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Lesson 2 of 8 · 5 min

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Courses · Private credit in eight lessons

Direct lending and unitranche

The biggest part of private credit is the plainest: a fund lends straight to a company, usually with first claim on its assets.

In this lesson

  • Terms: Direct lending, Unitranche, Senior and subordinated debt, Floating rate and spread
  • To work through: a worked example, a 27-second film, 3 check questions

Underlined terms show their definition when you rest on them or tap them.

Direct lending means a fund lends to a company itself, rather than buying a slice of a loan arranged by a bank and sold to many investors. The Fed note finds direct-lending loans are typically senior secured: they rank first for repayment and are backed by the company’s assets.

Many are a unitranche. Instead of a senior loan from one lender and a junior loan from another, the company signs one credit agreement, for one loan, at one blended rate. That is simpler and quicker for the borrower.

Behind the scenes, the lenders can split it. In a separate agreement among lenders, which the borrower is usually not party to, they divide the loan into a first-out piece and a last-out piece. If things go wrong, recoveries go to the first-out lenders first. In return, the last-out lenders take a bigger share of the interest. One loan to the borrower; two levels of risk for the lenders.

Pricing is higher than in the syndicated loan market. The Boston Fed found median BDC loan spreads of 4 to 5 percentage points over the benchmark rate (SOFR), against about 2 points for high-yield term loans at large banks, though they had narrowed by about a point over two years as competition grew.

Worked exampleRound, invented numbers

A $100 million unitranche at 10% a year. The lenders agree a $25 million first-out piece earning 7%; the last-out piece gets the rest of the interest.

Borrower pays: 10% × $100m$10 million a year
First-out: 7% × $25m$1.75 million
Last-out receives$8.25 million
Last-out yield: $8.25m ÷ $75m11%

The borrower sees one 10% loan. The first-out lenders take less income for first call on recoveries; the last-out lenders take more for standing behind them. Simple example. Terms vary.

Key takeaway: why it matters to investors

Direct lending is the core of most private credit funds, and its seniority is the main reason investors expect losses to be limited. Knowing that a unitranche can hide a first-out and a last-out piece tells an investor that two funds holding “the same loan” may hold very different risks.

Watch · 27 seconds

A company borrows from a fund, not a bank

Private credit is lending by investment firms rather than banks, directly to companies, with the loans held in funds rather than traded on markets.

Also: One loan doing the job of two: the unitranche

Check yourself

0 of 3 answered

Pick an answer to see why. Answer all 3 to finish the lesson.

  1. 1.Where do direct-lending loans typically rank, according to the Fed note?
  2. 2.From the borrower’s side, what is a unitranche?
  3. 3.A $200 million unitranche pays 9%. A $50 million first-out piece earns 6%. What does the last-out piece earn?

3 questions left to finish the lesson.

Sources

The facts in this lesson were checked against these public pages on November 11, 2026. Examples use round invented numbers. Simple examples; terms vary by fund.

  1. Private Credit: Characteristics and Risks (FEDS Notes, February 23, 2024; Fang Cai and Sharjil Haque), Board of Governors of the Federal Reserve System. Definition (debt-like, non-public instruments from non-bank lenders, mostly through funds and BDCs); nearly $1.7 trillion as of June 2023, direct lending about $800 billion or half; borrowers typically middle-market firms with $10 million to $1 billion of revenue; direct loans typically senior secured; about 15% hybrid loans, more junior; almost all floating rate; average maturity around five years, about 16% due in 2024; spreads above syndicated term loans; mean interest coverage about 2.0x vs 2.7x for leveraged loans (2023); default rates low vs syndicated loans through October 2023, not yet tested by a prolonged recession; post-default value around 33% vs 52% syndicated loans and 39% high-yield bonds (KBRA DLD); recent deals often without financial maintenance covenants (industry commentary); Form PF Q4 2021: pensions about 31% of private credit fund assets, other private funds 14%, insurers and individuals about 9% each; BDCs created by the Small Business Investment Incentive Act of 1980.
  2. Unitranche Lending Basics (August 20, 2020), Taft Stettinius & Hollister LLP. A unitranche combines senior and subordinate debt in one credit agreement with one blended rate; an agreement among lenders, negotiated without the borrower, splits it into first-out and last-out, with recoveries in a default going first-out first.
  3. Early Warning Signals in Private Credit? What BDC Portfolios Reveal about Emerging Risks (Current Policy Perspectives 26-6, August 5, 2026), Federal Reserve Bank of Boston. US private credit over $1 trillion; PIK means adding unpaid interest to principal; share of BDC loans with PIK rose from about 6% in early 2022 to about 10% by early 2026; median BDC spreads 4 to 5 percentage points over SOFR, narrowing about 1 point over two years; some BDCs are publicly offered but not listed and often have repurchase programmes.

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