Opp. Lend. Interview Q
How do direct lenders think about buying up private senior debt in somewhat troubled companies undergoing change, market dislocation, etc., especially at high LTVs? How would you first think about the valuation of the business and valuation to buy the bonds?
When tackling a scenario like this, here's how you could approach it based on the most helpful WSO content:
Part A: Valuation of the Company
Valuation Multiple Approach:
Impact of Lawsuit:
Consideration of Debt:
Part B: % of Par to Buy the Notes
LTV Analysis:
Discount Rate / Yield Target:
Default Risk and Recovery:
Market Comparables:
Key Takeaways:
This approach aligns with the insights shared in WSO threads on private credit and distressed investing, emphasizing the importance of valuation, LTV, and yield analysis in determining the attractiveness of an investment.
Sources: https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1, Private Credit Resources and Prep, Private Credit Secondaries Case Study Insight, Distressed publicly traded credit - case study help needed!, Debt for LBO?
With such limited info I’d assume the goal of the case is to see how you think about valuation rather than a “does this guy know what a MM manufacturing firm trades at”.
On A, I would take a multiple to EBITDA approach first, caveat-ing I don’t know exactly where these businesses trade, but that 8-9x sounds reasonable for a median estimate. I’d then show +/- 1x sensitivity around that. I’d then take a perpetual DCF model based on my steady state UFCF calc, showing a sensitivity for WACC. Would use these 2 methods to triangulate a rough valuation.
On B, this reads as a question for how you perceive risk. Would start by deciding on a risk profile for the business. Is this standard way PC paper that yields 8-10%? Or does the risk profile require a premium? Would definitely involve an LTV calculation based on your valuation in A to help measure risk. Sounds like there’s been some material litigation in a declining business so I’d expect a premium FWIW. Would then pick out a target return and use that to back out an acceptable price, expressed as a % of par.
Thanks - appreciate the detailed answer. Agreed that this question is more to understand how you think about valuation expectations of a business if a Company suffers a product loss / goes through some form of litigation, versus the exact industry knowledge to triangulate a multiple.
On A - how would we think about the valuation of a business that has lost a product line to litigation, is going through secular decline, etc? This part (applicable to the second question as well) is obv more art than science given the limitation of data / time pressure, but I'd assume its not too damning on the business given its a one-off event and doesn't necessarily represent an underlying fundamental shift in the business model, industry, competitive dynamics, etc.
On B - Notes were already returning a fixed coupon of high single digits which is very much market for run-of-the mill mid-market DL deals nowadays. I'm assuming the only quantitative way of determining what % of par to buy the notes at would be to think of a target yield? Any anecdotal info on what funds like the ones I mentioned above typically target for a gross, unlevered return? 15%? If so, does this scenario justify a ~10%ish discount for a ~15% 3-year yield?
I think you're on the right track with your mindset, but a couple additional points:
Hope this helps!
anecdote applicable to sensitizing 'losing a line of business' - American Tire Distributors' 2018 bankruptcy was precipitated by two suppliers representing ~20-25% (IIRC) of sales deciding to disintermediate ATD, which was pretty highly levered for the prior level of volume.
Nobis sint enim non. Quis quod et nam. Quasi vel error at nulla. Voluptatem distinctio magni totam ad aliquam sit. Quis quos debitis quos et labore nesciunt.
Distinctio exercitationem possimus qui minus. Animi voluptates vel accusantium eos quam.
In aut laudantium minima accusamus. Reprehenderit ea rerum adipisci beatae ratione velit iusto. Et similique accusamus corporis enim nisi laborum. Suscipit et aliquam voluptatem dolorem repellat in consequatur.
Ipsum qui nisi magni dolor harum blanditiis. Cumque sint omnis blanditiis a.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...