# privatecredit.wiki - full corpus

> A machine-readable structural reference for private credit: the capital structure from unitranche to holdco PIK with explicit waterfall recovery formulas, the arithmetic of SOFR-based pricing and yield to expected take-out, return metrics with worked numbers, covenant and EBITDA-definition mechanics, and the fund vehicles that hold it all.

Reviewed: 2026-08-27
License: CC BY 4.0
Source: https://privatecredit.wiki
Change feed: https://privatecredit.wiki/changes.json

## Capital structure and instruments
Reviewed: 2026-08-27
Canonical: https://privatecredit.wiki/structure/ (JSON: https://privatecredit.wiki/structure.json)

A private credit instrument is fully described by three facts: its position in the payment and lien waterfall, the band of enterprise value over which it absorbs loss, and the price it charges for that band. Names such as unitranche or mezzanine are shorthand for a combination of those three; the shorthand is not stable across documents, so the structure has to be read rather than assumed. Attachment and detachment are stated here in turns of EBITDA, because that is the unit in which the loss band is actually negotiated.

### Waterfall recovery by tranche
Given an enterprise value at the point of restructuring, each tranche is paid in full in seniority order until the value is exhausted. Every recovery estimate in private credit is this one calculation, and the whole of the analytical work is in the enterprise value input, not the arithmetic.

Formula: Rec_i = min(Claim_i, max(0, EV - sum of Claim_j for all j senior to i)); Recovery percent = Rec_i / Claim_i

The fulcrum security is the tranche in which the value runs out, and it is the only tranche whose holders convert into the post-restructuring equity. Identifying it before filing is the entire game in distressed private credit.,Recovery is a step function in enterprise value, not a smooth one. A tranche is at 100 percent or at a partial number or at zero, and the transitions are one turn of EBITDA apart. Point estimates of recovery are therefore far less useful than the enterprise value at which the tranche stops being money-good.,Claims accrete. Default interest, PIK, and unpaid fees enlarge senior claims during the period when the junior tranche can do least about it, so a junior recovery computed off the pre-default claim stack is optimistic.

### Unitranche
A single first-lien credit facility, under one credit agreement with one spread, that occupies the loss band a first lien and a second lien would otherwise split between them. The lender group may privately divide that band into a first-out and a last-out position under an agreement among lenders, which the borrower may never see.

Formula: S_blended = (Q_fo * S_fo + Q_lo * S_lo) / (Q_fo + Q_lo), where Q is quantum and S is spread in bps

The borrower's benefit is procedural, not financial: one document, one lender, one vote, and a closing timetable that does not wait on a second-lien syndication. That benefit is real and it is paid for in the blended spread.,The blended spread is the arithmetic mean only when the FO and LO holders take their stated quantum. Where the LO holder also holds part of the FO strip, the effective spread to that holder is a weighted average across both and is not recoverable from the credit agreement.,The AAL is a lender-to-lender contract. It does not bind the borrower and, in most formulations, the borrower cannot enforce it. A borrower negotiating protections against lender infighting must get them in the credit agreement, not the AAL.

### Agreement among lenders (AAL)
The contract that divides a single unitranche facility into first-out and last-out positions, allocating payments, voting rights, and remedies between holders of the same lien. It sits alongside the credit agreement rather than inside it.

Because the AAL is not part of the credit agreement, a court asked to adjudicate an FO/LO dispute is construing a document to which the debtor is a stranger, and the debtor's plan may be confirmed while that dispute is unresolved. This is the principal untested risk in the instrument.,The LO buyout option is the term that matters most and is negotiated least. Without it, the LO holder holds junior risk with no ability to control the outcome that determines its recovery.,AALs are not standardised in the way LSTA intercreditor forms are. Two facilities described identically to a borrower can allocate control very differently.,Where an AAL is silent on the treatment of a post-petition adequate-protection payment or a DIP priming, the silence resolves in favour of the party with control of enforcement, which is the FO holder.

### First-out / last-out (FLFO) split
The division of one first-lien facility into a first-out tranche, paid first from all proceeds, and a last-out tranche that carries the same lien but the junior payment position. Both tranches are secured; only the payment order differs.

Formula: LO impairment begins when EV < FO detachment quantum; LO recovery = min(Q_lo, max(0, EV - Q_fo)) / Q_lo

The LO holder has second-lien economics with first-lien collateral rights. In a liquidation that is a meaningful improvement over a true second lien, because the LO holder is a secured creditor for voting and adequate-protection purposes. In a going-concern reorganisation it is worth much less, because the FO holder controls enforcement.,A common misreading is that an FLFO structure gives the LO holder the first lien's recovery. It gives the LO holder the first lien's *lien* and the second lien's *place in the queue*. Those are different assets.,Because the whole facility shares one lien, there is no separate second-lien class to be crammed down. The debtor faces one secured class, which simplifies its plan and removes a blocking position the second-lien holder would otherwise have had.

### FILO (first-in, last-out) tranche
A term tranche secured on the ABL priority collateral, ranking behind the revolver in payment but ahead of the term loan in that collateral pool. It monetises the gap between the conservative advance rates of a borrowing base and the actual liquidation value of the working-capital assets.

Formula: FILO recovery from the working-capital pool = min(Q_filo, max(0, NOLV_pool - ABL_drawn)) / Q_filo

A FILO exists because the ABL lender will not advance against the top slice of liquidation value at any price. Someone willing to underwrite that slice is buying the difference between an advance rate and an appraisal.,FILO risk is appraisal risk, not EBITDA risk. It is one of the few private credit positions where the correct diligence is a field exam and a liquidation appraisal rather than a credit model.,The intercreditor question that decides the outcome is whether the FILO deficiency claim shares in the term-loan collateral or falls to unsecured. That single clause moves recovery by more than any pricing term in the tranche.

### Second lien term loan
A term loan secured by a second-priority lien on the same collateral as the first lien, governed by a separate credit agreement and an intercreditor agreement that subordinates its lien and restricts its remedies. Payment of interest is generally not subordinated while no event of default exists.

Formula: Money-good iff EV > (first lien claim + second lien claim); cushion as a fraction of EV = (EV - total claims through the second lien) / EV

Second-lien risk is best expressed as the percentage decline in enterprise value the tranche can absorb, not as a leverage multiple. Two loans at the same 5.5x total leverage have entirely different risk if one sits on a 7.0x business and the other on a 6.0x business.,The intercreditor agreement is worth more than the second lien. A second lien with a 180-day standstill, a waiver of the right to object to a first-lien credit bid, and deemed consent to a DIP has a lien it cannot use.,Because interest is usually not payment-subordinated, a second lien can be current on cash interest while its collateral coverage is already gone. Coupon receipt is not evidence of coverage.

### Mezzanine debt
Unsecured debt of the operating company, contractually subordinated to all senior debt by a subordination agreement, typically carrying a cash coupon, a PIK component, and an equity participation through warrants or a co-investment.

Formula: Total mezzanine return = cash coupon + PIK accretion + equity participation value; IRR solves the combined cash flow stream

Mezzanine has been displaced in most sponsor-backed structures by unitranche, because a single first-lien lender will now underwrite to a leverage level that previously required a mezzanine layer. Where mezzanine survives it is usually because the sponsor wants a non-amortising, non-covenant-heavy layer that does not consume first-lien capacity.,The equity participation is not decoration. Strip the warrants out and the coupon alone rarely compensates for a position that recovers nothing in a moderate downside. Mezzanine underwritten on coupon alone is mispriced by construction.,Contractual subordination at the opco is weaker than structural subordination at a holdco in one respect and stronger in another: the mezzanine holder has a direct claim against the entity that owns the assets, but that claim is expressly turned over to the senior lenders in a waterfall.

### PIK and the PIK toggle
Payment in kind means interest is added to principal rather than paid in cash. A PIK toggle gives the borrower, or in some documents the lender, a contractual election between cash pay and PIK for a given period, usually at a premium to the cash rate.

Formula: Balance after n periods of PIK = P * (1 + r_pik)^n; cash interest forgone in period t = P * (1 + r_pik)^(t-1) * r_pik

PIK converts a liquidity problem into a solvency problem, and it does so silently. A borrower toggling to PIK is reporting a covenant-compliant interest coverage ratio precisely because the interest is no longer cash.,The lender's accrual is taxable income in most structures without corresponding cash, which is why PIK is expensive to hold in a taxable vehicle and why the accrual shows up in a BDC's net investment income and therefore in its distribution requirement. Distributions can end up funded from something other than the income that created them.,A borrower-elective toggle is a valuable option granted to the party with the information advantage. The toggle premium is the price of that option and is usually set by convention rather than by option value.,Interest coverage covenants defined on cash interest are not breached by a PIK election. Where the lender wants the covenant to bite, the definition must reference total interest, including accrued and unpaid.

### Holdco PIK note
A PIK obligation issued by a holding company that owns the equity of the borrower group. It has no lien and no claim against operating assets; it is repaid only from value that reaches the holdco after every opco claim has been satisfied. This is structural subordination.

Formula: Value available to holdco = max(0, EV - total opco claims); holdco recovery = min(Balance_holdco, that value) / Balance_holdco

The worked example is the whole argument against holdco PIK as a yield instrument: the position was covered at inception and became uncovered because its own claim grew faster than the value beneath it. PIK positions are short volatility on the value cushion and long time.,Holdco PIK relies on the opco being permitted to distribute cash upward. That permission lives in the opco restricted-payments covenant, which the holdco lender does not control and cannot amend.,Structural subordination beats contractual subordination for the senior lender, because it does not depend on a subordination agreement being honoured or construed. There is simply nothing to subordinate: the holdco creditor is outside the entity that holds the assets.

### Preferred equity in a credit structure
Equity of the issuer carrying a stated accruing return and a liquidation preference ahead of common, but no principal, no maturity, no lien, and no right to accelerate or enforce. It sits below every debt claim and is treated as equity for leverage covenant purposes if drafted correctly.

Formula: Preferred entitlement = min(x*I + accrued, max(0, EV - all debt claims)); the accrual is a preference, not an obligation

The reason a sponsor uses preferred rather than a holdco note is covenant treatment: preferred that cannot be redeemed before the debt matures and whose return can be deferred without a default is not debt in the leverage definition, so it does not consume debt capacity. Get any one of those features wrong and the rating and the covenant both re-characterise it.,Preferred equity has debt-like return targets and equity-like remedies. That asymmetry is the entire risk: a preferred holder in distress has a claim, a coupon, and no leverage.,Whether preferred sits at the opco or at a holdco changes almost nothing for the preferred holder, because it is already behind all debt at either level. It changes a great deal for the debt, which is why the debt documents police it.

