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

An analyst compares a typical direct-lending loan with a broadly syndicated leveraged loan. Which characteristic most accurately distinguishes the direct-lending loan?

A direct-lending loan is typically negotiated with one lender or a small club, floats over a reference rate, and is held to maturity. As a result it has limited secondary trading and is valued by models rather than market prices, unlike broadly syndicated loans.

  1. AIt is typically held by a single lender or small club to maturity, is usually floating rate, and is less liquid with limited secondary tradingCorrect
  2. BIt is typically sold to hundreds of investors and rated by all major agencies, with a liquid secondary market
  3. CIt carries a fixed coupon and no financial covenants by design
  4. DIt is originated by banks and must be marked to market daily at exchange prices

Explanation

Direct loans are negotiated bilaterally or with a few lenders, are usually floating rate and held to maturity, so they are illiquid and valued by models. The second option describes syndicated loans. Fixed coupons and no covenants, or daily exchange pricing, do not describe the market.

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