Private credit refers to nonbank lenders such as direct lending funds, business development companies, and insurance platforms that originate and hold loans without broad distribution. By contrast, bank loans in this context means syndicated loans underwritten by banks and sold to institutional investors, plus club tranches that banks hold on their books.
Both products finance leveraged buyouts, add-ons, recapitalizations, and growth capital, yet they differ sharply in underwriting model, covenant style, information rights, economics, and regulation. Those differences drive decisions at investment committees.
Banks underwrite to distribute. They rely on flex language to adjust pricing, original issue discount, and sometimes terms to clear the book in syndication. Ratings, loan buyer feedback, and market windows drive execution risk and timetable. Sponsors accept market flex in exchange for lower headline spreads when demand is strong.
Private credit underwrites to hold. Lenders allocate from committed fund capital and credit facilities. They price to risk without syndication flex, and they deliver certainty at signing. Clubs of two to five funds are common for larger checks, but club dynamics rarely introduce public-market volatility or timing slippage.
Execution speed is consistently faster in private credit. Direct lenders deliver final credit approvals in two to four weeks after receiving a complete data room and management meeting, with legal close one to two weeks later. Syndicated loan timelines extend as arrangers run ratings processes and premarketing, then launch syndication. Six to ten weeks is typical for a marketed deal. Sponsors pay for speed and certainty with higher all-in cost and tighter covenants.
Syndicated term loans are mostly incurrence-based. Borrowers can incur debt, grant liens, make restricted payments, and execute investments as long as they meet ratio tests at the time of action and stay within baskets. There is no ongoing financial maintenance test on the term loan. Revolving credit facilities sometimes carry a springing maintenance covenant tied to a 35-40% utilization threshold, but the test protects the revolver lenders rather than the term loan holders.
Private credit facilities usually include a maintenance covenant at the term loan level, almost always a leverage test and sometimes a fixed charge coverage test. The maintenance covenant can be springing off a minimum revolver draw but is more often tested quarterly regardless of borrowing base utilization. One-time equity cure rights are common, usually cash paydowns or EBITDA cures with limits and caps.
Underwriting leverage and covenant headroom differ in practice. Private credit lenders underwrite a sharper downside case, typically seeking one to two turns of leverage cushion to the covenant at close and shorter step-downs. Incurrence-only term loans police conduct rather than performance. Breaches arise when borrowers seek actions that require satisfying ratio tests and baskets, not from ongoing performance slippage.
The enforcement path in private credit often begins earlier because a maintenance breach gives lenders consent leverage and, if needed, restructuring control. That early intervention can preserve value, but it also constrains borrower optionality.
Both markets allow pro forma adjustments for cost savings and synergies. Direct lenders are more likely to cap add-backs at the greater of a fixed dollar amount and a percentage, often 20-25% of EBITDA, and to impose realization timelines. Syndicated loans frequently use grower baskets and looser realization mechanics.
Sponsors should negotiate add-back transparency and audit rights early. The definitional fight sets the true covenant tightness and future flexibility. As a rule of thumb, require schedule-based add-backs with caps and sunset dates.
Private credit leverage covenants commonly step down over time and can toggle if the company de-levers via equity or asset sales. Grace periods and holiday concepts exist but are limited. Syndicated term loans rely on incurrence leverage tests that gate incremental debt and restricted payments. The level and scope of ratio debt capacity is the main leverage control in syndicated loans.
Term loans typically permit sizable incremental tranches via a fixed dollar basket plus a ratio amount, often on a pari passu or junior basis. Most-favored nation protection limits the spread differential on pari passu incrementals for a period, commonly 6-12 months, but carve-outs for different maturities, currency, or delayed draws can weaken protection. Private credit deals also allow incrementals but with tighter caps, stricter MFN provisions, and lender consent for structurally senior capacity. Delayed draw term loans often substitute for incremental flexibility where planned capex or M&A is known at close.
Syndicated loan agreements rely on a builder basket that grows with cumulative consolidated net income and on ratio-based cushions to allow dividends and junior debt prepayments. Private credit often narrows the builder concept, uses hard-dollar caps, and conditions distributions on leverage tests with headroom. Leakage is more constrained in private credit, and transfers of value to unrestricted subsidiaries are more closely policed.
Direct lenders demand monthly reporting, board packages, annual budgets with variance reports, and prompt notice of adverse events. They commonly secure meeting rights and sometimes observer rights. Syndicated loan buyers accept quarterly financials, annual audits, and standard notices. Limited information and lender diffusion in syndicated loans reduce ongoing surveillance efficacy.
Unitranche structures combine first-out and last-out tranches in a single credit agreement with an Agreement Among Lenders that governs priority, voting, and remedies. This is a private credit artifact and is often invisible to the borrower. However, AALs are not intercreditor agreements and are not typically filed publicly, which creates diligence friction in secondary transfers and enforcement ambiguity in bankruptcy.
Sponsors should ensure the AAL does not give a small first-out participant a veto on amendments that would be standard majority decisions in a syndicated first-lien deal. Counsel should reconcile AAL waterfalls with cash dominion and sweep mechanics to avoid structural surprises in distress.
Assume a $500 million first-lien facility at SOFR 5.25%.
Syndicated loan case: SOFR + 350 basis points, original issue discount 1.5%, 1% amortization, six-month 101 repricing call. All-in initial yield roughly 9.9% pre-fees. There is limited call friction if repriced after six months.
Private credit case: SOFR + 625 basis points, original issue discount 2.0%, 3% amortization, 102/101 soft call for two years. All-in initial yield roughly 12.9%. There is meaningful call friction if refinanced within 18 months.
Private credit wins when speed, certainty, confidentiality, and tailor-made structures are paramount. It also wins for complex or story credits and when sponsors value a stable, cooperative lender group with capacity for add-ons, delayed draw term loans, and follow-on equity co-investments. When syndication risk is high, certainty is worth the premium.
Sponsors accept tighter maintenance covenants, heavier reporting, call protection, and higher all-in cost in exchange for that certainty. Syndicated loans win when market windows are open and the credit is clean. Scale drives tighter spreads and original issue discounts, and covenant-lite documentation is a priority. The borrower values broad distribution and future transferability. Sponsors accept market flex, timeline risk, and less capacity for bespoke baskets and delayed draws.
Private credit can overreach on control, making ordinary-course actions consent-heavy. If a business needs frequent tuck-ins, cross-border complexity, or operational pivots, overly tight covenants can become value-destructive. By contrast, syndicated loans can deliver lax documentation that permits value leakage in stress, leaving lenders with limited remedies until liquidity is exhausted. Sponsors should avoid over-engineering leakage that reduces lender cooperation in downturns.
Private credit offers speed, certainty, and tighter governance at a higher but more predictable all-in cost with earlier intervention rights. Syndicated loans offer lower spreads, lighter covenants, and long-term optionality when markets are open, at the price of syndication risk and less lender alignment in stress.
Sponsors should choose based on the real constraints of the deal: timing, information sensitivity, business volatility, and the value of covenant-driven discipline versus flexibility. Price follows structure, and structure follows underwriting model. The right answer is the one that matches the asset’s risk, the sponsor’s playbook, and the window of execution, not only the cheapest quoted spread.
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