Private Credit Glossary: Key Terms Explained for Investors

Private credit has its own language. A term sheet can mention unitranche, PIK toggles, springing covenants and OID before reaching the interest rate, and a fund report can discuss non-accruals, amend-and-extend activity and NAV loans in the same paragraph. For an investor, the words matter because each one points to a source of risk or return.

The market has grown large enough that the vocabulary is now part of everyday allocation decisions. The Alternative Credit Council estimates global private credit assets at around $3.5tn, and family offices, wealth managers and private banks are a growing share of the investor base.

This glossary sets out the terms an allocator is most likely to meet, grouped by theme and listed alphabetically within each group. Where we cover a subject in more depth, the term links to the relevant Kingsbury & Partners article.

Private credit markets and strategies

• Asset-based lending (ABL) / asset-based finance: lending secured on specific pools of assets, such as receivables, inventory, equipment or consumer and SME loans, with the amount advanced tied to the value of those assets. See the investor's guide to asset-based lending.
• Direct lending: loans made by a fund or other non-bank lender directly to a company, usually a mid-market business, without a bank or a public bond issue in between. The risks of concentration in this segment are covered in the emerging risks of direct corporate lending.
• Distressed debt: debt of borrowers in, or close to, financial difficulty, bought at a deep discount in the expectation of a recovery, a restructuring or a liquidation that returns more than the purchase price.
• Fund finance: lending to investment funds rather than to companies. It includes subscription lines, secured on investors' undrawn commitments, and NAV loans, secured on the fund's portfolio.
• Litigation funding: capital provided to claimants or law firms to pay for legal proceedings, in return for a share of any recovery. See what is litigation funding.
• Mezzanine financing: debt that ranks below senior loans but above equity, often with warrants or an equity kicker attached, used in buyouts and expansion financing.
• Non-bank financial institution (NBFI): a lender that is not a bank, such as a specialty, consumer or SME lender, which typically funds itself through credit facilities from institutional investors. See why NBFIs matter for investors.
• Private credit: lending by non-bank investors that is negotiated privately with the borrower and usually held to maturity rather than traded. Our institutional perspective on private credit covers the asset class in full.
• Receivables finance: funding advanced against money owed to a business by its customers, through invoice discounting, factoring or a securitised pool. See what is receivables-based finance and invoice factoring as a private credit allocation.
• Special situations: opportunistic lending or investing around events such as restructurings, disputes, rescue financings or complex corporate changes, with higher returns for higher risk.
• Specialty finance: lending to niche borrowers or asset types that banks find hard to serve, such as consumer loans, SME finance, litigation or royalties. Many specialty lenders are themselves funded by private credit, through senior secured facilities provided to the lender.
• Sponsored and non-sponsored lending: sponsored loans go to companies owned by a private equity firm; non-sponsored loans go to founder-owned or independent businesses. See sponsored finance: why we back the backers.

Loan structure and the capital stack

The capital stack is the order in which a borrower's funders are repaid. The higher the position, the earlier it is repaid and the lower the expected return. Our guide to the capital stack explains how positioning drives risk and return.

• Advance rate: the percentage of eligible collateral a lender will fund. An 85% advance rate on a receivables pool leaves 15% of value as a cushion.
• Borrowing base: the formula that sets how much a borrower can draw at any time, based on the current value of eligible assets multiplied by the advance rate.
• Bridge loan: short-term financing that covers a gap until permanent funding or a sale completes, usually priced higher because of the refinancing risk.
• First lien and second lien: first lien lenders have the first claim on the collateral; second lien lenders are paid from what remains.
• Intercreditor agreement: the contract between different classes of lender that sets out who is paid first, who controls enforcement and what each group can and cannot do.
• Security package: the collateral and legal rights a lender holds, such as charges over assets, share pledges and guarantees.
• Senior secured debt: a loan backed by collateral that ranks ahead of all other debt in a default.
• Subordinated (junior) debt: debt that ranks behind senior debt and is repaid only after senior lenders are made whole.
• Unitranche: a single loan that combines senior and junior debt in one facility at one blended rate, common in mid-market direct lending.

