Private Credit & Direct Lending
Technical reference for direct lending structures, covenant mechanics, NAV facilities, and private credit fundamentals.
Covenant Framework
Financial and operational restrictions governing borrower flexibility and lender control.
Financial Covenants
Quantitative restrictions on leverage, coverage, liquidity, and net worth governing borrower financial flexibility.
Maintenance Covenants
Quarterly financial tests measured regardless of borrower actions—leverage ratios, coverage tests, compliance mechanics.
Incurrence Covenants
Action-triggered restrictions tested only when borrowers attempt specific transactions like debt issuance or dividends.
Negative Covenants
Restrictions prohibiting specific borrower actions—liens, debt issuance, guarantees, asset sales, fundamental changes.
Covenant-Lite Structures
Loan structures with minimal or no maintenance covenants, shifting control timing from lenders to borrowers.
Covenant Breaches
Mechanics of covenant violations, cure periods, amendment negotiations, and lender remedies.
Financing Structures
Debt structures and fund-level financing mechanics in private credit markets.
Unitranche Financing
Single-tranche debt that blends senior and subordinated risk, common in middle-market direct lending.
Revolver vs Term Loan
Structural differences between revolving credit facilities and term loans—commitment types, draw mechanics, and strategic uses.
First Lien / Second Lien Priority
How security positioning determines recovery rights in default scenarios.
Original Issue Discount (OID)
Upfront discount creating additional yield for lenders beyond stated interest rate.
PIK Toggle (Payment-in-Kind)
Borrower option to pay interest in additional debt rather than cash—mechanics and risk implications.
NAV Facilities
Credit lines secured by fund net asset values—margin call mechanics and feedback loops during stress.
Portability Provisions
Terms allowing debt to transfer with company ownership changes—sponsor flexibility vs lender protections.
Enforcement & Default Mechanics
Lender remedies, acceleration rights, and enforcement dynamics during defaults.
Event of Default
Triggering events that give lenders enforcement rights—payment defaults, covenant breaches, bankruptcy.
Acceleration Rights
Lender rights to declare entire loan balance immediately due upon default—remedies and strategic considerations.
Margin Call Dynamics
Forced collateral posting when values decline—creating liquidity spirals and forced selling cascades.
Risk Frameworks
Understanding failure modes, forced selling, and systemic risk in private credit.
Liquidity Risk vs Credit Risk
Distinguishing temporary price dislocations from fundamental credit deterioration.
Forced Seller Dynamics
How regulatory, accounting, and liquidity constraints create non-economic selling during market stress.
Funding Horizon Mismatch
When short-term financing funds long-term assets—refinancing risk and forced deleveraging during stress.