Australian Leveraged Finance Guide to Unitranche Financing TLB & Covenant-Lite Debt Finance22 min read

Introduction

The Australian leveraged finance market has transformed as private credit funds increasingly provide alternative debt finance solutions for acquisition and leveraged finance transactions. Sophisticated lenders, sponsors, and advisers require clear market structure guidance to understand how unitranche financing and other private credit products are reshaping Australia’s lending market, especially since the thin capitalisation rules updated in 2023 now strictly limit debt deductions and recourse to Australian assets.

This article explains unitranche, Term Loan B (TLB), and covenant-lite facilities for market participants so you can structure competitive private credit transactions. It compares the pricing, tenor, and covenant differences of these products while detailing how to manage a complex security package and determine when these structures are preferable to traditional bank and mezzanine combinations.

Interactive Tool: Find the Right Debt Structure for Your Deal & Rules

The Alternative Debt Finance by Private Credit Lenders

Filling the Supply Gap Left by Traditional Australian Banks

Following the Global Financial Crisis, regulatory reforms placed constraints on the lending capacity of traditional banks. This created a significant structural funding gap in the Australian leveraged finance market, particularly for mid-sized corporates and non-investment grade issuers who found it more difficult to access credit.

Private credit funds have expanded to fill this supply gap. These non-bank lenders have become a key source of capital, offering bespoke financing solutions and demonstrating a greater ability to underwrite flexible terms. As a result, this has reshaped the landscape of acquisition and leveraged finance in Australia, providing borrowers with viable alternatives to traditional bank debt.

The Decline of Traditional Bank & Mezzanine Combinations

The conventional Australian acquisition finance package historically involved a combination of senior and subordinated debt. This structure typically included:

• Term loan A: an amortising facility;
• Term loan B: a bullet facility; and
• Mezzanine debt: a separate tranche of subordinated debt.

This model is being replaced by more streamlined private credit solutions. Private equity sponsors, in particular, now often prefer unitranche financing and other bespoke debt instruments offered by private credit lenders.

These alternative structures provide several advantages over the traditional bank and mezzanine combination, including:

• accessing higher leverage multiples;
• securing longer tenors; and
• benefiting from reduced amortisation requirements.

Furthermore, the single-lender nature of many private credit deals removes the inter-creditor complexity that arises when negotiating between separate senior and mezzanine lenders.

Comparing Unitranche & TLB Structures for Private Credit Lenders

Key Features & Pricing of Unitranche Financing

Unitranche financing is a hybrid loan that combines senior and mezzanine debt into a single instrument. This structure is popular with private equity sponsors in the Australian leveraged finance market because it offers a nimble and flexible debt finance solution that is often easier to execute than traditional multi-tranche facilities.

Key characteristics of unitranche financing include:

• Structural Flexibility: These loans often come with fewer and more flexible covenants, providing borrowers with greater operational freedom.
• No Amortisation: Unlike traditional term loans, unitranche facilities typically do not require scheduled principal repayments over the life of the loan.
• Higher Pricing: Borrowers trade the flexibility and certainty of funds for a higher headline margin compared to other debt products.
• Super-Senior Facility: They are often accompanied by a super-senior revolving credit facility, usually provided by a bank for working capital, which ranks first for repayment in an enforcement scenario.

The Resurgence & Economics of Term Loan B Facilities

The Australian leveraged finance market has seen the return of fully underwritten Term Loan B (TLB) facilities. This has provided a strong, competitive alternative to unitranche debt, particularly for well-regarded, sponsor-backed companies.

The renewed availability of TLBs has been a welcome development for sponsors, adding another viable strategy to their acquisition and leveraged finance toolkit. Investment banks are arranging and underwriting these facilities with confidence, offering competitive pricing with margins often in the low 4s or even lower for the strongest credits. Ultimately, this has re-established bank-led TLBs as a credible option for borrowers balancing cost efficiency with structural needs.

