A unitranche loan is a single term loan that does the job a senior loan and a subordinated loan used to do together. Instead of negotiating with a bank for the first layer of debt and a mezzanine fund for the layer behind it, the borrower signs one credit agreement with one lender, or a small club of lenders, at one interest rate. The structure grew up with private credit and is now one of the most common ways to finance a sponsor-backed acquisition in the middle market.
It is simple to describe and less simple underneath. Knowing how the pieces fit helps you judge whether the convenience is worth the price.
How a unitranche is built
One loan, blended pricing
The interest rate on a unitranche sits between what a senior loan and a junior loan would cost separately. Valuation Research Corporation's third-quarter 2026 matrix showed middle market unitranche coupons in a range of SOFR plus 500 to 575 basis points, with the loan typically issued at a small discount, an original issue discount of around 98.75 to 99.25. Because there is only one rate, you do not see the split between the cheap senior money and the expensive junior money. You pay the blend on the whole amount.
Leverage
The appeal is the amount. A unitranche lender is underwriting what would otherwise be two layers of debt, so it will lend more against earnings than a senior-only lender. VRC noted that leverage of five to six times EBITDA remains common in competitive sponsor deals, although the median for recent originations has been lower. Smaller and non-sponsored borrowers should expect less.
The agreement among lenders
When more than one lender holds the loan, they often sign a separate agreement among lenders that the borrower is not party to. It splits the loan internally into a first-out piece and a last-out piece. The first-out lender is repaid first if the loan goes wrong and accepts a lower share of the interest; the last-out lender takes more risk and more of the return. To the borrower it still looks like one loan with one rate. The arrangement matters when you need a waiver or an amendment, because the voting rights inside that agreement decide who you really need to persuade.
The revolving facility
A unitranche is a term loan, and most businesses also need a revolving facility for working capital. That revolver is often provided by a bank and ranks ahead of the unitranche, sometimes described as super senior, because the bank wants to be first in line for the smaller amount it is lending. The sizing and priority of the revolver are worth negotiating early, since they affect how much liquidity you really have.
Delayed-draw term loans
For buy-and-build strategies, a unitranche can include a delayed-draw tranche: committed money you can draw later to fund add-on acquisitions, subject to conditions such as a leverage test. You usually pay a ticking fee on the undrawn amount. It is far quicker than raising new debt for each deal, but the conditions to drawing decide how useful the commitment really is.
What else to look at in the terms
- Covenants. Middle market unitranche loans usually carry a maintenance leverage test. Look at the level, the step-downs and how EBITDA is defined, including what adjustments and synergies you are allowed to add back.
- Call protection. Lenders often charge a premium if you repay in the first year or two, commonly a small percentage that falls away over time. If you expect to sell the business or refinance early, that cost belongs in the comparison.
- Amortization. Usually light, often around one percent a year, with the balance due at maturity.
- Interest options. Some lenders will let part of the interest be paid in kind, added to the loan instead of paid in cash. It preserves cash today and costs more over the life of the loan.
- Equity cure rights. The right for a sponsor or owner to put in equity to fix a covenant breach. How many times and how often it can be used matters more than whether it exists.
A simple example
Take a hypothetical business with EBITDA of 10 million dollars that is being acquired and needs 45 million dollars of debt, four and a half times earnings. A bank might be willing to provide a senior loan of three times EBITDA, 30 million dollars, at a relatively low margin. The remaining 15 million dollars would then need a junior lender charging a much higher rate, with its own documents and an intercreditor agreement between the two.
A unitranche lender would instead offer the full 45 million dollars in one loan at a single margin, higher than the bank's but well below the junior lender's. Whether the unitranche costs more or less in total depends on the gap between those prices, the fees on each piece and how long the debt stays in place. Running the numbers on real term sheets, rather than assumptions, is the only reliable way to know.
Unitranche or a senior and junior structure?
A unitranche usually wins on speed and simplicity. There is one set of documents, one lender to negotiate with and no intercreditor agreement for the borrower to work through. When a purchase agreement sets a tight timetable, certainty of execution is worth a great deal.
A separate senior loan and junior loan can be cheaper, because the senior piece from a bank may be priced well below the blended unitranche rate. It also brings more parties, more documents and more negotiation, and the junior lender's consent rights can complicate later amendments. For a borrower with strong, stable cash flow and time to run a fuller process, splitting the debt can lower the overall cost.
Other points to weigh:
- Size of the financing. Unitranche is most efficient in the middle of the market. For very small loans, a bank senior facility on its own may cover the need at lower cost.
- Exit plans. If you expect to sell or refinance within two years, call protection and fees on a unitranche weigh more heavily.
- Relationship. One lender holding the whole loan can make a waiver straightforward. It also means one view of your business decides the outcome.
- Market conditions. When direct lenders are competing hard for deals, unitranche pricing and terms tend to improve for borrowers.
The honest way to decide is to see both options priced on your own numbers. Kenward Partners prepares the credit package and takes it to banks and direct lenders at the same time, so you can compare a unitranche term sheet against a senior and junior structure on cost, flexibility and certainty before you commit.
Source: Valuation Research Corporation, Private Market Trends, Q3 2026.
