Private credit pricing is built on the same floating-rate framework as syndicated bank loans but typically at wider spreads and with additional components that reflect the private, illiquid nature of the instrument. Understanding each component — reference rate, credit spread, OID, and fees — allows borrowers and investors to compare private credit pricing against public market alternatives.
The floating reference rate in U.S. private credit is now almost universally SOFR, following the retirement of LIBOR. SOFR is typically used in either daily compounding (Daily Simple SOFR) or term form (Term SOFR, published by CME for 1-month, 3-month, and 6-month tenors). Most private credit loans reference 1-month or 3-month Term SOFR for administrative simplicity. SOFR floors — minimum rate levels that protect lender yield in low-rate environments — are standard in private credit, typically set at 50–100 bps.
The credit spread is the primary driver of all-in yield differentiation. Spreads in private credit reflect a premium over syndicated market rates for the same borrower, capturing the illiquidity premium (investors cannot easily sell) and the execution premium (borrowers pay for certainty, speed, and flexibility). First-lien senior secured direct lending spreads have historically ranged from SOFR + 450 bps to SOFR + 750 bps, depending on credit quality, leverage, and market conditions. Second-lien and unitranche last-out tranches carry wider spreads.
Original issue discount (OID) is an upfront fee that effectively increases the lender's yield. A loan with 2 points of OID (98 OID) means the borrower receives $98 for every $100 borrowed but must repay $100 at maturity. The difference ($2) is amortized as additional interest income over the loan term for the lender. OID is economically equivalent to an upfront arrangement fee paid by the borrower to the lender.
All-in yield is the total return measure that combines the SOFR floor (or spot SOFR, whichever is higher), the credit spread, and the OID amortized over the expected loan life. Comparing all-in yields across private credit opportunities — accounting for different SOFR floors, OID levels, and expected prepayment — is essential for investors assessing relative value.