Key Takeaways
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Private credit includes non-bank lending solutions such as direct lending, mezzanine financing, and asset-based lending.
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Understanding key terms like illiquidity premium, leverage ratio, and recovery rate is critical for evaluating risk and return.
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The market spans a wide range of strategies—from senior secured loans to distressed debt and special situations.
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Technical metrics like CFADS, PIK interest, and ICR help investors assess borrower quality and repayment capacity.
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A clear grasp of private credit terminology empowers smarter, more informed investment and structuring decisions.
Introduction
Private credit has become a pivotal segment in the global financial ecosystem, particularly in times of heightened volatility and restrained liquidity in traditional banking systems. Whether you’re an investor, financial adviser, or simply curious about the mechanics of this burgeoning asset class, understanding the terminology is essential. Below, we unpack key terms associated with private credit and debt, ranging from foundational concepts to advanced industry jargon.
Definitions
| Terminology | Definition |
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Private Credit |
An asset class comprising non-bank loans extended to companies or projects. Unlike public debt, such as bonds traded on an exchange, private credit deals are negotiated privately and tailored to the borrower’s needs. |
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Direct Lending |
A subset of private credit where a fund or institution provides loans directly to mid-market companies, bypassing traditional banks. These loans often come with bespoke terms and higher interest rates, reflecting the illiquidity premium. |
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Illiquidity Premium |
The additional yield demanded by investors for investing in assets that cannot be easily converted to cash. In private credit, this compensates lenders for the higher risk of non-tradable instruments. |
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Senior Secured Debt |
A loan or credit facility backed by collateral, giving the lender a first claim on the borrower’s assets in the event of default. This position is considered lower risk compared to subordinated or unsecured debt. |
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Subordinated Debt |
Also known as junior debt, this is a loan or bond that ranks below senior obligations in case of borrower default. Investors in subordinated debt take on higher risk in exchange for potentially higher yields. |
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Mezzanine Financing |
A hybrid form of debt and equity financing often used in leveraged buyouts or expansions. Mezzanine loans typically come with warrants or equity kickers, giving lenders an upside in the borrower’s success. |
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Unitranche Loan |
A single loan that blends senior and subordinated debt into one instrument. This simplifies the borrowing structure but often comes with a higher blended interest rate. |
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Convenants |
Contractual clauses in loan agreements designed to protect the lender. These can be financial covenants (requiring the borrower to maintain specific financial ratios) or negative covenants (restricting certain activities like additional borrowing). |
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Convenant Lite Loans |
A type of loan with fewer restrictions and protective covenants, increasingly common in competitive private credit markets. While attractive to borrowers, they increase risks for lenders. |
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Leverage Ratio |
A financial metric assessing a company’s level of debt compared to its earnings before interest, taxes, depreciation, and amortisation (EBITDA). Lenders often cap this ratio to ensure the borrower doesn’t become over-leveraged. |
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Interest Coverage Ratio (ICR) |
A measure of a borrower’s ability to meet interest obligations, calculated as EBITDA divided by interest expenses. A higher ICR indicates stronger debt service capacity, and lenders often set minimum thresholds for this ratio. |
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Cash Flow Available for Debt Service (CFADS) |
A critical metric for assessing a borrower’s ability to service debt, CFADS represents the cash flow remaining after operating expenses, taxes, and changes in working capital. It excludes discretionary items and serves as a reliable indicator of a borrower’s repayment capacity. |
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Payment-in-Kind (PIK) Interest |
A form of interest payment where the borrower does not pay cash but instead adds the interest to the loan’s principal balance. PIK interest is common in mezzanine financing or distressed debt situations, enabling borrowers to conserve cash flow at the cost of compounding the debt obligation. |
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Default Rate |
The percentage of loans in a portfolio that borrowers fail to repay as agreed. In private credit, analysing default rates is crucial for assessing risk. |
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Recovery Rate |
The proportion of a loan’s principal that a lender can recover in the event of default. Senior secured loans typically offer higher recovery rates compared to subordinated debt. |
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Distressed Debt |
Debt issued by borrowers experiencing financial difficulty. Investors in distressed debt aim to acquire these instruments at deep discounts, anticipating a turnaround or liquidation. |
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Private Placement |
A funding arrangement where securities or loans are offered to a select group of investors rather than the public market. Private placements often facilitate faster capital raising with fewer regulatory hurdles. |
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Bridge Loan |
A short-term loan designed to provide liquidity until a more permanent financing solution is secured. Bridge loans often come with higher interest rates due to their temporary nature. |
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Debt-to-Equity Swap |
A financial restructuring mechanism in which a creditor agrees to convert the debt owed to them into equity in the borrowing company. This is often a last-resort measure in distressed scenarios. |
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Non-Performing Loan |
A loan that has not received scheduled payments for an extended period, typically 90 days or more. NPLs are a significant risk factor in private credit portfolios. |
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Delinquent Loan |
A loan where the borrower has failed to make scheduled payments on time, typically for a specified number of days (e.g., 30, 60, or 90 days). Delinquent loans are closely monitored by lenders as they signal potential default risks. |
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Reperforming Loan |
A previously delinquent loan that has returned to current status following a successful loan modification, restructuring, or borrower remediation. Reperforming loans can present opportunities for investors seeking assets with reduced risk but higher yields compared to pristine loans. |
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Asset-Based Lending (ABL) |
Loans secured by the borrower’s tangible assets, such as inventory, accounts receivable, or equipment. ABL is often employed by companies needing immediate liquidity. |
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Risk-Adjusted Return |
metric to assess an investment’s profitability relative to its risk. In private credit, the illiquidity and default risks necessitate a higher risk-adjusted return. |
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Origination Fee |
A fee paid by borrowers to lenders for arranging and underwriting a loan. It compensates for the due diligence and administrative costs incurred during the process. |
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Secondary Market |
While less liquid than public bond markets, some private credit instruments may trade in secondary markets, allowing investors to exit positions before maturity. |
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Special Situations |
An investment strategy targeting companies undergoing financial or operational challenges, such as restructuring or bankruptcy. These opportunities often yield high returns, but with commensurately high risk. |
Your Next Step in Private Credit
Private credit offers immense potential, but navigating its complexity requires expertise and careful planning. Whether you’re an investor seeking tailored opportunities or a company exploring private credit solutions, Kingsbury & Partners can guide you every step of the way.
Kingsbury & Partners helps clients navigate the complexity of private markets with clarity, discipline, and strategic insight.
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