09/20/2022

Q&A: The debt financing market

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    The debt financing market has grown in recent years. Do you expect this trend to continue? If so, why?

    Leverage can be a magic bullet to increase equity returns. As a nation, we live on leverage for everything from auto loans, credit card debt, student loans, and mortgages on the consumer side; on the corporate side we have numerous tranches of debt that can be available including senior debt, sub debt, mezzanine debt, convertible debt, and junk debt, to name a few. So, with all the liquidity in the marketplace, debt is relatively cheap and readily available. So, I don’t see a decrease in the appetite for it any time soon.

    What are the primary factors that have been fueling growth in private debt financing?

    Access to relatively cheap credit. There are so many sources and forms of debt in the marketplace, as noted in the previous question, that it is hard to imagine a scenario in which debt, and access to debt, decreases. With so many new funds and lending entities being formed, the access to private debt can only increase.

    What do you think are some of the advantages of debt financing when compared to financing from investors? 

    Well debt is debt and it comes with a cost that is favorable to any equity instrument. There are convertible debt instruments that act like debt with an interest rate but will probably have a conversion to equity feature. That conversion is a function of value. Value is subjective. Debt is principal plus interest and fees. So other than a floating rate environment, other advantages include relatively known and fixed costs.

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