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Private Credit: Unitranche (USA)

Gain knowledge on the US private credit market, the private credit product spectrum unitranche (one-stop) structures, key terms in unitranche documentation reconciling first-out, last-out, agreements amongst lenders and more

Private Credit: Unitranche (USA) Workshop

A one-day course

  • The trainer is a Senior Consultant to Grant Thornton in Debt Advisory so is actively involved in the market and has visibility into current trends in the private credit / unitranche market.
  • Through his training/consultancy practice, he has exposure to a wide range of private credit providers e.g. Ares, Bluebay, Muzinich, Ardian and as well as banks involved in unitranche structures (e.g. Wells Fargo, RBS, Berenberg, Nordea, HSBC and BNP).
  • The trainer has had exposure to the North American market over many years through corporate finance, and through servicing a large number of US law firms in London on a bespoke basis (e.g. Simpson Thacher, Millbank Tweed, Baker & McKenzie, Shearman & Sterling, Sullivan & Cromwell).
  • The trainer’s varied career includes stints in commercial and investment banking, accountancy, tax and law providing insight from a wide range of perspectives.
  • The trainer has over 20 years’ experience in junior debt spectrum and was on the advisory panel for the leading Mezzanine/2nd Lien Conferences arranged by IRR for a number of years; this has given him insight into the legal, structuring and practical challenges which arise in using junior debt across differing jurisdictions, especially the inter-creditor issues.

  • The US Private Credit Market: review the market metrics and trends, the key players and how their motivations
  • Subordination & ranking: Understand the various methods used to achieve subordination, why it matters and the relevant judgements relating to the enforceability of intercreditor /AAL in light of 510(a) Bankruptcy Code
  • The Private Credit product spectrum: private credit provides offer a range of debt products often with some form of equity. These include unitranche or one -stop, which has emerged in recent years as the primary offering but providers continue to offer 1/2nd Lien, Split ABL/Unitranche and Mezzanine (although this market has largely been disintermediated by unitranche)
  • Unitranche (One-stop) structures: unitranche embraces a range of different structures; classic, bifurcated (or FOLO) and club/sell-down. Each structure offers pros and cons for both lenders and borrowers. The programme analyses the key differences in detail
  • 1 & 2nd Lien: the structures may offer advantages vis-à-vis unitranche (e.g. pricing) but are documented in a more traditional senior/junior manner. The programme examines the key issues in these structures.
  • Split ABL/Unitranche: Asset based lenders approach credit from a different perspective to cash flow based lenders particularly so far as the collateral; structure is concerned. The programme reviews the pros and cons of using ABL vis-à-vis RCFs in deals with unitranche
  • Key terms in Unitranche documentation: The programme covers a number of issues which assume greater significance in unitranche deals. Debt-incurrence is often the most important covenant to PE Sponsors (since most plan on growth!). For First-Out lenders (typically RCF providers or banks in bifurcated unitranche), incremental debt represents a major source of risk (despite the fact they rank first in line in distress) since it enhances the risk of distress. This aspect is magnified by the availability of additional debt via grower or starter baskets. Debt-reclassification complicates the picture for lenders seeking to monitor a borrower’s debt capacity. Against this background, this aspect is covered since it is one of the most heavily negotiated aspects in leverage deals
  • Equity Kickers: a range of equity kickers have long been used by providers of junior debt to boost returns. The programme reviews the various ways these can be structured, the issues lenders should consider and the pros and cons of each ‘equity’ option
  • Deal Economics: the programme includes data on deal economics in unitranche deals from a database complied by a Proskauer (pre Covid!)
  • Reconciling First-out, Last-out: unitranche structures differ from traditional senior/junior (i.e. 1st & 2nd Lien) in a number of material respects.  A unique aspect is that the junior (Last-Out) element typically represents a much larger portion of the debt finance compared to 1st & 2nd Lien or Senior/Mezzanine deals.  This aspect magnifies the tension between lenders and requires a range of unitranche-specific terms in the documentation suite to reconcile the priority of the First-Out against the greater exposure of the Last-Out lenders (e.g. voting re amendments and waivers, acceleration and remedies)
  • Intercreditor issues: these come to the fore in laminated or bifurcated capital structures involving senior and junior debt. The programme analyses the key features of intercreditor agreements and how they differ in the different private credit products
  • Agreement Amongst Lenders (“AALs”): AALs have been developed to deal with one-stop products which are split amongst two or more parties ‘behind the scenes’. To this end they combine issues that are typically be found in Credit Agreements (e.g. tranching, margins and fees) and aspects that typically appear in intercreditor agreements (e.g. Subordination, Exercise of Remedies, Bankruptcy issues and Assignability)

