Private credit

Direct lending is the private credit strategy in which a non-bank lender originates and holds loans, usually senior secured and floating rate, negotiated directly with a company or its private equity sponsor rather than arranged and syndicated by a bank.

Mezzanine debt is junior capital ranking below senior debt and above equity, usually unsecured or junior secured and subordinated in right of payment, and paid through cash interest, payment-in-kind (PIK) interest and sometimes an equity kicker such as warrants.

Venture debt is a loan, usually senior secured and amortising, to a venture-capital-backed company with little or no positive cash flow, underwritten mainly on its equity backers and ability to raise further rounds, with warrants for equity upside.

Asset-based finance (ABF) is private lending secured by, and repaid from, pools of financial or physical assets, such as consumer and commercial loans, receivables, leases, royalties or equipment, rather than the cash flow of an operating company.

A subscription line of credit is a revolving loan to a private fund secured on its investors' uncalled capital commitments and the fund's right to call them, used to fund investments and expenses before, or instead of, calling capital.

NAV lending is lending to a private fund, or to a vehicle that holds its investments, secured on the net asset value of the fund's existing portfolio rather than on investors' uncalled commitments.

Distressed debt investing is the purchase, usually at a deep discount, of debt and other claims on companies in or near default, bankruptcy or financial stress, to profit from price recovery, the restructuring outcome or control of the reorganised company.

Senior secured debt is debt that is not subordinated in right of payment to other debt and is secured by a lien on some or all of the borrower's assets; first-lien and second-lien loans, unitranches and secured bonds qualify.

A first-lien loan is debt secured by a first-priority security interest in the borrower's collateral, so that proceeds from enforcing on that collateral go to first-lien creditors before any second-lien or other junior secured creditor.

A second-lien loan is senior debt secured on the same collateral as a first-lien loan but ranking behind it, so second-lien lenders are paid from collateral proceeds only after first-lien claims are satisfied.

A unitranche is a single senior secured loan facility, normally first lien, that combines what would otherwise be separate senior and junior debt into one tranche under one credit agreement, with one blended interest rate for the borrower.

Subordinated debt is debt whose holders have agreed by contract to be paid only after specified senior debt has been paid in full, so it absorbs losses before senior creditors and pays a higher return.

Payment-in-kind (PIK) interest is interest paid by adding it to the loan's principal, or by issuing more of the same instrument, instead of in cash; the capitalised amount then accrues interest itself and is repaid at maturity or exit.

A credit spread is the extra yield or margin a lender or bond investor earns over a benchmark rate for bearing a borrower's credit and liquidity risk, usually quoted in basis points.

A maintenance covenant is a financial test in a credit agreement that the borrower must meet at every scheduled test date, usually quarterly, regardless of any action it takes; failing it is an event of default unless cured or waived.

Adjusted EBITDA is EBITDA modified by add-backs and deductions that remove items management or a contract treats as non-recurring, non-operating or unrepresentative; pro forma versions also add acquired earnings and planned cost savings.

Debt-to-EBITDA is the ratio of a borrower's debt to its EBITDA, usually over the last twelve months, expressed as a multiple ("turns"); leveraged lenders use it to size loans and commonly test it in financial covenants.

The interest coverage ratio (ICR) is the ratio of a borrower's earnings to its interest expense, typically EBITDA or earnings before interest and taxes (EBIT) over twelve months; lenders use it to size debt and as a financial covenant.

The debt service coverage ratio (DSCR) is the ratio of cash flow available for debt service to scheduled interest and principal in the same period, showing whether an asset or borrower can meet its loan payments from operating cash flow.

Loan-to-value (LTV) is the ratio of a loan's outstanding balance to the value of the asset or collateral securing it, used to size loans and to measure the equity cushion that protects the lender if the asset's value falls.

A business development company (BDC) is a US closed-end investment company that elects to be regulated under special provisions of the Investment Company Act and invests mainly in securities of private or small US companies, most commonly through private credit.