1.3 Private credit vs. public markets

When a company needs to borrow, private credit is only one option. It can also borrow from a bank, raise a broadly syndicated loan, or issue high-yield bonds. Each route has its own strengths, costs and trade-offs. The choice a company makes tells you a lot about what it values most.

For anyone working in private credit, this comparison is essential. Investment teams must explain why a borrower should choose them. Investor relations teams must explain why investors should accept lower liquidity. And anyone valuing or reporting on private loans needs to know why they behave differently from traded debt.

The four ways to borrow

Here are the four main options for a company that needs to borrow a meaningful amount of money.

Bank loans (relationship loans). A commercial bank lends directly to the company and usually keeps the loan on its own balance sheet. Banks often provide a revolving credit facility (a revolver), which works like a corporate credit card: the company can draw, repay and draw again up to a limit. Banks tend to lend at lower levels of debt and at lower interest rates. As Lesson 1.2 explained, post-crisis rules made banks more cautious about holding highly leveraged loans.

Broadly syndicated loans (BSL). A bank, acting as arranger, structures a large loan and sells pieces of it to many institutional investors. A major group of buyers is collateralized loan obligations (CLOs), which are vehicles that buy pools of loans and fund themselves by issuing notes to investors. BSLs are usually floating rate, rated by credit rating agencies, and traded among investors after they close. They are typically used by larger companies.

High-yield bonds. A company issues bonds to many investors, with the help of investment banks. "High-yield" means the bonds are rated below investment grade. These bonds usually pay a fixed interest rate, have longer terms than loans, and trade among investors. Many are sold to institutional investors under Rule 144A, which allows sales to large qualified buyers without a full public registration with the Securities and Exchange Commission (SEC).

Private credit. A non-bank lender, or a small group of lenders, negotiates a loan directly with the company and holds it to maturity. The loan is usually floating rate and senior secured, and it is not rated or traded in any meaningful way.

Side-by-side comparison

This table shows typical patterns, not fixed rules. Individual deals vary, and the markets have become more similar in some areas over time.

Speed and certainty of execution

Execution means getting a deal from agreement to closing. For a private equity firm buying a company, certainty of execution matters enormously. If the financing falls through, the purchase can fail.

In a syndicated loan or bond deal, the arranging bank must find enough investors. If market conditions worsen, the bank may use market flex, a right to change the pricing or terms to attract buyers. The borrower may end up paying more than it planned, or in rare cases the deal is delayed.

A private lender removes most of this uncertainty. It agrees the terms and commits its own capital. There is no marketing to investors, no rating process, and no need to wait for market conditions to improve. Deals can often close in a few weeks.

Private lenders also offer flexibility. Because there are only a few lenders, the borrower can renegotiate terms more easily. For example, it can ask for extra money to fund an add-on acquisition or change a covenant after a business setback. In a BSL or bond, the borrower may need consent from many investors it does not know.

Pricing

Private credit usually costs the borrower more than the other options. Lenders earn a higher spread for several reasons:

• Illiquidity. Lenders cannot easily sell the loan, so they want extra return for tying up their money. This is often called an illiquidity premium.
• Complexity and effort. Private lenders do their own due diligence, negotiate custom terms and monitor the borrower closely. That work costs money.
• Borrower profile. Many private borrowers are smaller or more highly leveraged, which adds credit risk.

In the US, private loans and BSLs both use SOFR as their base rate. The price difference shows up in the spread and in upfront fees. Borrowers accept this higher cost because they value speed, certainty and flexibility.

Liquidity and valuation

Liquidity is the ability to sell an asset quickly at a fair price. BSLs and high-yield bonds trade among investors, and dealers quote prices daily. A lender that changes its mind can usually sell.

Private loans rarely trade. A fund that makes a private loan should expect to hold it until the borrower repays, typically when the company is refinanced or sold. This is why private credit funds lock up investors' money for several years.

Low liquidity also changes how loans are valued. Traded debt can be priced from market quotes. Private loans have no quoted price, so managers estimate their fair value using models and judgment, usually each quarter and often with help from independent valuation firms. As a result, reported values of private loans tend to move less than market prices of traded debt. That does not mean the risk is lower. It means the price is estimated, not observed. PC302 covers valuation in depth.

Disclosure and information

In public markets, information is prepared for many investors. A high-yield bond issuer provides an offering document and then periodic financial reports. A BSL borrower shares information with a larger group of lenders, some of whom also trade the company's public securities, which limits what can be shared.

Private lenders are in a different position. Because only a few parties are involved, the borrower can share detailed, confidential information: monthly financial reports, budgets, customer data and direct access to management. Lenders use this information to spot problems early. Borrowers, in turn, like that their information and terms stay private.

An example

The following example is illustrative.

Northfield Components wants to borrow to fund its purchase by a private equity firm. Its bankers lay out two paths:

• A broadly syndicated loan: a lower spread, but the deal must be marketed to investors, rated, and could be re-priced through market flex. Northfield's size is at the small end for this market.
• A private unitranche loan (a single loan combining senior and junior debt; see Lesson 3.1): a higher spread, but one lender commits to the full amount in writing, the deal can close in about four weeks, and Northfield can come back to the same lender for more money for future acquisitions.

The private equity firm chooses the private loan. It pays more in interest but secures its financing and keeps a single, flexible lender.

Key terms

• Revolving credit facility (revolver): A credit line a borrower can draw, repay and draw again up to a limit.
• Arranger: The bank that structures a syndicated loan and sells it to investors.
• Collateralized loan obligation (CLO): A vehicle that buys a pool of loans and funds itself by issuing notes; a major buyer of BSLs.
• High-yield bond: A bond rated below investment grade, usually paying a fixed rate.
• Market flex: An arranger's right to change a syndicated deal's terms to attract enough investors.
• Illiquidity premium: Extra return investors demand for holding an asset they cannot easily sell.
• Maintenance covenant: A financial test the borrower must meet regularly, such as every quarter.
• Covenant-lite: A loan without regular financial maintenance tests.
• Fair value: An estimate of the price an asset would fetch in an orderly sale, used when no market price exists.

Key takeaways

• Companies can borrow from banks, through broadly syndicated loans, by issuing high-yield bonds, or from private lenders.
• Private credit usually costs borrowers more, but offers speed, certainty, flexibility and confidentiality.
• Syndicated loans and bonds are more liquid for lenders; private loans are usually held to maturity.
• Private loans are valued with models rather than market prices, so reported values move less, but risk is not necessarily lower.
• Private lenders get detailed, confidential information and often stronger covenants in return for giving up liquidity.