In this lesson
- Terms: Floating rate and spread, Original issue discount (OID), Direct lending
- To work through: a worked example, a 28-second film, 3 check questions
Underlined terms show their definition when you rest on them or tap them.
The Fed note finds almost all private credit loans are floating rate and spread. The rate is a base rate that moves, plus a fixed spread. In the US the base is now usually SOFR, the Secured Overnight Financing Rate, a broad measure of the cost of borrowing cash overnight against Treasury securities, which the New York Fed publishes every business day.
Floating rates cut both ways. When rates rise, lenders and the investors in their funds earn more, but borrowers pay more. The Fed note found private credit borrowers’ mean interest coverage (earnings over interest) was about 2.0 times in 2023, against about 2.7 times for borrowers in the syndicated loan market, so they had less room to absorb higher rates.
Lenders often also lend at a discount: they hand over a little less than the face value and are repaid in full. The difference is original issue discount, which the IRS describes as a form of interest: the excess of what is repaid at maturity over the issue price. It adds to the lender’s return on top of the coupon.
The Fed note puts the average maturity at around five years. Many loans are repaid early when the company is sold or refinanced, so what an investor earns depends on how long loans actually stay out as well as on the stated rate.
A $50 million five-year loan at SOFR + 5.5%, issued at 98 (an OID of 2 points). SOFR is 4%.
| Coupon: 4% + 5.5% | 9.5% |
|---|---|
| Interest a year: 9.5% × $50m | $4.75 million |
| Lender actually hands over: 98% × $50m | $49 million |
| Extra repaid at maturity (the OID) | $1 million |
| If SOFR falls to 3%, interest a year | $4.25 million |
The OID is worth about $200,000 a year over five years, roughly 0.4% a year on the $49 million lent, if the loan runs to maturity. Simple example: no fees, no amortisation.
Key takeaway: why it matters to investors
Floating rates are why private credit income rose with interest rates, and why borrowers came under strain at the same time. Seeing base rate, spread and OID separately lets an investor tell how much of a fund’s yield is the market and how much is the manager’s pricing.
Watch · 28 seconds
A loan's interest rate can change every quarterA floating rate resets at set intervals, often quarterly, to a short-term benchmark plus an agreed spread. Lenders' income and borrowers' interest bills move with rates.
Also: Lend $98. Get back $100., One ratio shows whether a borrower can keep up
Check yourself
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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.
- 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.
- Secured Overnight Financing Rate (SOFR), Federal Reserve Bank of New York. SOFR is a broad measure of the cost of borrowing cash overnight collateralised by Treasury securities, published each business day by the New York Fed.
- Publication 1212, Guide to Original Issue Discount (OID) Instruments (December 2025), Internal Revenue Service. OID is a form of interest: the excess of a debt instrument’s stated redemption price at maturity over its issue price.
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