Non-call clauses in unitranche financing

The vast majority of unitranche financings include what is commonly referred to as a "non-call" clause. This clause establishes a period during which the issuer is prohibited (referred to as a "hard" non-call) from making early repayments of the bonds or faces a significant financial incentive to refrain from doing so (known as a "soft" non-call), typically manifesting as a prepayment penalty.

An analysis of the portfolio of unitranche financings in which Aether Financial Services acts as agent reveals that the inclusion of non-call clauses is systematic, and the key findings are as follows:

• All unitranche transactions in the analyzed sample (30 transactions) include a soft non-call clause,
• None include a hard non-call clause or lack a non-call clause altogether,
• The average duration of the non-call period is 21 months (with almost all cases falling between 18 and 24 months),
• The structure of the prepayment penalty is as follows:
  • In 75% of cases, it corresponds to the greater of (i) 1% or 2% of the repaid principal and (ii) the sum of all remaining interest until the end of the non-call period,
  • In 15% of cases, it corresponds to the sum of all remaining interest until the end of the non-call period,
  • In 10% of cases, it corresponds to 1% or 2% of the repaid principal.
• The structure of the prepayment penalty often evolves based on the number of months remaining in the non-call period. For example: up to the first anniversary of the issuance, a penalty equal to 2% of the repaid principal, and between the first and second anniversaries, a penalty equal to 1% of the repaid principal,
• 85% of unitranche financings provide for a "freebie amount," which is an amount exempt from prepayment penalties. The freebie amount, intended to provide flexibility to the issuer for partial early repayments, is generally around 10% of the total financing amount.

In conclusion, while unitranche lenders seek to guard against early repayment, issuers and sponsors still retain a degree of flexibility if they are willing to pay the associated costs; this reflects the very principle of this asset class.