Senior Stretch Loans: A Flexible Financing Solution

Financing a major acquisition or expansion often requires more flexibility than a standard bank loan can provide. For middle-market companies looking to execute leveraged buyouts (LBOs) or growth initiatives, traditional lending limits can feel restrictive. Similarly, for real estate investors looking to develop, acquire or refinance commercial properties, creative debt structures can be attractive alternatives to traditional debt. One such structure gaining traction is the senior stretch loan.

This financing strategy offers a unique blend of features designed to bridge the gap between more conservative senior debt and higher leverage, more expensive junior or mezzanine capital. By understanding how senior stretch loans work, borrowers can unlock higher leverage options with a single capital source rather than resorting to complex, multi-lender arrangements.

In this guide, we will break down the mechanics of senior stretch loans, explore their key benefits and help you determine if this hybrid loan structure is right for your next commercial real estate or corporate finance transaction.

What Are Senior Stretch Loans?

A senior stretch loan – sometimes referred to as a "unitranche" facility in broader contexts – is a hybrid loan structure that combines senior debt and junior (or mezzanine) debt into a single package.

In a traditional capital stack, a borrower might secure a senior loan from a bank covering 50-60% of the value, and then seek a separate mezzanine loan or preferred equity to reach 75-80% leverage. A senior stretch loan simplifies this by offering that higher leverage point (the "stretch") in one document, with one interest rate, from one lender.

The lender essentially "stretches" beyond the typical senior debt limits based on the borrower's cash flow or asset value. This structure is particularly popular among middle-market borrowers that need certainty of execution and speed, which can be bogged down when negotiating intercreditor agreements between multiple lenders.

While senior stretch loans originated in the corporate world, they have become an increasingly vital tool for commercial real estate investors. This strategy is applicable across a wide range of loan sizes, even those exceeding $50 million. For real estate sponsors, this structure provides a streamlined alternative to constructing a capital stack with separate mortgage and mezzanine pieces, particularly for transitional assets or value-add projects where maximizing proceeds is critical.

Key Characteristics of Senior Stretch Loans

• Single Facility: One set of loan documents and one primary relationship to manage.
   
• Blended Rate: The interest rate is typically higher than pure senior debt but lower than the weighted average of separate senior and mezzanine pieces.
   
• Cost Efficiency: By consolidating financing into a single note, borrowers can significantly reduce the legal fees and administrative costs typically associated with closing and servicing two separate loans.
   
• Higher Leverage: Loan-to-value (LTV) or debt-to-EBITDA or -NOI ratios are higher than traditional senior loans.
   
• Cash Flow Focus: Lenders often rely heavily on the company's ability to generate consistent cash flow to service the debt.

Key Benefits and Use Cases

Why would a borrower choose a senior stretch loan over a traditional bifurcated structure? The primary drivers are usually efficiency, flexibility and the need for higher leverage.

Streamlined Execution

Time kills deals. When you are in the middle of a competitive acquisition or a time-sensitive leveraged buyout, negotiating with two different lenders can be risky. You have to manage intercreditor agreements, distinct due diligence processes and potentially conflicting terms. A senior stretch loan removes this friction. You deal with a single counterparty, which significantly accelerates the closing timeline. These same benefits apply to commercial real estate financing, where removing the complexity of intercreditor negotiations can mean the difference between winning and losing a competitive bid.

Lower Blended Cost of Capital

While the rate on a senior stretch loan is higher than a bank's senior note, it eliminates the need for a separate, expensive slice of mezzanine debt. Mezzanine financing can carry interest rates in the mid-to-high teens for corporate financing situations, while secured loans for CRE assets are seeing rates between 11% and 13% on average. By blending the risk into one facility, the overall cost of capital often ends up being more attractive than a two-tiered structure.

Greater Flexibility for Middle-Market Borrowers

Traditional banks often have rigid regulatory constraints that cap how much leverage they can offer. Alternative lenders who provide senior stretch products – such as debt funds or specialized finance companies – are often not subject to the same regulations. This allows them to offer terms tailored to the specific cash flow dynamics of the business.

Common Use Cases

• Leveraged Buyouts (LBOs): Private equity firms frequently use these loans to acquire companies without diluting equity too heavily.
   
• Dividend Recapitalizations: Business owners can pull equity out of the company while refinancing existing debt.
   
• Growth Capital: Funding rapid expansion where traditional asset-based lending falls short.
   
• Commercial Real Estate Acquisitions: Securing properties that require higher leverage than GSEs or banks provide.

Senior Stretch vs. Traditional Loans

Understanding the distinction between a senior stretch loan and a traditional senior loan is vital for strategic financial planning.

In a traditional scenario, if a borrower needs $50 million but a bank will only lend $35 million, the borrower must find the remaining $15 million elsewhere. In a senior stretch scenario, the lender provides the full $50 million. The trade-off is that the lender assumes more risk, which is priced into the loan.

Risks and Considerations

While senior stretch loans offer compelling advantages, they are not without risk. Borrowers must carefully evaluate their ability to service the debt and the lender's expectations.

Higher Interest Expense

Because the lender is taking on risk that would traditionally be held by a mezzanine provider, they charge a premium. Even if the blended cost is efficient, the absolute interest expense will be higher than a low-leverage bank loan. Companies or borrowers with volatile cash flows may find this burden difficult to manage during economic downturns.

Prepayment Penalties

Lenders providing these flexible structures often require yield maintenance or strict prepayment penalties. They are deploying capital for a specific return profile over time. If you plan to refinance quickly or sell the asset shortly after closing, exit fees and prepayment penalties or minimum payments could be substantial.

Relationship Dynamics

Since there is only one lender, that lender holds significant control. In a multi-lender scenario, a senior lender might be willing to work with you while a junior lender is aggressive, or vice versa. With a senior stretch loan, the single lender calls the shots if the company underperforms or breaches covenants. It is crucial to choose a lending partner with a reputation for working constructively with borrowers.

Due Diligence Intensity

Because the lender is exposed to the "first dollar" of loss (like a senior lender) and the "last dollar" of risk (like a mezzanine lender), their due diligence is often exhaustive. They need to be absolutely certain of the collateral value and cash flow projections. Borrowers should be prepared for a deep dive into their financials.

Is a Senior Stretch Loan Right for You?

Senior stretch loans are powerful tools for borrowers who need to maximize leverage and minimize closing complexity. They are particularly well suited for middle-market companies with strong, predictable cash flows and experienced management teams. For commercial real estate investors, these loans can offer a streamlined path to higher proceeds and faster execution, especially in competitive or transitional property situations.

Before committing to this structure, ask yourself:

• Does this structure align with the financing needs of my commercial real estate project?
   
• Does the efficiency of a single lender outweigh the potentially lower cost of a traditional bank loan?
   
• Is my company's cash flow stable enough to handle the higher debt service requirements?
   
• Do I need a financing partner who can move faster than a traditional commercial bank?

If the answer to these questions is yes, exploring a senior stretch option could be the key to unlocking your next phase of growth.

Explore Financing Options with Northmarq

Navigating the complex world of debt and equity financing requires an experienced guide. Whether you are considering a senior stretch loan, looking for traditional debt placement or exploring agency financing, Northmarq offers a full spectrum of capital solutions.

Our team of experts understands the nuances of hybrid loan structures and can help you identify the right capital stack for your unique investment goals. We connect borrowers with a vast network of lending sources, ensuring you get the most competitive terms available in the market.

Ready to discuss your financing needs? Connect with a Northmarq expert today.