Q4 2023 Lincoln Senior Debt Index

Lincoln International is pleased to release the quarterly Lincoln Senior Debt Index (LSDI). The LSDI represents years of research and analysis of data and was developed by professionals from Lincoln’s Valuations & Opinions Group in collaboration with Professor Pietro Veronesi of The University of Chicago Booth School of Business.

Current trends in the direct lending market at the end of 2023 were comparable to those at the tail end of 2022. The LSDI yielded 11.4%, a 20-basis point decline relative to yields as of Q4 2022 given how SOFR rates trended during the year. As a result, fair value continued to climb, finishing the fourth quarter of 2023 at 97.9. Finally, the default rate declined approximately 50 basis points since Q3 2023, continuing the trend of decreased rates of default in the direct lending market as seen throughout 2023. Lenders continued to benefit from high interest rates resulting in record yields and stable prices while also getting a better handle on the credit stresses in portfolio companies that were resulting in continued defaults. Since the start of 2023, approximately 740 amendments have been executed for the companies valued by Lincoln, or 18% of the total companies valued by Lincoln. Of the companies with recent amendments, 14% included covenant holidays and 29% included sponsor infusions. We believe the decline in default rates demonstrates that borrowers and lenders anticipated defaults, which primarily resulted not from declining earnings but from increases in interest rates, and proactively addressed the issue by amending the loan documents. Despite the decreased rates of default in a rising rate environment, Lincoln also noted that, of these amendments, 65.3% had increases in interest spreads.

In the fourth quarter of 2023, the direct lending and broadly syndicated loan (BSL) market continued to experience a contraction in their yield differential with only a 2.0% yield difference relative to the historical average of 3.8%. As competition to deploy capital has increased, returns between the two markets decreased. LSDI yields have contracted from 11.6% to 11.4% (-0.2%) from December 31, 2022, to December 31, 2023, whereas BSL yields have risen from 9.1% to 9.5% during this same period (0.4%).

The LSDI provides insight into the direct lending market as it is a fair value index consisting of four components:

  1. Total return (income return plus capital gain return);
  2. Price (i.e., fair value);
  3. Spread; and,
  4. Yield to maturity
Each of the four components are then categorized into three types of senior loans:

  1. All senior loans – consisting of first lien, Unitranche, and second lien loans;
  2. Senior loans consisting of first lien; and
  3. Second lien loans

In addition, we provide additional descriptive statistics including: (a) loan-to-value; (b) the impact of interest rate and credit changes on total return; (c) default rates and (d) historical yields by EBITDA size.

The U.S. non-investment grade corporate loan market has two segments: the BSL market, which attracts investors investing in broader syndicated deals and the direct lending market for investors investing in club deals. While correlated, there are subtle but significant differences between the two markets. Both markets primarily provide floating-rate loans; however, divergences exist in terms of market liquidity, company size and credit facility size. Given the greater liquidity in the BSL market, pricing and terms are a function of the technical market and competitive factors, whereas the more illiquid direct lending market has a stronger orientation to assessing company fundamentals.

In contrast to the Morningstar LSTA U.S. Leveraged Loan 100 Index which is comprised of companies borrowing in the BSL market, the constituents in the LSDI are virtually all companies borrowing in the direct lending market.

The direct lending market is a significant source of capital to private equity-backed middle-market companies. The LSDI benefits market participants by providing information to facilitate a greater understanding of the attributes of this important source of capital to the private sector.

How We Obtain the Information

On a quarterly basis, Lincoln values more than 4,500 private companies primarily owned by over 150 alternative investment funds and lenders to funds. Most of these companies are levered via borrowings from the direct lending market. A significant percentage of the LSDI constituents are based upon valuations of loans provided for nonpublic business development companies and other private investment vehicles and, therefore, not disclosed in public filings.

For many of the private companies valued quarterly, Lincoln advises on the fair value of at least one senior debt security in the capital structure. All valuations conform with GAAP and fair value principles and have been reviewed by fund management, fund boards, limited partners, and auditors.

Additional information can be found in our methodology discussion and on our website.

Average Fair Value of Loans in the Index as of Q4 2023


Total Return

Comparison of Total Return – Lincoln Senior Debt Index (All Loans) to Morningstar LSTA U.S. Leveraged Loan 100 Index


Correlation and Comparison of Quarterly Returns – Lincoln Senior Debt Index (All Loans) to B Market


Comparison of Yields – Lincoln Senior Debt Index (All Loans) to B Market

Comparison of Yields – Lincoln Senior Debt Index (All Loans) by Size

Default Rates

Direct Lending Default Experience

Note: Defaults defined as loan covenant defaults (not monetary defaults)


