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

A risk analyst at a pension fund is reviewing why middle-market firms in several advanced economies increasingly borrow from private credit funds rather than from banks or public bond markets. Which borrower-side characteristic is most consistently associated with higher private credit usage in cross-country evidence on the global drivers of private credit?

Smaller, more leveraged and less transparent firms are the typical private credit borrowers. They struggle to access public bond markets and face bank constraints, so they value the speed, flexibility and bespoke terms that direct lenders offer, whereas large highly rated issuers can borrow cheaply in public markets.

  1. ALarge, highly rated firms with easy access to public bond markets
  2. BSmaller, more leveraged, and less transparent firms that find bank and public market funding harder to obtainCorrect
  3. CFirms owned exclusively by governments
  4. DFirms with no external debt requirements

Explanation

Private credit borrowers tend to be smaller, more levered and more opaque, with limited access to public markets and constrained bank credit. Large highly rated issuers can use bond markets cheaply, so they are not the typical private credit borrower. Government-owned firms and firms without debt needs are not demand drivers.

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