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Case study

Case study: reading a term sheet

6 questions · pass mark 70%

All companies, names, figures and terms in this case are fictional and illustrative. They are chosen to keep the arithmetic simple, not to describe current market pricing.

The situation

Ridgeline Partners, a fictional private equity firm, has agreed to buy Harbor Lane Software, a fictional company that sells subscription software to regional logistics firms. Harbor Lane has steady, recurring revenue and EBITDA of $60 million at closing. Ridgeline will pay for the business with its own equity and a unitranche loan.

Ridgeline ran a short process among direct lenders and chose Kestrel Point Credit, a fictional direct lending manager, which will hold the whole loan across its funds. The summary term sheet below sets out the main terms. Read it, then answer the questions. Unless a question says otherwise, use the market shorthand from Lesson 3.3 (base rate + spread + OID points ÷ a 3-year assumed life) and hold SOFR flat.

Summary term sheet (illustrative)

Term Detail
Borrower Harbor Lane Software, Inc.
Sponsor Ridgeline Partners (not a guarantor)
Lender Funds managed by Kestrel Point Credit; Kestrel Point also acts as administrative agent
Purpose Finance Ridgeline's acquisition of Harbor Lane
Facilities $300 million senior secured unitranche term loan; $25 million revolving credit facility, undrawn at closing
Ranking First lien. The term loan and revolver share the same first-priority security
Maturity Term loan: 6 years. Revolver: 5 years
Pricing SOFR + 550 bps on drawn amounts
SOFR floor 0.75%
Unused fee 0.50% a year on the undrawn revolver
Original issue discount Term loan issued at 98 (2 points of OID)
Call protection 102 in year 1, 101 in year 2, par thereafter. Applies to any prepayment of the term loan, including on a sale of the company
Amortization 1% of the original term loan a year, paid quarterly; balance due at maturity
Financial covenant Maximum total net leverage, tested quarterly: 6.50x for quarters 1 to 8, stepping down to 6.00x from quarter 9
Total net leverage (Total debt − cash) ÷ EBITDA, as defined in the credit agreement
Equity cure Ridgeline may inject equity to cure a financial covenant breach, within limits set in the credit agreement
Security First-priority liens on substantially all assets of the borrower and guarantors; pledge of the shares of the borrower and its subsidiaries
Guarantees Harbor Lane Holdings (the parent) and all material subsidiaries
Other covenants Monthly and quarterly financial statements and quarterly compliance certificates; limits on extra debt, liens, dividends and asset sales, with agreed baskets
Illustrative SOFR 4.25%
Closing figures EBITDA $60 million; total debt $300 million; cash $12 million; net debt $288 million; total net leverage 4.80x

Answer every question, then check your answers. The pass mark is 70%.

Question 1 of 6

Using the market shorthand and the illustrative SOFR of 4.25%, what is the all-in yield on the term loan?

Question 2 of 6

How does the SOFR floor affect the term loan's interest rate today, and what would the rate be if SOFR fell to 0.50%?

Question 3 of 6

Seven months after closing, Ridgeline sells Harbor Lane and the term loan is repaid in full from the proceeds. After two quarterly amortization payments, $298.5 million is outstanding. What does early repayment cost the borrower, and how does it affect Kestrel Point's yield?

Question 4 of 6

Where does Kestrel Point's term loan sit in Harbor Lane's capital structure, and what protects it?

Question 5 of 6

Holding net debt at its closing level of $288 million, roughly how far can EBITDA fall from $60 million before Harbor Lane breaches the initial 6.50x covenant?

Question 6 of 6

In quarter 10, Harbor Lane's EBITDA has fallen and its compliance certificate shows total net leverage of 6.3x. Based on the term sheet and usual practice in private loans, what is the most likely outcome?