Direct Lending: One Lender, One Borrower, One Negotiated Loan

Direct lending is one fund lending to one borrower on a document the two of them negotiated, with no other lender in it. The fund holds the whole loan, the whole vote and the whole exposure. Position 6 of Nilgiri Direct Lending Fund I, invented, is that loan: Rs 25,00,00,000 at this invented fund's own contracted 14.0 per cent.

One structural fact produces everything that follows. The arithmetic later is trivial and the fact is not, so the fact is worth sitting with before a single number arrives. There is nobody else in the document. Not a second lender, not a third, not somebody appointed to speak for a group. Two parties signed, and those two parties are the whole of the arrangement. The single fact of a two-party document runs in both directions, and an account that gives only one of the two directions teaches half a thing and leaves the reader confident about it. Having one counterparty means the terms can be shaped around one borrower rather than around whatever a group of lenders will all put their name to. Having one counterparty also means that when those terms have to change, or when they have to be enforced, the fund is the only party on its side of the table and carries the whole of the outcome by itself.

What does bilateral actually mean, and who has signed the document?

Consider a case away from finance entirely. Suppose a person needs money for a scooter and one friend lends the whole of it. There is one conversation, one understanding, and if the repayment date has to move by two months there is one person to ring, and the two of them either sort it out or they do not. Now suppose six friends chipped in instead. The money is the same money. Moving that repayment date is now a completely different task: six calls, six sets of feelings, and somebody has to decide what happens when four say yes and two say nothing at all. Nothing about the scooter changed. Nothing about the amount changed. Only the number of people who have to agree changed.

Direct lendingA fund lending straight to a borrower rather than buying an obligation somebody else created. is the first version of that, done deliberately, at scale, by a pooled vehicle rather than by a friend. The fund puts money straight into the hands of a borrower on terms the two of them wrote. The fund is not buying an obligation that somebody else created and then sold on, and it is not taking a slice of something another lender arranged. The fund made the loan. Where that loan has one lender and one borrower and nothing else in the document, it is a bilateral loanA loan between one lender and one borrower with no other lender in the document., and the fund is the sole lenderThe only party on the lending side, holding the whole loan and the whole vote..

Position 6 of Nilgiri Direct Lending Fund I, invented, is exactly that. Position 6 is a bilateral direct loan of Rs 25,00,00,000 at 14.0 per cent, negotiated between this one lender and this one borrower, with no other lender in the document. The 14.0 per cent is this invented fund's own contracted rate and it says nothing whatsoever about what private credit costs in India. On Rs 25,00,00,000 that contracted rate is Rs 3,50,00,000 of interest a year. The figure is arithmetic on the fund's own paper: move the contracted rate and the interest moves with it. The case fixes no security package for position 6 either way, so everything below is about the document and the control it creates rather than about what anybody could claim.

Why does a borrower go to a fund rather than to a regulated lender?

Two things are true here, and both are needed without leaning on either. The first is structural and it is the one worth teaching. A borrower dealing with one lender is negotiating with one counterparty, so the terms that come out the other end can be shaped around this borrower and its own timetable rather than around whatever a group of people will all accept. Shaping the terms around one borrower is what negotiated termsTerms written for one borrower rather than terms a group of lenders will all accept. means in practice. Negotiated terms is not a claim that the terms are gentler but a claim about who the terms were written for.

The second thing is a limit on the first. A fund is not thereby a quicker route, a cheaper route or the right route for anybody. Where a regulated lender appears in the same sentence as this invented fund, the Reserve Bank of India at rbi.org.in is named and the sentence stops. Where the fund itself appears, the Securities and Exchange Board of India at sebi.gov.in is named and the sentence stops. The conditions, thresholds and registrations that apply to a fund or to a bank are set out in the current text at those sites, and only that current text reliably answers who may lend on what terms.

Between the one-lender case and the six-lender case there is a middle worth naming once so that it causes no confusion later. A small group of lenders who sit down together and negotiate the same single document is a club dealA small group of lenders who each negotiate the same document together.. A club deal is neither of the two positions on this book. Lending does not have exactly two settings; it has a range, and a club deal sits between the two.

What does being the only lender actually buy?

Three things, and none of them is money. The first is shape. When one lender is writing the terms, nobody else in the room has an internal policy to accommodate, so the terms can follow the borrower's own circumstances. The second is speed, and speed here is not a marketing word: it is a count. Two parties can reach an agreement in the number of conversations it takes two parties to reach an agreement, and that number does not grow when the amount grows.