Borrower & Lender Pros & Cons for Each Structure

When choosing between unitranche and TLB structures, borrowers and lenders must weigh the trade-offs between cost and flexibility. Each debt finance product offers distinct advantages depending on the specific needs of the transaction.

For borrowers, the key benefits of unitranche financing include:

• Bespoke Terms: Unitranche loans can be tailored to specific needs, offering features like payment-in-kind (PIK) interest and more flexible prepayment options that are generally unavailable in TLBs.
• Certainty of Funds: The direct-lending model provides a high degree of certainty and speed in execution, as it removes syndication risk.

The primary advantage of a TLB for a borrower is sharper pricing. For strong, well-bid credits, a TLB can offer a more cost-effective solution than a unitranche facility. However, this comes at the cost of the structural flexibility and bespoke features that define unitranche financing.

Covenant-Lite Facilities in the Australian Market

The Mechanics of Springing Financial Covenants

In Australian leveraged finance, a covenant-lite (or cov-lite) structure moves away from traditional loans that require consistent testing of a borrower’s financial performance. Instead, these facilities feature a ‘springing’ financial covenant, which means the covenant is only tested if a specific condition is met.

The most common trigger for testing is the utilisation of a revolving credit facility (RCF) beyond an agreed threshold. For instance, the covenant might only ‘spring’ into effect if cash drawings on the RCF exceed a certain percentage of the total facility limit. As a result, this mechanism acts as a liquidity tripwire, signalling potential financial distress, rather than a tool for ongoing performance monitoring.

In many sponsor-led deals, only the lenders providing the revolving credit facility have the right to act on a breach of the springing covenant. Furthermore, even if the covenant is triggered and breached, the term loan lenders may have no right to accelerate their loans unless the RCF lenders choose to do so.

Distinguishing Between Cov-Loose, Cov-Lite & No-Covenant Deals

While the term “cov-lite” is often used, the Australian market features several types of covenant structures, each with distinct characteristics. Understanding these differences is important for both borrowers and lenders in acquisition and leveraged finance.

There are four main categories of deals as follows:

• Covenanted: These deals include at least one maintenance financial covenant, such as a net leverage ratio, that is tested regularly. This structure is typically found in the mid-market.
• Cov-Loose: This is a variation of a covenanted deal but with significantly more headroom in the financial covenants. The thresholds are set so generously that a breach is unlikely to occur until the borrower is already facing substantial financial difficulty.
• Cov-Lite: This structure features a springing financial covenant that is only tested when a specific condition is met. It is commonly applied to the revolving credit facility in a Term Loan B (TLB) financing package.
• No-Covenant: As the name suggests, these facilities have no maintenance financial covenants at all. This approach is often seen in large-scale unitranche financing and the term loan portions of TLB deals.

Structuring the Security Package & Intercreditor Arrangements

Understanding the Personal Property Securities Act & Security Package Design

The Personal Property Securities Act 2009 (Cth) (‘PPSA’) provides the main framework for granting and perfecting PPSA security interests in Australian debt finance. The PPSA establishes a uniform definition of a ‘security interest’, which applies to most consensual transactions that secure payment or performance of an obligation, covering traditional concepts like mortgages and charges. Furthermore, it primarily governs security over personal property, a broad category that includes most assets other than land and certain statutory licences.

In a typical Australian leveraged finance transaction, security providers grant a general security deed covering all of their assets and undertakings. This single instrument effectively creates security over all forms of personal property. However, the market has seen a shift from this traditional “all asset” approach to adopting European-style Agreed Security Principles. These principles allow for more flexibility by:

• Specifically excluding certain assets from the security package, such as real property or assets requiring third-party consent;
• Governing the scope of security based on principles like a cost-benefit analysis; and
• Excluding certain methods of perfection, such as control over assets other than shares.

