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Private Capital: Equity and Debt: practice question
Torpoint Credit Opportunities, a private debt fund, buys senior secured bank loans of issuers that are in default or in restructuring, paying about 60 cents per 100 of par value, and expects to profit from improved recoveries as the restructurings conclude. Torpoint's strategy is best described as:
- direct lending, because the fund holds senior secured loans of mid-market companies until they mature or are repaid
- distressed debt, because the fund buys the discounted claims of issuers in or near default to profit from their recovery
- mezzanine finance, because the fund supplies junior capital that sits between the issuer's bank debt and its equity
Show answer and explanation
Correct answer: B
Explanation: B is correct: buying the senior debt of issuers already in default or restructuring at a steep discount to par, with returns driven by how much is ultimately recovered, is the defining feature of a distressed debt strategy. A is incorrect because direct lending means originating new loans, typically first-lien loans to performing mid-market companies, and earning contracted spread income on them — not buying existing defaulted loans at about 60% of par. C is incorrect because mezzanine finance provides new subordinated capital, ranked between senior debt and equity, usually to borrowers that are still performing; Torpoint is purchasing senior secured claims, not supplying junior capital.
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