Double-Digit Private Credit: Where 15 to 20 Percent Coupons Come From in GCC Real Assets

Introduction

The first reaction of most international credit investors to the Gulf private-credit market is disbelief. Coupons that would signal acute distress in a developed market, fifteen, eighteen, occasionally twenty per cent, are quoted on transactions secured by completed, income-producing or readily saleable real assets, arranged for established sponsors, in a jurisdiction with a four-decade currency peg to the US dollar and an investment-grade sovereign backdrop. The instinctive response is that something must be wrong: the collateral must be weaker than it looks, the borrower more fragile, the enforcement regime less reliable, or the yield simply unsustainable. That instinct is healthy, and a serious investor should not deploy capital until it is satisfied. But the instinct can also be misleading, because it implicitly assumes that the price of credit is set in the Gulf the way it is set in New York or London, by deep, competitive, intermediation-heavy markets in which any persistent excess return is quickly competed away. That assumption does not hold, and understanding why it does not hold is the key to understanding the coupon.

This paper sets out to decompose the Gulf real-asset credit coupon into its constituent parts and to ask, of each part, whether it represents compensation for a real and identifiable risk or an unexplained residual that should worry a lender. The exercise matters because the alternative ways of reacting to a high coupon are both costly. An investor who dismisses the yield as implausible foregoes one of the more attractive risk-adjusted opportunities in global private credit. An investor who chases the yield without decomposing it, treating eighteen per cent as eighteen per cent regardless of what sits beneath it, will eventually fund the one transaction in which the coupon was in fact compensation for a loss that duly arrives. The disciplined middle course is to treat the coupon as a sum of priced risks, to estimate each component, and to fund only those transactions in which the total payment comfortably exceeds the total risk borne.

The central proposition of the paper is that the elevated Gulf coupon is, to a first approximation, a structural rather than a credit phenomenon. It arises principally because the market is young and thinly intermediated, because bank balance sheets retreat from precisely the situations, land, pre-completion development, transitional and time-sensitive assets, where sponsors most need capital, and because the resulting supply-demand imbalance allows non-bank lenders to command a scarcity premium on top of a genuine credit spread. The collateral underpinning these loans is frequently strong; what is scarce is not security but speed, flexibility and a counterparty willing to underwrite complexity. The coupon, on this reading, is largely a payment for providing scarce capital into an inefficient market, with a smaller and identifiable portion compensating for expected credit loss.

Results And Discussion

This section presents the decomposition results in the order of the propositions. It begins by building the coupon component by component, then shows how the coupon varies across deal types and risk tiers, compares the Gulf coupon to developed-market direct lending, and finally translates gross coupons into net-of-loss-and-fee returns.

Building the Coupon

Figure 1 builds a representative senior-plus coupon from the risk-free rate upward. Beginning with a dollar base rate of around four and a half per cent, the framework adds a term and illiquidity premium for the lock-up, a complexity premium for the structuring work, an origination component for sourcing the transaction, and a credit spread for expected loss, arriving at an all-in coupon in the mid-teens. The visual makes the central point of the paper immediately: the credit spread, the part that compensates for the borrower defaulting, is only one of several blocks, and not the largest. The bulk of the coupon is compensation for illiquidity and for the lender's specialised work.

Figure 1. Building the Coupon: From Risk-Free to All-In

Illustrative decomposition; the credit-loss block is a minority of the all-in coupon.

The significance of this decomposition is that it reframes the investor's risk. An investor earning a mid-teens coupon of which perhaps a quarter is credit spread is not, in any meaningful sense, taking mid-teens credit risk. The credit risk borne is the credit-spread block; the rest is compensation for bearing illiquidity and for supplying scarce capability, exposures that are real but quite different in character from default risk and that a patient, capable lender is well placed to absorb. The headline coupon overstates the credit risk by a wide margin, which is precisely why a naive reading of it as implausibly high is wrong.