### ABL revolver and the borrowing base
An asset-based revolving facility sized not to EBITDA but to a formula applied to eligible receivables and inventory, less reserves, and recalculated on each borrowing base certificate. Availability, not a covenant, is the primary control.

Formula: BB = a_AR * Eligible AR + a_INV * NOLV_pct * Eligible Inventory - Reserves; Availability = min(Commitment, BB) - Drawn - LCs

The lender's real control is the reserve. Reserves are discretionary in most ABL documents, so the lender can reduce availability without amending anything and without declaring a default. Borrowers negotiating an ABL should spend their effort on the reserve definition, not the advance rates.,Eligibility criteria - concentration limits, ineligibles, cross-ageing, dilution - remove more availability in practice than the advance rates do, and they tighten automatically as the business deteriorates. A borrowing base is procyclical by construction.,A springing fixed-charge covenant that triggers below an availability threshold means the covenant appears exactly when the borrower can least satisfy it. The threshold is the covenant.

### NAV loan (fund-level facility)
A loan to a fund or a holding vehicle, secured by the fund's portfolio of investments or the equity of the vehicles that hold them, sized to a loan-to-value against net asset value rather than to any portfolio company's cash flow. Distinct from a subscription line, which is secured by uncalled LP commitments.

Formula: LTV = D / NAV. Covenant breach when NAV < D / LTV_max. Permitted NAV decline before breach = 1 - (D / LTV_max) / NAV_0

The covenant is measured against a NAV the borrower marks. That is the structural weakness of the instrument and the reason lenders negotiate independent valuation triggers, concentration limits, and cash-sweep tests rather than relying on LTV alone.,The dangerous case is a NAV loan used to fund distributions rather than investments. It converts unrealised value into realised DPI while leaving the LP economically long the same portfolio plus a senior claim ahead of them. DPI ceases to mean what an allocator reads it to mean.,Because a NAV facility is senior to LP capital at the fund level, LP loss is levered by it. The right disclosure question is not the LTV but the NAV decline at which LP equity is impaired.,Subscription lines and NAV loans are frequently discussed together and have opposite risk. A subscription line is secured by uncalled commitments and is a credit exposure to the LPs; a NAV loan is secured by assets and is an exposure to the portfolio.

### Recurring revenue loan
A term loan to a business with contracted recurring revenue and negative or immaterial EBITDA, sized to a multiple of annual recurring revenue and governed by revenue, liquidity, and retention covenants rather than leverage. Documents specify a conversion date or trigger after which the tests become EBITDA-based.

Formula: Debt / ARR at origination; at conversion the binding test becomes Debt / EBITDA <= L_max, which implies a required EBITDA margin m* = (Debt / L_max) / ARR

Translating the ARR multiple into the implied margin at conversion is the single most useful piece of arithmetic on these loans, and it is rarely in the credit paper. It converts an unfamiliar metric into the familiar question of whether the company can plausibly be that profitable by that date.,The covenants that actually protect the lender are net revenue retention and a minimum liquidity test, because they fail before revenue does. A gross ARR covenant can be satisfied by discounted new bookings while the installed base is churning.,ARR definitions in these documents are negotiated and non-uniform: annualisation window, treatment of non-recurring and usage-based revenue, and whether contracts in a notice period still count. Two loans quoted at the same ARR multiple can be at materially different real multiples.

#### Waterfall order, loss position, and pricing consequence
Ordered senior to junior. 'First loss borne' is the enterprise value band over which the instrument is impaired before the tranche above it is touched. Pricing direction is relative to the tranche immediately senior, not an absolute level.

| Instrument | Lien and payment position | Loss band | Pricing consequence |
|---|---|---|---|
| ABL revolver | First lien on current assets, often a separate collateral pool with a split-lien intercreditor | Last to be impaired; sized to a liquidation value of receivables and inventory rather than to EBITDA | Cheapest cash margin in the structure, plus an unused-commitment fee on the undrawn portion |
| First-lien term loan / senior secured | First lien on all assets other than the ABL priority collateral, pari passu payment | Impaired only after all junior claims are wiped | Base of the pricing stack; every junior spread is quoted as a premium to it |
| Unitranche (single blended tranche) | First lien, single credit agreement, single spread | Bears the entire first-lien-through-junior band itself unless split by an agreement among lenders | A blended spread between the first-lien and second-lien levels, plus a premium for speed and certainty of a single counterparty |
| Unitranche first-out (FO) | First lien, first-out payment priority under an AAL | Lowest attachment band; effectively a synthetic first lien | Prices near or below the standalone first-lien level because the FO holder has bought the safest slice |
| Unitranche last-out (LO) | Same first lien, last-out payment priority under an AAL | The band above the FO detachment point | Prices above the second-lien level; it is second-lien risk wearing a first-lien lien |
| FILO tranche | First lien on the ABL priority collateral, last-out in payment | Absorbs shortfall in liquidation value of the working-capital pool before the ABL | Priced between the ABL margin and the term loan |
| Second lien term loan | Second-priority lien, payment subordination usually limited to remedies rather than interest | The band between first-lien detachment and its own detachment | Wide premium to first lien; the width is a function of how many turns of cushion sit beneath it |
| Mezzanine debt | Unsecured, contractually subordinated at the opco, often with warrants or an equity co-invest | Impaired below every secured claim | Highest debt cost; frequently part cash and part PIK, with equity upside intended to carry the return |
| Holdco PIK note | Debt of a parent holding company, structurally subordinated; no claim on opco assets | Recovers only from residual value after all opco claims | Prices above opco mezzanine for the same enterprise, because structural subordination is stronger than contractual subordination |
| Preferred equity | Equity of the issuer with a stated return and liquidation preference; no acceleration remedy | First-loss ahead of common only | Priced as equity risk with a debt-like return profile; the return is a preference, not a promise |
| Common equity | Residual | Absorbs the first dollar of enterprise value decline | No stated return |

#### Unitranche versus a separate first-lien and second-lien structure
Same borrower, same total quantum of debt. The differences are contractual and procedural, not economic in the base case; they are entirely economic in a restructuring.

| Attribute | Unitranche | Separate first lien plus second lien |
|---|---|---|
| Credit agreements | One | Two, plus an intercreditor agreement |
| Governing document for the senior/junior split | Agreement among lenders (AAL), between lenders only; the borrower is often not a party | Intercreditor agreement, to which the borrower is a party |
| Borrower visibility of the split | Often none; the borrower sees one spread and one lender group | Full; two tranches with two spreads |
| Voting on amendments | Single class vote, with AAL carve-outs reserving specified matters to the FO or LO holder | Two classes, each voting its own agreement, plus intercreditor consent rights |
| Standstill on remedies | Set in the AAL and unenforceable against the borrower | Set in the intercreditor agreement and enforceable |
| Cost to borrower | One blended spread, plus a premium for certainty and speed of execution | Weighted average of two spreads, generally lower in aggregate where a deep second-lien market is available |
| Behaviour in a restructuring | The FO and LO holders litigate the AAL among themselves while the borrower deals with one lien | First-lien and second-lien groups negotiate directly, with the intercreditor as the rulebook |

#### Attachment and detachment in turns of EBITDA
Illustrative structure on EBITDA of 40. These are illustrative inputs chosen to make the arithmetic legible, not benchmarks. 'Cushion' is the enterprise value below the tranche's detachment point, expressed as a percentage of a 7.0x enterprise value.

| Tranche | Attachment | Detachment | Quantum | EV decline before impairment, at 7.0x EV |
|---|---|---|---|---|
| Unitranche first-out | 0.0x | 3.0x | 120 | 57.1 percent (EV falls from 280 to 120) |
| Unitranche last-out | 3.0x | 5.5x | 100 | 21.4 percent (EV falls from 280 to 220) |
| Holdco PIK | 5.5x | 6.5x | 40 | 7.1 percent (EV falls from 280 to 260) |
| Equity | 6.5x | 7.0x | 20 | 0 percent; first dollar of decline |

## Pricing and yield mechanics
Reviewed: 2026-08-27
Canonical: https://privatecredit.wiki/pricing-mechanics/ (JSON: https://privatecredit.wiki/pricing-mechanics.json)

A quoted private credit loan is a base rate plus a spread, issued at a discount, with a fee schedule attached and call protection over the early years. None of those components is the yield. The yield is the internal rate of return on the actual cash flows over the actual holding period, and because private credit loans are repaid on refinancing rather than at maturity, the holding period assumption moves the answer by more than most of the pricing terms do.

### Cash coupon with a base rate floor
The periodic interest rate actually payable, being the greater of the base rate and the floor, plus any credit spread adjustment, plus the credit spread. The floor is an embedded option written by the borrower to the lender on the base rate.

Formula: r = max(B, F) + CSA + S; Interest for a period = P * r * days / 360

The floor is a written put on the base rate, and it is worth the most exactly when a levered lender is under the most pressure from falling rates on its own asset yield. It is the one term in the pricing stack whose value is negatively correlated with the loan's credit risk, which makes it a genuine hedge rather than just extra spread.,A floor that is in the money means the borrower is paying above the floating rate, so a rate cut delivers no relief until the base rate clears the floor. Borrowers frequently model rate cuts as immediate interest savings and are wrong by the distance to the floor.,Comparing two loans requires resolving the base rate convention first. A Term SOFR spread and a Daily Simple SOFR spread are not comparable at the same number, and neither is comparable to a legacy LIBOR spread without the CSA.

### Original issue discount (OID)
The difference between par and the price at which the loan is funded, quoted in points where one point is one percent of par. The lender advances less than the amount it is owed, and the discount accretes to par over the life of the loan, raising the realised yield above the coupon.

Formula: Price = 100 - OID. Exact yield solves 0 = -Price + sum over t of (P*r)/(1+Y)^t + P/(1+Y)^n. Crude approximation: Y ~ r + OID/n, which understates.

OID is the pricing lever of choice when a spread is being held constant for optical or comparability reasons. Moving two points of OID is roughly equivalent to 35 bps of spread on a six-year assumption and roughly 80 bps on a three-year one - so quoting OID rather than spread lets the same economics be described as a tighter loan.,Because OID accretes over the actual life rather than the stated maturity, its contribution to yield is inversely proportional to how long the loan stays outstanding. A discount is a bet on early repayment, and call protection is the complementary bet.,The crude approximation r + OID/n is used almost universally and is always low, because it credits the discount ratably while the cash is only recovered at repayment. The error grows with the discount and shrinks with the tenor.,OID has a separate tax meaning under the Internal Revenue Code with its own de minimis rule and accrual method; the tax accretion schedule is not the same as the yield arithmetic above and should not be substituted for it.

### All-in yield and all-in spread
The lender's expected return expressed as a single annualised figure, combining coupon, accreted discount, and retained fees over the assumed holding period. All-in spread is the same figure stated as a margin over the base rate, so that credit compensation can be compared across rate environments.

