Excerpt: Sub Debt Coming in More Flavors

New trend in unitranche: Lenders have been trying to become more competitive with lower-cost alternatives by tranching a loan out on the back end, according to Ronald Kahn, a managing director in the debt advisory practice at Chicago investment bank Lincoln International LLC, who discussed the phenomenon with sister publication Buyouts.

While the lenders still present the loan to the borrower as a single, blended loan, the high-yield investor, perhaps a hedge fund that has promised an 11 percent return to its investors, may seek a partner to take a “first out” position in the unitranche loan, which may also involve a revolving loan as part of the overall structure.

“They tranche it out internally, and it’s not always transparent,” Kahn said. It remains to be seen if this kind of structure will catch on in the market, he added. “It’s not the easiest thing to do because there are not that many people willing to do the first-out piece.”

For mezzanine debt providers, it’s one more reason that they are finding it difficult to find desirable financing opportunities, as low interest rates provide buyout sponsors and other borrowers with a range of alternatives that they seem to be finding more attractive.

In today’s environment, sponsors are able to do their deals with only a sliver of subordinated debt, if they need any at all.

Still, mezzanine fundraising remains strong. Year to date, mezzanine fundraising stands at $4.4 billion, up 26.4 percent from the comparable period last year, according to data collected by Buyouts. And even a year ago observers were warning of an oversupply of mezz money. For more details, check out Buyouts magazine coming out today. Subscribers can see the story here.

Steve Bills is a senior editor at Buyouts Magazine. Any opinions expressed here are entirely his own. Follow him on Twitter @Steve_Bills. Follow Buyouts tweets @Buyouts. For information on how to subscribe, contact Greg Winterton at greg.winterton@thomsonreuters.com.