Private Credit: Unitranche (USA)

• 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 1/2^nd 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 & 2^nd 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. 1^st & 2^nd 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 1^st & 2^nd 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)

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.