Coupons by Deal Type

Figure 2 shows indicative gross coupons across the six transaction types. The ordering is informative. Senior development lending, the most secured and least complex, carries the lowest coupon; special situations, where complexity, time-pressure and subordination are greatest, carries the highest. Mezzanine and bulk-inventory take-out sit in between, reflecting their intermediate position in the capital structure and their intermediate complexity. The coupon is not a single number for the market but a function of where in the structure and in the risk spectrum a given transaction sits.

Figure 2. Indicative Gross Coupon by Deal Type

Coupons rise with subordination, complexity and time-sensitivity, consistent with priced risk.

That the coupon orders itself so cleanly by complexity and seniority is itself evidence for Proposition 3. If the high coupons were random or were compensation for hidden, uniform risk, one would not expect them to track the economic characteristics of the transactions so closely. The fact that the most subordinated, most complex, most time-sensitive transactions command the highest coupons, and the most senior and straightforward the lowest, is exactly the pattern that priced-risk theory predicts.

Decomposing Across Deal Types

Figure 3 decomposes the coupon for four representative deal types into the four components of the framework. Two features stand out. First, the base rate is common to all, a reminder that part of every coupon is simply the dollar risk-free rate and not a risk premium at all. Second, as one moves from senior to special situations, the complexity and credit blocks grow while the base and illiquidity blocks grow more slowly. The escalation in the coupon is driven by the components that economic theory says should drive it: the difficulty of the transaction and the risk of loss.

Figure 3. Decomposing the Coupon into Priced Risks

As subordination rises, the complexity and credit blocks expand; the base rate is common to all.

The Gulf Premium Against Developed Markets

Figure 4 compares Gulf real-asset coupons against developed-market direct lending at matched risk tiers. At every tier the Gulf coupon is higher, and the gap is the quantity this paper seeks to explain. The framework attributes the gap principally to the illiquidity and complexity premia: the Gulf market is younger, thinner and less intermediated than the US or European direct-lending markets, so the same risk tier commands a larger premium. The gap is not, on this analysis, evidence that Gulf collateral is weaker; it is evidence that Gulf capital is scarcer relative to the opportunity.

At matched risk tiers the Gulf coupon is higher; the gap is largely an illiquidity and scarcity premium.

This comparison is where the structural argument earns its keep. In a mature market, competition among lenders compresses the premium for any given risk to its competitive minimum. In the Gulf, the supply of capable non-bank capital is small relative to the demand from sponsors that banks will not serve, so the premium remains wide. Proposition 5 follows directly: as more capital enters and the market deepens, the gap in Figure 4 should narrow, and the excess return now available to early entrants should compress. The premium is a reward for being early and capable in a market that has not yet matured.

The Term Structure of the Coupon

Implementation Considerations

Translating the analysis into a live programme requires decisions about sourcing, underwriting, structuring, portfolio construction and access. This section addresses each.

Sourcing and Origination

Because the premium is in part an origination and complexity premium, it accrues to lenders who can source proprietary transactions rather than compete for intermediated ones. Origination capability, relationships with sponsors, brokers and local advisers, a reputation for closing reliably and quickly, is therefore not a back-office function but the engine of the return. An investor without origination capability of its own must either build it, partner with a local originator, or access the market through a fund whose origination it has diligenced. The worst outcome is to have capital but no proprietary flow, and so to be shown only the transactions that better-connected lenders have declined.

Underwriting Discipline

The sensitivity analysis instructs the underwriter to concentrate on default probability and, above all, on collateral value and enforceability, the drivers of recovery. In the Gulf context this means valuing collateral conservatively, understanding the saleability of the underlying asset in a downturn, and structuring the security so that the lender can actually realise it. The coupon should be treated as the reward for getting these judgements right, not as a substitute for making them. A transaction whose coupon is high because its collateral is weak is not an opportunity; it is a credit risk wearing an attractive coupon.

