Summary
- A private loan’s quoted return must be tested against currency mismatch, leverage, covenants, valuation and recovery rights.
- Illiquidity matters before default because investors may be unable to sell or verify a changing value when conditions deteriorate.
Private credit is lending negotiated outside public bond markets. That structure can give a lender detailed information, tailored covenants and direct contact with a borrower. It can also leave the investor dependent on periodic reports, manager valuation and a small set of possible buyers.
Digital infrastructure makes the currency question concrete. Equipment, cloud capacity, leases or upstream services may be priced in dollars while customers pay in local currency. A depreciation can weaken debt coverage even when demand and operating performance remain stable. The coupon alone does not show whether the borrower can absorb that movement.
The underwriting file should therefore identify revenue and cost currencies, hedging, leverage, collateral, payment priority and the exact events that permit intervention. Covenants have value only if they are measured frequently and if the lender has practical rights when they are breached. A valuation supplied by the same manager that earns fees also deserves an independent check.
Liquidity is not an issue to consider only at maturity. If the loan cannot be sold, an investor may have to hold it through a restructuring. Recovery depends on enforceable documents, local insolvency rules and whether the financed assets can keep producing cash under a new owner.
The next useful evidence is a stress test showing debt service after currency depreciation and lower revenue, plus the recovery assumptions behind the reported value. Until then, a high yield is an offer—not proof of adequate compensation.