Formula: All-in yield Y solves 0 = -(Price - retained fees) + sum of coupons discounted at Y + redemption value discounted at Y. All-in spread = Y - B_assumed.

All-in spread is only comparable between loans if the holding period assumption is the same. A lender quoting all-in spread on a three-year take-out and one quoting on stated maturity are describing different things with the same words, and the gap is the whole of the OID and fee contribution.,Fees paid away to an arranger or a co-lender do not enter the holding lender's yield, so a borrower's all-in cost and a lender's all-in yield diverge by exactly the fee leakage. In a club deal these can differ by more than a point.,Base rate assumption matters for the spread figure but not for the yield figure. When rates are expected to fall, an all-in spread computed off spot base rate flatters the loan; computed off a forward curve it does not.

### Yield to maturity versus yield to expected take-out
Yield to maturity assumes the loan runs to its stated maturity date. Yield to take-out assumes repayment on the date a refinancing, sale, or recapitalisation is expected. Because most sponsor-backed loans are repaid on a transaction rather than at maturity, the take-out yield is the one that describes the position.

Formula: Y_takeout solves 0 = -Price + sum for t = 1..m of (P*r)/(1+Y)^t + (P * (1 + call premium_m))/(1+Y)^m, where m is the assumed take-out year

The take-out year is an assumption, not a fact, and it is the single largest free parameter in a private credit return model. A yield quoted without stating it is not a number that can be checked.,The relationship inverts for a loan bought above par in the secondary market: there, early repayment destroys yield, and call protection becomes the lender's protection against its own upside being taken away.,A three-year take-out assumption combined with hard call protection through year two is not conservative - it is the assumption under which the premium is collected. Modelling a take-out immediately after the call protection expires is the aggressive case, not the base case.

### Call protection, soft call, and make-whole
Contractual compensation payable on early repayment. Hard call protection is a stated premium over par for a defined period. Soft call is a smaller premium payable only on a repricing or refinancing, not on repayment from other sources. A make-whole is the present value of the interest the lender would have received to a date, and is the strongest form.

Formula: Proceeds on prepayment in year m = P * (1 + premium_m); yield to that date solves 0 = -Price + sum for t = 1..m of P*r/(1+Y)^t + P*(1 + premium_m)/(1+Y)^m

Call protection and OID are the same trade seen from two sides. OID pays the lender for early repayment; call protection pays the lender for being repaid early. A loan with deep OID and no call protection is a loan whose lender wants to be refinanced.,The carve-outs decide whether the protection is real. A soft call that does not apply on a change of control is no protection in a sponsor-backed credit, because the change of control is the most likely repayment event.,A make-whole discounted at the base rate rather than at the loan's own yield produces a far larger premium, since it does not credit the lender's credit spread as a reinvestment opportunity. The discount rate in the definition is worth more than the number of years of protection.

### Ticking fee
A fee accruing on a committed but unfunded amount from a specified date - typically a set number of days after signing - until funding or termination, compensating the lender for holding capital against a commitment that has not yet drawn.

Formula: Ticking fee = rate * Commitment * days / 360, accruing from the start date; often stepping up in tranches over time

The ticking fee is the borrower's clock on its own regulatory approvals. In an acquisition financing it prices the risk that the deal takes longer than the sponsor said it would, which is why the free period and the step-up dates are negotiated against the antitrust timetable rather than against the loan.,A ticking fee accrues whether or not the acquisition closes, so it is a real cost of an uncertain deal, and it is usually the sponsor's cost rather than the target's.,Ticking fees are quoted on the commitment, not the funded amount, so a facility that funds partially still ticks on the whole. Where a delayed-draw tranche exists, check whether the ticking fee and the unused fee both apply - in some documents they do.

### Unused commitment fee
A recurring fee on the undrawn portion of a revolving or delayed-draw commitment, being the price of the borrower's option to draw. Distinct from a ticking fee, which runs to first funding rather than for the life of the facility.

Formula: Unused fee = rate * (Commitment - Drawn - LC exposure) * days / 360

Restating the unused fee as an increment to the drawn margin is the only way to compare a large lightly-drawn revolver with a small heavily-drawn one, and it is the calculation borrowers most often skip when sizing a facility.,An oversized revolver is not free optionality. The unused fee is paid every year regardless, and the facility consumes debt-incurrence capacity in the covenant on its full committed amount in most definitions.,In a delayed-draw term loan the unused fee is frequently set at a level close to the full margin, precisely so the borrower does not treat the commitment as a costless option. Check whether it steps up to the full margin at a date.

### Upfront, arrangement, and structuring fees
Points on the commitment paid at closing. An arrangement or structuring fee compensates the party that originated and structured the deal; an upfront or participation fee is paid to lenders for taking the paper. Only the portion a lender retains contributes to that lender's yield.

Formula: Lender net outlay = P * (1 - OID/100) - Retained fees; yield is computed on the net outlay

Fee economics are where an originating lender's return diverges most from a participating lender's on identical paper. Two funds reporting the same loan at the same spread can have yields a point apart, and the difference is origination, not credit selection.,A structuring fee retained by the manager rather than credited to the fund is an economic term worth checking in the LPA, because it is fee income earned on the fund's balance sheet risk.,Amortising a closing fee into yield over the assumed life, rather than recognising it at close, is what makes a manager's stated portfolio yield comparable to a coupon. Recognised upfront it inflates first-year returns and depresses later ones on the same asset.

### PIK versus cash-pay in a yield calculation
A PIK coupon produces the same nominal rate as a cash coupon but no interim cash, so all of the return is concentrated in the terminal payment. At the same stated rate the IRR is identical only if the PIK is paid in full at maturity; any recovery shortfall hits a PIK position harder because more of its return is at risk on the final date.

Formula: Cash-pay: cash flows are (-Price, P*r, ..., P*r + P). PIK: cash flows are (-Price, 0, ..., 0, P*(1+r)^n). Both have the same IRR at full recovery.

PIK and cash-pay are equivalent in the base case and divergent in every downside, which is exactly the shape of a position that looks well-priced on a yield screen and is not. The compensation for PIK should be a premium to the cash rate, and the size of that premium should be a function of the recovery distribution, not convention.,Cash interest received is unrecoverable by the estate in most circumstances once the preference period has passed. Accrued PIK is simply a larger claim against the same value. That is the real distinction, and it is a legal one rather than a mathematical one.,A portfolio's PIK share is the most informative single disclosure a private credit vehicle publishes, because PIK is where a stressed borrower's problems go before they reach a default statistic.

### MFN protection on incremental debt
A most-favoured-nation clause requiring the existing loan's margin to be increased if the borrower later incurs incremental pari passu term debt at a higher effective yield, so the existing lender is not left holding cheaper paper alongside identical-ranking, better-priced debt.

Formula: Required adjustment = max(0, Yield_new - Yield_existing - Threshold), applied to the existing margin

The MFN is defeated by its definitions, not by its threshold. Carve-outs for maturity, sunset periods, tranche size, currency, and 'incurred in connection with a permitted acquisition' can leave a clause that never triggers.,An MFN sunset is the term that matters: protection that expires after a period covers the lender exactly for the period in which the borrower was least likely to raise incremental debt anyway.,Because the calculation compares effective yields, a borrower can price incremental debt with a wider spread and no OID and still stay inside the threshold, or vice versa. The OID amortisation convention written into the definition is therefore a pricing term.

### Amendment and consent fees
A fee paid to consenting lenders for agreeing to a change to the credit agreement - a covenant reset, a maturity extension, a waiver, or a permitted transaction. Paid to the consenting class, usually pro rata to holdings.

Formula: Fee = points * holdings of consenting lenders; contribution to yield = fee / net outlay, annualised over the remaining assumed life

Amendment fee income arrives precisely when the credit is deteriorating, which makes it a poor addition to a reported yield and an excellent early indicator. A portfolio whose realised yield is being supported by consent fees is a portfolio being amended.,The fee is the price of the lender's vote, and it is paid by the borrower for something the lender may be economically compelled to grant anyway. Where the alternative to consenting is a default the lender does not want, the fee is compensation for a decision already made.,Fees paid only to consenting lenders create an incentive to consent quickly and a structural disadvantage for holders who wait, which is one mechanism by which a majority group forms before the minority has organised.

#### Components of the all-in cost and where each one lands
Borrower cost and lender yield are not the same number. Fees paid to an arranger that the lender does not retain raise the borrower's cost and not the lender's yield; OID does both.

| Component | Formula | Raises borrower cost | Raises lender yield |
|---|---|---|---|
| Base rate | B, the reference rate for the interest period | Yes | Yes, and it is passed through, so it is not credit compensation |
| Base rate floor | max(F - B, 0) | Yes, only while B < F | Yes, only while B < F |
| Credit spread adjustment (CSA) | A fixed additive adjustment to B, in bps | Yes | Yes; it exists to make a SOFR-based rate economically comparable to a LIBOR-based one |
| Credit spread | S, in bps over the base rate | Yes | Yes; this is the credit compensation |
| OID / issue discount | Points below par at funding; price = 100 - OID | Yes, it reduces net proceeds | Yes, it is accreted to par over the life |
| Upfront / arrangement fee | Points on the commitment, paid at close | Yes | Only to the extent the lender retains it rather than paying it away |
| Unused commitment fee | rate * undrawn commitment * days/360 | Yes, on the undrawn portion | Yes; it is the price of the option to draw |
| Ticking fee | rate * commitment * days/360 from a start date to funding | Yes | Yes; it compensates for capital held against an unfunded commitment |
| Amendment / consent fee | Points on the amending class's holdings | Yes | Yes, and it is realised at the moment credit quality is being renegotiated |
| Prepayment premium / call protection | Points above par on early repayment | Yes, on early exit only | Yes, and it shortens the effective holding period over which OID accretes |

#### SOFR and the credit spread adjustment
SOFR is an overnight secured rate; LIBOR was a term unsecured rate. The static spread adjustments below are the ARRC and ISDA recommended values, codified for LIBOR-referencing contracts without workable fallbacks by the Federal Reserve's Regulation ZZ under the LIBOR Act. They are a published legal artefact, not a market observation, and they do not update.

| USD LIBOR tenor | Static spread adjustment (percent) | In basis points |
|---|---|---|
| Overnight | 0.00644 | 0.644 |
| 1-month | 0.11448 | 11.448 |
| 3-month | 0.26161 | 26.161 |
| 6-month | 0.42826 | 42.826 |
| 12-month | 0.71513 | 71.513 |

#### SOFR conventions in loan documents
Three distinct rates are all called SOFR. Which one a document uses changes when the rate is known, how it is compounded, and what operational machinery the borrower needs.

