Private Credit Model (Direct Lending)

Based on the most helpful WSO content, here are some key insights and steps to prepare for your private credit case modeling study:

1. Understand Covenant Ratios:

   • Look-through Gross Debt Ratio: This measures the total debt of the company relative to its financial metrics, such as EBITDA.
   • Look-through Net Debt Ratio: Similar to gross debt ratio but subtracts cash or cash equivalents from the total debt.
   • LTV Ratio (Loan-to-Value): This compares the loan amount to the value of the pledged collateral (e.g., shares of HoldCo).
   • Interest Coverage Ratio: Calculated as Free Cash Flow to Firm (FCFF) divided by the sum of interest and principal payments. This is critical for assessing the borrower’s ability to meet debt obligations.

2. Modeling Approach:

   • Build a cash flow model of the business, focusing on debt capacity rather than equity returns.
   • Include a debt schedule with credit metrics like FCCR (Fixed Charge Coverage Ratio), total leverage, and debt service coverage ratio.
   • Use public filings (10-Ks, 10-Qs) to gather data on comparable companies’ capital structures, leverage ratios, and interest rates.

3. Steps to Create Assumptions:

   • Identify 5-10 public comparable companies.
   • Spread their capital structures (e.g., revolvers, term loans, bonds) and calculate leverage ratios based on Adjusted EBITDA.
   • Create a table showing the interest rates of each debt piece in the comparables’ structures to inform your pricing assumptions.
   • Analyze covenant packages in credit agreements, focusing on recently issued term loans. Check the long-term debt section of filings for details.

4. Additional Resources:

   • Moyer's Distressed Debt Analysis: Offers a credit-focused perspective.
   • S&P's Leveraged Loan Primer: A free PDF available online.
   • Private Debt: Opportunities in Corporate Direct Lending: Provides insights into private debt as an asset class.

5. Practical Tips:

   • If you’re unfamiliar with covenant analysis, focus on financial covenants like leverage limits and coverage ratios.
   • Review credit agreements or indentures attached as exhibits in public filings for real-world examples.
   • Practice building a cap table to calculate leverage and interest coverage ratios.

Unfortunately, I cannot provide a financial model directly, but these steps and resources should help you build a robust model for your case study. Good luck with your transition to private credit!