I have been self-educating on Private Credit and one thing that has stood out to me exploring various forums/doing research is the amortization profiles that investment funds can provide for senior debt. I have seen quoted amortization at 1-2% annually. How are investment funds comfortable with this? Second, I am having trouble connecting the dots here between that amort and the average term size. If the average term size is 5-7 years, how do we get from 1-2% amort to a fully amortized loan in that timeframe. I am obviously missing something, so please enlighten me!
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There are some types of loans -- mortgages, construction, project finance, consumer finance -- that amortize over the life of the loan as you've described. However, the majority of loans issued by private credit firms instead tend to have a couple of points of annual amortization and then the remaining principal is due at maturity. Often there will also be an "excess cash flow sweep" where levered free cash flow from the business is "swept" to pay down the principal of the loan.
From a practical standpoint, you've hit on the right idea -- a loan fully amortizing over 5 years would require I borrow $1,000 and pay down $200 next year. This typically isn't possible for most borrowers and reduces the ability of the borrower to utilize the funds productively.
Understood. Figured there would be a cash sweep involved but couldn’t see past that low amort. Thanks!
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