Part 1: Overview of Private Credit market, debt products and key issues

Review of lenders and the market

  • The North American Private Credit market
  • Review of private lending fundraising landscape
  • The players in the market
  • Market size
  • Fund data
    • Private debt fundraising
    • AUM
    • Deal metrics
  • Investment strategies
    • Key sectors
    • Use and Application ® M&A vs Refinancing vs Dividend Recap
    • Sponsored vs Unsponsored deals
  • Jargon buster glossary

 Overview of private credit product spectrum

  • Unitranche (One-stop) products
  • 1st & 2nd Lien
  • Split Collateral ® ABL & Unitranche
  • Mezzanine (summary)
  • Equity kickers
    • Warrants
    • Preferred Stock
    • Common Equity

 Key documents in Private Credit lending (summary)

  • The Credit Agreement (Acqusition & RCF)
  • The ABL Credit Agreement
  • Security Agreement
  • ABA Model Intercreditor Agreement (2010)
  • LSTA new model AAA (2019) 

Part 2: Private Credit debt products and key issues

Unitranche (One stop)

  • The three ‘unitranche’ structures
    • Classic structure
    • Bifurcated / FOLO structures
    • “Sell down-club” structures
  • Key Documentation for each type
  • Liens & Collateral pools
  • Subordination & ranking
  • Overview of the “Intercreditor” arrangements
  • Specific issues for the Unitranche
    • Voting
    • Amendments & Waivers
    • Debt Caps
    • Buyout rights
  • Pros & cons Lender perspective
  • Pros & cons Borrower perspective 

Split Collateral ® ABL & Unitranche

  • Deal structure
  • Key Documentation
  • Liens & Collateral pools
  • Subordination & ranking
  • Overview of the “Intercreditor” arrangements
  • Specific issues for the ABL & Unitranche
    • Voting
    • Amendments & Waivers
    • Debt Caps
    • Buyout rights
  • Pros & cons Lender perspective
  • Pros & cons Borrower perspective 

1st & 2nd Lien structures (& Senior/Mezzanine)

  • Use and Application
  • Deal structure
  • Documentation suite
  • Liens & Collateral pools
  • Subordination & ranking
  • Specific issues for 1st/2nd Lien
    • Voting
    • Amendments & Waivers
    • Debt Caps
    • Buyout rights
  • Ranking and subordination (Debt / Lien)
  • Overview of the “Intercreditor” arrangements
  • Pros & cons Lender perspective
  • Pros & cons Borrower perspective
  • Senior / Mezzanine (bried summary)
    • Key differences to 1st/ 2nd Lien 

Equity Kickers – Warrants, Preferred & Common Stock

  • Rationale for equity kickers – why they matter to funds!
  • Warrants ® which investors want these and why?
    • Why these matter to investors
  • Preferred Equity
    • Pros & cons
    • Dividends – fixed or variable, cumulative
    • Anti-dilution / ‘pay-to-play’ rights
    • Liquidation preference & triggers
  • Common Stock
    • Pros and cons
  • Key issues for equity – the Shareholders’ Agreement (overview)
    • Dilution / pay-to-play rights
    • Drag & Tag
    • Information & Representation
    • Exit (liquidity events)

Part 3: Unitranche metrics – leverage, coupons, covenants & debt incurrence

Facility size and leverage

  • Deal size
  • Review of data on tranche sizes
  • Closing leverage metrics
    • EBITDA
    • Leverage
  • Equity contribution 

Coupon structure, margins, ratchets, fees & call protection 

  • Margins / Interest / OID
  • Cash pay
  • Fees
    • Agency fees
    • Commitment fees
    • Ticking fees (delayed draw loans)
  • Call premia
    • Hard (Make-whole) vs. soft (percentage)
    • Why does it matter to funds (Reinvestment risk)?
    • Application ® Voluntary vs Mandatory vs Refinancing 

