GE Capital hangs out its unitranche shingle

GE Capital has signalled its intention to increase share in the local leveraged loan market, with a presentation at yesterday's AVCJ Private Equity and Venture Forum on its unitranche leveraged finance product. GE has built a strong portfolio of middle market debt with the product in the US and it is hoping to do the same here.

Unitranche finance is a hybrid loan structure with a single-tranche term facility and a singe interest rate, but with more than one lender. The lenders have entered into an agreement among themselves as to which of them will have priority claims to proceeds and how interest payments will be allocated.

For example, GE Capital and Ares Capital lend together through a joint venture called Senior Secured Loan Program.

Leverage under a unitranche structure tends to be higher than a traditional senior term structure.

GE Capital's senior managing director, strategic investor program and sponsor finance, Charlie Allred said the leverage ratio (debt to EBITDA) for US deals involving unitranche was more than five times. This compares with an average leverage ratio of a little over four times for debt in private equity deals in Australia.

The interest rate is usually higher than a traditional term facility but borrowers get a number of offsetting advantages. They save on establishment costs because only one agreement needs to be drafted.

It also speeds up the borrowing process because borrowers don't have to negotiate with senior and mezzanine financiers.

And unitranche has tended to be more flexible in terms of covenants and the deployment of excess cash flow.

Unitranche lending came to prominence during the US credit squeeze in 2009/10, when more conventional finance was scant.

Since then the structure has maintained its popularity, especially in the private equity market, because finance companies like GE Capital have been able to use it to offer higher leverage than banks, which are more constrained by regulation.

Allred said the US market for unitranche finance has grown from around US$2 billion in 2006 to US$10 billion last year.

He said: "We have had 60 per cent annual growth in assets since 2009. We are currently running nine programs with investors.

"We think it would make sense in this market."