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

A private equity sponsor has acquired a company and needs financing that will close within three weeks, with a delayed-draw feature for future add-on acquisitions. A direct lender offers a unitranche loan at a higher spread than the syndicated loan market would charge. Which reasoning best explains why the sponsor may rationally accept the higher spread?

The sponsor may accept the higher spread because it buys execution certainty, flexibility such as delayed-draw add-on financing, and easier renegotiation with a single lender. The premium is a payment for these services, not a signal of lower cost, regulation or higher credit quality.

  1. AThe spread premium compensates for execution certainty, flexibility for add-ons and lower renegotiation frictionCorrect
  2. BDirect lending always carries lower all-in cost than syndicated loans once fees are included
  3. CUnitranche loans are required by regulation for leveraged buyouts
  4. DThe higher spread signals the borrower has a higher credit rating than public issuers

Explanation

Sponsors weigh the extra spread against certainty of closing, delayed-draw flexibility and simpler dealings with one lender. Cost is not always lower, and no regulation requires unitranche loans.

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