Financial maintenance covenants

  • The key financial covenants
    • Leverage
    • Fixed charge coverage
    • CapEx
  • Incidence in different deals sizes
  • Step downs
  • Cushion (Headroom) – variation for different deals sizes
  • EBITDA add-backs / addbacks
    • Recurring expenses (caps vs uncapped)
    • Synergy addback caps (run-rate)
  • Equity cures
    • Key issues for borrowers
    • Traps for lenders 

Incremental debt & Incremental Equivalent debt

  • Incremental debt vs Incremental Equivalent debt
    • Cap type – Hard/fixed vs leveraged based
  • ‘Typical’ terms of Incremental debt
  • General debt baskets ® differing deal sizes
  • Free and clear (starter) baskets – percentage of EBITDA
  • MFN & Sunset issues
    • Scope of MFN
  • Incremental Equivalent debt (“Sidecar” facilities/debt) 

What about baskets?

  • Grower baskets – incidence, use and application
    • General debt
    • General investments
    • Restricted payments
  • Restricted payments baskets
  • Available Amount / Starter baskets
    • Incidence
    • Size – percentage of EBITDA
  • Restricted payments’ leverage levels ® dividends
  • Reclassification between baskets ® yes or no 

Part 4: Subordination, ‘Intercreditor’ / AAL issues

Subordination, Intercreditor Agreements & AALs (how & why it matters)

  • Contractual subordination
  • Structural subordination
  • Lien subordination vs. Debt subordination
  • Equitable subordination [§510(c)]
  • Relevance of §510(a) Bankruptcy Code re subordination
  • Cases supporting enforcability of Intercreditors in Bankruptcy
    • Radioshack (Del)
    • Boston Generating (S.D.N.Y.)
  • Key against enforceability of Intercreditors
    • LaSalle St Partnership (N.D. IL)
    • Beatrice Foods (Minn.) 

Issues included in the AAL

Note (most) of the following issues may be included in an Intercreditor (i.e. in classic unitranche, split collateral structures with ABL and in 1st/2nd Lien structures) or in an AAL where it does sell down all / part of the unitranche. Some aspects may also be carved out and included in the Credit Agreement itself (e.g. tranching, deal economics, voting in a classic unitranche structure)

  • Tranching ® key negotiating issues for the First-Out and Last-Out
    • What is included in the First-Out and Last-Out?
    • Sizing of the respective tranches (affects control)
    • Incremental facilities
    • Caps on either First-Out or Last-Out
    • DIP funding arrangements (in Ch 11)
    • Should some aspects be moved to the Credit Agreement?
  • Deal economics
    • Margins & skims paid to Last-Out by First-Out (what First-Out facilities are covered?)
    • Mandatory & Voluntary Prepayments
    • Prepayment premia ® pro rata?
    • Dealing with Protective Advances
  • Voting thresholds
    • ‘Class’ Voting thresholds
    • Voting issues requiring First-Out consent
    • Voting issues requiring Last-Out consent
    • Issues requiring unanimous consent
    • Drag rights for Last-Out
    • What happens post default?
  • The Waterfall
    • Waterfall pre and post a ‘trigger’ event
    • Negotiating the ‘trigger’ event
    • Remedies and Standstills
    • What does “Exercise of Remedies” cover?
    • Who can initiate “Exercise of Remedies”?
  • Transfers & Assignability
    • Why it matters
    • Consent requirements
    • Offers to others in the same class
    • Right of first offer vs Right of first refusal
  • Bankruptcy issues
    • Plan Classification & Voting issues
    • Restrictions on the Last-Out
    • DIP financing restrictions
    • Credit bidding ® Restrictions on junior creditors (i.e. Last-Out)
    • Collateral Sales under §363

The trainer is a consultant, public speaker and author with expertise in private equity, debt advisory, restructuring and infrastructure. He is a Senior Advisor to KPMG Finland, a Senior Advisor to Reorg EMEA Covenants, the leading provider of information to the European High Yield community, and a Senior Consultant to Grant Thornton UK.

