NEW YORK, June 2 (Reuters) - Falling yields and larger deals have wreaked vast changes on the structure of unitranche loans and put intense pressure on joint ventures set up by lenders to win business in that niche market.
A unitranche has typically split the loan into first-out and last-out pieces, effectively creating a combination of senior and junior tranches.
At least 12 joint ventures were formed between 2014 and 2016 to serve that market, with one lender usually providing the senior or first-out position and another the last-out junior.
Yet no JVs have been announced since then, and two have been dissolved, as the market has shifted to a "dollar-one uni" structure for which the unitranche joint ventures are unneeded.
The dollar-one format acts like a single strip of pari passu debt, an appealing prospect that has helped draw more investors into these types of deals.
But it has threatened the competitive advantage for JVs, specialty vehicles that have struggled to win new business in the changed market environment.
"First-out/last-out unitranche simple when deals were smaller," one lender told LPC. "But as deals have gotten bigger – over US$125m – it gets much more complicated."
Many of the JVs were formed when unitranche loans, priced at about 700bp over Libor, commanded yields in the 8-9% range on a blended basis between first-out and last-out. That was an appealing return and sponsors liked the structure - execution was easy, deals were certain to close and there was no risk of price flex.
And as the middle market grew more crowded and competitive, there was a sense that teaming up in a JV could add scale and help lenders win the ever-bigger deals they might not have gotten alone. But as the leveraged loan refinancing wave has spilled into the middle market, that has put downward pressure on spreads and boosted demand for second-lien loans.
Slowly, the traditional first- and second-lien structure has gotten inexpensive enough to outweigh the convenience the JV-backed deals were offering. Meanwhile, the JV lenders have had to slash pricing to compete, pushing spreads down to the 575bp-600bp over Libor area. And with first-lien spreads narrowing to the LIB+450bp area, only so many lenders could commit to the big pieces of senior debt in the JV structures.
"How many guys can realistically hold US$100m or more of term debt at 450bp over Libor plus the revolver?" a second lender said.
That has put pressure on the JVs, two of which have folded.
LStar Capital, the credit arm of private equity firm Lone Star Funds, exited its partnership with Antares Capital last month, while GE Capital's Senior Secured Loan Program with Ares Capital ended following CPPIB’s purchase of GE Capital’s sponsored finance business.
At the same time, middle market lenders have been able to take advantage of the money pouring into their market - some US$83bn since the start of 2016, according to LPC.
That has allowed them to pool together for ever-bigger deals without having to divvy up senior and junior debt the way that the joint ventures were structured to do.
One such trade was the US$1bn dollar-one unitranche for Thoma Bravo's buyout of Qlik Technoligies. The loan was later refinanced in the less expensive broadly syndicated loan market.
"There are far more guys willing to do the dollar-one uni," said a third banker. "It's basically a club execution with an anchor guy. It's easier to syndicate." (Reporting by Leela Parker Deo and Fran Beyers; Editing By Marc Carnegie and Jon Methven)