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.
Cash Sweep
Excess cash flow and asset-sale proceeds redirected to mandatory debt repayment.
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.
Amendment Fees
Fees and economics paid for waivers, covenant resets, maturity extensions, and credit agreement changes.
Lender Consent Rights
Voting thresholds and sacred rights that determine who controls amendments and waivers.
Margin Call Dynamics
Forced collateral posting when values decline—creating liquidity spirals and forced selling cascades.
Distressed Credit & Recovery
How private credit stress moves from delinquency to workout, foreclosure, OREO, valuation marks, and final recovery.
OREO - Other Real Estate Owned
Real estate taken back after borrower default and foreclosure; a hard credit-quality signal for lenders.
Nonaccrual Loans
Loans where interest is no longer accrued because collection is doubtful.
Foreclosure
The secured-lender enforcement process that converts collateral rights into recovery proceeds or OREO.
Collateral Liquidation
The process of selling or collecting collateral after default, net of legal, repair, tax, and sale costs.
Recovery Rate
The percentage of defaulted exposure recovered through collateral, guarantees, workouts, or sale proceeds.
Loss Severity
The percentage of exposure lost after default, net of recoveries and costs.
Workout Timeline
The sequence and duration from first credit stress through repayment, foreclosure, sale, or charge-off.
Fair-Value Mark
The current accounting estimate of an illiquid asset's exit price in an orderly transaction.
Carrying Value
The value at which a loan, property, or OREO asset is recorded on the balance sheet.
Loan-Loss Reserve
The accounting allowance for expected credit losses before loans are finally charged off.
Marketplace Credit Mechanics
Deal-level mechanics used by platforms like Percent: fees, statuses, collateral cushions, and secondary-market liquidity.
Borrowing Base
Collateral-driven formula that determines how much a borrower can draw under an asset-backed facility.
Advance Rate
The percentage of eligible collateral value a lender is willing to finance.
Collateral Eligibility Criteria
Rules that determine which assets count toward a borrowing base or collateral pool.
Concentration Limits
Caps that prevent a credit pool from relying too heavily on one obligor, sector, or collateral type.
Obligor Concentration
How much of a credit pool depends on a single payer, borrower, tenant, or account debtor.
Servicer Reporting Package
Recurring data package showing collateral performance, collections, delinquencies, and covenant compliance.
Backup Servicer
Standby servicing provider appointed to protect collections if the primary servicer fails.
Lockbox Account
Controlled account used to route collections and prevent collateral proceeds from being diverted.
Investor Service Fee
The servicing fee deducted from private credit investor interest before distributions are paid.
Deal State
Lifecycle status across funding, outstanding, workout, reperforming, repaid, and charge-off outcomes.
Active Workout
Unresolved distressed credit status where lenders pursue amendment, recovery, or enforcement.
Reperforming Credit
A previously distressed loan or note that resumes payment after cure or restructuring.
Overcollateralization
Collateral cushion above investor principal that absorbs losses before notes are exposed.
Cash Reserve
Funded protection account used to cover shortfalls, expenses, and temporary payment delays.
Simple Loss Coverage
Screening ratio comparing structural credit protection to a reference loss rate.
Merchant Cash Advance
Receivables-purchase financing with factor-rate economics and frequent collections.
Participation Interest
Contractual exposure to loan or receivable cash flows without necessarily owning the whole asset.
Private Credit Secondary Market
Order-book or brokered mechanisms for selling private credit notes before maturity.
Delinquency Buckets
Aging categories that show how far past due loans, invoices, leases, or receivables are.
Days Past Due
The number of days an asset is late relative to its required payment date or schedule.
Default Definition
The contractual or reporting standard that determines when an asset is treated as defaulted.
Net Charge-Offs
Realized credit losses after subtracting recoveries from gross charge-offs.
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.