Corporate lending | Russell Investments

CORPORATE LENDING

What is corporate lending?

Corporate lending is the process of providing loans or credit to businesses or corporations to finance their operations, projects, or growth.

About corporate lending

Corporate lending: The origination of loans to companies secured by their cash flow and equity value – is a key segment within the broader private credit market and is divided into two main categories: direct lending and special situations.

Portfolio role: In a diversified portfolio, direct lending provides a stable core exposure with attractive risk-adjusted returns. The distinction between sponsored and non-sponsored loans helps balance yield potential with risk, aligning investments with the investor's risk tolerance and return expectations.

Direct lending

Direct lending involves providing loans, typically senior or first in the capital structure, directly to businesses. The market can be further divided into sponsor-backed loans, where private equity firms are the owner, and non-sponsored loans, which are usually family-owned or privately-held companies with limited access to capital markets.

Internal rate of return (IRR) is the discount rate that makes the net present value of all cash flows (both positive and negative) equal to zero for a specific project or investment is typically used for calculating performance of private equity funds.

Internal Rate of Return (IRR) can overestimate the potential returns of a project or future investment by making the Net Present Value (NPV) equal to zero.

Special situations

Special situations in lending refers to financing scenarios that fall outside of standard, corporate lending practices and often involve higher risk, higher returns, and customized terms.

For instance, these include loans to companies needing more leverage or having unique financial needs, such as growth opportunities requiring upfront capital with cash flows not realized until later.

These strategies are often flexible and will buy liquid loans on the secondary market when such opportunities present better return potential than originating new debt with a similar risk profile.

Special situations often involve payment-in-kind (PIK) deals, where interest payments are added to the loan balance at a future date. This category offers potentially higher returns but requires strong risk management and a strong ability to assess the future sale price of the business.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.

The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.

Private Credit is considered a high-risk investment. Investing in a private credit involves considerable risks, you should make sure you understand the risks before investing.

Private Credit debt instruments are subject to the risk that a borrower will default on the payment of principal, interest or other amounts owed. The financial strength and solvency of the issuer, including the lack or inadequacy of any collateral securing repayment affect credit risk.

In general, rising interest rates in the market will negatively affect the price of the debt instruments. Sensitivity to a change in interest rates is more pronounced and less predictable in instruments with uncertain payment (or prepayment) schedules.

Investments in private credit should be regarded as illiquid. Private credit is not listed on an exchange, traded in the secondary market and are generally not transferable.

Pay-in-Kind (PIK) bonds also carry additional risk as holders of these types of securities realize no cash until the cash payment date unless a portion of such securities is sold and, if the issuer defaults, the Fund may obtain no return at all on its investment.