The vast majority of Unitranche financing includes what is known as a «non-call» clause. This clause sets out a period during which the issuer is prohibited to make an early repayment (named «hard» non-call) or a strong financial incentive not to do so (named «soft» non-call), taking the form of an early repayment penalty.
The portfolio review of the Unitranche financing on which Aether Financial Services acts as an agent shows that the “non-call clause” insertion is systematic. The main findings are as follows:
- All the unitranche transactions in the sample analysed (30 transactions) include a soft non-call clause,
- All “non-call clause” are soft ones, no “hard non-call”,
- The average duration of the non-call period is 21 months (between 18 and 24 months in most cases),
- The structure of the prepayment penalty is as follows:
- ◊ For 75% of cases, it corresponds to the higher amount between (i) 1 or 2% of the principal prepaid and (ii) the total of all outstanding interest until the end of the non-call period,
- ◊ For 15% of cases, it corresponds to the interest amount remaining until the end of the non-call period only,
- ◊ For 10% of cases, it corresponds to 1 or 2% of the principal prepaid only.
- Most of the time, the prepayment penalty structure evolves according to the number of months remaining in the non-call period. Example: during the first year, the penalty equals 2% of the prepayment then during the second year, the penalty equals 1% of the amount prepaid,
- 85% of Unitranche financings include a «freebie amount», i.e. an amount exempt from the prepayment penalty. The freebie amount gives flexibility to the borrower/issuer for partial prepayments and is usually set at 10% of the total amount of the financing.
As a conclusion, if Unitranche lenders wish to protect themselves from early repayment, issuers and sponsors still have some flexibility if they are willing to “pay the price”, which is consistent with the very principle of this asset class.