Training programmes are provided to a wide range of blue-chip clients in Europe, Africa, the Middle and Far East, North America and Australasia. In-house clients include banks (BNP Paribas, Société Générale, ING, Barclays Capital, Bank of China, RBS, SEB); lawyers (Baker & McKenzie, Skadden Arps, Sullivan & Cromwell, Cadwalader, Latham & Watkins, Weil, White & Case); advisory firms (Lazard, PWC, M&A International, KPMG, EY, Deloitte); PE firms (Cinven, Advent, Barings Asia, Waterland); corporates (Siemens, Airbus, Turkcell, Candy Crush, Gunvor, Statkraft) and governmental bodies (the UKLA, the EBRD, the ECGD, Omani Oil Corp.)

He qualified in South Africa both as a Chartered Accountant, with Deloitte, and as a lawyer with Hofmeyr where he was involved in structuring a number of high-profile project financings including BMW 3 Series, Ford Sierra, GM, Sappi and Mondi.

When he moved to London and joined Lazard Brothers as a corporate finance executive he was involved in a wide range of public and private transactions. Subsequently he joined Hoare Govett as an assistant director where he acted as an advisor to smaller listed companies and was involved in several syndicated Euro-Equity Initial Public Offerings.

In 1991 he joined ABN Amro’s cross border M&A team prior to being transferred to MeesPierson Corporate Finance as a Director in Cross-Border M&A where he was also involved in a number of deals in Central Europe. During this time he was a member of the EU-PHARE programme and advised the Estonian government on their privatisation programme.

He is the Programme Director at the City Business School, London, for Infrastructure Finance for the M. Sc. programme in Business Administration and Finance.

He is a member of the Institute of Chartered Accountants in England & Wales and the South African Institute of Chartered Accountants. He completed a BA and an LLB at the University of Natal and a B. Compt. (Hons) at UNISA.

Recent research from Prequin forecasts Alternative AUM growth of c. 10% through 2025 with Private Credit growth second only to Private Equity. As at June 2019 Global Private Credit AUM totalled $812 Billion with North America-Focused Private Debt Assets under Management comprising the lion’s share at c $500 billion AUM (unrealised value and dry powder).

The growth in private credit has been fuelled by a number of forces from both buy and sell side. These include contraction in bank lending in the face of regulatory pressures which become even more acute during economic decline (e.g. Covid); the increasing attraction to both institutional and private investors of the higher yields available in private credit.  On the demand-side, sponsors (borrower’s) increasingly requirement more tailored solutions for more challenging ‘story credits’ that cannot access traditional sources of lending from banks or the bond markets.

Within the private credit debt spectrum, unitranche (or one-stop) has supplanted traditional 1st & 2nd Lien and mezzanine as the product of choice and in 2019 comprised 56% of deals according to data from Proskauer (compared to 36% in 2018).

In the traditional products offered by private credit (e.g. 1st & 2nd Lien and Split Collateral deals) the documentation is well settled although there is always give and take around the key commercial issues (e.g. standstill periods and what happens in distress) depending on the usual factors (credit quality, leverage, deal economics and lender protection).

These considerations differ in the case of unitranche deals primarily because, uniquely, the more junior unitranche provider is providing the bulk of the debt finance. This creates tension in distress since the more senior First-Out lender’s aim is simply to recover their exposure in distress rather than to maximise recoveries for the benefit of the more junior unitranche lender. At the same time the more senior lenders lack the lender protection usually available to senior lenders (e.g. the ability to accelerate and grant waivers/amendments) since they lack the voting power in standard credit agreements required to prevent the more junior Last-Out from passing amendments and waivers to their detriment or failing to implement the traditional remedies when the borrower is in default (usually 50.1%).

An additional complication is that ‘Unitranche’ is a term of art and actually covers a range of different structures all of which impact the documentation; classic, bifurcated (FOLO) and ‘club’-style’ deals where the arranger sells down part of the debt (sometimes later) to various other funds behind the scenes and uses an AAL to regulate a wide range of matters which are usually included in either the Credit Agreement itself or the Intercreditor.

These intercreditor issues cover a range of ‘standard’ issues (e.g. the waterfall, bankruptcy issues) although the details are heavily negotiated and vary from deal to deal; however, they may appear inf differing documents depending on the actual unitranche structure. This matters, since in laminated capital stacks involving senior and junior secured debt, ‘intercreditor issues’ are critical to all parties and become live in distress. The programme covers these issues in detail whether they are in the intercreditor itself (as in a classic structure) or removed to an AAL in a bifurcated or club structure (tranching, fees, skims, voting).

Note mezzanine is not covered in detail since it has been largely disintermediated by unitranche.


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