The third is the one that matters most and gets noticed least. The fund knows, at every moment, exactly who has to say yes. On position 6 the answer is the borrower, and there is no second answer. Knowing exactly who has to say yes is worth something on the day nothing is happening and worth a great deal on the day something is. The same certainty, and this is the honest half of the sentence, tells the fund there is nobody to share anything with.

How does this differ from a loan shared across six lenders?

How Direct Lending Differs From Syndicated Lending

Set position 6 beside position 7 on the same book, at the same record date, inside the same invented fund. Position 7 is a participation of Rs 20,00,00,000 in a syndicated facility of Rs 4,00,00,00,000 shared across six lenders, so this fund holds 5.0 per cent of the facility and 5.0 per cent of the vote on anything the facility decides by majority. The remaining Rs 3,80,00,00,000 sits with five other lenders, and the case does not fix how it splits between them. How that vote actually works inside the facility is covered separately and is used here rather than taught again.

The two positions differ on five specific lines, and it is worth reading them as five separate facts rather than as one impression. Size is not on the list. The fourth line, what it takes to change a term, decides everything practical.

What does it take to change a term on each of the two positions?

The five lines stop being a table here and start being a working week. A change to a loan document after it has been signed is an amendmentA change to the loan document after it is signed., and amendments are ordinary. Dates move. Definitions get tightened. A borrower asks for room to do something the document as drafted does not allow. None of that means anything has gone wrong; it means a contract signed years ago is meeting a business that has kept moving.

On position 6, changing a term takes a conversation with one counterparty and then a signature. A conversation and a signature are the entire mechanism. There is no circulation, no response deadline, no counting and no clause about what happens when somebody does not reply. On position 7, changing a term takes a process: the request goes to the agent, the agent puts it to the six holders, the holders consider it, and the answer is whatever the facility's own voting clause says the answer is when the shares are counted. The fund's 5.0 per cent goes into that count and comes out as 5.0 per cent of it.

How much control did each of these two positions buy?

Now the arithmetic, and it is short. On position 6 the fund holds Rs 25,00,00,000 of a Rs 25,00,00,000 facility. The facility is the loan and the loan is the fund's, so position 6 carries 100 per cent of the facility and 100 per cent of every vote in it. On position 7 the fund holds Rs 20,00,00,000 of a Rs 4,00,00,00,000 facility. The holding is 5.0 per cent of the facility and 5.0 per cent of the vote on anything decided by majority. Rs 5,00,00,000 more money bought twenty times the voting share, in the same book, at the same record date, and the extra Rs 5,00,00,000 had nothing to do with it.

There is a second way of putting the same arithmetic that some readers find sharper, and it needs its denominator named as carefully as the first. Take the vote each position carries per Rs 1,00,00,000 lent. Position 6 carries 100 per cent of its facility across Rs 25,00,00,000, or 4.00 percentage points of its own vote for every Rs 1,00,00,000. Position 7 carries 5.0 per cent across Rs 20,00,00,000, or 0.25 percentage points of its own vote for every Rs 1,00,00,000. The ratio per rupee is 16 times, not 20, and the two figures are both correct: 20 times compares total votes and 16 times compares votes per rupee. A sentence quoting either without saying which comparison it is has stated something the reader cannot check.

What does being the only lender cost?

Everything the last three sections described as an advantage is the same fact, and here it is again pointing the other way. Because there is nobody to persuade, an amendment takes two signatures. Because there is also nobody to share anything with, the whole of the Rs 25,00,00,000 is this one fund's own. Persuasion and exposure are not two facts that happen to sit together but one fact read from two sides, and giving one side more room than the other would quietly turn a description into a preference.

The household version returns here. The friend who lent the whole of the scooter money is easy to renegotiate with. The same friend is also the only person carrying the loss if the borrower cannot pay. Six friends means six calls and it also means each of them is carrying a sixth. Neither arrangement is the sensible one. The two arrangements differ in where the risks land and where the conveniences land, and that is the whole of the difference.

