medium · Private Credit loan-structures-instruments
An investor is comparing two senior secured loans. Loan A is 'Sponsor-backed' at SOFR + 550 bps. Loan B is a 'Direct Lending' deal to an entrepreneur-owned firm at SOFR + 750 bps. Both have identical leverage.
What is the most plausible reason for the 200 bps 'Non-Sponsor Premium'?
- The absence of a sophisticated PE sponsor reduces the likelihood of an 'equity cure' during a covenant breach.
- Sponsor-backed loans are typically 'Second Lien', whereas direct deals are always priced 'First Lien'.
- Direct lending deals to entrepreneurs carry lower documentation standards, justifying a higher yield for legal risk.
- Entrepreneur-owned firms are required by IRS regulations to pay structurally higher rates on all externally sourced debt.
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