| Convention | How it is computed | Known in advance | Where it is used |
|---|---|---|---|
| Term SOFR | A forward-looking term rate published for set tenors, derived from SOFR derivatives | Yes, set at the start of the interest period | The dominant convention in syndicated and private credit loan documents, because it behaves like LIBOR operationally |
| Daily Simple SOFR | Arithmetic average of daily SOFR over the interest period, no compounding | No, known only at period end | Some bilateral and ABL facilities; simplest to administer of the backward-looking options |
| SOFR Compounded in Arrears | Daily SOFR compounded over the period, usually with a lookback and observation shift | No | Derivatives and some larger facilities; the ARRC-preferred convention for hedgeable exposure |
| Daily Simple SOFR with a lookback | As above, shifted back a set number of business days so the rate is known before payment | Rate known shortly before payment, not at period start | Facilities that want arrears economics with a workable payment mechanic |

#### Worked yield table - one loan, three exit assumptions
Par 100, issued at 98 (2 points of OID), base rate 4.00 percent with a 1.00 percent floor, spread 500 bps, so the cash coupon r = max(4.00, 1.00) + 5.00 = 9.00 percent. Bullet maturity in 6 years. Call protection 102 in year 1, 101 in year 2, par thereafter. Annual periods, ACT/ACT for legibility. Inputs are illustrative and are not market levels.

| Exit assumption | Cash flows | Yield (IRR) | Difference vs stated-maturity YTM |
|---|---|---|---|
| Held to 6-year maturity | -98; +9 x 5; +109 | 9.45 percent | - |
| Repaid at end of year 3 at par | -98; +9; +9; +109 | 9.80 percent | +35 bps |
| Repaid at end of year 2 at 101 | -98; +9; +110 | 10.64 percent | +119 bps |
| Crude approximation, 6 years | r + OID/n = 9.00 + 2/6 | 9.33 percent | Understates the true 6-year yield by 12 bps |
| Crude approximation, 3 years | r + OID/n = 9.00 + 2/3 | 9.67 percent | Understates the true 3-year yield by 13 bps |

## Return metrics
Reviewed: 2026-08-27
Canonical: https://privatecredit.wiki/returns/ (JSON: https://privatecredit.wiki/returns.json)

Private credit reports returns in two incompatible languages: a yield language borrowed from fixed income, and a multiple-and-IRR language borrowed from private equity. The translation between them is not clean, because a yield is a rate on capital outstanding while an IRR is a rate on capital called, and fund-level leverage, recycling, and a subscription line all move the second without touching the first. Every identity below is stated so that a reported number can be reconciled to the cash flows that produced it.

### MOIC (multiple on invested capital)
Total value returned and remaining, divided by capital invested at cost. It is a gross, asset-level, time-insensitive measure and is the correct metric for judging underwriting because it cannot be improved by timing.

Formula: MOIC = (Realised proceeds + Residual value) / Invested capital at cost

In private credit MOIC is compressed by construction: a performing loan returns par plus coupon, so a 1.2x to 1.4x MOIC covers almost the whole distribution of good outcomes while a workout can produce 0.4x. The distribution is left-skewed, which means an average MOIC tells you almost nothing about how many loans went wrong.,Because MOIC ignores time, it is the metric that a manager cannot flatter with a subscription line, a delayed capital call, or an early recycling. Where MOIC and IRR tell different stories, MOIC is describing the credit and IRR is describing the treasury.,MOIC on invested capital and TVPI on paid-in capital differ by fees, expenses, and uninvested capital. They are frequently reported side by side and are not the same denominator.

### DPI, RVPI, and TVPI
The three paid-in ratios. DPI is cash actually returned per unit of capital called. RVPI is the remaining mark. TVPI is their sum. The identity TVPI = DPI + RVPI holds exactly, which is what makes the split informative.

Formula: DPI = D / PIC; RVPI = NAV / PIC; TVPI = (D + NAV) / PIC = DPI + RVPI

Read the split, not the sum. A private credit fund with high DPI is a fund whose loans have repaid, which is the only unambiguous evidence of credit quality. A fund with high RVPI is a fund holding its own marks.,DPI can be raised without a realisation, by drawing a NAV facility and distributing the proceeds. The LP's DPI rises, their RVPI falls by less than the distribution, and they are now behind a secured lender. Reconciling distributions to realisations is the check.,In credit, RVPI should converge to zero on a schedule set by the loans' maturities. RVPI that persists past the weighted average life of the portfolio is a portfolio of amended loans, not a portfolio of unrealised gains.

### Gross versus net IRR
Gross IRR is computed on cash flows between the fund and its investments. Net IRR is computed on cash flows between the fund and its LPs, and is therefore reduced by management fees, incentive fees, fund expenses, and organisational costs, and affected by the cost and timing of any fund-level borrowing.

Formula: Net IRR solves 0 = sum over t of LP_CF_t / (1 + IRR)^t, where LP_CF includes capital calls (negative), distributions (positive), and the terminal NAV

A management fee quoted on gross assets is a different fee from one quoted on net assets, and the difference is exactly the leverage ratio. One percent of gross assets at 1:1 leverage is two percent of equity; at 2:1 it is three percent. Comparing headline fee rates across vehicles without normalising to the equity base is comparing nothing.,The gross-to-net gap in private credit is proportionally larger than in private equity for the same fee schedule, because the gross return is lower. A 200 bps fee load on a 20 percent gross return is a tenth of the return; on a 10 percent gross return it is a fifth.,Net IRR is the only number that describes what an LP received, and it is also the number most sensitive to when capital was called. Those two facts together are why gross-to-net bridges and subscription-line disclosure exist.

### Why IRR and MOIC disagree
IRR is a rate and MOIC is a ratio. For a single draw and a single return, they are related by IRR = MOIC^(1/n) - 1, so the same MOIC maps to a range of IRRs depending only on the holding period. For a stream of cash flows the relationship has no closed form, and IRR additionally assumes interim distributions earn the IRR itself.

Formula: Single-draw case: IRR = MOIC^(1/n) - 1; equivalently MOIC = (1 + IRR)^n

In a credit fund the multiple is capped near par plus coupon, so a manager cannot raise MOIC to defend an IRR through a longer hold. The only levers are shortening the hold, recycling faster, or adding leverage. That constraint - not skill - explains most IRR dispersion between credit managers with similar loss experience.,Recycling repaid principal within the investment period raises TVPI on the same paid-in capital, so it improves both the multiple and the IRR without any change to per-loan performance. The recycling provision in the LPA is therefore a return term, and it is in the legal section.,IRR is not additive across funds or time periods and cannot be averaged. Pooling cash flows and re-solving is the only correct aggregation.

### Subscription line effect on net IRR
A subscription facility secured by uncalled LP commitments lets the fund invest before calling capital. The investment's cash flows are unchanged; the LP's are shifted later. Because IRR is a function of timing, net IRR rises while MOIC and TVPI do not.

Formula: IRR_reported = MOIC_after_facility_cost^(1/(n - delay)) - 1, where delay is the period funded by the facility

This is the clearest case in fund reporting where a metric and the underlying economics move in opposite directions. It is not improper - the facility genuinely reduces the LP's capital-at-risk period - but any comparison of net IRRs between a fund that uses a line and one that does not is meaningless without an unlevered restatement.,The facility cost is a real drag on the multiple, borne by the LPs, in exchange for an IRR improvement that accrues to the manager's track record and, where the hurdle is IRR-based, to the manager's carry.,Ask for net IRR computed both with and without the facility, and for the average number of days between investment and capital call. The second number tells you the size of the first adjustment before it is calculated.

### Loss-adjusted yield
The all-in yield reduced by the expected annualised credit loss, being the annual default rate multiplied by loss given default. It converts a promised yield into an expected yield and is the only basis on which two loans at different risk can be compared.

Formula: LAY = Y - d * (1 - R), where d is the annualised default rate on par and R is the recovery on defaulted par. LGD = 1 - R.

Default rate and recovery are not independent, and treating them as separate inputs is the standard error. Defaults cluster in the conditions that also depress recoveries, so the product d * LGD computed from independently-estimated averages understates loss in the states of the world that matter.,The inputs above are illustrative parameters chosen to make the arithmetic legible. Any specific default or recovery figure is an estimate about a particular portfolio in a particular period, and a loss-adjusted yield is only as good as the two numbers fed into it.,LAY is a first moment and credit returns are not symmetric. Two portfolios with identical LAY and different loss dispersion are not equivalent, and the difference is what fund-level leverage amplifies.,Recovery must be measured on the tranche, not the credit. First-lien and second-lien recoveries on the same defaulted borrower are different numbers, and applying a blended figure to a junior position overstates it.

### Breakeven default rate
The annualised default rate at which a position's loss-adjusted yield falls to a chosen threshold - zero, or a hurdle rate, or the point at which levered equity is wiped out. It restates a yield as the cushion it buys, which is a more useful comparison than the yield itself.

Formula: d* = (Y - h) / (1 - R), where h is the threshold return. With fund-level leverage L at cost c, equity return is zero when the asset return equals c*L/(1+L), so d*_levered = (Y - c*L/(1+L)) / (1 - R).

The comparison that matters is between the breakeven rate and the loss experience of the relevant cohort in a real downturn, not against a long-run average. Averages include the good years.,Leverage cuts the breakeven default rate and does so non-linearly in the cost of debt. Going from unlevered to 1:1 took the cushion from 24.5 to 17.0 percent here; going to 2:1 took it to 14.5. Each incremental turn buys less return and costs more cushion.,A high breakeven default rate on a portfolio with correlated borrowers is not the protection it appears to be, because the metric is an annualised average and correlated losses arrive together. The same expected loss delivered in one year rather than five behaves entirely differently against a leverage facility with an LTV covenant.,Stated as a sentence, this is the most useful single output of a credit model: 'a fifth of this portfolio can default at a 40 percent loss severity before the equity earns nothing.' That is a claim an allocator can argue with.

### Levered return through a fund-level facility
The return on equity produced by borrowing at the fund level and investing the proceeds alongside equity in the same asset pool. It is linear in the asset return and linear in the cost of debt, with the leverage ratio as the multiplier on both.

Formula: R_e = R_a * (1 + L) - c * L, where L = D/E, R_a is the asset-level return net of asset-level costs, and c is the all-in cost of the facility

The second form, R_e = R_a + L * (R_a - c), is the one to reason with: leverage adds nothing except L copies of the spread between the asset yield and the cost of debt. When that spread compresses, additional turns add risk and almost no return.,Both R_a and c are floating in most private credit vehicles, so a rate move largely cancels in the spread - which is the real argument for the structure. It does not cancel where the assets have base rate floors that are in the money and the facility does not, in which case falling rates compress the spread from both ends.,Leverage is symmetric in the arithmetic and asymmetric in practice, because the facility carries an LTV or borrowing base covenant that forces deleveraging at the worst point. The formula has no term for a margin call.,Asset-level leverage at a portfolio company and fund-level leverage compound. A 5.5x levered borrower held in a 1:1 levered fund is not a 5.5x exposure to the LP.

