Unitranche Funds Find Strong Demand
August 12, 2008
Unitranche funds, which have been launched by only handful of lenders, including Allied Capital and Golub Capital, have found some success in a market where raising debt is not always easy, Private Equity Analyst, a Dow Jones publication, reports. Unitranche funds provide all the debt needed for a leveraged deal, both senior and subordinated, while the buyer pays a uniform interest rate, rather than paying different rates for different tranches.
Allied Capital, for instance, currently prices the unitranche debt it offers at 6% to 7% over Libor, or roughly 9% to 10%. This compares to the current rate of around 13% to 15% for subordinated notes, and 6.5% to 7% for senior debt.
Buyout firms like the unitranche idea because it offers greater certainty of closing on a deal and saves them the trouble of having to try and arrange debt financing on their own. The lenders, meanwhile, find the unitranche offerings attractive because they increase the overall fees they get on deals. These offerings also enable lenders to diversify out of riskier mezzanine debt by pairing it with more secure senior debt.
And demand for such funds appears strong. Allied’s unitranche fund, a $3.6 billion fund launched in December 2007 in a joint venture with GE Commercial Finance, has been used in no fewer than six buyout-related transactions in less than a year.
These deals include Riverside Co.-backed Nordco’s purchase of railcar-mover maker Central Power Products; a recapitalization of Industrial Air Tool, a Pasadena, Texas, distributor of equipment, tools and goods to offshore oil and natural-gas drillers; and a $185 million financing for Odyssey Investment Partners LLC-backed York Insurance Services Group’s acquisition of two smaller workers compensation companies.
Golub Capital’s unitranche fund has financed such deals as a dividend recap of medical device company ExtruMed, which is backed by Wedbush Capital Partners and Inverness Graham.
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