Collateralized lending in private credit

Summary

Focus

Private credit, often associated with uncollateralised lending, has become an important source of corporate financing. With total assets under management now exceeding $1.5 trillion, the private credit market rivals the markets for leveraged loans or high-yield bonds in the United States. Within the private credit universe, direct lending has grown particularly fast. In direct lending, loans are directly negotiated between non-bank lenders and borrowers, and lenders typically hold the loan on their balance sheet until maturity. This paper studies the patterns and determinants of secured and unsecured direct lending in the US private credit market.

Contribution

Our study uses loan-level data to study secured and unsecured direct lending in the United States. We document the rise of secured lending, examine differences in loan terms between secured and unsecured direct loans, and assess the importance of real estate collateral and house prices for secured direct lending. We also shed light on the role of informational asymmetries in direct lending as well as on the evolving nexus between banks and non-bank financial intermediaries and the changing nature of the private credit market.

Findings

Secured lending grew substantially over the past decade and now surpasses unsecured direct lending. Secured loans tend to have smaller amounts, higher spreads and longer maturities compared with unsecured loans, even among borrowers in the same industry and region. Rising house prices significantly increase secured lending volumes, with no comparable effect on unsecured lending – suggesting the presence of a "collateral channel". Furthermore, there is a growing prevalence of so-called club deals (deals involving more than one lender) and revolvers (ie credit lines), often involving banks. This suggests a convergence of private credit and syndicated lending practices. These findings have important implications for understanding how private credit markets respond to monetary policy and how they may evolve in the future.

Abstract

Private credit, often associated with unsecured lending, has experienced remarkable growth in recent years. We use U.S. loan-level data to show that total outstanding amounts of secured direct loans now surpass unsecured direct loans. Loans are more likely to be secured when informational frictions between lenders and borrowers are more severe. Comparing loans to firms within the same metropolitan statistical area (MSA) and industry, we observe that secured loans have lower amounts, higher spreads, and longer maturity than unsecured loans. Club deals and revolvers are increasingly common in both market segments, likely driven by rising bank participation. Finally, employing an instrumental variable strategy and cross-sectional variation in house prices across MSAs, we provide suggestive evidence of a 'real estate collateral channel' in private credit. When house prices rise, secured direct lending increases by substantially more than its unsecured counterpart, especially in collateral-dependent industries. We conclude by discussing the implications for monetary policy transmission and the evolving bank-private credit nexus.

JEL classification: G20, G23, G28

Keywords: private credit, direct lending, collateral, house prices, asymmetric information