FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit
A mid-sized manufacturer needs a customized $150 million loan with delayed-draw features and tailored covenants, and wants certainty of execution without a public rating or syndication process. Which feature of private credit most directly explains why a direct lender may suit this borrower better than the broadly syndicated loan or bond market?
Private credit is held by a small group of lenders, so loan terms can be tailored and execution is faster and more certain than in syndicated or public markets. It does not offer deep secondary liquidity or bank-style capital rules, and it typically pays an illiquidity premium.
- APrivate credit loans are typically held by a small group of lenders, allowing bespoke terms and faster negotiated executionCorrect
- BPrivate credit lenders are subject to the same risk-weighted capital requirements as regulated banks
- CPrivate credit loans trade daily in deep secondary markets, giving lenders easy exits
- DPrivate credit loans carry lower yields than syndicated loans because of their lower illiquidity risk
Explanation
Private credit is bilateral or club lending with few holders, so terms can be customized and execution is certain without a syndication process. Option 2 is wrong because non-bank lenders are not subject to bank capital rules. Secondary liquidity is thin, and yields usually include an illiquidity premium.
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