FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit
A risk manager at an asset manager notes that leveraged buyout (LBO) activity by private equity sponsors has risen sharply, and that sponsors increasingly arrange unitranche loans from a single private credit lender rather than syndicating debt. Which feature of private credit most directly explains sponsor demand for this structure?
Sponsors favor unitranche private credit because a single lender offers execution certainty, speed and simpler negotiation than syndicating a deal. It is not reliably cheaper, is illiquid for the lender, and generally still carries covenants and reporting requirements.
- ACertainty of execution and speed of closing with a single lender, with fewer parties to negotiate withCorrect
- BGuaranteed lower all-in cost than broadly syndicated loans in all market conditions
- CDaily mark-to-market liquidity for the lender
- DExemption of the borrower from financial covenants and reporting
Explanation
Sponsors value speed, certainty and confidentiality when dealing with one or a few lenders. Private credit usually costs more than syndicated debt, not always less. Loans are illiquid, and covenants and reporting typically remain, often tighter.
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