Actionable Ideas for Companies and Sponsors
Shift from Dual Tranche to Max Leverage Unitranche Structure
The strength of the leveraged loan market has led to increasingly issuer-friendly structures, including those that support all first lien transactions which benefit issuers by reducing their weighted average cost of debt. As private equity sponsors evaluate the most inexpensive financing options available for portfolio companies, the traditional first lien / second lien, dual tranche syndicated structure could give way to the less costly, all first lien max leverage syndicated unitranche structure.
In July 2021, Jefferies acted as Joint Lead Arranger in Sovos Compliance’s all first lien, max leverage dividend recapitalization. The company’s existing capital structure consisted of multiple first lien / second lien tranches resulting in first lien / total leverage of 3.7x / 7.4x. As part of the transaction, Sovos issued a $1,245 million First Lien Term Loan and a $215 million Delayed Draw First Lien Term Loan resulting in first lien / total leverage of 7.3x / 7.3x. In addition to syndicating the all first lien, max leverage unitranche structure, the underwriting group was able to tighten the existing first lien term loan margin from L+575 (1.0% LIBOR floor) to L+450 (0.5% LIBOR).