Unitranche versus senior plus mezzanine
One loan at one rate, or cheap senior debt with expensive mezzanine behind it.
- Calculate the interest bill and blended rate of a two-tranche structure
- Compare it with a unitranche of the same size
- Find the mezzanine rate at which the two cost the same
- Split mezzanine interest into cash and PIK
The intuition
You can fund a home with a cheap first mortgage plus a pricier second loan from another lender, or with one loan from one lender at a single rate in between. The two loans are often cheaper overall, but they mean two applications, two sets of conditions, and an argument between the lenders if you ever fall behind.
Buyouts face the same choice. Senior debt is cheap because it is repaid first; mezzanine sits behind it and charges for the risk. A unitranche is one loan for the whole amount at one blended rate.
Blended rate = (senior × senior rate + mezz × mezz rate) ÷ total debt. Compare the two interest bills; then decide whether the unitranche's speed, certainty and simplicity are worth any difference.
Why it works
- The conventions here: senior and mezzanine each sized in turns of EBITDA at their own rates; the unitranche is the same total at one rate; one year of interest on the opening balances; no fees or amortization.
- The blended rate is dollar-weighted. Most of the dollars are usually senior, so the blend sits closer to the senior rate than a simple average would.
- The comparison is two interest bills on the same total debt. The layered structure is often cheaper on paper, because the senior lender is paid only for senior risk.
- Why pay more for a unitranche: one lender, one document, one set of covenants, a faster close and no intercreditor negotiation, which matters most when a deal is in trouble.
- Behind the scenes a unitranche lender often splits the loan into first-out and last-out pieces among its own funders, recreating senior and mezzanine the borrower never sees.
- PIK mezzanine. Part of the mezz coupon can be paid in kind: added to the loan instead of paid in cash. Cash interest falls and cash coverage improves, but the balance grows.
| Senior: 400 × 7% | 28.0 |
| Mezzanine: 150 × 12% | 18.0 |
| Two tranches: 28 + 18 | 46.0; blended 46 ÷ 550 = 8.36% |
| Unitranche: 550 × 9% | 49.5, so 3.5 a year more |
| Mezz rate where they match: (49.5 − 28) ÷ 150 | 14.33% |
| With 4 points of the mezz coupon PIK: 28 + 150 × 8% | 40 cash, 6 added to the loan |
Cash coverage with the PIK: 100 ÷ 40 = 2.5x.
The formulas
Each layer sized off earnings.
Each layer at its own price.
Dollar-weighted, not a simple average.
One rate on everything.
What is left of the unitranche bill, spread over the mezz.
The PIK part is added to the loan instead.
Worked example
Interest on each layer, add them, then divide by the total debt for the blended rate.
See it move
Same company and the same unitranche offer. Change the size of each layer, what the mezzanine costs and how much of its coupon is paid in kind.
- Raise the mezzanine rate. The two-tranche bill rises and the unitranche's does not; past the crossing, the unitranche is cheaper.
- Add senior debt. The blended rate falls toward the senior rate, because more of the dollars are cheap.
- Add mezzanine. The blended rate rises toward the mezzanine rate.
- Raise the part paid in kind. Cash interest falls and cash coverage rises, while the total interest does not change: the rest is added to the loan.
Run it backwards
Same offers, reversed: how high can the mezzanine rate go before the two-tranche structure costs more than the unitranche?
Take the unitranche's interest bill and subtract what the senior costs. Whatever is left is the most the mezzanine can charge in dollars; divide by the mezzanine amount for the rate.
It gives the sponsor a number to negotiate with. A mezz quote below it saves money, and the question becomes whether the saving is worth the second lender.
Traps
Say it in the interview
“When would a sponsor choose a unitranche over senior debt plus mezzanine?”
Check yourself
4 fresh questions, with new numbers. Answer each one correctly to finish the chapter. Get one wrong and you will see the full working, then you can try it again with new numbers.
Answers within 1% are marked right. Type the number; $, %, x and M are fine. First tries count toward Learned: the topic is Learned once every chapter is done and 75% of first tries were right.
- Blended rate = total interest ÷ total debt, weighted by dollars.
- Compare interest bills on the same total debt.
- Breakeven mezz rate = (unitranche bill − senior interest) ÷ mezz.
- A unitranche buys speed, certainty and simplicity.