For a lender, the moment that matters is a workout: the conversation that happens when a borrower's circumstances have moved and the document has to move with them. Moyer, in Distressed Debt Analysis, frames a workout as a negotiation whose shape is set by who has to be at the table, and on a bilateral loan that table has two chairs. The case fixes no recovery and no expected outcome for position 6, and nothing on this book indicates what any position would recover; what it fixes is who would be in the room.

Does bilateral mean small?

Where does one bilateral loan sit inside a book of eight?

The last thing a reader needs about position 6 is not about position 6 at all. The remaining question is about the book it sits in. Nilgiri Direct Lending Fund I, invented, has lent Rs 2,40,00,00,000 across eight positions and has taken Rs 3,00,00,00,000 in commitments. ConcentrationHow much of a lender's own book one position accounts for, against a named denominator. is how much of that book any one position accounts for, and the word is useless without the denominator attached to it.

Position 6 is Rs 25,00,00,000. Against the Rs 2,40,00,00,000 this invented fund has lent, that is 10.4 per cent. Against the Rs 3,00,00,00,000 it has taken in commitments, the same Rs 25,00,00,000 is 8.3 per cent. The two percentages are different fractions of one identical position, and a sentence quoting either of them without naming which denominator it used has stated something the reader cannot check and may well be false. The habit is simple and it never stops being worth it: say the number, then say what it is a share of, in the same breath.

Two of the eight shares land exactly on a half at one decimal place, so both are stated unrounded rather than under a rounding convention: position 2 is 18.75 per cent of the Rs 2,40,00,00,000 lent and position 8 is 6.25 per cent of it. The eight unrounded shares sum to exactly 100.0.

If private does not mean bilateral, what does it mean?

A complication sits inside this fund's own book. Position 7 was not bought on an exchange. Position 7 is a privately negotiated facility, arranged and documented between a borrower and a set of lenders, and this fund is one of them. The facility is private, and it also has six holders and a voting clause. So the tidy sentence that private lending means one lender and one borrower is contradicted by the second position on the same schedule.

The way out is to notice that two separate questions have been collapsed into one word. The first question is where the arrangement came from: was it negotiated between the parties, or was it bought from a market. The second question is how many holders are in the document once it exists. Both of this fund's positions answer the first question the same way and answer the second question completely differently. The two questions therefore have to be asked separately; asked together, one of them comes out wrong.

What ends up in the document because two parties wrote it?

Two things, and both of them are about the drafting rather than about the money. The first is specificity. A document written for one borrower can name that borrower's own circumstances: its particular timetable, the way its receipts actually arrive, the particular thing it wants room to do next year. Unfamiliar drafting is where a group's agreement slows down, so a document that six holders will each have to be comfortable with tends to reach for language all six already recognise. Neither of those is the careful version. The two are different drafting problems with different natural answers.

The second is absence. Position 6's document has no schedule setting out who counts as a majority, no mechanic for what happens when a holder does not respond, no provision for one holder selling its share to somebody else, and no appointment of anybody to act for a group. Position 7 has six holders, so every one of those situations can actually arise and its document needs every one of those provisions. The bilateral document is shorter in the places where a shared document has to be long, and it is longer in the places where the terms follow one borrower's own circumstances.

How would somebody actually use this on a Tuesday morning?

Three people meet this distinction in a working week, and each of them uses it for something different.

Somebody managing a lender's own book uses it to work out who to call. A loan schedule with eight lines is a list of eight relationships, and the useful column is not the amount and not the rate. The number of holders in the document tells the manager how long anything will take before a single word of the request has been drafted, and that is the useful column. On this invented book, one line says one and one line says six, and those two lines will consume completely different amounts of somebody's week for reasons that have nothing to do with Rs 5,00,00,000.

Somebody reading a lender's report from the outside uses it to interpret a concentration figure. A report saying that one position is 10.4 per cent of the book has said very little until the reader knows that it is 10.4 per cent of the Rs 2,40,00,00,000 lent rather than the Rs 3,00,00,00,000 committed, and knows whether that position is one document with one signature or a slice of somebody else's arrangement. The same percentage carries a very different set of practical consequences in the two cases.

And somebody on the borrower's side of the table uses it to know who they are actually negotiating with. If there is one lender, the person across the table can say yes. If there are six holders and an agent, the person across the table is relaying a question and the answer will arrive later, from a process. Knowing which of those two situations applies changes what the borrower asks for, when it asks for it, and how much notice it gives. The difference is not a financial insight but a practical one, and it decides how the negotiation actually goes.