The primary goal of a credit investor is to make a profit through lending money. The investor takes the risk that the loaned money will be repaid in full and on a pre-determined schedule. There are many types of loans, and some require collateral. If a borrower fails to repay the loan, the credit investor may take the collateral to recover his or her losses.
Credit investors must be able to navigate increasingly volatile market conditions and competition for investment deals. In order to succeed, it is imperative to work with an experienced partner who can evaluate and structure corporate credit offerings in various stages of the economic cycle. The team should look for opportunities with fairly valued assets at discounted prices, and apply proven investment strategies to build a risk-return profile.
Credit investment may be structured as debt financing or equity financing. A bank loan is a form of senior secured debt. It is issued by a noninvestment grade company and is typically accompanied by financial covenants requiring the borrower to meet minimum financial performance requirements on a quarterly basis. Investors choose to invest in credit based on where in the capital structure the company is located. The capital structure is an overview of the firm’s assets and liabilities and reflects its risk and return profile.
The credit rating of the company a credit investor chooses to invest in plays a major role in the type of financing the investor receives and the repayment amount that the lender receives. This factor is critical because a smaller company that does not have investment grade bonds is unlikely to be able to obtain inexpensive loans from major banks. An investment grade rating ranges from AAA/Aaa to BBB/Baa and anything lower is considered high-yield.