The Role of Featherweight & Springing Security Interests

Lenders in Australia face ‘administration risk’ under the Corporations Act 2001 (Cth) (‘Corporations Act’). If an administrator is appointed to a company, a statutory moratorium is triggered, which prevents a secured party from enforcing its security. However, a key exception under Section 441A of the Corporations Act allows a creditor with a perfected security interest over “all, or substantially all,” of a company’s assets to enforce its security within a 13-business-day decision period.

To manage this risk, especially when the primary security package has significant exclusions, lenders use featherweight or springing security interests. These mechanisms are designed to ensure the lender’s security covers all or substantially all of the company’s assets at the critical moment, as follows:

• Featherweight security: attaches to the grantor’s otherwise excluded assets from day one but only secures a nominal amount, such as AUD 1,000, and does not restrict the company from dealing with those assets.
• Springing security: remains dormant and only “springs” into existence to attach to the excluded assets immediately before an administrator is appointed, which is used when a day-one charge could cause adverse issues for the borrower.

Managing Intercreditor Agreements & Super Senior Revolving Facilities

Contractual subordination is a standard feature of Australian acquisition and leveraged finance, managed through intercreditor agreements. These documents clarify the relationship between different classes of creditors, including shareholder lenders and hedging counterparties, and establish the priority of payments. Unlike in Europe, there is no universally adopted market standard intercreditor agreement in Australia, meaning key terms are often heavily negotiated.

Intercreditor agreements are also essential for structuring arrangements involving super senior revolving credit facilities. In unitranche financing, a working capital facility is often provided by a bank on a “super senior” basis. As a result, the intercreditor agreement ensures that this facility ranks ahead of the term facilities for repayment if security is enforced. Ultimately, the agreement will set out the enforcement waterfall, detailing how proceeds are distributed and confirming the priority of the super senior lenders.

Tax Rules & Regulatory Scrutiny Impacting Private Credit Lenders

Applying the Third-Party Debt Test Under Thin Capitalisation Rules

New thin capitalisation rules took effect from 1 July 2023, changing how income tax deductions for interest expenditure are treated in Australian debt finance. The default method is now the ‘fixed ratio test’, which generally limits net debt deductions to 30% of a taxpayer’s ‘tax EBITDA’. Ultimately, this can present challenges for many leveraged borrowers.

As an alternative, certain taxpayers may be able to apply the ‘third-party debt test’ (TPDT). This test is complex but allows for debt deductions attributable to third-party debt if specific conditions are met, as follows:

• the debt must be used to fund commercial activities connected with Australia;
• the lender must not be an associate of the borrower; and
• the lender’s recourse for repayment of the debt must be limited exclusively to the borrower’s Australian assets.

This recourse requirement adds significant complexity to structuring a security package for Australian-headquartered businesses with offshore operations. Consequently, lenders are prevented from having recourse to foreign assets, which often means that any offshore assets must be removed from the security pool, complicating cross-border acquisition and leveraged finance transactions.

Interest Withholding Tax Exemptions & Section 128F Compliance

A 10% interest withholding tax (IWT) generally applies to interest payments made by an Australian resident borrower to a non-resident lender. However, an exemption is available under Section 128F of the Income Tax Assessment Act 1936 (Cth) if the debt satisfies the ‘public offer’ test.

To qualify for this exemption, a syndicated facility agreement must meet several conditions, including:

• the agreement must describe itself as a ‘syndicated loan facility’ or ‘syndicated facility agreement’;
• the borrower must have access to at least A$100 million at the time of the first drawdown; and
• the debt must be offered to at least ten unrelated parties that are in the business of providing finance or dealing in securities.

The public offer exemption is not available if the borrower knew or had reasonable grounds to suspect that the debt would be acquired by an ‘offshore associate’ of the borrower. In addition to the Section 128F exemption, certain double tax agreements with countries like the United Kingdom, the United States, and Japan may also provide relief from IWT for qualifying financial institutions.

