Last-Out Tranche
Private Credit glossary · Loan Structures & Instruments
Definition
Within a bifurcated unitranche, the junior internal tranche held by the direct lender. Receives a higher coupon than the blended rate (to compensate for being structurally subordinated to the First-Out under the AAL) and is paid only after the First-Out is current. Functionally equivalent to a junior/mezzanine layer but with first-lien legal status against the collateral — only the cash-flow priority is subordinated, not the lien priority.
Last-Out Tranche in plain English
Imagine a business borrows one big loan, but behind the scenes the lenders quietly split it into two lines that wait in different spots. The 'last-out' piece is the one that gets paid back last — it only receives its money after the safer 'first-out' piece is fully caught up. Because it's riskier (you're at the back of the cash line), it earns a higher interest rate as compensation. The clever twist: legally it still has a first-priority claim on the company's assets if things blow up — it's only the order of getting cash that's junior, not its rights to the collateral. So it acts like a riskier mezzanine slice while keeping top-tier legal protection.
Learn these first
Practice Last-Out Tranche
Related Private Credit terms
Private Credit practice questions · Private Credit flashcards · Private Credit study guide