Direct lending: Does borrower size matter?
A closer look at risk and returns. The rest of the story…
- Defaults are generally viewed as a sign of an imminent loss, but not all defaults are the same.
- Financial covenant defaults protect capital by forcing the borrower back to the negotiating table before a payment is missed.
- Leverage matters. Larger borrowers generally use more debt in their capital structure, increasing the risk profile of the loan.
- Financial covenants, combined with lower capital structure leverage, have produced slightly higher returns and narrower dispersion for direct loans in the lower middle market versus the upper middle market.
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