Structuring for Recovery

Because recovery dominates the downside, structuring matters as much as pricing. The lender should seek the security, controls and covenants that maximise recovery in stress: first-ranking charges where possible, step-in and cure rights, completion guarantees, cash-flow control, and clear enforcement paths. The complexity premium in the coupon is, in part, payment for doing this structuring work well; a lender who collects the premium but neglects the structuring is being paid for work it has not done and is exposed when the work would have mattered. Structuring is examined in greater depth in the companion papers on underwriting and on security and enforcement.

Portfolio Construction and Diversification

A single Gulf real-asset loan is an undiversified, illiquid, concentrated exposure. A portfolio of such loans, if deliberately diversified across sponsor, asset type, geography within the region and vintage, can offer an attractive return with materially lower idiosyncratic risk. The key word is deliberately: because all real-asset loans share exposure to the property cycle, diversification across that single systematic factor is limited, and the investor must size the overall allocation accordingly rather than assuming that holding many loans removes the risk. Portfolio construction for a Gulf credit book is the subject of a dedicated companion paper.

Accessing the Market

An investor can access Gulf real-asset credit directly, by lending from its own balance sheet; through a fund managed by a specialist originator; or through a managed account or co-investment alongside such a manager. The direct route captures the full spread but requires origination and underwriting capability the investor may not possess. The fund route supplies that capability but charges for it, and the fee, as Figure 7 showed, is the largest single deduction from the gross coupon. The managed-account and co-investment routes can offer a middle path, access to the manager's origination and underwriting at a lower fee load, for investors large and capable enough to use them. The right choice depends on the investor's scale, capability and fee sensitivity.

Monitoring the Premium

Because Proposition 5 holds that the premium will compress as the market matures, an investor should monitor the indicators of maturation: the entry of new lenders, the emergence of any secondary market, the willingness of local banks to return to development risk, and the compression of coupons for a given risk tier over time. These indicators tell the investor how much of the structural premium remains and how the opportunity is evolving. The early, capable entrant captures the widest premium; the investor who waits until the opportunity is widely recognised will find much of it gone.

Communicating the Coupon to an Investment Committee

Concluding Comments

This paper has asked where the fifteen-to-twenty per cent coupons on Gulf real-asset credit come from, and whether they represent compensation for risk or evidence of mispricing. The answer, developed through a transparent decomposition framework, is that the coupon is a sum of priced components, a dollar base rate, a term and illiquidity premium, a complexity and origination premium, and a credit spread, and that for well-secured, well-sponsored transactions the credit-loss component is a minority of the total. The bulk of the coupon is compensation for bearing illiquidity and for supplying scarce, capable capital into a young, segmented, collateral-rich market that the banking system has largely vacated.

The practical implications follow directly. The high coupon is real, not an illusion, but it is a gross figure from which real expected losses, costs and fees must be subtracted to reach a real net return, and that net return, while well below the headline, remains materially above developed-market direct lending at a comparable risk tier. The coupon varies across transactions in the direction priced-risk theory predicts, rising with subordination, complexity and time-sensitivity and falling with collateral and sponsor quality, so that a lender can read the risk of any transaction off its decomposition. And because the premium is structural, it will compress as the market matures, rewarding early and capable entrants disproportionately.

The argument is properly qualified. The framework is stylised, and the figures are illustrative rather than forecasts; the components of the coupon are not perfectly separable in practice; and the conclusion that the credit-loss component is small holds for well-secured transactions but not for the most subordinated and weakly secured ones, where the coupon is genuine credit compensation and the downside is real. The central contribution is not a number but a discipline: treat the coupon as a sum of priced risks, estimate each, and fund only those transactions where the total payment comfortably exceeds the total risk borne.

The study is subject to limitations that also define its contribution. It relies on stylised assumptions rather than a proprietary loan dataset; a natural extension would calibrate the decomposition to realised loss and recovery data as the market matures and such data accumulate. It treats the property cycle as a single systematic factor; further work could model the correlation structure across Gulf real-asset exposures more explicitly. And it considers the premium at a point in time; tracking its compression as the market deepens would test Proposition 5 directly. Each of these extensions would sharpen the framework without altering its central message.