### Cash yield versus total return
Cash yield counts only interest actually received in cash. Total return additionally includes OID accretion, PIK accrual, fee amortisation, and unrealised mark changes. The gap between them is the portion of reported income that has not been collected.

Formula: Cash yield = cash interest received / average cost basis. Non-cash income share = (Total investment income - cash interest received) / Total investment income.

The non-cash income share is the closest thing private credit has to a single early-warning statistic. It rises when borrowers toggle to PIK, when amendments capitalise interest, and when new loans are issued at wider discounts - which are the three things that happen before a default rate moves.,A vehicle with a distribution requirement and a rising non-cash income share is distributing cash it did not receive. That is a solvable problem for one period and a structural one across several.,Cash yield on average cost basis and cash yield on fair value differ once marks move away from cost, and a discounted book shows a higher yield on fair value. Both are reported; only cost basis is stable across periods.

### Hurdle, catch-up, and the incentive fee on income
An incentive fee on net investment income is typically payable only above a stated hurdle on equity, with a catch-up band over which the manager takes a high or full share of income until the target split is reached, after which the ordinary split applies.

Formula: Full catch-up boundary = hurdle / (1 - incentive rate). Between the hurdle and that boundary the manager takes 100 percent of the excess; above it, the incentive rate applies to all income.

The catch-up is the least-read and most expensive term in an income incentive fee. It exists so that the manager reaches its target share of total income rather than only its share of income above the hurdle, which means the hurdle is a deferral rather than a genuine preference.,At income levels just above the hurdle the marginal fee rate inside the catch-up band is 100 percent, so the manager captures the entire benefit of the first increment of outperformance. Netting a small beat against the hurdle produces no LP benefit at all.,An income incentive fee and a capital-gains incentive fee are separate calculations in most vehicles, with separate hurdles and separate lookbacks. Realised credit losses may reduce the second without reducing the first, so a manager can earn income fees through a period in which the LP lost principal. Whether a total-return hurdle or a loss carryforward applies is the term that closes that gap.

#### Metric definitions
PIC is paid-in capital, D cumulative distributions, NAV residual value, I invested capital at cost, and n the holding period in years.

| Metric | Formula | What it is blind to |
|---|---|---|
| MOIC (gross, asset level) | (Realised proceeds + residual value) / I | Time. A 1.3x over two years and over eight are the same number. |
| DPI | D / PIC | Unrealised value, and the source of the cash - a NAV loan increases DPI without a realisation. |
| RVPI | NAV / PIC | Nothing about liquidity; it is a mark, and in private credit almost always a Level 3 mark. |
| TVPI | (D + NAV) / PIC | Time, and the split between cash and mark. |
| Gross IRR | Rate solving 0 = sum of asset-level cash flows discounted | Fees, fund expenses, and the cost of fund-level leverage. |
| Net IRR | Rate solving 0 = sum of LP cash flows discounted | Nothing, which is why it is the only number an allocator should anchor on - but it is sensitive to the capital-call timing a subscription line controls. |
| Cash yield | Cash interest received in the period / average cost basis | OID accretion, PIK accrual, and fees - so it understates total return on a discounted book. |
| Loss-adjusted yield | Y - d * (1 - R) | The path. It is an expected value, and credit losses are not symmetric around it. |

#### Worked fund example - the PI ratios and MOIC
Committed capital 100. Paid-in capital 100. Cumulative distributions 118. Residual NAV 12. Invested capital at cost 100.

| Metric | Computation | Result |
|---|---|---|
| DPI | 118 / 100 | 1.18x |
| RVPI | 12 / 100 | 0.12x |
| TVPI | (118 + 12) / 100 | 1.30x |
| MOIC | (118 + 12) / 100 | 1.30x |
| Implied IRR, 3-year average life | 1.30^(1/3) - 1 | 9.14 percent |
| Implied IRR, 5-year average life | 1.30^(1/5) - 1 | 5.39 percent |
| Spread between the two | - | 375 bps on an identical multiple |

#### Levered versus unlevered return, worked
Asset-level yield 9.80 percent. Fund-level facility cost 6.00 percent. L is debt divided by equity. Formula: R_e = R_a * (1 + L) - c * L. Inputs are illustrative.

| L (debt/equity) | Gross return on equity | Loss-adjusted (asset yield 9.00 percent) | Asset return at which equity return is zero |
|---|---|---|---|
| 0.0x | 9.80 percent | 9.00 percent | 0.00 percent |
| 0.5x | 11.70 percent | 10.50 percent | 2.00 percent |
| 1.0x | 13.60 percent | 12.00 percent | 3.00 percent |
| 1.5x | 15.50 percent | 13.50 percent | 3.60 percent |
| 2.0x | 17.40 percent | 15.00 percent | 4.00 percent |

#### Gross asset yield to net return on equity, worked
Equity 100, fund-level debt 100 at 6.00 percent, gross assets 200 earning a 9.80 percent asset yield. Management fee 1.00 percent of gross assets. Incentive fee 15 percent of net investment income above a 7.00 percent hurdle on equity, no catch-up. Illustrative fee terms.

| Line | Computation | Amount | Percent of equity |
|---|---|---|---|
| Gross investment income | 200 * 9.80 percent | 19.60 | 19.60 percent |
| Less interest on fund debt | 100 * 6.00 percent | (6.00) | (6.00) percent |
| Less management fee | 200 * 1.00 percent | (2.00) | (2.00) percent |
| Pre-incentive net investment income | 19.60 - 6.00 - 2.00 | 11.60 | 11.60 percent |
| Income above the hurdle | 11.60 - 7.00 | 4.60 | 4.60 percent |
| Less incentive fee | 15 percent * 4.60 | (0.69) | (0.69) percent |
| Net investment income to equity | 11.60 - 0.69 | 10.91 | 10.91 percent |
| Fee load as a share of gross income | (2.00 + 0.69) / 19.60 | - | 13.7 percent |

## Documentation and covenants
Reviewed: 2026-08-27
Canonical: https://privatecredit.wiki/covenants/ (JSON: https://privatecredit.wiki/covenants.json)

A covenant package is three things: a set of ratios, a definition of EBITDA that those ratios are computed against, and a set of baskets permitting things the covenants would otherwise prohibit. The ratios receive the negotiating attention and the definitions decide the outcome, because a covenant tested against an adjusted number is only as tight as the adjustments. The liability-management transactions of the last decade were not covenant breaches; they were permitted uses of baskets that existed in documents everybody had read.

### Total net leverage covenant
A maintenance test capping net debt as a multiple of adjusted EBITDA, measured quarterly on a last-twelve-months basis with pro forma effect for acquisitions and disposals. It is the covenant that most often steps down over the life of the loan.

Formula: Net leverage = (Total debt - min(unrestricted cash, netting cap)) / Adjusted EBITDA_LTM <= L_max. EBITDA headroom = 1 - (Net debt / L_max) / EBITDA_current

Express headroom as a percentage EBITDA decline rather than as turns. Turns of headroom are not comparable between a 3.0x credit and a 6.0x credit: half a turn of cushion on 6.0x is an 8 percent EBITDA decline, and on 3.0x it is 14 percent.,Step-downs are the mechanism by which a covenant tightens without a negotiation. A package with generous opening headroom and aggressive step-downs is a package that will be amended, and the amendment is the lender's second bite.,The cash netting cap is worth checking. Uncapped netting lets a borrower draw its revolver, hold the proceeds, and improve its reported net leverage - the drawn debt and the held cash cancel while liquidity risk has increased.,Because the denominator is LTM and pro forma, a covenant computed on the acquisition-date pro forma figure can be met by an acquisition that has not yet contributed a single quarter of actual results.

### Interest coverage ratio
Adjusted EBITDA divided by cash interest expense for the period. In a floating-rate structure it is the covenant that responds to rate moves rather than to operating performance, which makes it the binding test in a rising-rate environment even where leverage is unchanged.

Formula: ICR = Adjusted EBITDA_LTM / Cash interest expense_LTM >= ICR_min. Breakeven all-in rate = EBITDA / (ICR_min * Total debt)

Stating the covenant as a breakeven interest rate rather than a ratio is what turns it into a usable risk measure, because the base rate is observable and the forward curve is quoted. A borrower whose breakeven rate is inside the forward curve has already breached; it just has not been tested yet.,Whether the definition says cash interest or total interest decides whether a PIK toggle cures the covenant. On a cash-interest definition, capitalising interest raises the ratio - the covenant improves as the credit deteriorates.,Hedging changes the answer and is frequently excluded. If a required interest rate cap is in place, the covenant should be computed on the hedged rate, and the document should say which.,Interest coverage and leverage bind at different points in the cycle. Leverage binds when EBITDA falls; coverage binds when rates rise. A package with only a leverage covenant has no protection against the second.

### Fixed charge coverage ratio
A cash-flow coverage test measuring EBITDA less non-discretionary cash uses against fixed obligations, being at minimum cash interest and scheduled amortisation and often also rent, taxes, and dividends. It is the standard test in ABL and in cash-flow-poor credits.

Formula: FCCR = (Adjusted EBITDA - capex - cash taxes) / (Cash interest + scheduled amortisation + other fixed charges) >= FCCR_min

Capex in the numerator is the reason FCCR is a weak covenant in a deteriorating credit: the cheapest way to satisfy it is to stop investing, which improves the ratio and degrades the asset. A lender who wants the covenant to mean something specifies maintenance capex or a floor.,Springing FCCR tests in ABL facilities are triggered by an availability threshold. Because availability falls as the borrowing base shrinks, the test appears at exactly the moment the borrower's cash flow is worst - which is the design, but it also means the covenant produces defaults rather than early warnings.,FCCR is the most definition-dependent of the standard covenants. Whether rent, preferred dividends, cash taxes, and the revolver's average outstanding balance are inside it varies more between documents than the test level does.

### Covenant-lite
A structure in which the term loan has no maintenance financial covenant. Where a revolver exists it usually carries a springing covenant tested only when revolver utilisation exceeds a threshold, so the term lenders benefit from it only indirectly and only while the revolver is drawn.

