £300M unitranche at a blended SOFR+575. Split it 50/50: £150M of first-out at SOFR+250 and £150M of last-out at SOFR+900. The weighted average is exactly the SOFR+575 the borrower pays — the blend is not a rounding of two rates, it is engineered backwards from the coupon the deal can bear and the return the last-out demands to stand in the loss position. (Illustrative; real splits run anywhere from 40/60 to 70/30 depending on leverage and asset quality.) The first-out is often a bank or a lower-cost fund content with senior economics and senior risk; the last-out is the direct-lending fund reaching for a mezzanine-like return without a mezzanine-shaped document. The borrower gets one loan. The risk gets sliced in a room it is not in.

Why the Sponsor Pays Up — Speed, Certainty and a Single Counterparty

A wider margin than a Term Loan B is a real cost, and a sponsor pays it deliberately. What it buys is everything the syndicated market cannot promise. Certainty of terms: a direct lender commits at signing to a fixed margin and structure, with no market flex — no clause letting an arranger widen the spread or shift terms if the syndication goes badly. Speed: one counterparty underwriting the whole cheque can diligence and close in weeks, without a ratings process or a book-build, which wins competitive auctions where the sponsor needs financing certainty on the day it bids. Confidentiality: no ratings, no public marketing, no lender meeting — the deal never surfaces. And relationship: the same fund that wrote the initial cheque funds the bolt-on acquisitions and the delayed-draw lines later, so a buy-and-build can lean on one lender across a dozen deals instead of re-syndicating each time.

That bundle — certainty, speed, discretion, a single relationship — is worth more to a mid-market sponsor on a fast auction than the 100–200bps it gives up on margin. The syndicated loan is cheaper and more liquid; the unitranche is faster and surer. A sponsor picks the second when the deal cannot wait for the first. But the trade is not free of edges.

The Price of That Certainty — Wider, Held, and Harder to Escape

The same features that make a unitranche certain make it inflexible. Because the lender holds the paper rather than trading it, there is no liquid secondary market to reprice against — a unitranche does not get repriced at par the moment the loan market rallies the way a Term Loan B does. Instead it carries richer call protection — commonly a 102/101 soft call over the first two years, sometimes with a make-whole on top — so escaping the wider margin early costs a premium the syndicated borrower does not pay. The lender has priced for a hold and defends that hold.

The universe is narrower, too. A single fund can only write so large a cheque against its own concentration limits, which historically capped the product in the mid-market — though the arrival of club deals and jumbo unitranches has pushed the ceiling from a sub-£100M cheque to financings well above £5bn, blurring the old line between private credit and the broadly syndicated market. And where the syndicated market has drifted almost entirely covenant-lite, unitranche historically kept a maintenance covenant — a leverage test checked every quarter — because a single held-to-maturity lender wants an early seat at the table if the credit slips. On the largest deals even that distinction is eroding as sponsors win cov-lite unitranche terms, but the direction of travel is the tell: the product is where a lender still bargains for control.

The Verdict: Simple to Borrow, Bifurcated to Lend, and Priced for Certainty

The unitranche is two products wearing one coat. To the borrower it is the simplest debt in the market: one loan, one margin, one lender, terms fixed at signing and closed in weeks with no ratings and no syndication — the reason a sponsor reaches for it is that it removes execution risk from the day it bids. To the lenders it is a carefully tranched credit, senior and junior money sharing a single document but split by a private Agreement Among Lenders into a first-out that is paid first and a last-out that absorbs the loss, each earning a rate the borrower never sees itemised. The blended margin sits between the two layers it replaces, wider than a Term Loan B, and that width is the toll for certainty, speed and a single relationship.

The candidate who calls a unitranche “senior debt from a private credit fund” has the label. The one who says “it collapses the senior and the mezzanine into one loan at a blended margin, holds it to maturity so it prices wider than a TLB and carries 102/101 call protection, and is split behind the borrower’s back into a first-out and a last-out under an Agreement Among Lenders that decides who gets paid in a default” is describing how private credit actually lends. The borrower buys certainty. The lenders buy a waterfall. The margin is where the two prices meet.

Take Your Preparation Further

A unitranche only makes sense against the structure it replaces. See how the senior and junior layers stack in a conventional deal in the LBO debt stack; how the ranking it collapses is enforced between separate instruments in the intercreditor agreement; where the product sits in the wider market in private credit and direct lending explained; why a syndicated loan reprices at par while a held unitranche does not in call protection explained; and why the maintenance covenant a unitranche keeps matters in covenant-lite explained.

To build the debt schedule, the blended interest line and the call-protection mechanics inside a live deal model, download the LBO Model Template — PE Ready, and for the financing and valuation mechanics on one page, see the free Valuation Methods Cheat Sheet.

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