lev-os Structuring First Lien Last Out Facilities
Designs FILO structures with tranche-level pricing, distribution waterfalls, and intercreditor provisions within unitranche financing.
When To Use
- Structuring a unitranche facility that splits into first-out (FO) and last-out (LO) tranches with differentiated economics
- Analyzing blended yield versus tranche-level pricing to determine FILO feasibility against a traditional first lien / second lien stack
- Designing or reviewing the Agreement Among Lenders (AAL) governing FO/LO intercreditor rights
- Evaluating FILO economics for a direct lender syndicating the FO piece to a bank or other lower-cost capital provider
- Modeling distribution waterfalls, default interest allocation, and recovery scenarios across tranches
Inputs To Gather
- Deal parameters: Total facility size, FO/LO split (dollar amounts and percentages), maturity, amortization schedule
- Pricing terms: FO coupon (spread + floor), LO coupon (spread + floor), OID on each tranche, any PIK toggle or PIK component on the LO
- Blended yield target: Weighted-average cost the borrower sees as a single unitranche rate
- Credit metrics: Borrower EBITDA, total leverage, FO leverage, LO leverage, fixed charge coverage ratio
- Intercreditor provisions: Voting thresholds for amendments/waivers, standstill periods, purchase option triggers, buyout pricing mechanics
- Waterfall mechanics: Order of payments (interest, principal, fees), default interest allocation, excess cash flow sweep split
- Recovery assumptions: Collateral value estimates, expected recovery rates by tranche under stress scenarios
- Market context: Comparable FILO transactions, current spread benchmarks for FO (bank market) and LO (direct lending market)
Workflow
Define the tranche architecture
- Set FO and LO commitment amounts as a percentage of total facility size
- Determine whether the LO tranche carries a PIK component, cash-pay coupon, or blended structure
- Confirm maturity alignment — typically co-terminus, but flag any maturity mismatch risk
Build blended pricing analysis
- Calculate the blended all-in yield the borrower pays across FO and LO tranches
- Compare blended cost against alternatives: traditional first lien/second lien, standalone unitranche, or syndicated TLB
- Model OID amortization and upfront fee impact on effective yield for each tranche holder
Structure the distribution waterfall
- Define payment priority: FO interest → LO interest → FO scheduled amortization → LO scheduled amortization → excess cash flow sweep allocation
- Specify default interest treatment — whether it flows pro rata or is allocated entirely to FO
- Address make-whole and prepayment premium allocation between tranches
- Model the waterfall under base case, downside, and default scenarios
Draft intercreditor provisions (AAL terms)
- Voting rights: Identify which amendments require unanimous consent versus FO-only or LO-only consent [VERIFY — AAL terms are deal-specific and heavily negotiated]
- Standstill period: Specify duration during which LO lenders cannot exercise remedies after an event of default (typically 90–180 days)
- Purchase option: Define the LO lender's right to purchase FO claims at par (or par plus accrued) upon a default trigger
- Buyout mechanics: Set pricing for the buyout option — par, par plus accrued, or a premium
- Release and DIP provisions: Address how FO and LO rights interact in a bankruptcy filing, including DIP financing consent and collateral release
Run recovery and stress analysis
- Model collateral recovery at multiple enterprise value haircuts (e.g., 20%, 40%, 60% decline)
- Calculate recovery rates for FO and LO tranches separately under each scenario
- Determine the enterprise value breakpoint at which LO recovery drops below a target threshold
- Assess whether FO sizing provides adequate cushion under stress
Benchmark against market
- Compare FO spread to bank-market first lien spreads for similar credit profiles
- Compare LO spread to direct lending second lien or stretched senior pricing
- Validate that the blended yield falls within market norms for the borrower's leverage and sector
Output
- FILO Structure Summary: Tranche sizes, pricing (coupon, OID, PIK if applicable), blended all-in yield, and key dates
- Waterfall Exhibit: Step-by-step payment cascade under performing, stressed, and default scenarios with dollar allocations to each tranche
- Intercreditor Term Sheet: AAL provisions covering voting, standstill, purchase option, buyout pricing, and bankruptcy-related rights
- Recovery Analysis Table: FO and LO recovery percentages at multiple enterprise value haircut levels
- Blended Pricing Comparison: Side-by-side analysis of FILO blended cost versus alternative capital structures
- Key Risk Flags: Identified issues such as thin LO cushion, aggressive standstill periods, or blended yield above market
Quality Checks
- Blended yield calculation reconciles exactly to the weighted average of FO and LO all-in costs
- Waterfall allocations sum to total available cash in each scenario — no leakage or rounding gaps
- Intercreditor provisions are internally consistent (e.g., standstill period length aligns with purchase option trigger timeline)
- Recovery analysis uses collateral values consistent with the deal's appraisal or enterprise valuation basis
- FO leverage and LO leverage correctly map to the borrower's capital structure and priority of claims
- All jurisdiction-dependent provisions (UCC perfection, intercreditor enforceability) are marked [VERIFY]
- PIK accrual mechanics, if applicable, are modeled through maturity with compounding correctly applied