Pricing, fees and returns

• Base rate: the floating benchmark that interest is calculated over, such as SOFR in US dollars, SONIA in sterling or EURIBOR in euros.
• Call protection: fees or restrictions that compensate the lender if the borrower repays early, such as a prepayment premium in the first one or two years.
• Floor: a minimum level for the base rate, so the lender's coupon does not fall below a set level if rates drop.
• Illiquidity premium: the extra return paid for holding an asset that cannot be sold quickly, measured against a comparable liquid asset. See what is the illiquidity premium.
• IRR and MOIC: the internal rate of return measures annualised performance, taking timing into account; the multiple on invested capital measures total cash returned against cash invested, ignoring timing.
• Original issue discount (OID): a loan advanced at below its face value, for example 98 cents on the dollar, which adds to the lender's return.
• Origination or arrangement fee: an upfront fee paid by the borrower to the lender for structuring and underwriting the loan.
• Payment-in-kind (PIK) interest: interest added to the loan balance instead of being paid in cash. PIK can be agreed at the outset or switched on later through a PIK toggle; a rising share of PIK income in a portfolio can be a sign of borrower stress.
• Risk-adjusted return: return measured against the risk taken to earn it. See what are risk-adjusted returns.
• Spread or margin: the interest rate a lender charges over the base rate, reflecting credit risk, complexity and illiquidity.

Covenants and credit metrics

• Amend and extend: a renegotiation in which lenders agree to push out a loan's maturity or relax its terms, often in exchange for higher pricing. Useful in moderation; a high volume can disguise problem loans.
• Cash flow available for debt service (CFADS): the cash a borrower generates after operating costs, tax and working capital, before paying lenders.
• Covenants: promises in the loan agreement that protect the lender. Financial covenants require the borrower to meet ratios; negative covenants restrict actions such as taking on more debt or paying dividends; information covenants require regular reporting.
• Covenant-lite: loans with few or no maintenance covenants, which leave lenders with less warning and less leverage when performance slips.
• Debt service coverage ratio (DSCR): CFADS divided by scheduled interest and principal payments. A DSCR of 1.3x means the borrower generates 30% more cash than it needs to pay its lenders.
• Interest coverage ratio (ICR): EBITDA divided by interest expense; a measure of how comfortably a borrower can pay interest.
• Leverage ratio: total or net debt divided by EBITDA. Lenders usually cap it at a set multiple.
• Loan-to-value (LTV): the loan amount as a percentage of the value of the collateral.
• Maintenance and incurrence covenants: maintenance covenants are tested regularly, usually quarterly; incurrence covenants are tested only when the borrower takes a specific action, such as borrowing more.

Credit performance, default and recovery

• Default: a failure to meet the terms of a loan. A payment default is a missed payment; a technical default is a covenant or other breach.
• Default rate: the share of loans in a portfolio, by number or value, that have defaulted over a given period.
• Debt-for-equity swap: a restructuring in which lenders convert some or all of their debt into ownership of the borrower.
• Delinquent loan: a loan with a payment past due, usually reported in 30, 60 and 90-day buckets.
• Expected loss: the probability of default multiplied by the loss given default and the exposure at default; the starting point for pricing credit risk.
• Loss given default (LGD) and recovery rate: the share of a loan lost after a default, and its mirror image, the share recovered. Senior secured loans usually recover more than junior debt.
• Non-accrual: a loan on which the lender has stopped recognising interest income because payment is doubtful.
• Non-performing loan (NPL): a loan more than 90 days past due or unlikely to be repaid in full. See what are non-performing loans.
• Re-performing loan: a loan that was delinquent but has returned to regular payments, often after a modification. See consumer debt as an asset class.
• Workout: the process of managing a troubled loan to maximise recovery, through restructuring, asset sales or enforcement.

