Private debt has evolved into a cornerstone of modern finance, providing bespoke capital solutions outside the public bond markets. These credit facilities are often negotiated directly between borrower and lender, giving companies flexibility not available in the public markets. The asset class is vast, spanning everything from distressed strategies and mezzanine debt to asset-based lending and hybrid facilities. To understand how private credit works, it helps to look at the main building blocks—each one addressing a different risk-return calculation while collectively shaping how companies raise capital. 

Borrower Friendly Covenant-Lite Structures Offer Flexibility 

Credit facilities often include the use of covenants that establish guardrails between lender and borrower. These guardrails include requirements and/or limits that must be maintained (e.g., cash on hand limits, total debt, revenue). In borrower-friendly credit cycles, facilities often reduce these requirements in what are referred to as covenant-lite loans. Traditional maintenance covenants once gave lenders early warning when leverage or coverage ratios slip, allowing intervention before liquidity runs out. Covenant-lite structures often are only triggered when a borrower takes certain actions, like issuing dividends or adding new debt. 

Covenant-lite structures help companies by providing flexibility and reduce the risk of technical defaults during periods of volatility. The drawback is delayed intervention in distress, which can limit lender protections until the convenants are triggered (e.g., liquidity has dried up).  

How Second Lien Loans Augment the Capital Stack  

Within this new framework, second lien loans occupy an increasingly common role. Subordinated to first-lien facilities but ranking above unsecured claims, they give borrowers more debt capacity without forcing equity dilution. For sponsors, second lien financing is a way to optimize capital structures when senior lenders impose limits. 

These facilities share collateral with first-lien lenders but are governed by intercreditor agreements that determine rights during distress. In volatile situations, those agreements often become the focal point of recovery negotiations. Second liens highlight the balancing act at the heart of private debt—creating enough leverage capacity, while keeping risk at an acceptable level.  

How Unitranche Loans Reduce Capital Stack Complexity  

If second lien loans represent adding another layer of leverage, unitranche loans represent collapsing multiple layers into one. A unitranche blends senior and subordinated tranches into a single loan, with one payment schedule and one set of documents. Behind the scenes lenders must agree on the repayment mechanics, but to the borrower the appeal is simplicity. 

This structure can be popular in sponsor-backed mid-market deals when speed and certainty matter most. Unitranche financing demonstrates how private debt adapts not just to risk preferences, but also to process demands (e.g., streamlining execution and compressing complexity in competitive deal environments). 

Why Companies Leverage Asset-Based Lending  

While covenant-lite, second lien, and unitranche facilities may include other (e.g., revenue, cash flow) considerations, asset-based lending (ABL) emphasizes collateral. Borrowers raise capital against the value of receivables, inventory, or equipment, with borrowing bases recalculated at specific points in time. ABL facilities are more akin to revolving credit lines than term loans, scaling with the quality and turnover of assets.  

Why Companies Turn to Mezzanine Financing  

Bridging the gap between senior debt and equity is mezzanine financing. It is typically unsecured, carries higher interest rates, and may include warrants or conversion rights to give lenders equity upside. Mezzanine appears often in leveraged buyouts where senior debt reaches its cap, or in growth scenarios where companies need additional capital but do not want to dilute existing equity holders. Mezzanine debt provides valuable flexibility for PE and sponsor-backed companies.  

Conclusion 

Viewed together, covenant-lite loans, second lien facilities, unitranche structures, asset-based lending, and mezzanine debt are not isolated instruments. They are interconnected pieces of a broader private debt ecosystem — tools that allow companies to tailor financing to their needs and sponsors to optimize outcomes. What unites them is the balance between risk and flexibility. Each solution reflects the same underlying reality: capital structures are not fixed cookie cutter templates but dynamic systems, constantly reshaped by negotiation, competition, and innovation