On the money

When thinking about corporate lending, the first thing retail investors usually consider is the corporate bond, and for good reason – publicly traded, with relatively low minimum purchase amounts, the corporate bond, much like the sovereign bond, is a readily exchangable token of credibility – in America alone, over $11 trillion of corporate bonds are currently outstanding.

However, corporate bonds are far from the only option companies have to raise capital. Over $8 trillion of non-bond credit remains outstanding in America alone, and in an era when the low-interest debt from the early 2020s is just starting to be refinanced, combined with trillions of fresh debt issuances expected in the coming years, it’s important to know what’s out there – from Collateralised Loan Obligations to convertible equity options, companies have a myriad of tools at their disposal to secure additional cashflow, at various rates. In my previous article on Fiserv, when discussing debt burdens I focused exclusively on corporate bonds (appropriate in that case as the vast majority of Fiserv’s debt was issued via those instruments). However, a proper understanding of the spreads involved in corporate debt issuances requires a slightly deeper dive.

So, what classes of corporate debt are available – and how should investors react to their various levels? Ultimately, the use of different debt issuers can depend on a few different factors:

• The type of organisation issuing the debt
• The type of organisation(s) funding the debt
• The end use of the debt
• What, if anything, can be used to back the debt, be it assets, shares, or promises of future cashflows.

In this article, we’ll walk through several types of debt issuance – both narrow classes of debt, and the broader debt issuance vehicles that they feed into. We’ll analyse their use, their significance, and lessons that can be derived by the retail investor.

A note to readers that may be new to the finance world – I’ll be using two terms through this article that you may not be familiar with:

– SOFR – the Secured Overnight Financing Rate. This is a rate, determined daily by the Federal Reserve, based off of the interest rates of overnight treasuries. Higher US overnight treasury yields lead to a higher SOFR
– Basis points, or BP – basis points. 1 basis point = 1 hundredth of a percent. 100 basis points = 1 percent

Syndicated Loans

• Used by: alternative investment groups, blue chip companies with ambitious plans
• Used for: Typically large (multi-billion) dollar transactions, namely leveraged buyouts
• Issued by: A group (‘syndicate’) of reputable lenders
• Collateral: Two main options here – either the assets the borrower already owns, or the assets that the borrower is seeking to buy
• Typical interest rate: you can expect ~3% above SOFR as a ball-park estimate ) for ‘blue chip’ acquisitions – at time of writing, with SOFR at 3.95%, that would lead to an implied estimated syndicated loan interest rate of about 7% – but there can be a massive range of rates depending on the details of each transactions

The Syndicated Loan is a cornerstone of the Mergers and Acquisitions industry. It’s typically used by entities looking to raise a large chunk of capital for a single purpose – acquiring a company. The scale of these loans are so large that individual banks often feel uncomfortable about the scale of exposure they may have to any single deal – therefore, they choose to partner with multiple other financial institutions so that they can access exciting deals without putting all their eggs in one basket. Important – ‘syndicated loans’ are an umbrella term in the finance world – a single syndicated loan agreement can comprise multiple different debt classes depending on risk appetite of various investors – for the purpose of explaining it, we’ll stick to distinguishing between ‘secured’ debt (debt which entitles the creditor to something in the event of default), and ‘unsecured’ debt (which entitles the creditors to nothing unless all secured debt has been paid out, which is extremely unlikely).

If an entity starts racking up large amounts of syndicated loans, this typically means that they are entering a period of rapid mergers, and are unable or unwilling to trust bond markets to fund them – as in the case of Elon Musk buying Twitter in 2022, for which nearly a third of the purchase amount was obtained through a $13 billion syndicated loan, with the funds coming from Morgan Stanley, the Bank of America, Barclays, BNP Paribas and other companies. Debt servicing costs are the sole way to determine how risky issuing banks believed the syndicated loan to be – in the case of the Twitter acquisition, about half of the debt (which was secured against Twitter stock), had interest charged at 4.75% above SOFR, whilst $3 billion of ‘secured bridge’ debt , and a further $3 billion had an interest rate at a whopping 10% above SOFR – or about 14% today. With provisions in the syndicated loan to gradually ratchet up interest rates of some tranches of debt over time, it is safe to say that this syndicated loan falls squarely in the sub-investment grade category of debt.

