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

An investor compares a direct lending fund with a broadly syndicated leveraged loan portfolio. Which characteristic is most typical of direct lending loans relative to broadly syndicated loans?

Direct lending loans are typically negotiated with one or a few lenders, floating-rate, often senior secured with customized covenants, and held to maturity with limited secondary liquidity. Broadly syndicated loans are the ones widely distributed and actively traded.

  1. ALoans are typically negotiated with one or a small group of lenders, are held to maturity, and have floating rates with tailored covenantsCorrect
  2. BLoans are widely distributed to hundreds of investors and trade daily in liquid secondary markets
  3. CLoans are usually fixed-rate, unsecured, and carry no financial covenants
  4. DLoans are rated by agencies and must be marked to market daily by the lender

Explanation

Direct loans are bilateral or club deals, usually floating-rate, senior secured, with bespoke covenants, and typically held to maturity, so secondary liquidity is limited. The syndicated market is the one with wide distribution and liquid trading. Fixed-rate unsecured no-covenant terms are not typical.

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