The consequence of covenant-lite is not a higher default rate; it is a later default date. Problems surface at a liquidity event or a maturity rather than at a quarterly test, by which point enterprise value has had longer to fall below the debt. Empirically the pattern shows up as unchanged or higher recoveries per default and a longer period of deterioration beforehand.,A springing covenant for the revolver's benefit gives the term lenders nothing, because a borrower approaching the trigger simply repays the revolver from cash. The trigger is under the borrower's control.,Covenant-lite and covenant-loose are not the same. A cov-loose package has a maintenance covenant set so wide it cannot be breached without a catastrophe. That is still better than none, because the covenant creates a reporting and certification obligation and a defined default event that can be leveraged.,In direct lending the meaningful question is not whether a maintenance covenant exists but whether the lender group is small enough to act on it. A covenant held by two lenders is a negotiating right; the same covenant across sixty holders is a coordination problem.

### EBITDA addbacks and adjustments
Items added to reported EBITDA under the credit agreement's Consolidated EBITDA definition, converting an accounting figure into the contractual figure every ratio is computed against. The definition is negotiated and is not an accounting standard.

Formula: Adjusted EBITDA = Reported EBITDA + addbacks, subject to a cap. Where the cap is a percentage p of adjusted EBITDA: A <= p*(EBITDA_reported + A), so A_max = p*EBITDA_reported / (1 - p).

The identity p on adjusted equals p/(1-p) on reported is the single most useful piece of arithmetic in covenant review, and the caps are almost always quoted without saying which denominator applies. At a 35 percent cap the difference is larger still: 53.8 percent of reported.,Every ratio in the package - leverage, coverage, incremental capacity, restricted payment capacity, and the excess cash flow sweep - runs off the same adjusted number. A wide EBITDA definition loosens all of them simultaneously, which is why negotiating the definition dominates negotiating any single test level.,Run-rate synergy addbacks have three governing parameters: the cap, the lookforward window in which the savings must be realised, and whether any third party must certify them. A generous cap with a long window and no certification requirement is an unpoliced number.,Addbacks compound through acquisitions. A target's LTM EBITDA is itself an adjusted figure, and adding it pro forma imports its adjustments into the group's. A serial acquirer's adjusted EBITDA can drift a long way from any cash number without a single individually unreasonable addback.

### Equity cure right
A right for the sponsor to remedy a financial covenant breach by contributing cash equity within a stated period after the test date. The economics turn entirely on how the cure amount is applied: credited to EBITDA for the covenant calculation, or applied to reduce debt, or both.

Formula: EBITDA-credit cure: X = Net debt / L_max - EBITDA_actual. Debt-paydown cure: X = Net debt - L_max * EBITDA_actual.

The identity X_paydown = L_max * X_EBITDA is the whole negotiation, and it is rarely stated. At a 6.00x covenant the two formulations differ by a factor of six in the cash the sponsor must write. A sponsor who agreed to an EBITDA-credit cure has bought the covenant back for a sixth of the price.,An EBITDA-credit cure that persists in the calculation for the following three quarters cures four tests with one cheque, because the LTM figure carries the credited amount forward. Whether the credit applies to that quarter only or to every LTM calculation including it is a term worth more than the cap on the number of cures.,Caps are usually expressed as a maximum number of cures, a maximum in consecutive quarters, and an aggregate amount. A package permitting cures in non-consecutive quarters only is materially tighter, because a deteriorating credit fails consecutively.,Whether cure proceeds may be netted against debt for the leverage calculation, and whether they count in the following period's cash netting, are separate questions from how the cure is applied. Documents get this wrong often enough that it is worth reading rather than assuming.

### Maintenance versus incurrence covenants
A maintenance covenant is tested on a schedule regardless of what the borrower does; failing it is an event of default. An incurrence covenant is tested only when the borrower proposes a specified action; failing it means the action is not permitted, with no default.

An incurrence covenant is a leak-prevention device, not a monitoring device. It stops value leaving; it does not tell the lender that value is falling. A package with only incurrence tests gives the lender no scheduled moment at which the borrower must come and ask for something.,Because incurrence tests are run pro forma for the transaction, a debt-financed acquisition can satisfy a leverage-based incurrence test that the group would fail on its actual results, provided the target's adjusted EBITDA is large enough. The test is passed by the transaction it is meant to constrain.,The practical asymmetry is timing. A maintenance covenant hands the lender a negotiation while enterprise value still covers the debt. Every restructuring outcome depends more on when the conversation started than on the terms it started under.

### Baskets and incremental debt capacity
Exceptions permitting debt, liens, investments, restricted payments, and asset transfers that the negative covenants otherwise prohibit. Capacity comes in three forms: fixed dollar amounts, grower amounts scaling with EBITDA or assets, and ratio-based capacity available only if a pro forma test is met.

Formula: Day-one incremental capacity = Free-and-clear (greater of fixed amount and x percent of EBITDA) + Ratio debt (L_ratio * EBITDA - existing debt of that ranking) + Available amount + reclassified capacity

The worked example is the point: free-and-clear capacity plus ratio debt can exceed what the maintenance covenant would allow, and the two provisions are negotiated by different people at different points in the document. Aggregate the baskets and compare the total against the maintenance test before signing.,Grower baskets scale with EBITDA, so a wide EBITDA definition enlarges every basket in the document at once. They also generally do not shrink: most are drafted as the greater of a fixed amount and a percentage, so a fall in EBITDA leaves the fixed floor intact.,Reclassification permits capacity used under one basket to be re-designated to another once headroom reopens, freeing the original basket for reuse. Without an anti-reclassification provision, aggregate capacity is a stock that refills rather than a budget that depletes.,The most consequential basket in a liability-management context is not a debt basket at all. It is investment capacity into unrestricted subsidiaries, because that is the pipe through which collateral leaves the credit group.

### Available amount (builder basket)
A cumulative, growing pool of capacity for restricted payments and investments, built primarily from retained net income from a build-up date, plus equity contributions and returns on prior investments, less amounts already used. Unlike a fixed basket it grows with performance.

Formula: Available amount = 50 percent of cumulative Consolidated Net Income from the build date (or a fixed starter if CNI is negative) + specified equity contributions + returns on and dispositions of investments previously made using the basket - amounts utilised

The asymmetry between the restricted-payment condition and the investment condition is where value leaves. A builder basket that requires a leverage test for a dividend but not for an investment permits the same cash to be moved into an unrestricted subsidiary and then used from there.,The starter amount matters more than the builder in the early years, because cumulative CNI is small or negative for a newly levered borrower. Documents commonly grant a fixed starter precisely so the basket is usable from day one, which makes the 50 percent CNI construction a description of the later years only.,Consolidated Net Income is itself a defined term, adjusted in the same direction as Consolidated EBITDA. The builder grows on the adjusted figure, not the reported one.,Returns on investments feeding back into the basket create a revolving pool: capital deployed under the basket, returned, and redeployed does not consume permanent capacity. Cumulative gross usage can far exceed the basket's stated size.

### Unrestricted subsidiary designation
A designation removing a subsidiary from the credit group, so that its assets are no longer subject to the covenants, guarantees, or liens, and its results no longer count in the financial definitions. It is the mechanism on which the J. Crew and drop-down transactions depend.

Formula: Designation consumes investment capacity equal to the fair market value of the designated subsidiary's assets, charged against the general investment basket, the available amount, or a ratio-based investment basket

Designation is not a breach and does not require lender consent in most documents. It is a permitted use of investment capacity, which is why the response was to restrict the assets that can move rather than to prohibit the designation.,The valuation of the transferred asset is usually determined by the borrower's board acting in good faith. Where the asset is intellectual property with no market comparables, the capacity consumed is effectively self-assessed.,A borrower can transfer assets to a non-guarantor restricted subsidiary instead, which does not require investment capacity at all in many documents and achieves much of the same result. Restricting only unrestricted subsidiaries leaves that route open, which is what the Chewy-style transactions used.

### Uptier exchanges and sacred rights
An uptier transaction is an amendment, passed by the required lender majority, permitting new super-priority debt, followed by an exchange in which the consenting majority moves its own holdings into that priority position and leaves the non-consenting minority subordinated. Sacred rights are the provisions requiring more than a majority to amend.

Formula: A group holding just over the required-lender threshold - commonly more than 50 percent of the outstanding loans - can amend everything that is not a sacred right, including provisions protecting the other side of that threshold

The arithmetic is the whole vulnerability: 50.1 percent of a class can act against 49.9 percent of the same class, and the sponsor chooses which lenders to invite into the majority. Position size relative to the required-lender threshold is therefore a risk factor independent of credit quality.,This is why direct lenders holding a whole facility, or a club small enough to act together, price a genuine structural advantage over a broadly syndicated position of the same seniority. It is not a liquidity premium; it is a control premium.,The litigation has not settled a single national rule. Courts have reached different conclusions on whether an open-market-purchase exception covers a negotiated exchange and on the scope of the implied covenant of good faith. Protection has to come from the drafting, not from an expectation of how a court will read a document.,A minority-protection provision is only useful if the holder can monitor it. Knowing the composition of the lender group, and whether a cooperation agreement is forming, is the practical defence.

### J. Crew blocker and dropdown protections
Drafting provisions preventing the transfer of material assets - characteristically intellectual property - out of the credit group where the lenders' liens and guarantees reach them. The name refers to the 2016 transaction that transferred brand IP to an unrestricted subsidiary using investment-basket capacity.

A J. Crew blocker that covers only unrestricted subsidiaries is incomplete, because the same assets can move to a restricted non-guarantor. The blocker and the guarantor coverage test have to work together; either alone leaves a route open.,The definition of 'material intellectual property' does the work. Where it is limited to registered trademarks, a transfer of the operating know-how, customer data, or a licence over the same brand can achieve the economic result without touching the covered asset.,The strongest version is not a prohibition on transfers but a requirement that any asset leaving the group either remain subject to the lien or be sold for cash consideration at fair value applied to prepay the loans. That converts an asset-stripping route into a mandatory prepayment.,Blockers are now common in newly drafted documents and absent from many outstanding ones. For a secondary purchase, the presence of a blocker is a credit term, and its absence is a discount.

### Excess cash flow sweep
A mandatory prepayment of a percentage of the borrower's excess cash flow for each fiscal year, with the percentage stepping down as leverage falls and with deductions for voluntary prepayments and permitted capital expenditure already made.

Formula: Sweep = s(L) * ECF - voluntary prepayments during the period, where ECF is broadly EBITDA less cash interest, cash taxes, capex, scheduled amortisation and working capital increases, and s(L) steps down with net leverage

The sweep is the only contractual mechanism by which a bullet term loan amortises in a good year, and the step-downs are calibrated so that it stops exactly when the credit is improving. As a de-levering tool it delivers a fraction of a turn a year at best.,Deducting voluntary prepayments from the sweep means a borrower can pay early at a moment of its choosing and receive full credit against a payment it would have owed anyway. Where the deduction is dollar-for-dollar with no discount, the sweep is optional in timing if not in amount.,ECF definitions include a working capital adjustment, which makes the sweep procyclical in the wrong direction: a growing borrower consuming working capital reports low ECF and sweeps little, while a shrinking borrower releasing working capital reports high ECF and sweeps into a declining business.,Check whether the sweep is applied pro rata across tranches or can be directed. In a structure with a first-out and last-out split, who receives the sweep is worth more than its size.