So, what can investors look out for? If a publicly traded company takes out a significant syndicated loan (almost certainly for an acquisition), here’s what to notice, in order of obviousness:

• Consider the initial interest rate of the debt’s tranches – high
• Dig Deeper – the initial interest rate of the debt may be appealing, but provisions buried in ‘bridge loans’ in particular may include equity dilutions, gradual ratcheting up of debt costs relative as the loan approaches maturity that can strain a business’ long-term cashflow.
• What is the loan secured against? This may be a minor point, but it’s a helpful reference point for a business’ future. If tranches of a syndicated loan are secured against the assets of the company that is being bought, then the buyers of a company intend to keep it under ownership for quite some time. Conversely, if the loan is secured against the assets of the buyer, there is a chance that the company being bought could (but by no means will) be sold for parts, implying a shorter repayment period of the loan and smaller overall debt servicing costs.

Private Credit and Direct Lending

• Used by: private equity sponsors, mid-market companies, some larger corporates
• Used for: leveraged buyouts, add-on acquisitions, recapitalisations, growth capital
• Funded by: specialist private credit funds, BDCs, insurance mandates (not banks)
• Typical size: tens to hundreds of millions; now also multi-billion deals (e.g. Coupa)
• Typical yield: roughly SOFR + 500-700 bps (high single-digit to low-teens all-in)
• Security: usually senior secured (first-lien), sometimes as a unitranche structure

Private credit, or direct lending, is lending that happens outside both the banking system and the public bond/loan markets. Instead of going to a bank syndicate or issuing a bond, a company and its private equity owner sit down with a handful of specialist credit funds and negotiate a bespoke loan.

These loans are typically floating-rate, secured on the business, and held to maturity by the same few funds. There is little or no active secondary trading; the lender is effectively “married” to the borrower until the loan is refinanced or repaid.

The market has grown rapidly. Global private debt assets under management have more than tripled since 2013 and now exceed $1.5 trillion, with direct lending the largest strategy. Loans commonly price at SOFR plus 5-7 percentage points, putting total yields into the high single digits or low teens.

A good illustration is Thoma Bravo’s acquisition of Coupa Software. About $2.6 billion of the financing came from a club of 19 private lenders led by Sixth Street, rather than from a bank-led syndicated loan. Reports suggest the original margin was around SOFR + 750 bps, later repriced tighter to about SOFR + 550 bps as the credit bedded in.

Companies like private credit because deals can be arranged quickly, structures and covenants are highly flexible, and these lenders are often willing to support higher leverage than banks. The trade-off is cost and dependence on a small group of creditors.

Investor takeaways:

• Heavy use of private credit signals a business is willing to pay up for speed, leverage or flexibility; it is rarely the cheapest option.
• A company reliant on one or two private-credit clubs has concentrated funding risk: if those funds pull back, refinancing may be difficult.
• The headline margin you see is only a floor; true cost can be higher once fees, PIK options and step-ups are considered.

Collateralised Loan Obligations (CLOs)

• Used by: CLO managers and structured-credit investors; indirectly by loan-funded corporates
• Used for: packaging portfolios of leveraged loans into tranches with different risks/returns
• Funded by: institutional investors buying AAA down to BB notes, plus equity investors
• Typical size: a few hundred million dollars per CLO; global market around $1.4 trillion
• Typical yields: AAA roughly SOFR + 1.5%-2%; BB often SOFR + 9-10%; equity targets low- to mid-teens Internal Rate of Return.
• Security: CLO notes are secured on a diversified pool of senior secured leveraged loans

A CLO is essentially a box full of corporate loans that has been sliced into layers. A manager buys a large pool of senior secured leveraged loans. Then, they finance that portfolio by issuing notes that rank from AAA at the top down to equity at the bottom. Interest and principal from the loans are collected into the box and paid out in order: senior notes first, equity last.

