Pricing and yield mechanics

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.

Field	Value
Formula	r = max(B, F) + CSA + S; Interest for a period = P * r * days / 360
Worked	B = 0.30 percent, F = 1.00 percent, CSA = 0.10 percent, S = 5.00 percent: r = 1.00 + 0.10 + 5.00 = 6.10 percent. The floor contributed max(1.00 - 0.30, 0) = 70 bps.
Floor out of the money	B = 4.00 percent, same terms: r = 4.00 + 0.10 + 5.00 = 9.10 percent and the floor contributes nothing
Day count	ACT/360 on a 365-day year multiplies the quoted rate by 365/360. A 9.00 percent ACT/360 coupon is a 9.125 percent effective annual rate before compounding.

• 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.

Source: ARRC (Alternative Reference Rates Committee) conventions for SOFR-based syndicated loans.

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.

Field	Value
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.
Worked, exact	2 points of OID, r = 9.00 percent, 6-year bullet: IRR on (-98, +9, +9, +9, +9, +9, +109) = 9.45 percent
Worked, crude	9.00 + 2/6 = 9.33 percent - understates the exact figure by 12 bps because the discount is recovered at maturity rather than ratably
Same OID, shorter life	Repaid at end of year 3: IRR on (-98, +9, +9, +109) = 9.80 percent. Two points of OID is worth 35 bps a year over 6 years and 80 bps a year over 3.

• 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.

Source: Internal Revenue Code sections 1271-1275 govern the tax treatment of OID, which differs from the yield computation.

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.

Field	Value
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.
Worked	Price 98, 1 point of retained upfront fee so net outlay 97, r = 9.00 percent, 3-year take-out at par: IRR on (-97, +9, +9, +109) = 10.21 percent. All-in spread over a 4.00 percent base = 621 bps.
Without the retained fee	IRR on (-98, +9, +9, +109) = 9.80 percent, an all-in spread of 580 bps. One point of retained fee is worth 41 bps on a 3-year assumption.

• 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.

Field	Value
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
Worked, 6-year YTM	(-98, +9, +9, +9, +9, +9, +109) = 9.45 percent
Worked, 3-year take-out at par	(-98, +9, +9, +109) = 9.80 percent, +35 bps
Worked, 2-year take-out at 101	(-98, +9, +110) = 10.64 percent, +119 bps
Direction	Shortening the take-out raises the yield whenever the loan is priced below par or carries a call premium, and lowers it whenever it is priced above par

• 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.

Field	Value
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
Typical structural forms	NC-1 then 101 then par; or 102 / 101 / par; or make-whole to year 2 then 101; the shape is negotiated, not standard
Soft call trigger	Repricing or refinancing that reduces the effective yield on the loan, usually with a 6 to 12 month sunset and a carve-out for a change of control or a transformative acquisition
Make-whole formula	Premium = max(0, PV at a discount rate of remaining scheduled interest and principal to the make-whole date, less the principal repaid)
Worked, premium in yield terms	Repayment at end of year 2 at 101 on a loan bought at 98: IRR = 10.64 percent. At par instead of 101: IRR on (-98, +9, +109) = 10.15 percent. The one point of call premium is worth 48 bps.

• 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.

Field	Value
Formula	Ticking fee = rate * Commitment * days / 360, accruing from the start date; often stepping up in tranches over time
Worked	50 bps on a 100,000,000 commitment for the 90 days from day 31 to day 120: 100,000,000 * 0.0050 * 90/360 = 125,000
Stepped structure	50 bps for days 31-90, then 100 bps thereafter: 100,000,000 * (0.0050 * 60/360 + 0.0100 * 30/360) = 83,333 + 83,333 = 166,667

• 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.

Field	Value
Formula	Unused fee = rate * (Commitment - Drawn - LC exposure) * days / 360
Worked	37.5 bps on a 100,000,000 revolver with 50,000,000 drawn: 50,000,000 * 0.00375 = 187,500 per annum on the undrawn half
Effective cost of the drawn amount	If the borrower draws 50 at a 5.00 percent margin and pays 187,500 on the undrawn 50, the effective margin on drawn funds is 5.00 + (187,500/50,000,000) = 5.375 percent

• 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.

Field	Value
Formula	Lender net outlay = P * (1 - OID/100) - Retained fees; yield is computed on the net outlay
Worked	1 point retained on par 100 issued at 98 gives a net outlay of 97. On a 3-year take-out at par with a 9.00 percent coupon: IRR on (-97, +9, +9, +109) = 10.21 percent versus 9.80 percent without it, a 41 bps uplift.
Borrower view	The borrower pays 2 points of OID plus 1 point of fee, so receives 97 of the 100 it owes, an effective 3 points of issue cost regardless of who keeps the fee

• 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.

Field	Value
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.
Worked, full recovery	100 at 12.00 percent for 3 years. Cash-pay: (-100, +12, +12, +112), IRR 12.00 percent. PIK: (-100, 0, 0, +140.49), IRR = 140.49^(1/3) / 100^(1/3) - 1 = 12.00 percent. Identical.
Worked, 80 percent recovery at maturity	Cash-pay: (-100, +12, +12, +89.60), IRR = 4.89 percent. PIK: (-100, 0, 0, +112.39), IRR = 3.97 percent. The same 20 percent haircut costs the PIK holder 92 bps more, and the cash-pay holder has already banked 24 of cash that cannot be clawed back.
Duration	PIK has the longer effective duration at the same stated maturity, because no principal-equivalent cash is returned before the end

• 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.

Field	Value
Formula	Required adjustment = max(0, Yield_new - Yield_existing - Threshold), applied to the existing margin
Worked	Existing all-in yield 9.00 percent, MFN threshold 50 bps. New incremental at 9.75 percent: adjustment = 9.75 - 9.00 - 0.50 = 0.25, so the existing margin rises 25 bps. New incremental at 9.40 percent: adjustment = max(0, -0.10) = 0, no change.
Yield definition	Whether OID and upfront fees count, and at what amortisation period, determines whether the MFN can be avoided; a 4-year OID amortisation convention converts 2 points into 50 bps

• 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.

Source: LSTA model credit agreement provisions address MFN mechanics and the components of effective yield.

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.

Field	Value
Formula	Fee = points * holdings of consenting lenders; contribution to yield = fee / net outlay, annualised over the remaining assumed life
Worked	50 bps consent fee on a 20,000,000 position = 100,000. Over a remaining 2-year assumed life on a 19,600,000 net outlay that is approximately 26 bps a year.

• 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.