Structures, securities and vehicles

• Bankruptcy remoteness: a structure designed so that the insolvency of a sponsor, originator or servicer does not reach the assets backing an investment.
• Business development company (BDC): a US vehicle, listed or private, that invests mainly in loans to mid-sized companies and distributes most of its income.
• Collateralised loan obligation (CLO): a securitisation of a diversified pool of leveraged loans, split into rated tranches.
• Compartment: a ring-fenced segment of a securitisation vehicle whose assets and liabilities are legally separate from every other compartment.
• Credit linked note (CLN): a security whose return is linked to the performance of a loan or pool of credit exposures. See what is a credit linked note and credit linked notes explained.
• ISIN: the 12-character International Securities Identification Number that identifies a security for trading, settlement and custody. See what is an ISIN.
• Luxembourg securitisation vehicle: a company or fund set up under Luxembourg's securitisation law, often with multiple compartments, widely used to issue notes backed by private credit. See what is a Luxembourg securitisation vehicle.
• Overcollateralisation: holding more collateral than the value of the notes or loan it supports, so losses are absorbed before investors are affected.
• Private placement: securities sold directly to a limited group of professional investors rather than offered to the public.
• Securitisation: pooling loans or receivables and funding them by issuing securities backed by their cash flows. See how securitisation works.
• Significant risk transfer (SRT): a transaction in which a bank transfers the credit risk on a loan portfolio to investors, often through a credit linked note, to reduce its capital requirements.
• Special purpose vehicle (SPV): a separate legal entity created to hold specific assets and issue securities against them.
• Structured credit: credit investments in which cash flows from a pool of assets are divided into tranches with different risk and return. See structured credit as a portfolio tool.
• Tranche and waterfall: a tranche is a slice of a structured deal with its own ranking; the waterfall is the order in which cash is paid to each tranche.
• Trustee: an independent party that holds security or acts for noteholders, and can enforce on their behalf.

Fund and portfolio terms

• Capital call (drawdown): a request from a closed-ended fund for investors to pay in part of their commitment.
• Closed-ended fund: a fund with a fixed life and no redemptions, which returns capital as loans are repaid.
• Concentration risk: the risk that too much of a portfolio depends on one borrower, sector, sponsor or region. See private credit and concentration risk in the mid-market.
• Evergreen (semi-liquid) fund: an open-ended fund that offers periodic redemptions, usually capped each quarter, and can apply gates when requests exceed the cap.
• Gate: a limit on how much investors can withdraw from a fund in a given period.
• Net asset value (NAV): the value of a fund's assets less its liabilities, usually calculated monthly or quarterly for private credit funds.
• Originate and hold: a lending approach in which the lender keeps the loans it makes until they are repaid, rather than selling them on.
• Secondary market: the market for buying and selling existing private credit loans or fund interests before maturity.
• Vintage: the year a fund or loan was made, which shapes performance because lending conditions vary year to year.

What this means for investors

Every term in this glossary is a question an investor can ask. Where does my loan sit in the capital stack? What covenants protect it, and how often are they tested? How much of the income is PIK? Is the structure bankruptcy remote, and who is the trustee? How much of the reported yield is credit risk and how much is illiquidity?

Allocators who can ask those questions, and understand the answers, are in a far better position to compare managers and structures. For what good reporting on these points looks like, see the case for transparency in private credit.

Frequently Asked Questions

What is private credit in simple terms?

Private credit is lending by non-bank investors, such as funds and insurers, directly to companies or other borrowers, on privately negotiated terms, usually held until the loan is repaid.

Is private credit the same as private debt?

Yes. The two terms are used interchangeably for non-bank lending that is not traded on public markets.

What is the difference between direct lending and asset-based lending?

Direct lending is usually based on a company's cash flow and earnings, while asset-based lending is secured on specific assets, such as receivables or loan pools, with the amount advanced tied to their value.

What does PIK mean in private credit?

PIK stands for payment-in-kind: interest that is added to the loan balance rather than paid in cash. It preserves the borrower's cash but increases the debt.

What is a unitranche loan?

A unitranche loan combines senior and junior debt into a single facility with one blended interest rate and one set of documents, simplifying the borrower's financing.

What is a covenant-lite loan?

A covenant-lite loan has few or no maintenance covenants, so the lender cannot step in on the basis of deteriorating financial ratios until a more serious event, such as a missed payment, occurs.