Case study
Case study: matching the financing to the need
The following case is illustrative. All names are fictional.
Hollin Bay Capital, a multi-strategy credit manager, receives four requests for financing in the same week. Read them, then answer the questions below.
1. Tarnbrook Software. A private equity sponsor owns Tarnbrook, a profitable business software company, and has agreed to buy a smaller competitor. It needs $120m of debt, wants to sign within four weeks, and would like one loan, one credit agreement and one lender group. Tarnbrook has recurring revenue but few receivables or hard assets.
2. Ferncastle Supply. A family-owned distributor of garden and outdoor products. Its sales are seasonal, so it builds inventory and receivables each spring and needs a revolving facility that grows and shrinks with them. Its latest borrowing base certificate shows:
| Item | Amount |
|---|---|
| Receivables | $60m, of which $10m ineligible |
| Advance rate on eligible receivables | 85% |
| Eligible inventory (net orderly liquidation value) | $30m |
| Advance rate on inventory | 70% |
| Reserves | $3m |
| Facility commitment | $70m |
| Currently drawn | $45m |
3. Kellsgate Labs. A venture-backed software company that isn't yet profitable. It raised equity from well-known venture investors six months ago and wants a $20m term loan to extend its runway, with 4% warrant coverage offered to the lender.
4. Ridgemoor Partners Fund III. A buyout fund in its eighth year. It has called almost all of its LPs' commitments and invested them. Several portfolio companies need follow-on capital, and the fund's portfolio is valued at $800m. The GP is asking about a loan at 12.5% loan-to-value.
Answer every question, then check your answers. The pass mark is 70%.