Credit · C9 · 8 min
Leveraged loans and private credit
Work out the rate on a floating loan, what buying it below 100 adds, and why borrowers can cut that rate when markets are strong.
In the news: “The borrower cut its loan rate by 0.5 points”: why lenders accept a pay cut, and where private credit fits in.
The essentials
- Leveraged loans
- Loans to riskier companies, often ones owned by private-equity firms. They are usually secured and first in line in a default, and many are bought by , funds that buy loans in bulk.
- Base rate plus margin
- Loan rates float: a fixed margin over a base rate, which is for dollars, for sterling and EURIBOR for euros. A sets a minimum base: SOFR + 3.5% with a 0.5% floor pays at least 4%.
- Discount margin
- Loans often trade below 100, and buyers spread the discount over an assumed life, often three years. At 98.5 with a 350 margin, that adds 1.5 ÷ 3 = 0.5% a year: a of about 400bp.
- Repricing
- Loans can be repaid at 100 almost any time, so when one trades above 100 the borrower asks lenders to accept a lower margin. Most agree rather than be repaid, which is why loan prices rarely climb far above 100.
- Private credit
- Funds and insurers lending directly to companies and holding the loans. Lenders get a higher margin and tighter terms for having no market to sell into; with no market price, losses can show up slowly.
Loan rate and discount margin
rate = max(base, floor) + margin; DM ≈ margin + (100 − price) ÷ life
- base
- the base rate: term SOFR, SONIA or EURIBOR
- floor
- the lowest base rate the loan will use
- margin
- the fixed extra rate over the base
- life
- the assumed life in years, often 3
- DM
- discount margin
How it works
1. A loan that floats
A tracker mortgage’s rate goes up and down with . Most company loans work the same way: a base rate plus a fixed margin. The base is for dollar loans, for sterling and EURIBOR for euros; , the old base rate, ended in 2024.
2. Leveraged loans
Loans to riskier companies, often ones bought by private-equity firms, are . They are usually secured on the company’s assets and first in line if it fails. Many are sold on to , funds that buy loans in bulk.
3. Floors
A sets a minimum for the base rate. A loan at SOFR + 3.5% with a 0.5% floor pays at least 4%, even if SOFR falls to zero.
4. Buying below 100
Loans are often sold below 100, say at 98.5, so buyers earn the discount on top of the margin. Lenders expect to be repaid early, so they spread the gain over an assumed life, often three years: 1.5 points ÷ 3 = 0.5% a year. With a margin of 350bp (3.5%), the is 350 + 50 = 400bp.
5. Repricings
Loans can be repaid at 100 almost any time. So when a loan trades above 100, the borrower asks lenders to accept a lower margin: a . Lenders who refuse are simply repaid and would have to lend again at today’s lower margins, so most accept. That is why loan prices rarely climb far above 100.
6. Loans or bonds
Loans float, are secured and can be repaid early. High-yield bonds usually pay a fixed rate, can’t be repaid for the first few years, and settle in a day or two, while loan trades can take weeks to settle.
7. Private credit
Some lenders skip the market: funds and insurers lend directly to companies and keep the loans. That is . Borrowers get speed and privacy; lenders get a higher margin and tighter terms. But there is no market price, so losses can show up slowly.
Worked example
A dollar loan pays term SOFR + 350bp with a 0.50% floor and trades at 98.50. Say term SOFR is 4.00%, and assume a three-year life.
- Rate: SOFR is above the floor, so 4.00% + 3.50% = 7.50%.
- Discount: 100 − 98.50 = 1.5 points, or 0.5 points (50bp) a year over three years.
- Discount margin: 350 + 50 = 400bp.
- If SOFR fell to 0.25%, the floor would apply: 0.50% + 3.50% = 4.00%.
A 7.50% rate and about 400bp of discount margin; the floor matters only if SOFR falls below 0.50%.
Check yourself
7 quick questions on the explanation above.
Practice
New numbers every set. Misses and guesses go into your review deck.
In the interview
Answer out loud in under a minute, then compare.
Why are leveraged loans popular when rates rise?
How does private credit differ from syndicated loans?
What’s a repricing, and why do lenders accept it?
Remember
DM ≈ margin + (100 − price) ÷ expected life
Loans float, sit first in line and can be repaid at 100, so lenders earn the margin but rarely see price gains.
Sources
Definitions and maths are standard textbook material; dated facts link to the sources above. Worked numbers are illustrative.