The 411 On Private Debt


From the AxSA Staff

Debt is evolving as a financing strategy, and private debt is now the fastest-growing option for businesses of every size and in every sector of the economy.

For the providers of #privatedebt, these instruments offer contractually-based, risk-adjusted returns, typically well above the prime rate of interest. And for the borrowers, private debt may offer liquidity terms not readily available from a conventional bank or lending institute.

Decision-makers hoping to explore private debt should keep in mind these pointers:

○ Beyond #banks and other deposit-accepting institutions, the sources of private debt include specialty finance companies, #hedgefunds, insurers, business development companies, and even high net-worth individuals.

○ Private debt is witnessing its biggest year, thus far, as a swell of institutional investors have allocated billions to private debt funds and direct #loans. This has been positive news for businesses that are too leveraged for conventional lenders but too small to tap bond markets.

○ Loans originating from private debt sources are expensive and tricky. They routinely have a higher cost of capital, and they can be harder to obtain, if they are attached to too few attractive assets. Furthermore, in some instances, deals for private debt can include equity kickers, or the terms can contain covenants that convert debt to #equity under special circumstances.

○ The level of priority is important – and not just to the provider of the loan. A #borrower must understand that, if the loan is subordinate to other debts, then the cost of the loan may generally be higher, because there is a greater risk of non-payment in the event of the business’s #bankruptcy.

○ Due diligence still matters, and access to the business’s operational information and financial records is necessary for a lender to evaluate that business’s ability to repay the debt, along with surveying any other risks.

Businesses today have a wider array of debt financing options, but that money does not come without risks. It behooves decision-makers to carefully consider their long-term capital strategy before closing deals that add costly financing to their #balancesheet in the short term.

© 2010. All Rights Reserved; Axiom Strategy Advisors, LLC


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