Direct Lending / Private Credit Case Study - Questions
In process with a prominent credit shop and was guided towards a 3-hour case study as the next step. Wanted some advice on the following:
- For the 3-hour test, I'm assuming this is going to include a model and memo portion. Would it be advisable to just run a CF model without including a balance sheet and include appropriate credit stats? What is an appropriate split of time between modeling and memo'ing?
- Would you advise I run multiple cases through the model? I was thinking management, base, and downside case. Or would it be more advisable to try to think through multiple downside cases instead (i.e. base case, downside 1, downside 2). Maybe thinking through 2 downsides is overkill?
- To wit, how do you usually think about your base and downside cases? Do the case materials usually provide a split between fixed and variable expenses so you don't need to think through fixed/variable assumptions on the fly? For me, base case would just be a simple industry growth on the top line, COGS split by fixed/variable, Opex kept fixed, no changes in WC or capex assumptions. Essentially business grows at a tepid pace without significant alterations to the business model. On the downside, which is more important here, I understand that this is dependent on the business itself and varies. For me, I'd think about hitting top-line by a similar drop to what it may have experienced in a prior recession, key customer(s) loss, key product discontinuation/disintermediation. Perhaps margin degradation due to raw material fluctuation.
- Most importantly, given this case study is a first for me, how exactly have past succesful candidates going through MM/MF processes structured their memo write-up? What are the essentials to include? How many slides should it be? I understand you'd want a page on Merits and Risks / Mitigants. Model output. Company overview (is it necessary)?
Thank you for the advice! Any examples on sample models / memos would be greatly appreciated - I can PM you.
Bump
Have done a few of these and know people that have done with other firms too.
Feel free to PM me if helpful too. It was a learning process for me so messed up a couple times in interviews before I got it pat down. Hope you're very quick on building models from scratch etc.
That helps a ton! Just PM'd you for a few follow-ups. Thanks!
summermonkey649
Thanks for the above. Would love your thoughts on the below:-
1) What credit metrics would you suggest including in your model: DSCR/Cash Cover etc.? It also seems as though everyone defines them differently.
2) How would you go about deciding which piece of the cap stack you would choose?
Thank you!
Hey, thank you for this - super insightful as I'm new to credit and have a case myself.
Can I please ask you in what ways the downside scenarios translate into decision making?
as in, if I'm given a CIM and I build the model and tweak cases to squeeze CFADS, what is it that I'm looking for? what should happen that will make me recommend not doing the loan in a given scenario - covenant breaches and inability to repay principal/interest? if the company is able to repay and stay above leverage ratios and covenants even in my downside scenario, is the company good or was I being too gentle with my DS scenario assumptions?
Cash flows being too negative and leverage going through the roof (well beyond recovery values / blowing through equity cushions). It's up to you to make reasonable assumptions as to how bad things could get when stuff hits the fan. For example if your top customer is 30% of revenue, and you model losing them, think through what cadence revenue would fall at (likely not all at once but phased as the customer grows into a replacement), any gross margin impact from that loss, and any operating leverage from that loss / how the business would respond.
Case Study - Credit/Direct Lending - helped WSO ppl on a few different but similar versions of these. Would love to connect and see if I can help. Definitely have a good idea on structure of the memo and key sections and subsections to hit. I find this is the most vague area and they offer limited guidance.
By the way - by some of the points you’ve made it’s clear you know the space - you’re def gonna crush it given proper guidance. Also agree w/ all your points on downside mimicking past recession, key product/contract loss etc. seem bright - u should get this job! Feel free to DM
I'm in a similar boat but for an Associate role with a middle market Financial Sponsors and Leveraged Finance group. I'd love to connect
Thanks, PM'd!
Also have an upcoming case would love to connect if the offers still available.
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