CLOs matter because they are now the largest buyers of leveraged loans. Recent research estimates CLOs purchased about 61% of all new leveraged loans in 2024 and own roughly 64% of the outstanding loan market, with total CLO balances around $1.4 trillion by early 2025. If your company has a big term loan B, a large slice of that debt probably sits inside CLOs.

CLO debt offers unusually high spreads for a given rating. Over the decade to end-2024, AAA CLO tranches paid on average about 130 bps over risk-free rates, versus about 78 bps for a typical investment-grade corporate bond index. Recent deals like Palmer Square CLO 2024-2 and Empower CLO 2024-2 have seen AAA notes priced around SOFR + 1.5-2.0 percentage points, while BB tranches came at SOFR + 9-10 points, i.e. low-teens yields.

Historically, the top of the CLO capital stack has been extremely robust: no AAA CLO note has ever defaulted. Lower tranches can be volatile in price and would be hit only in a severe loan default cycle. Equity is highly leveraged: it does very well if loan spreads stay healthy and defaults remain low, but can be wiped out in a deep downturn. All tranches are less liquid than plain bonds and can gap wider in stressed markets.

Investor takeaways:

• Companies funded by leveraged loans are indirectly tied to the health of the CLO market; a slowdown in CLO issuance can push up spreads or choke off refinancing.
• Loan and CLO spreads are useful lead indicators for future interest costs on term-loan-funded businesses.
• For equity, the practical question is not “are CLOs safe?” but “will there be strong enough CLO demand to refinance our loans on tolerable terms when they mature?”

Commercial Paper

• Used by: large investment-grade corporates and financial institutions
• Used for: short-term funding of working capital, inventory, payroll, and general corporate purposes
• Funded by: money-market funds, banks, cash-rich corporates and other cash managers
• Typical size: individual programmes from hundreds of millions to tens of billions; US market about $1.3-1.4 trillion
• Typical yield: closely tracks money-market rates; around 4% for top-tier 90-day CP in 2025
• Security: unsecured; backed by issuer credit and usually by committed back-up bank lines

Commercial paper (CP) is ultra-short-term corporate IOU paper. Maturities run from overnight to at most 270 days, with most issuance in the 30-90 day range. Only high-quality names can tap this market at scale, because investors need to be confident they will be repaid in weeks, not years.

Apple is a typical example. Its filings show $6.0 billion of CP outstanding at the end of December 2023, rising to $10.0 billion by September 2024 and then dropping back to $2.0 billion by late December 2024. Apple uses this programme for general corporate purposes, including dividends and share buybacks, treating CP as flexible, cheap working capital.

On a system level the US CP market is roughly $1.3-1.4 trillion, a crucial part of global dollar funding. Yields are usually just above Treasury-bill rates and move with central bank policy.

For top-tier issuers, outright default risk is tiny. The main vulnerability is roll-over risk: CP constantly matures and must be refinanced. In crises such as 2008 or March 2020, buyers briefly step back and the market can freeze; firms then need cash or committed bank facilities to pay back maturing paper immediately.

Investor takeaways:

• Heavy CP usage is perfectly normal for an AA-rated giant with large cash and undrawn bank lines; it is a red flag for weaker names without obvious back-up.
• Check whether CP is fully covered by committed facilities; if not, a market freeze could force emergency measures.
• Be wary if CP is funding long-term assets rather than short-term swings in working capital – that signals a maturity mismatch.

This is already a substantial tour through some of the major pillars of corporate borrowing, and there’s plenty more ground to cover. To keep things digestible, I’ll draw a line under it for now. In my next post on Friday, I’ll pick up with Asset-Backed Securities, preferred shares, mezzanine debt and unitranche facilities – a set of instruments that sit further along the risk spectrum and reveal even more about how companies structure their capital.

See you then!