Leveraged Loans

A company that has already borrowed heavily from its banks cannot easily borrow again on the same terms. The banks hold the security and the first claim on cash; there is nothing left to offer a second lender at a bank rate.

A leveraged loan is what gets lent anyway. It goes to a borrower with a lot of senior debt already outstanding, sits behind that debt on security and on repayment, and is priced for the difference. In India it is the bread and butter of private credit AIFs, because most Indian corporates already have banks as senior lenders — so a private lender arriving late has no choice but to be subordinate.

The structural problem shapes the instrument. With the banks holding first charge, a private credit fund has to build its own protection: subordinate debt, or structured financing with ring-fenced asset collateral and credit enhancement — a share pledge, an escrow account, a debt service reserve. Sometimes a special purpose vehicle is inserted, as an LLP or a company, through which the AIF structures the deal; sometimes a promoter entity acts as the SPV.

What leveraged loans are actually used for, per the workbook: stressed asset resolutions, securitised debt issuances in the private credit market, promoter financing through structured credit, often against promoter shares as collateral, and LBO financing for listed companies with a good track record, plus prime-rated structured financing using structured collateral and asset covers.

The return has two parts. The coupon — term sheets in private credit are flexible, with a minimum interest rate payable quarterly in many cases, and principal repayment structured against cash flow or future financings. And the equity kicker — warrants, preference shares, or equity at a pre-determined valuation — that most subordinated structures carry.

The market context the workbook gives: global private credit was estimated at USD 2 trillion in 2024, the Indian private credit market at USD 25 billion, with domestic players making up roughly 50% of Indian private credit providers per EY. In the UK and USA, private credit has shown returns 200 to 600 basis points above conventional debt. Indian yields ran high until 2023 when lenders were few, and moderated in 2024 as more AIF debt funds entered — but remain above bank debt, because the credit risk is higher.

Spread over senior debt = Leveraged loan coupon − Senior debt rate

Total leverage          = (Senior debt + Subordinate debt) ÷ EBITDA

Concentration check     = Loan amount ÷ Investible funds of the scheme   ≤ 25%

A capital goods manufacturer has Rs 900 crore of senior bank term debt against Rs 1,400 crore of fixed assets, and needs Rs 250 crore to fund a restructuring the banks will not lend against.

A Category II AIF running a private credit strategy has a corpus of Rs 1,200 crore and investible funds of Rs 1,120 crore after set-up costs. It lends the Rs 250 crore as a leveraged, subordinate loan:

Interest: Rs 250 crore × 15.5% = Rs 38.75 crore a year.

Leverage after the loan: total debt Rs 1,150 crore against EBITDA of Rs 300 crore = 3.8×. The senior lenders alone were at 3.0×. The AIF has taken the company from three turns to nearly four, and is paid 625 basis points for standing in the extra turn.

Concentration check: Rs 250 crore ÷ Rs 1,120 crore of investible funds = 22.3%, inside the 25% cap with Rs 30 crore of headroom. Measured lazily against the Rs 1,200 crore corpus it would have looked like 20.8% — comfortable, and the wrong denominator.

Chapter 3 (Alternative Investment Funds in India and its Suitability), section 3.2.2, introduces leveraged loans as the subordinate debt some private debt funds finance. Chapter 9 (Investment Strategies), under Performing Credit / Credit Opportunities, repeats the passage almost verbatim in the context of M&A financing and adds the market-size figures.

Expect questions on where private credit ranks relative to bank debt, why an Indian AIF is usually a subordinate lender, what credit enhancement is offered in its place, and the equity kicker that tops up the return.

• A leveraged loan is leverage in the borrower, not in the fund. A Category II AIF that lends one has taken no fund-level leverage and has breached nothing.
• A leveraged loan is not a leveraged buyout. The loan is an instrument; the LBO is one of several transactions it may fund.
• Sub-ordinate means ranking behind, not unsecured. These loans routinely carry a second charge, a share pledge, an escrow and a debt service reserve.
• The workbook repeats the same paragraph in Chapter 3 and Chapter 9, and in Chapter 9 flags that "special situation financings" there means the ordinary English sense, not the SEBI sub-category Special Situation Fund. Two different things, one phrase.
• The 25% concentration cap is measured on investible funds of the scheme, not on corpus and not on commitments.
• Venture debt is a different animal. It is unsecured lending to asset-light start-ups at above-market rates, with an equity kicker usually up to 10% of the loan amount, relying on the diligence and growth trajectory the equity investors have already underwritten.
• The 200-600 basis point premium the workbook quotes is a UK and US observation. Indian private credit yields moderated in 2024 as more lenders entered.