So far in our unitranche series we’ve examined the structural variations of this increasingly popular financing tool for leveraged lenders and sponsors. This week we look behind the curtain at the dynamics between lenders in the unitranche itself.

For some unitranche options, one debt provider alone mimics the leverage that would be offered by both first and second lien (or senior and sub) lenders at a blended pricing of the two debt layers. Size is less a limiting factor today as one-stop credit solution suppliers can underwrite and hold $250 million or more, distributing the paper within various vehicles under their control.

The unitranche can also be bifurcated behind the scenes into first-out and second-out term loans with different lenders providing each piece. Unlike a multi-tranche financing with separate credit and security agreements (and distinct security interests), the relationship between unitranche lenders is governed by one document called an Agreement Among Lenders, or AAL.

The AAL is outside of the credit and security agreement between the unitranche provider and the borrower, and is negotiated by the lenders. The main purpose of the AAL is to clearly outline the intercreditor terms and conditions. As we discussed last week, because so many unitranche alternatives exist, each AAL is unique.