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Unitranche Loans: Somewhat Complex, Yet Streamlined and Efficient

Date: Mar 12, 2014 @ 07:00 AM
Filed Under: Legal

Enforceability of the AAL

Unitranches are fairly new financing devices. Consequently, there are few reported cases addressing the enforceability of certain provisions of the AAL, especially those pertaining to bankruptcy matters. Even as to intercreditor and subordination agreements, which have been used for many years in first-lien/second lien and senior/mezzanine loans, it is still unclear whether all of the bankruptcy-related provisions contained in those documents are enforceable. While there is no real doubt about the enforceability of common lien and payment subordination provisions contained in intercreditor and subordination agreements, there remains continuing uncertainty about whether courts will enforce agreements, consents and waivers made by junior creditors in favor of senior creditors that arguably impact fundamental bankruptcy policy matters.

Most attorneys and legal commentators believe that courts reviewing AALs will be guided by cases involving intercreditor and subordination agreements used in first-lien/second lien or senior/mezzanine financings. Nevertheless, since borrowers are typically not parties to AALs, there is a risk that bankruptcy courts will hold that they do not have the jurisdiction to enforce these agreements. A requirement that borrowers be parties to AALs might effectively mitigate this risk. But even if a bankruptcy court exercises jurisdiction over the AAL, the court could struggle with the single lien and single set of loan documents features of unitranches and awkwardly apply intercreditor or subordination agreement precedents, designed for the separate lien, separate documentation structures of first-lien/second-lien and senior/mezzanine financings, when ruling upon AALs.

Liquidity Restrictions

Unitranches are fairly illiquid. There is currently no significant secondary (trading) market for unitranches. And even if the asset-based lender identifies a proposed assignee, there are additional hurdles to assignment. First, under the terms of the AAL, the asset-based lender must offer to assign its loan to others in the unitranche syndicate before making an assignment outside the syndicate. Second, any assignee would have to become a party to the AAL, a document that lacks the kind of standardization that facilitates smooth loan trading. Lastly, while AAL’s commonly contain mutual buy-out rights in favor of each of the first-out and last-out lenders, these rights are at the option of the purchasing party. The first-out lenders do not have the right to “put” their loans to the last-out lenders. In short, an asset-based lender should view a unitranche as a relationship loan to be held in its portfolio, rather than a loan that may be easily traded.

Bankruptcy Issues

As noted above, unitranches involve a single term loan, documented in a single loan agreement, secured by a single lien granted in favor of the administrative or collateral agent. As such, in a bankruptcy proceeding involving the unitranche borrower, there is a risk that the entire unitranche loan will be viewed as a single secured claim. Since it is frequently the case that the collateral for a unitranche is insufficient to secure the entire unitranche loan, if the unitranche is treated as a single secured claim in bankruptcy, it will be regarded as an undersecured claim. This result would adversely impact the asset-based lender’s right, in its role as a first-out lender, to receive post-petition interest, expenses and adequate protection payments. Additionally, a single claim characterization in bankruptcy could allow the last-out lenders, if they constitute a majority of the creditors in their class and hold more than two-thirds of the amount of the unitranche, to accept a plan or reorganization over the objection of the first-out lenders.

It may be possible to mitigate these risks through careful drafting of the loan documents. For example, an explicit provision in the AAL granting first-out lenders the right to receive post-petition interest on their claim before payments are made to the last-out lenders, even if such post-petition interest is not an allowed claim in the bankruptcy, should enable the first-out lenders to receive post-petition interest. And insistence that the borrower grant two liens under the unitranche loan documents, one to secure the first-out obligations and one to secure the last-out obligations, may prevent the treatment of the unitranche as a single secured claim.


Unitranches are popular financing devices for middle-market borrowers and asset-based lenders will be presented opportunities to participate in unitranches as first-out lenders. As a result, ABLs will need to embrace those opportunities to ensure an appropriate share of the middle-market leveraged lending business. Nevertheless, unitranches present several unique issues for asset-based lenders and require careful drafting and negotiation of the relevant loan documents to ensure that asset-based lenders are afforded rights and remedies consistent with their expectations.

Anthony R. Callobre
Chair, Bank and Finance Practice | Buchalter Nemer
Anthony R. Callobre is Chair of Buchalter Nemer’s Bank and Finance Practice. He can be reached at or (213) 891-5024.
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