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FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit

A credit committee examines why private equity sponsors favour private credit for leveraged buyouts. Which feature of private credit is the most relevant demand-side attraction for a sponsor needing to close an acquisition quickly and with certainty?

Sponsors value that one lender or a small club can commit to and hold the entire financing. This gives quick execution and certainty of closing without syndication or market-flex risk, even though private credit often costs more than broadly syndicated loans and still carries covenants.

  1. APrivate credit always carries lower spreads than syndicated loans
  2. BPrivate credit is exempt from all covenants
  3. CA single lender or small club can commit to the full financing, giving speed and execution certainty without syndication or market-flex riskCorrect
  4. DPrivate credit lenders must be regulated deposit-takers

Explanation

Sponsors value that a direct lender can underwrite and hold the whole loan, avoiding syndication and market-flex risk. Private credit is usually priced at a premium, not always lower, and it typically has covenants, although often fewer than bank loans. Lenders are generally non-bank.

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