Distressed debt investment model (from the lender's perspective)

bump!

It's just going to be your basic LBO model but instead you're investing in the debt and not the equity, so you'll calculate your IRR based on coupons and principal repayment (and any kickers). Whether or not you invest is based on getting a high enough IRR to offset the risks you perceive.

uoft2013

Thanks!

I assume the private debt holding period is 3 years. At the end of yr3, will the debt be refinanced? If so, how would you make the judgement whether there'll be new credit available?

There is no set period. It is going to depend on the deal. Generally sub or mezz is 5-7, with no periodic payments and a bullet at the end. For DD/SS, you may find 2-4 year loan windows.

If the company is turned around, it will likely refinance ASAP to reduce its cost of capital going forward. How long that takes just depends.

Distressed-debt-investing.com walks through some models and assumptions in regards to distressed investing. Not very in depth, but I think it be something worth adding to whatever you have.

uoft2013

Thank you!

I know it may sound obvious, but what is the measurement standard that a company has 'turned around'?

There is no "standard". It depends on how the investor is viewing it.