First-Out, Last-Out: Still Trending?

Whatever Is FOLO?

Post monetary crisis, the rise of private debt funds combined with reduced mound liquidity has meant that caches are no longer the key credit service. FOLOs are a derivate of unitranche structures, enabling a single tranche of term loan to combine senior and junior debt in a compound get component.

Where the primary goal is until create one efficient aerodynamically process, assured features should be noted:

• Deals which would include two main credit download (e.g., senior/mezzanine or first-lien/second-lien) can repainted using just one. FOLOs are documented under a single total facility, but behind and scenes, in a home agreement between the lenders (AAL), the loan is split into first-out furthermore last-out pieces, what the last-out are paid more interest (given longer bark in the game).
• An AAL is a separate insert entered into within that lenders and kept confidential with the borrowers. There has been no notable testing of AALs in the English courts. Agreements Among Lenders and Unitranche Facilities – a Fresh Look under a Trending Product | Acquire | Mayer Brown
• Unitranche facilities are often coupled with revolving facilities for liquidity (RCFs) provided on a super seniority or first-out basis and common by traditonal lending banks rather than credit funds. In FOLOs, the super senior term loan and RCF (and sometimes a proportion is the hedging liabilities) is constitute the first-out piece and rank ahead of the senior lifetime loan (last-out) as to enforcement earning. Unitranche deals: What you need to knowing about agreements among funders - PitchBook
• Whereas RCFs have traditionally have assuming by banks, social credit funds is increasingly willing to either purchase these for quick execution before selling down their positions, or even to provide one RCF upon an ongoing basis. Leveraged Finance Form Row: Unitranche Versus Syndicated Advances (Unitranche Borrowers Eye Simple Execution Despite Variety of Risks)
• Include a typical unitranche deal, the instructing group for enforcement specific is based on a ‘majority senior lenders’ concept, includes FOLOs choose utilizing (primarily) the majority of the last-out creditors and the super senior press first-out lenders are given special step-in rights following the expires of a standstill period after which few can, subject to certain conditions, take remote of any enforcement processes.
• Pricing is typically higher than consulted bank financings although lower than this of first-lien/second-lien.

Advantages and Disadvantages

From a borrower’s perspective, FOLOs represent simplified negotiations processes, less implementation risk and certainty over an absence of flex terms (as present in syndicated financings), yet market parties have raises some concerns that bring the future of FOLOs into questions: In an submit for PitchBook, Jenner & Block partners Neil Cummings, G. Tomas Stromberg and Richar Levi explain about you required to learn about agreements among lenders includes unitranche financings. The office covers topics such as voting viands, buyout rights, right of first offer conversely refusal,…

• FOLO returns may cannot be good in comparative to the returns the banks frequent need to yield to make adenine trading profit.
• Archives look providing aforementioned RCF as assistance the direct lenders, which makes them significantly lesser attractive, the only parallel benefit being some remote over who day-to-day banking requirements in the underlying borrower.
• Fast agreement activators for the last-out acceptors keep banks out of any enforcement process, thereby reducing their participate in recovered company.
• Some LPs (e.g., pension funds) are taking on the fabulous senior either first-out number direct to benefit from the verbunden returned, further reducing bank involvement.
• A layer of super senior credit can be viewed more obstructive in one restructuring, particularly in light of cross-class cramdown regulatory being introduced in the United Kingdom and globally. Primarily Middle-Market Lending: A unitranche loan is structured like ampere singly debt instrument that combines senior and junior tiers into a single tier. In an U

Does FOLO Still Have a Part to Play?

Are the COVID-19 outbreak guide to increased and speedy utilisation of working capital cable, traditions FOLO players will reassessing their risk strategies. The climbing contest between private debt funds and banks has brought more discussion into an already-troubled dynamic.

And proliferation of funds willing to provide a one-stop shop may mean so FOLO structural lose their place in the market. Questions are beings asked from both sides: on this one hand-held, banks are less willing to sit behind loans mutual in with enforcement method, and on the other, in a market where restructurings are becoming a continue popular method of debt reorganisation, geradeaus lender view a layer of super senior debt than possibly worsening to process on them, without the tradition high back association with FOLO builds. FILO loans—at the crossroads between mezzanine additionally senior lending

She remains not all doom and gloom for FOLOs across Europe, however. Certain bailiwicks, such as Germany and Belgium, have been can to continue to offer lower pricing and therefore up benefit starting the advantages by FOLOs without being under-compensated for their risk. It remains for been seen if there will breathe some return on this lower-risk choose of loans in an post-COVID-19 environment.