Non-bank lenders aim at larger unitranche deals

This summer’s big $1 billion loan arranged by Ares Capital Corp for Thoma Bravo’s take-private of Qlik Technologies Inc marks the largest of a stream of large unitranche loans in recent months.

Players in the space expect to see more big-game unitranche deals starting in the $300 million range and up, as non-bank lenders move into the middle-market. They’re challenging both the broadly syndicated loan market as well as more traditional senior-mezzanine debt structures, industry participants said.

A unitranche structure between lenders and borrowers has one class of lenders – hence the use of the phrase uni, meaning one. The loan type often reduces borrowing costs because it eliminates the need for complex inter-creditor agreements between senior and junior lenders.

With unitranche debt, lenders frequently hold more of the debt on their own balance sheets, instead of trading it in the syndicated loan market.

Along with Ares, a handful of other unitranche lenders may hold $100 million to $300 million or more on their own, including Kohlberg Kravis Roberts, Golub Capital, Guggenheim Partners, Canadian institution PSP and Blackstone Group’s GSO unit, and Antares, which is part of Canada Pension Plan Investment Board, according to industry players.

The unitranche surge comes amid a shift away from complex capital structures with multiple players. Large banks continue to fuel the trend by pulling back from middle market lending, focusing on larger deals and decreasing their staffing. Buy and hold solutions from lenders have been gaining favor as syndicated loans give up ground in the middle market.

“You’re dealing with a group that is signing up one credit agreement and one set of security documents without a complex inter-creditor agreement that can involve protracted negotiations,” said Joanne De Silva, a Ropes & Gray partner who focuses on the space. Often the unitranche package may offer pricing advantages when compared to other structures, she said.

“The unitranche deals I’ve worked on have grown in size,” she said. “It used to be limited to a smaller number of lenders who were initially involved in the structure and a club of their partners. Now, many other lenders are willing to consider it as an option.”

Golub Capital sees healthy unitranche pipeline

Along with taking part in the Qlik deal with Ares, Golub Capital has been putting together larger unitranche deals such as a financing package for Roark Capital’s merger of Pet Valu and Pet Supermarket. The $605 million debt package from July ranks as the largest-ever unitranche financing led by Golub.

David Golub, president of Golub Capital, said the firm’s origination volume of one-stop, or unitranche, deals has been robust despite a slowdown in overall M&A. Unitranche debt offers sponsors an easier path to finance buy-and-build transactions for their platform companies, he said.

If deals go sour, it’s harder to get flexibility if a borrower has to conduct separate negotiations with a syndicate for first lien debt and another syndicate for second lien. Such lenders have a transaction-specific point of view rather than a long-term point of view from a party that holds more of the debt on its own balance sheet.

Golub Capital expects to see more one-stops in the $300 million to $1 billion size range, with strong partners.

“When we do a larger one-stop, we have a lot of conviction in the credit quality of the borrower,” Golub said.

As attention shifts toward unitranche, competing lenders are trying to make other structure more desirable by agreeing to start with a precedent inter-creditor agreement to get some of the preliminary loan work done up front.

“People are looking for certainty and a swift closing,” said De Silva, of Ropes & Gray. “When they opt for a first lien/second lien structure, they want to know that a fair amount of the inter-creditor work has been done ahead of the commitment, so they can go from signing the commitment papers to closing within a short period of time. That’s one way people have tried to make the first lien/second lien structure more competitive.”

Unitranche offers yet another way to build the capital stack for a business, but it won’t necessarily replace other types of leveraged financing.

“It’s given people an additional tool,” De Silva said. “It generally offers better pricing for lenders and can offer borrowers more certainty.”

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Photo of Joanne De Silva courtesy of Ropes & Gray