#### Financial covenants and their formulas
Worked against a single illustrative borrower throughout this section: LTM adjusted EBITDA 40, total debt 220, unrestricted cash 15 with a 15 netting cap, cash interest 19.80 (220 at a 9.00 percent all-in rate), scheduled amortisation 2.20 (1 percent of 220), capex 6, cash taxes 3.

| Covenant | Formula | Computed | Test level and headroom |
|---|---|---|---|
| Total net leverage | (Total debt - netted cash) / Adjusted EBITDA | (220 - 15) / 40 = 5.125x | 6.00x. EBITDA can fall to 34.17, a 14.6 percent decline. |
| First-lien net leverage | (First-lien debt - netted cash) / Adjusted EBITDA | (120 - 15) / 40 = 2.625x | Tested separately; governs incremental first-lien and ratio debt capacity. |
| Interest coverage | Adjusted EBITDA / Cash interest expense | 40 / 19.80 = 2.02x | 1.50x. EBITDA can fall to 29.70, a 25.8 percent decline, or the all-in rate can rise 312 bps to 12.12 percent. |
| Fixed charge coverage | (Adjusted EBITDA - capex - cash taxes) / (Cash interest + scheduled amortisation) | (40 - 6 - 3) / (19.80 + 2.20) = 31 / 22 = 1.41x | 1.10x. Capex is inside the numerator, so cutting capex cures it - which is why lenders sometimes exclude discretionary capex. |
| Debt service coverage | Cash flow available for debt service / (Cash interest + scheduled amortisation) | Definition varies; frequently EBITDA less capex less taxes less working capital movement | Common in ABL and asset-backed structures rather than sponsor term loans. |
| Minimum liquidity | Unrestricted cash + revolver availability >= floor | 15 + availability | The only covenant that cannot be cured by an accounting adjustment, and the first one a lender should ask for in a low-EBITDA credit. |

#### Maintenance versus incurrence
The distinction is when the test is run, and it decides whether a covenant is a monitoring tool or a permission gate.

| Attribute | Maintenance covenant | Incurrence covenant |
|---|---|---|
| Tested | Every quarter, regardless of borrower action | Only when the borrower takes a specified action - incurring debt, making a restricted payment, or an acquisition |
| Consequence of failure | Event of default, subject to cure rights | The action is simply not permitted; no default |
| What deteriorating performance triggers | A default, and therefore a negotiation | Nothing at all until the borrower wants to do something |
| Typical home | Bank facilities, ABL, revolvers, smaller direct lending deals | High-yield indentures, and the term loan tranches of covenant-lite structures |
| Lender value | An early seat at the table while enterprise value still exceeds the debt | A restriction on value leakage but no early warning |
| Cure mechanics | Equity cure rights, usually capped in number and frequency | Not applicable |

#### EBITDA adjustment categories
Ordered roughly from least to most contestable. Every one of these is a definitional term in the credit agreement, not an accounting standard.

| Category | What it adds back | Why it is contestable |
|---|---|---|
| Interest, taxes, depreciation, amortisation | The base definition | Not contestable; this is the acronym |
| Non-cash equity compensation | Stock-based compensation expense | Genuinely non-cash, but it is a real cost of retaining the management team the projections depend on |
| Transaction and financing costs | Fees and expenses of the acquisition and its financing | One-time by nature, but a serial acquirer has them every quarter |
| Restructuring and integration charges | Severance, facility closure, systems integration | Recurring in practice for a platform doing add-ons; often uncapped |
| Pro forma effect of acquisitions and disposals | LTM EBITDA of an acquired business as if owned for the full period | Reasonable in principle; the acquired figure is itself adjusted, so adjustments compound |
| Run-rate cost savings and synergies | Savings not yet realised, expected within a stated lookforward period | Adds EBITDA that does not exist yet. Governed by a cap, a lookforward window, and whether an accountant must certify it. |
| Extraordinary, unusual, or non-recurring items | A residual category | The breadth of this phrase is the single most valuable drafting point in the definition |
| Business interruption and insurance recoveries | Expected proceeds not yet received | Converts a receivable into EBITDA |

#### The addback cap denominator, worked
Reported unadjusted EBITDA 32. Addbacks claimed 12. Net debt 205. The cap is 25 percent in both cases; only the denominator differs.

| Cap formulation | Algebra | Permitted addbacks | Adjusted EBITDA | Net leverage |
|---|---|---|---|---|
| 25 percent of pre-addback EBITDA | A <= 0.25 * 32 | 8.00 | 40.00 | 205 / 40.00 = 5.125x |
| 25 percent of adjusted (post-addback) EBITDA | A <= 0.25 * (32 + A), so 0.75A <= 8 | 10.67 | 42.67 | 205 / 42.67 = 4.805x |
| Difference | - | 2.67 | 2.67 | 0.320 turns of leverage |
| Uncapped | A = 12 | 12.00 | 44.00 | 205 / 44.00 = 4.659x |

#### Liability management transactions and what blocks them
Each of these was executed using capacity the credit agreement granted. The blockers listed are drafting responses now common in the market; none is universal and each has been tested in litigation.

| Pattern | Mechanism | What the lender loses | Structural protection that blocks it |
|---|---|---|---|
| J. Crew (trapdoor) | Transfer material IP to an unrestricted subsidiary using investment-basket capacity, then raise new secured debt at that subsidiary against the transferred collateral | Its lien on the most valuable asset, without any breach | A J. Crew blocker: an express prohibition on transferring material IP or specified assets to unrestricted subsidiaries, and a requirement that any such transfer be at fair value with lender consent |
| Chewy / PetSmart (dropdown to a non-guarantor) | Move a valuable subsidiary or asset to a restricted but non-guarantor subsidiary, or spin equity of it to the parent, so the guarantee and lien no longer reach it | Guarantee coverage of the asset, and therefore structural priority | Requiring all material subsidiaries to be guarantors, capping non-guarantor EBITDA and assets as a share of the group, and an anti-dropdown covenant on specified assets |
| Serta (uptier / non-pro-rata exchange) | A majority lender group amends the credit agreement by simple majority to permit new super-priority debt, then exchanges its own holdings into it, leaving the minority subordinated | Its pari passu ranking and its share of collateral, by a vote it lost | Making lien subordination and any non-pro-rata change to the payment waterfall a sacred right requiring all-lender or each-affected-lender consent, and removing the 'open market purchase' exception the transaction relied on |
| Envision / double dip | New money lends to a new entity that in turn lends to the original borrower with a guarantee, creating two claims on the same collateral pool for one dollar of new money | Dilution of its claim in the collateral pool | Restricting intercompany debt and guarantees, and prohibiting the group from guaranteeing debt of affiliates that is not itself subject to the credit agreement's liens |
| Drop-and-uptier combinations | A dropdown followed by new secured financing at the transferee, followed by an exchange for existing lenders who participate | Both the collateral and the pari passu ranking, sequentially | The two protections above, plus a covenant prohibiting the group from designating subsidiaries as unrestricted while any default exists or if it would use the builder basket |

## Fund and vehicle structures
Reviewed: 2026-08-27
Canonical: https://privatecredit.wiki/vehicles/ (JSON: https://privatecredit.wiki/vehicles.json)

The same loan produces different investor economics depending on the wrapper it sits in, because the wrapper sets the leverage limit, the fee base, the liquidity promise, and the valuation regime. Three of those are arithmetic and one is judgement, and the judgement one - valuation - determines the other three in a stressed period. The statutory limits below are real and citable; the fee and leverage levels used in the worked examples are illustrative inputs.

### Asset coverage ratio
The statutory leverage constraint on a BDC and on a registered closed-end fund. Total assets less liabilities other than senior securities, divided by senior securities representing indebtedness. A BDC may not issue senior securities unless the ratio is at least the applicable minimum immediately after, and may not pay distributions if the ratio is below it.

Formula: ACR = (Total assets - liabilities other than senior securities) / Senior securities = (D + E) / D. Implied maximum leverage: D <= E / (ACR_min - 1).

The cushion is the number that matters and it is not the ratio. A BDC reporting 166.7 percent asset coverage has 25 percent of NAV of room; the same vehicle at 155 percent has under 8 percent. Reported ACR is a level; the distance to the limit expressed in NAV is a risk measure.,The constraint binds on marks, not on cash. A vehicle whose portfolio is performing but whose Level 3 marks fall is in the same position as one whose loans have defaulted, which makes the valuation policy part of the leverage policy.,Breaching the ratio does not force a sale, but it prohibits issuing further senior securities and prohibits distributions. For a RIC with a 90 percent distribution requirement that is a genuine bind, because the distribution obligation and the prohibition can point in opposite directions.,The 2018 reduction from 200 to 150 percent doubled the permitted leverage of the entire BDC sector without changing any individual credit. Comparing a BDC's historical return series across that change is comparing two different vehicles.

### Business development company (BDC)
A closed-end investment vehicle that elects BDC status under s.54 of the Investment Company Act, invests predominantly in private US operating companies, and is subject to a reduced set of the Act's provisions - notably the asset coverage limit, affiliate transaction restrictions, and the 70 percent qualifying assets test. Most elect RIC tax status and therefore distribute substantially all of their taxable income.

The combination of a RIC distribution requirement and a portfolio with non-cash income is the structural tension in the wrapper. PIK and OID accretion are taxable income without cash, so the distribution obligation can exceed cash received - funded from borrowings, return of capital, or realisations.,A listed BDC trades at a price the manager does not control, and the discount or premium to NAV is itself a constraint: issuing shares below NAV is restricted under s.63, so a BDC trading at a discount cannot raise equity to de-lever. Leverage capacity and market price are linked.,Non-traded BDCs replace exchange liquidity with periodic tender offers, usually capped as a percentage of shares per quarter. The cap is the liquidity term, and it is the term that binds when everybody wants out at once.,The 70 percent test is measured at acquisition, so a portfolio can drift below it through appreciation of non-qualifying assets without a violation. It constrains what can be bought, not what can be held.

### Private drawdown fund
A closed-end limited partnership with a defined investment period and term, funded by capital calls against LP commitments, relying on the s.3(c)(1) or s.3(c)(7) exclusions from the Investment Company Act. Leverage, fees, and recycling are contractual rather than statutory.