ASIC Surveillance & Increased Regulatory Oversight

The Australian Securities and Investments Commission (ASIC) has increased its focus on the private credit market, reflecting the sector’s rapid growth and prompting analysis of the growth and risks in the Australian private credit market. Following reviews conducted during 2025, ASIC highlighted several key areas for ongoing surveillance to support investor protection and market integrity.

ASIC’s primary areas of focus include:

• Governance and oversight: The adequacy of board and senior management accountability in credit decision-making.
• Valuation practices: The independence and transparency of methodologies used for valuing illiquid private credit assets.
• Management of conflicts of interest: How firms identify and manage conflicts arising from related-party arrangements and fee structures.
• Disclosure to investors: The quality of disclosures regarding risks, fees, and liquidity, particularly for funds with exposure to retail investors through superannuation.

While ASIC has indicated it does not plan to introduce new regulations specifically for private credit in the immediate future, it will maintain close supervision, making ongoing regulatory compliance for private lenders a critical focus. Furthermore, the regulator’s forward plan involves encouraging the development of industry-led standards, enhancing data collection through pilot programs, and conducting targeted surveillance of private credit fund managers.

Managing Restructuring & Downside Risks in Leveraged Finance

The Rise of Payment-in-Kind Interest & Dividend Recapitalisations

In the Australian leveraged finance market, sponsors have increasingly used specific financial tools to manage cash flow and return capital to investors, particularly when exit conditions are challenging. As a result, dividend recapitalisations have become a popular method for sponsors to boost distributions to paid-in capital, often funded by upsizing existing debt facilities.

Another key tool is the use of payment-in-kind (PIK) interest. This structure allows a borrower to capitalise interest payments instead of paying them in cash, which helps manage cash flow volatility and reduces immediate debt servicing burdens. Furthermore, the value of loans with PIK agreements has increased significantly since 2021. This shows that lenders in the debt finance sector are offering this flexibility to help issuers through investment phases or periods of temporary liquidity strain.

Strategies for Private Credit Lenders in Restructuring Scenarios

Private credit lenders often adopt different approaches to distressed debt compared to traditional banks. With formal restructuring processes reaching record highs in Australia during 2025, private credit funds have demonstrated a preference for collaborative workouts over immediate debt enforcement and recovery. This is partly because they typically hold loans to maturity and are motivated to work with borrowers to restore enterprise value.

In restructuring situations, private credit lenders employ several key strategies:

• Flexible Negotiations: With smaller lender groups, private credit funds can negotiate tailored solutions like “amend-and-extend” agreements more quickly, reducing execution risk for the distressed company.
• Value Preservation: Lenders are often more willing to restructure terms through covenant holidays or loan extensions rather than enforcing security to crystallise a loss.
• Debt-for-Equity Swaps: In some cases, private credit lenders will convert their debt into equity, taking control of the company to actively shape and accelerate a turnaround plan. A notable example was the restructure of Accolade Wines, where a consortium of private capital funds took control after executing a debt-for-equity swap.
• Post-Restructuring Capital: These funds frequently act as the go-forward lender for businesses emerging from a restructure, providing bespoke unitranche financing or other capital solutions that may be outside the risk appetite of traditional banks.
• Safe Harbour Protection: An increasing number of companies are using safe harbour protections, which allow directors to develop a restructuring plan that is likely to produce a better outcome than formal insolvency, while being protected from personal liability for insolvent trading.

Conclusion

The Australian leveraged finance market now provides sophisticated debt finance solutions through private credit, with unitranche, TLB, and covenant-lite facilities offering distinct advantages. Understanding the differences in structure, security, and covenants is essential for sponsors and lenders to execute successful acquisition and leveraged finance transactions.

To effectively structure your next deal in this competitive environment, contact GRM LAW’s experienced private lender and non-bank finance lawyers. Our Legal Team offers specialised guidance on private credit arrangements, helping you manage complex security packages and tax considerations to achieve your commercial objectives.

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