The corporate credit market has grown exponentially in recent years, and offers a wide array of investable opportunities. This global opportunity set allows for a more strategic, long-term approach. The credit marketplace is made up of many types of financial instruments, each differentiated by their underlying assets, issuers, and structures.
While credit investments may be profitable, they are not without risk. Nonpayment of scheduled payments by the borrowers can reduce the lender’s overall return. Interest rate risk is another common risk of credit investments. Interest rates on floating rate loans may rise or fall. Although these changes are unlikely to affect the value of the underlying debt, they can impact the lender’s return.
Most credit investors follow a pre-set formula to assess the risks of a credit investment. They evaluate the loan request, collateral value, and likelihood of repayment. They also determine the interest rate to be charged. A typical interest rate ranges from 6% to 12%. For this reason, it is important to understand what constitutes a credit investment.
Private credit is often the only source of funding for small or midsized companies that cannot access liquid capital markets. The private market offers higher yields and is more tailored to the needs of issuers. Many companies use private credit as a strategic partner for acquisitions, organic growth, and capital investment.