What is Unitranche Debt? Unitranche is short for Unit Rate Mortgages. This type of mortgage is different from other forms of mortgages in the sense that it is a hybrid model combining many other loans into a single, with a low interest rate for the lender who sits between the lender and the loan.
This low rate is called the discount rate and is used as a means to offset the costs incurred by the lender. In this way, Unitranches allow many different people to put their money into the mortgage, which helps to make it more stable.
There are two types of this type of financing
The first is a senior debt consolidation loan where all of the debt you have accumulated has been bundled into a single debt with a lower interest rate. The second type is a senior debt mortgage where the unitranches are used to pay off the debt of just one person, thus, saving the lender money.
Both of these financing models are often used together in order to achieve better financing than could be obtained using other methods.
What is Unitranches?
Well, Unitranches are just like a conventional refinance loan, where you would go to a lender and apply for financing. However, instead of receiving a refinance, you would be putting all of your debt into one loan, which would be secured by your home equity. This way, you would be able to obtain a lower monthly payment and get rid of several high interest debts such as credit cards. This new loan structure would be called a “subordinated debt loan structure” by most professional lenders.
One thing that must be made clear is that what is happening here is that there is usually only one party that comes to the negotiation table and that is the lender. Virtually all commercial lenders only make commercial loans with the objective of generating revenue. Therefore, if the only purpose of the lender is to generate revenue by loaning money, then the resulting deal between the lender and the borrower will be one that has a very low interest rate. The end result will be that the lender recoups most, if not all, of its investment on the unitranches.
There are different strategies
In some instances, a lender may opt to include a servicing charge onto the face value of the unit ranches. The effect of this charge is to raise the interest rate that the lender charges on its commercial borrowers. This strategy has the potential to significantly reduce the profitability of what is termed as a “multi-party servicing relationship”.
To illustrate the point of this article, imagine the following scenario. An investor that is both a junior and a senior debt holder in a multi-party financing transaction enters into a financing agreement with a junior. Under this arrangement, the junior borrows against its own senior debt to purchase the unit ranches. The junior then takes the loss of the underlying property in order to satisfy the debt and related expenses. The result is that the junior has incurred a loss even though it ultimately does not repay the investment made by the investor.
As a result of what is sometimes described as a “leverage scenario“, one can observe that the potential for negative financing risks associated with what is sometimes called a “leverage complex” is greatly enhanced by what is called a “podiatric” financing transaction. A podiatric deal occurs when two or more entities (a syndicate) enter into an agreement to finance a business venture involving a number of sophisticated borrowers who are highly leveraged.