THE ECONOMICS OF THE PRIVATE MARKET
Bank loans typically have floating rates and short-to intermediate-term maturities and are relatively small and prepayable at par. They tend to include relatively tight financial covenants and thus must frequently be renegotiated.
Private placements typically have fixed rates and intermediate- to long-term maturities, are moderately large, and include punitive prepayment penalties. Many include financial covenants. Though these covenants are usually looser than those in bank loans, and thus are less easily violated, a typical private placement is renegotiated at some point. A significant number of private placements include no financial covenants, and thus renegotiation is less frequent for them.
Publicly issued bonds are typically fixed-rate, long-term, large loans. The presence of prepayment penalties and other call protection has varied over time. They seldom include financial covenants and are seldom renegotiated.
Individual lenders and borrowers take this cross-market pattern of terms as given and choose the market(s) with preferable terms. The next section explains why borrowers choose the private placement market, and section 4 explains why lenders do so.