First-Out Tranche
Private Credit glossary · Loan Structures & Instruments
Definition
Within a bifurcated unitranche, the senior internal tranche held by a bank or lower-cost lender. Receives a lower coupon than the blended unitranche rate and is paid first from any cash flows (interest, principal amortization, recoveries) under the Agreement Among Lenders (AAL). Functionally equivalent to a first-lien revolver/TLA layered inside a unitranche, but invisible to the borrower.
First-Out Tranche in plain English
Inside that secretly-split unitranche loan, the "first-out" tranche is the safer slice — usually held by a bank — that gets paid back before anyone else whenever cash comes in, whether it's interest, scheduled repayments, or money recovered if things go wrong. In exchange for being first in line (and therefore lowest risk), it accepts a lower interest rate than the loan's blended rate. Picture two people who chipped in for a loan agreeing that if repayment money is tight, this person collects first — they take less reward because they carry less risk. To the borrower it's invisible; they just see one loan and one rate.
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