QoE / Private Credit Diligence
Hello,
I am looking for any private credit professionals / individuals familiar with private debt due diligence to answer the following question;
Is a Quality of Earnings report ever performed on the target during lender due diligence in this space? Further, what are some typical analyses performed during DD by the asset manager?
I am just trying to understand the market a little better, apologies for any misuse of terminology, thanks
If it’s a sponsor backed buyout or add on acquisition there will most likely be a QoE prepared, and lenders lean on that for justification of EBITDA adjustment to closing date financing ebitda.
I think the one instance I may not have seen a QoE was a larger leveraged borrower making a de minimis tuck in acquisition. In fact thinking back this acquisition probably didn’t even hit the threshold for reporting requirements stipulated in the credit agreement.
Thanks Utah
In sponsor deals the PE fund commissions FDD (which include QoE) and lenders take reliance on that - taking reliance means the Big4 who does the report is liable if there are inaccuracies (in short).
Nevertheless, lenders don’t take the report at face value but come up with their own QoE normally discounting some of the adjustments (eg run-rate impact of hires, synergies).
For more complex / special situations deals yes I’ve seen lenders commissioning buyside QoE.
You don’t typically sign NRLs?
NRLs are a legal "necessary evil" which lenders sign not because they actually waive reliance from an underwriting perspective, but rather because otherwise the reports won't be made available to them due to consultants wishing to protect themselves (which is understandable, since the sponsor commissions the report to its own specifications which may or may not align with the credit investor's mandate / process). To CovenantHeadroom's para 2 above -> yes, the report (and any DD package report for the matter + associated Q&As / calls w/ advisors) is never taken at face value - it forms the basis for developing the base, downside and combined downside cases.
To para 3, my shop commissions bespoke reports when we engage into a new sector / asset class (market, technical etc., i.e. not strictly QoE).
Thank you!
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