Unitranche Loans

A unitranche loan, as the name implies, is one tranche of debt that can replace the traditional two tiered (i.e. first-lien/second-lien, senior/subordinated or secured/unsecured) debt structure for highly leveraged companies. For those unfamiliar with this increasingly popular structure, here is our summary. What they are Structure: One tranche of debt that is split into “first-out” and “last-out” pieces. First-out debt typically includes a revolver and part of the term loan; last-out debt is everything else. To replicate the differentiated seniority of traditional deals, unitranche deals define trigger events during which first-out debt is paid before any payments are made to last-out debt. Typical trigger events include a missed payment, bankruptcy or financial covenant default, or acceleration or other actions by first-out lenders to exercise their rights. Documentation: One credit agreement and one security agreement. In addition, if multiple investors will provide the debt, there is an additional agreement, the Agreement Among Lenders (“AAL”), which allocates interest and principal payments across the tranches and addresses other intercreditor issues. The borrower is not a party to the AAL. Pricing: One blended interest rate. The AAL replicates the different yields and repayment terms of the traditional two-tiered deal by skimming borrower payments and allocating them from the first-out lenders to the last-out lenders. Lenders: May be provided by a single lender (typically to companies with revenues between $10 and $50 million) or by multiple lenders. Participants in this market include finance companies, business development companies, and hedge funds.  Some banks also provide unitranche structures. Voting and exercise of remedies: Highly negotiated and vary significantly deal to deal. They are specified in the...

Private Equity Likes Strong Brand Names

Private Equity Funds often target companies with strong brand names in mature industries.  These companies often have strong, stable cash flows, which can be used to repay the acquisition debt.  Two transactions, both announced in February 2013, demonstrate this trend. Food behemoth H.J. Heinz Company agreed to be acquired by Brazilian PE firm 3G Capital and Warren Buffet’s Berkshire Hathaway at a total transaction value of $28.8 billion. As part of the transaction, both 3G and Berkshire invested approximately $4.1 billion to acquire common stock of the company.  Heinz is a leader in the mature condiments market with large and stable cash flow, and the potential for additional cost savings.  The transaction closed in June of 2013, and the new owners wasted no time in shaking up the HNZ management team by dismissing 11 executives and replacing them with new personnel. Dell Inc. announced a deal to sell the computer maker to founder Michael Dell and PE firm Silver Lake at a price of $13.65 per share, valuing the transaction at $24.4 billion.  The company also announced that the Board would commence a 45-day go-shop period to seek offers from other bidders. This action led to two competing offers, one from PE firm Blackstone, which offered $14.25 per share for the entire company, and one from Carl Icahn’s Icahn Enterprises, which offered $15.00 per share for a 58% stake. Blackstone eventually dropped out of the process after Dell reported declining sales, but Icahn continued to purse the transaction and offered several alternative structures to the Silver Lake deal. The Board of Directors was hesitant to pursue the Icahn deal...