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

An investor reviews a direct lending fund that makes mostly senior secured, floating-rate loans to private middle-market companies, with loans typically held to maturity and negotiated with a small group of lenders. Compared with broadly syndicated loans, which feature is most characteristic of this private credit segment?

Direct lending is typically negotiated bilaterally or with a small club of lenders, held to maturity, and rarely traded in a secondary market, so investors rely on the lender's own due diligence and covenants. It does not have daily exchange pricing or universal agency ratings.

  1. ABilateral or club negotiation of terms, with limited secondary market trading and greater reliance on lender due diligenceCorrect
  2. BDaily mark-to-market pricing from active exchange trading
  3. CFixed-rate coupons with no covenants
  4. DRatings from at least two major agencies on every loan

Explanation

Direct lending is negotiated with one or a few lenders, held to maturity, and trades little, so lender diligence and covenants matter. Exchange pricing, absence of covenants and universal ratings are features of public markets, not typical direct loans.

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