Skip to content

FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit

A pension fund considers replacing a $100 million allocation to broadly syndicated leveraged loans, yielding SOFR + 400 bps, with direct lending at SOFR + 600 bps. Assume expected annual credit losses are 1.00% for syndicated loans and 1.50% for direct lending, and no other costs. What is the expected loss-adjusted spread pickup of direct lending over syndicated loans?

The expected loss-adjusted pickup is 150 bps. Direct lending nets 600 minus 150 equals 450 bps, syndicated loans net 400 minus 100 equals 300 bps, and the difference is 150 bps. Ignoring losses would overstate the pickup at 200 bps.

  1. A200 bps
  2. B150 bpsCorrect
  3. C250 bps
  4. D50 bps

Explanation

Loss-adjusted spread for direct lending is 600 − 150 = 450 bps. For syndicated loans it is 400 − 100 = 300 bps. The pickup is 450 − 300 = 150 bps. The 200 bps figure ignores the difference in losses.

Did you get it right without looking?

One question tells you little. A timed set on The Rise and Risks of Private Credit shows your real accuracy, how long you take and where you lose marks.

Practise The Rise and Risks of Private CreditFree diagnostic mock

More The Rise and Risks of Private Credit questions