A unitranche loan is a hybrid credit structure that combines what would traditionally be a first-lien senior loan and a second-lien or subordinated loan into a single facility with a single set of loan documents, a single agent, and a blended interest rate. The borrower interacts with one lending group rather than two, simplifying the relationship and eliminating intercreditor complexity.
The economics of a unitranche reflect the blended cost of the first-lien and second-lien tranches it replaces. If a first-lien loan would carry SOFR + 450 bps and a second-lien loan would carry SOFR + 850 bps, the combined unitranche might price at approximately SOFR + 600–650 bps — slightly above a pure first-lien alternative but below a pure second-lien, reflecting the aggregate risk of the combined capital structure.
Internally, unitranche facilities are typically divided between two or more lenders under an Agreement Among Lenders (AAL) — a private agreement that establishes which lender has first-lien and which has last-out (second-lien equivalent) economics, voting rights in distress, and rights to purchase the other lender's position. From the borrower's perspective, the AAL is invisible — they have one loan document and one agent. From the lenders' perspective, the AAL defines their relative priority.
Unitranche financing is particularly common in private-equity-backed middle market transactions because it allows speed: one underwriting process, one credit agreement negotiation, and one closing. For deals in the $25M–$500M total capitalization range, unitranche execution is often faster than assembling a multi-tranche capital structure. Larger transactions may revert to split first-lien/second-lien structures to access the deeper institutional investor base.
Pricing for unitranche loans includes an OID (original issue discount) component in addition to the cash interest spread. OID represents proceeds withheld at closing — a $100M loan funded at 98 OID means the borrower receives $98M but owes $100M at maturity. OID is economically equivalent to additional upfront interest and increases the lender's effective yield while reducing the net proceeds available to the borrower.