Credit Analysis and Underwriting

1.1 A framework for credit decisions Free preview

What a lender is really deciding, the five questions behind every credit decision, and the Corbel Facility Services deal that runs through this course.

1.2 Business and industry analysis

What makes a business good to lend to, how industry structure shapes credit risk, and how Hollin Bay applies these questions to Corbel Facility Services.

1.3 Assessing the private equity sponsor

Why the sponsor matters to a lender, what to look at in its track record, equity check and fund, and how Hollin Bay assesses Linden Row Partners.

2.1 Reading financial statements as a lender

The three financial statements through a lender's eyes: what drives cash, what can go wrong, where debt-like items hide, and Corbel's summary financials.

2.2 EBITDA and adjustments: add-backs and pro forma synergies

How adjusted EBITDA is built, which add-backs lenders accept, haircut or reject, and the Corbel bridge from $36.0m reported to $44.0m lender EBITDA.

2.3 Quality of earnings reports

What a quality of earnings report tests, how a lender should read one, where it stops, and how Corbel's QoE supports most add-backs but not the synergies.

2.4 Free cash flow and working capital

How a lender gets from EBITDA to free cash flow, why working capital can drain or release cash, and the worked Corbel free cash flow.

2.5 Recurring-revenue loans

Lending to software and subscription businesses on annual recurring revenue: retention, leverage on ARR, and the covenant that flips to EBITDA.

3.1 Leverage ratios: total, senior and net

Debt divided by EBITDA in its total, senior and net forms, and why Corbel's leverage runs from 4.68x to 6.11x depending on the EBITDA used.

3.2 Interest and fixed-charge coverage

Interest coverage, coverage after capex and the fixed-charge coverage ratio, with Corbel's figures and what a 1-point rise in SOFR does to them.

3.3 Loan-to-value and the equity cushion

How a lender turns the purchase price into loan-to-value, why the sponsor's equity is a cushion, and how far Corbel's value can fall before the lender loses.

4.1 Building a lender's cash flow model

What a lender's model is for, the inputs that drive it, and the five-year Corbel base case, with its cash sweep and falling leverage.

4.2 Downside cases and stress tests

How lenders build a downside case, measure covenant headroom and liquidity, and why Corbel's covenant breaks before its cash runs out.

4.3 Recovery analysis

What a defaulted company is worth, what a restructuring costs, who gets paid first, and the worked Corbel recovery of 71.0% for the unitranche.

5.1 Writing a credit memo

The sections of a credit memo, how to write one a busy committee can use, and an outline of Hollin Bay's memo on the Corbel unitranche.

5.2 Presenting to investment committee

How investment committees commonly work, the questions members ask, how to handle conditions, and what happens after a loan is approved.

5.3 Case study: underwriting a $75m unitranche for a sponsor-backed software company

Work through Quillmark Software's ARR and EBITDA leverage, LTV, coverage and retention, weigh the risks, and reach a recommendation with terms.