Private Credit Transactions: How to Structure Direct Lending Deals

Direct lending provides senior secured loans to middle-market borrowers without bank syndication. Unitranche financing combines senior and subordinated debt into a single instrument. Mezzanine financing fills gaps between senior debt and equity. Asset-based lending uses receivables and inventory as primary collateral.

Recurring revenue facilities support software and subscription businesses. Net asset value facilities provide leverage to private equity funds against portfolio holdings. Each structure responds to different borrower size and exit timeline. Counsel handling acquisition finance work selects the structure matching deal economics.

The credit agreement establishes core economic and legal terms across all loan parties. Schedules and ancillary documents complete the documentation package. Conditions precedent must be satisfied before initial funding. Closing follows a coordinated sequence of document delivery and funds movement.

Pricing grids tie interest spreads to leverage levels and performance metrics. Original issue discount and upfront fees affect effective yield. Closing flow of funds memoranda direct each party's deliveries. Active business loan agreement drafting integrates each component into a coordinated package.

Financial covenants measure leverage, liquidity, and repayment capacity throughout the loan term. Breaches can trigger defaults even when payments remain current. Quarterly testing applies to most maintenance covenants. Definitions of consolidated adjusted earnings frequently produce significant litigation.

Incurrence covenants apply only when the borrower takes specific action. Equity cure provisions allow sponsors to remedy breaches through capital contributions. Modern agreements blend both covenant types based on credit quality. Coordinated creditors rights work documents each metric for compliance and dispute defense.

Security agreements grant liens on borrower assets. Uniform Commercial Code Article 9 governs creation and perfection of most security interests. Real property security follows state-specific mortgage procedures. Pledge agreements cover equity interests in subsidiaries.

Intercreditor agreements allocate priority and enforcement rights among lenders. First lien-second lien intercreditors typically bar second lien enforcement until senior claims are satisfied. Senior-mezzanine intercreditors address payment subordination and standstill provisions. Effective asset-based lending work coordinates security creation with intercreditor terms.

Most private credit fund managers register as investment advisers under the Investment Advisers Act of 1940. Form ADV registration documents fund operations, fees, and conflicts. Business development companies face additional Investment Company Act requirements. Regulation D rules apply to fund interest sales.

Loan participations may trigger securities law analysis under Reves v. Ernst & Young. Most syndicated and bilateral commercial loans qualify for non-security treatment under the Reves test. Securitization transactions involving private credit assets trigger additional reporting obligations. Strong banking and finance work coordinates fund and transaction compliance.

Amendments and waivers address technical or anticipated covenant issues before default occurs. Borrowers typically pay amendment fees and may face tightened terms. Liability management transactions have expanded rapidly in distressed markets. Many disputes now focus on dropdown structures and debt exchange strategies.

Out-of-court restructurings combine forbearance agreements and capital infusions. Pre-packaged Chapter 11 plans negotiated before filing reduce bankruptcy duration. Receivership and assignment for the benefit of creditors provide alternatives to formal bankruptcy. Coordinated corporate restructuring work plans pre-default options before distress reaches crisis level.

Events of default include payment defaults, covenant breaches, and cross-defaults to other debt. Cure periods apply to many defaults but not to payment defaults. Acceleration declares all amounts immediately due and payable. Required lender vote percentages vary by agreement and default type.

Standstill periods often apply between default declaration and enforcement actions. Forbearance agreements pause enforcement while parties negotiate restructuring terms. Material adverse change definitions have produced significant recent litigation. Active collection of debt work uses each procedural step strategically based on recovery prospects.

Chapter 11 reorganization provides a framework for restructuring while preserving operations. Automatic stay halts enforcement actions immediately upon filing. Adequate protection provisions protect secured lenders during the case. Plan confirmation requires fair and equitable treatment of impaired classes.

Section 363 sales allow rapid asset sales free of liens with court approval. Credit bidding allows secured lenders to bid up to the amount of their secured claim. Article 9 foreclosure provides out-of-court remedies for personal property collateral. Intercreditor disputes frequently arise when distressed assets lose value rapidly. Coordinated bankruptcy and restructuring defense supports lenders through every recovery scenario.