Direct Lending Default Experience by Size

Source: VOG Private Market Proprietary Data. Data as of: February 07, 2024

Decomposing Yields in the Direct Lending Market – LIBOR/ SOFR Floors and Spreads

Decomposing Yield – LIBOR, LIBOR / SOFR Floors and Spreads – All Loans

Fair Value – Price – Trends

Fair Value – Lincoln Senior Debt Index (All Loans) Compared to the S&P / LSTA U.S. Leveraged Loan Index

Bifurcation of the Impact on Total Return Due to Credit Risk and Interest Rate Risk

Decomposition of Index Returns: Interest Rate versus Credit Risk


Source of Data and Sample Size

On a quarterly basis, Lincoln determines the enterprise fair value of over 5,000 portfolio companies for approximately 150 private equity sponsors and lenders. These portfolio companies report quarterly financial results to the sponsor (i.e., private equity group) or lender. Lincoln obtains company and loan level information to create the Lincoln Senior Debt Index.

All information is prepared in accordance with the fair value measurement principles of generally accepted accounting principles. Finally, each valuation is then vetted by auditors, company management, boards of directors and regulators.

Additional information about the methodology of the LSDI can be found at: www.lincolninternational.com/perspectives/an-overview-of-the-lincoln-senior-debt-index.

Academic Advisor

Professor Pietro Veronesi is the Chicago Board of Trade Professor of Finance at the University of Chicago, Booth School of Business. He is also a research associate of the National Bureau of Economic Research and a research fellow of the Center for Economic and Policy Research.

Professor Veronesi’s research has appeared in numerous publications, including the Journal of Political Economy, American Economic Review, Quarterly Journal of Economics, Journal of Finance, Journal of Financial Economics and Review of Financial Studies. He is the recipient of several awards, including the 2015 AQR Insight award, the 2012 and 2003 Smith Breeden prizes from the Journal of Finance, the 2008 WFA award, the 2006 Barclays Global Investors Prize from the EFA, the 2006 Fama / DFA prizes from the Journal of Financial Economics and the 1999 Barclays Global Investors / Michael Brennan First Prize from the Review of Financial Studies. Professor Veronesi teaches both masters- and Ph.D.-level courses. He is the recipient of the 2009 McKinsey Award for Excellence in Teaching.

His undergraduate work was in economics at Bocconi University where he received a laurea magna cum laude with honor in 1992. He earned a master’s degree with distinction in 1993 from the London School of Economics. He joined the Chicago Booth faculty upon obtaining his Ph.D. in Economics from Harvard University in 1997.



Q4 2023 Lincoln Senior Debt Index

From 2014 through December 31, 2023, a portfolio of direct lending loans has yielded higher returns and lower volatility relative to broadly syndicated loans.

The LSDI provides market participants many unique valuation insights into the fair value of direct lending loans and represents a significant enhancement to the information available within an opaque market.


IMPORTANT DISCLOSURE: The Lincoln Senior Debt Index is an informational indicator only, and does not constitute investment advice or an offer to sell or a solicitation to buy any security. It is not possible to directly invest in the Lincoln Senior Debt Index. Some of the statements above contain opinions based upon certain assumptions regarding the data used to create the Lincoln Senior Debt Index, and these opinions and assumptions may prove incorrect. Actual results could vary materially from those implied or expressed in such statements for any reason. The Lincoln Senior Debt Index has been created on the basis of information provided by third-party sources that are believed to be reliable, but Lincoln International has not conducted an independent verification of such information. Lincoln International makes no warranty or representation as to the accuracy or completeness of such third-party information.

The LSDI should not be construed as an offer to sell or buy, or a solicitation to sell or buy, any products linked to the performance of the LSDI. The use of the LSDI in any manner, including for benchmarking purposes, is not endorsed or recommended by Lincoln International and Lincoln International is not responsible for any use made of the LSDI. Lincoln International does not guarantee the accuracy and/or completeness of the LSDI and Lincoln International shall not have any liability for any errors or omissions therein. None of Lincoln International, any of its affiliates or subsidiaries, nor any of its directors, officers, employees, representatives, delegates or agents shall have any responsibility to any person (whether as a result of negligence or otherwise) for any determination made or anything done (or omitted to be determined or done) in respect of the LSDI and any use to which any person may put the LSDI. Lincoln International has no obligation to update the LSDI and has no obligation to investors with respect to any product based on the performance of the LSDI. Any investment in such a product will not acquire an interest in the LSDI. Lincoln International is not an investment adviser and will not provide any financial advice relating to a product linked to the performance of the LSDI. Investors should read any such product offering documentation and consult with their own legal, financial and tax advisors before investing in any such product.

© 2023 Lincoln Partners Advisors LLC. All rights reserved. LINCOLN SENIOR DEBT INDEX and LINCOLN INTERNATIONAL are service marks owned by Lincoln Partners Advisors LLC and its affiliated entities. Any use of these service marks and these materials, including the reproduction, modification, distribution or republication of these materials, without the prior written consent of Lincoln International, is strictly prohibited.


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