Recycling is the most underweighted term in a credit LPA. A fund permitted to recycle repaid principal for the full investment period can invest well over its committed capital in aggregate, which raises TVPI on the same paid-in base and is the main reason two credit funds with the same loss experience report different multiples.,Because loans repay early, a credit drawdown fund's capital is in motion continuously. Fee on commitments during the investment period is therefore a materially different economic term from fee on invested capital, and the gap is largest exactly when deployment is slow.,A whole-fund carry with a clawback and a deal-by-deal carry with an escrow can be described identically in a marketing document and differ substantially in the amount of carry actually paid on a portfolio with dispersed outcomes.,The absence of a statutory leverage limit is the material difference from a BDC. The limit is in the LPA and in the facility's LTV covenant, and the second is the one that acts first.

### Interval fund
A registered closed-end fund that offers to repurchase a stated percentage of its outstanding shares at NAV at periodic intervals under Rule 23c-3, rather than offering daily redemption. It is continuously offered, available to retail investors without an accreditation test, and constrained by the s.18 leverage limits applicable to registered closed-end funds.

The 5 percent quarterly offer is a promise about the queue, not about the investor. An investor requesting full redemption in an oversubscribed quarter receives a pro rata slice, and at 5 percent per quarter a full exit takes years if everyone else is also leaving. That is the point of the structure and it is not always how it is sold.,The liquidity sleeve required to meet repurchases is a permanent drag: capital held in liquid assets is not earning the illiquidity premium the fund exists to harvest. The stated yield is therefore a blend of the credit portfolio and the sleeve.,Because subscriptions are struck at NAV and NAV is largely Level 3, the price at which new money enters and old money exits is set by the same valuation the adviser produces. That is true of any NAV-traded private vehicle, and the continuous offering makes it a recurring event rather than an annual one.,The 300 percent asset coverage limit means an interval fund cannot lever a credit portfolio anywhere near BDC levels. Comparing an interval fund's yield with a 2:1 levered BDC's is comparing two different amounts of risk on the same underlying assets.

### Separately managed account (SMA)
A single-investor mandate in which the investor owns the assets directly and the manager invests under a negotiated agreement. There is no fund, no other investors, no commingled leverage, and no shared liquidity queue.

The economics of an SMA versus a commingled fund are not primarily about fees. They are about who provides the leverage. An investor who can borrow more cheaply than the fund's facility should provide the leverage themselves and take the spread; one who cannot is better off in the levered vehicle even at a higher fee.,Allocation is the risk. An SMA relies on the manager allocating comparable assets to it alongside its funds, and the allocation policy - not the fee schedule - determines whether the mandate performs like the flagship.,Because the investor owns the assets, they also own the valuation problem, the audit, and the administration. That cost is real and is usually understated when comparing an SMA fee to a fund fee.

### ASC 820 fair value and Level 3 marks
The accounting framework requiring investments to be measured at the price that would be received in an orderly transaction between market participants at the measurement date, classified by the observability of the valuation inputs. Directly originated private loans are almost entirely Level 3, valued using unobservable inputs.

Formula: Yield method: Fair value = sum over t of CF_t / (1 + y)^t, where y is a market yield calibrated at origination and adjusted for changes in credit quality, base rates, and spreads. Enterprise value method: value the borrower, then apply the waterfall.

The yield method calibrates to origination and then moves the discount rate for observable changes. Its weakness is that it holds the contractual cash flows constant, so a loan can be marked near par on a rate adjustment while its probability of repaying par has changed materially. The enterprise value method catches that and the yield method does not.,The Level 3 disclosure that carries the most information is the quantitative table of significant unobservable inputs, because a discount rate range converts directly into a price range using the arithmetic above. A portfolio marked at 99 with a disclosed discount rate range far above its weighted average coupon is internally inconsistent.,Fair value is an exit price at the measurement date, not a hold-to-maturity value and not the manager's view of recoverable value. Those three numbers diverge most in exactly the conditions where the mark matters.,Rule 2a-5 places responsibility for fair value determination on the fund's board, permitting designation to the adviser subject to oversight, reporting, and specified process requirements. It changed the governance of the mark, not the mark itself.

### NAV per share and levered NAV sensitivity
Net assets divided by shares outstanding. In a levered vehicle it is the residual after debt, so a percentage change in asset value produces a larger percentage change in NAV, magnified by one plus the leverage ratio.

Formula: NAV per share = (Assets at fair value - Liabilities) / Shares. Percentage change in NAV = (1 + L) * percentage change in asset value, where L = D/E.

The two constraints in the worked example bind in the wrong order for an investor: the asset coverage limit is breached at a 5 percent asset decline while NAV per share has only fallen 15 percent. The vehicle loses its ability to issue senior securities and to distribute long before it loses its equity.,A five percent decline in a Level 3 portfolio is not a large event; it is a modest widening of the discount rate applied to loans that are all still paying. The multiplier turns an unremarkable mark adjustment into a structural problem.,Because both the numerator and the denominator of the fee calculation move, a fee on gross assets is nearly unaffected by a NAV decline while the investor's equity has fallen by three times as much. Fee-on-gross-assets and leverage compound against the investor in a drawdown.

### Fee base - gross assets, net assets, or commitments
The quantity on which the management fee is computed. Because the same percentage on gross assets, net assets, or commitments produces very different amounts, the base is a more important term than the rate.

Formula: Fee as a percentage of investor equity = rate * (Fee base / E). On gross assets, that is rate * (1 + L).

Normalising every fee to a percentage of investor equity is the only way to compare vehicles, and it is a one-line calculation that is almost never presented. A vehicle advertising a low headline rate on gross assets at high leverage can be the most expensive of a set.,A fee on gross assets pays the manager for using leverage, whose cost the investor bears. That is a genuine incentive misalignment, and it is the reason the shift to 150 percent asset coverage was an economic event for BDC managers and not only a risk event for BDC shareholders.,A fee on commitments during the investment period pays for undeployed capital, which is defensible as compensation for readiness and indefensible if deployment is slow for reasons within the manager's control. The step to invested capital at the end of the investment period is the corrective, and its date is negotiable.,Whether the fee base is struck before or after the deduction of accrued fees and expenses is a small technical point that compounds; ask which, and ask whether it is averaged over the period or taken at period end.

#### Vehicle comparison
Statutory references are to the Investment Company Act of 1940 unless stated.

| Attribute | BDC | Private drawdown fund | Interval fund | Separately managed account |
|---|---|---|---|---|
| Regulatory regime | Elects BDC status under Investment Company Act s.54; subject to ss.55-65 | Exempt under s.3(c)(1) or s.3(c)(7); adviser registered under the Advisers Act | Registered closed-end fund; repurchases under Rule 23c-3 | No fund-level registration; the account is the client's |
| Leverage limit | Asset coverage under s.61: 200 percent, reducible to 150 percent on board and shareholder approval per the Small Business Credit Availability Act of 2018 | Contractual only - the LPA and the facility documents | s.18 asset coverage: 300 percent for debt, 200 percent for preferred | Contractual only, set by the client |
| Maximum debt-to-equity implied | 1:1 at 200 percent; 2:1 at 150 percent | Whatever the LPA permits | 0.5:1 for debt | Client's choice |
| Investor liquidity | Listed BDC: daily on an exchange at a market price that may differ from NAV. Non-traded: periodic tender offers. | None; capital is locked for the fund term | Periodic repurchase offers at NAV, between 5 and 25 percent of shares outstanding at each interval | Negotiated; typically the most liquid of the four |
| Capital deployment | Permanently capitalised; raises when it can | Commitments drawn as needed | Continuously offered; NAV-based subscriptions | Funded by the client |
| Valuation regime | Fair value under ASC 820, board-determined, with the s.2(a)(41) fair value process and Rule 2a-5 requirements | ASC 820 fair value per the valuation policy; audited annually | ASC 820, with a daily or periodic NAV struck for subscriptions and repurchases | Per the client's policy and its own auditors |
| Fee base convention | Frequently gross assets, which includes borrowed money | Commitments during the investment period, then invested capital | Managed assets, commonly net of leverage or gross depending on the prospectus | Negotiated, often lower and often on net assets |
| Tax | Typically elects RIC status under IRC Subchapter M; must distribute at least 90 percent of investment company taxable income | Partnership, flow-through | RIC | Depends on the client |

#### Asset coverage arithmetic
Asset coverage is total assets less all liabilities other than senior securities, divided by the amount of senior securities representing indebtedness. E is net assets (equity), D is senior securities. ACR = (D + E) / D, so the implied maximum leverage is D <= E / (ACR_min - 1).

| Required ACR | Statutory source | Implied maximum D/E | At E = 100: max D | Total assets |
|---|---|---|---|---|
| 300 percent | Investment Company Act s.18(a)(1), registered closed-end funds including interval funds | 0.50x | 50 | 150 |
| 200 percent | Investment Company Act s.61(a), BDC default | 1.00x | 100 | 200 |
| 150 percent | s.61(a)(2), available to a BDC after board and shareholder approval under the Small Business Credit Availability Act of 2018 | 2.00x | 200 | 300 |
| Worked cushion at 150 percent | D = 150, E = 100, assets = 250, ACR = 166.7 percent | 1.50x | Breach when assets fall below 1.50 * 150 = 225 | Assets can fall 25, being 10.0 percent of assets or 25.0 percent of NAV |

#### ASC 820 fair value hierarchy applied to private credit
The hierarchy classifies by the observability of the inputs to the valuation, not by the type of asset and not by the confidence of the valuer.

| Level | Inputs | Where private credit assets fall |
|---|---|---|
| Level 1 | Quoted prices in active markets for identical assets | Almost nothing in a private credit portfolio. Listed equity received in a restructuring, occasionally. |
| Level 2 | Observable inputs other than Level 1 quotes - quoted prices for similar assets, observable indices, broker quotes in a functioning market | Broadly syndicated loans with dealer quotes; some larger club deals with observable comparables. |
| Level 3 | Unobservable inputs; the valuation reflects the reporting entity's own assumptions | The great majority of directly originated loans. Valued by discounted cash flow with a market yield input, or by an enterprise value waterfall. |
| Required disclosure for Level 3 | Reconciliation of opening to closing balances, transfers in and out, quantitative information about significant unobservable inputs, and a description of the valuation processes | The unobservable-input table - typically the discount rate range - is the most informative disclosure a private credit vehicle publishes. |

Reference information only. Not legal, tax, accounting, or investment advice. Private credit documents vary materially between transactions, lenders, and jurisdictions, and the definitions that determine every covenant calculation are negotiated rather than standard; the structures described here are common patterns, not the terms of any particular deal. Worked examples use illustrative inputs and are not market levels. Consult counsel.