Although unitranche structures have been popular for middle market M&A deals in recent years, especially since the financial crisis, now senior cash flow lenders and mezzanine lenders are picking up market share, according to experts. In part, the competition is driven by the amount of debt capital that has been raised, which has been outstripping the pace of deal flow.

Before 2013, the terms and conditions of unitranche loans, which combine senior and subordinated debt into one product, often "tipped the scales in their favor," says Christine Tiseo, managing director at Lincoln International. Chicago-based Lincoln often runs the financing processes for deals of less than $40 million of Ebitda.

Lincoln saw an increase in senior cash flow, loans based on expected cash flow and mezzanine structures, which are a fusion of debt and equity financing, in 2013. Before that, unitranche lenders (often business development companies, hedge funds, or private equity debt funds) had been offering low amortization schedules, light covenants and general financial flexibility.

Commercial finance companies have figured out that they need to be more aggressive, and they have begun winning more deals than previously, Tiseo says. "I think the competitiveness of the market has driven senior cash flow and mezzanine lenders to give a little bit on yield to win back market share," she says.

In the past year, senior cash flow and mezzanine lenders have fought back by reducing amortization and pricing by 100 or 150 basis points, and 1 percent to 2 percent, respectively, says Tiseo of the deals Lincoln has worked on. "The cost of capital, when you blend those two pieces together, becomes better than a unitranche," she says.

The shift comes as lenders are working in markets that are flooded with debt capital. "At some point the market will balance itself out but it's still very competitive; lenders are competing very hard for deals," says Tiseo. Sponsors are also asking for senior-stretch loans, according to Jeffrey Day, director at lending group Madison Capital Funding LLC. Senior-stretch loans also come with an attractive cost of capital, which "caused competitive pressures on traditional unitranche players," Tiseo says.

From Day's experience, mezzanine loans, which are priced higher and have fairly onerous call protections, are often getting squeezed out of the capital structure by senior-stretch and second-lien loans, which tend to be less expensive and with less onerous or no prepayment penalties. Comparatively, Tiseo says sometimes providers of senior-stretch loans allow mezzanine lenders to come in below them.

For lenders, the shift comes as markets are flooded with debt capital. "At some point the market will balance itself out, but it's still very competitive. Lenders are competing very hard for deals," says Tiseo.

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